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6 Dr. Naaman AZHARI - Chairman of BLOM BANK Group Mr. Saad AZHARI - Chairman and General Manager of BLOM BANK s.a.l.

7 Table of Content Chairman s letter Customers deposits evolution Evolution of main indicators Consolidated financial ratios Strong and continuous growth for the last 7 years BLOM BANK s group chart BLOM BANK s organizational chart Corporate Governance 1. BLOM BANK s.a.l. Code of corporate governance 2. BLOM BANK s.a.l. Major common shareholders 3. BLOM BANK s.a.l. Board of directors 3.1 List of board members 3.2 Information about board of directors 3.3 Number and date of board meetings held in Information on key members of BLOM BANK s.a.l. Management 5. BLOM BANK s.a.l. commercial arrangements 6. General management of BLOM BANK s.a.l. Management discussion & analysis Operating environment 2. Overview 3. Evolution of total assets 4. Sources of funds 4.1 Customers deposits 4.2 Capitalization (tier I & tier II capital) 4.3 Banks & financial institutions 5. Uses of funds 5.1 Cash and balances with the central banks 5.2 Lebanese treasury bills and other governmental bills and bonds 5.3 Bonds and financial instruments with fixed income 5.4 Banks and financial institutions 5.5 Loans and advances to customers 6. Liquidity 7. Profitabilty 7.1 Net interest income 7.2 Non-interest income 7.3 Staff and operating expenses 8. Dividend distribution and preferred shares revenues 9. Capital adequacy ratios 10. Interest rate risk 11. Risk management and Basel II preparations Universal banking services 12.1 Private and investment banking 12.2 Commercial and corporate banking 12.3 Retail banking 12.4 Islamic banking 12.5 Insurance products & services 13. Information systems and technology 13.1 Customer relationship management 13.2 Advanced electronic payment systems 13.3 Enterprise application integration (eai) 13.4 Basel ii & regulatory compliance 13.5 Systems security & high availability 13.6 Financial reporting & consolidation 14. People development 14.1 General overview 14.2 Policies and procedures 15. Bank s operational efficiency 16. Regional expansion BLOM BANK s.a.l. consolidated financial statements 1. Auditors report 2. Consolidated income statement year ended 31 December Consolidated statement of comprehensive income year ended 31 December Consolidated statement of financial position at 31 December Consolidated statement of cash flows for the year ended 31 December Consolidated statement of changes in equity for year ended 31 December 2010 Notes to the consolidated financial statements Blom bank worldwide correpondent banks Blom bank group management and directory

8 Chairman s Letter BLOM BANK s operations were broad-based in terms of business areas and regional expansion, helping to make BLOM BANK one of the prime leading banks in the Arab world. Despite a struggling world economy, a hesitant regional recovery, and a tense domestic political scene, BLOM BANK S.A.L. achieved in 2010 record profits and strong growth. The Bank recorded the best ratios on the profitability charts of listed Lebanese banks, scoring the highest rate of return on average equity at 21% and the highest rate of return on average assets at 1.54%. BLOM BANK s.a.l. Annual Report 2010 Its balance sheet also witnessed robust and balanced growth, with assets increasing by 7.9% to $22.4 billion, deposits rising by 8.8% to $19.6 billion, and profits going up by 12.9% to $330.7 million. These strong results stood out among Lebanese banks, and came as a product of BLOM BANK s reputed control over expenses and risk, as reflected in the lowest cost to income ratio at 35%, a low ratio of net non-performing loans at 0.47%, and a high capital adequacy ratio ala Basel II at 14%. And this control involved the Bank s strict compliance with the rules and regulations set by the regulatory authorities, and that has made the Bank the renowned destination for safe and clean banking. BLOM BANK s solid core business and high asset quality continued to ensure a sturdy revenue stream. In addition, its margin-centered approach produced among Lebanese banks the highest net interest income at $495 million and the best net interest margin at 2.3%. The Bank s total lending also saw some remarkable increase, rising by 28.9% to $5.2 billion, noteworthy among which is retail lending which increased by 46% to $ 1.56 billion - enabling the Bank to attain the highest market share among Lebanese banks in credit card loans at 32%, in car loans at 25%, and in housing loans at 14%. The Bank s income stream was also broad-based, stretching across all the Bank s areas of operation. Accordingly, fee income increased by 23% to $178 million, constituting 27.2% of operating income, and driven by our activities in private and investment banking, and our brokerage, insurance, and asset management services. The latter services are especially eminent, since BLOM BANK S.A.L. stands as the only Lebanese Bank to have launched its own in-house mutual funds comprising financial instruments from different Arab countries including Lebanon, Jordan, and Egypt, and a new one launched in mid comprising Saudi assets. BLOM BANK s operations were also broad-based in the regional-expansion sense, stretching across the Bank s operating footprints in the twelve Arab and European countries in which it is present. This feeds into our strategy of exploiting growth opportunities, diversifying our risk and revenue sources, and enlarging our customer base. And in the process, it also strengthens the Bank s brand name and reputation, and helps turn BLOM BANK S.A.L. into one of the prime leading banks in the Arab region. Going forward, the Bank is mindful of the soft spots in the world economy and, more importantly, of the political and economic changes raging in the Arab world. These developments, though they might 6

9 cause the Bank to adjust its short-term priorities, they will not detract it from its overall focus and long-term goals. In the medium-to-long term, the Bank sees these developments as leading to more open economic and political systems in the Arab countries, something that will add to their allure as investment and business destinations. It is also something that the Bank will look forward to be a part of, in terms of further and deeper expansions in what could be promising future markets. As for the short term, the Bank aims at strengthening and developing its activities in all universal banking areas, while maintaining its tested conservative approach especially in the countries experiencing transitional changes. We are also cementing our syndicated lending and lending to small - and medium - sized enterprises, towards which a seperate marketing unit has been developed for each; and, of particular interest, strengthening our investment and corporate banking services in the Gulf. I am pleased to add that, given BLOM BANK s Mr. Saad AZHARI excellent and steady performance, appreciation from international institutions has been unstinting. As a result, BLOM BANK S.A.L. received many accolades in 2010, prominent among them were the awards: CEO of the Year, Pan-Arab/Middle East from Emeafinance; Best Retail Bank in the Middle East and Best Investment Bank in the Middle East from The Banker Middle East; and Best Bank in Lebanon from Global Finance, World Finance, and Emeafinance. BLOM BANK s success rests on the trust and confidence that its customers, shareholders, and the community place on it. What reinforces these attributes is Blom Bank s consistent delivery of financial Peace of Mind to its customers and better value to its shareholders. In the latter s case, the Bank attained in 2010 an EPS of $1.46, up by a notable 13% on 2009; and distributed $0.45 per common share to its shareholders, constituting a dividend pay-out ratio of 31%. As to our bondage with the community, this represents an organic part of the Bank s socially responsible corporate model. For the Bank remains very active in this domain, supporting various charitable organizations, sponsoring the world-class BLOM Beirut Marathon, and pioneering the educational program BLOM Shabeb and the internationally-recognised BLOM MasterCard Giving Card that has as its target the removal of all 425,000 mines in the country, with 26,000 removed so far. I would like to close by also saying that Blom Bank s success as a business model is a collective effort, bringing together the hard work of its management and staff to realize efficiently and consistently the Bank s values and vision. Thank you. Saad Azhari 7

10 BLOM Bank s Consolidated Customers Deposits Evolution (in USD Millions) years 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20, , , , , ,161 11, , ,686 BLOM BANK s.a.l. Annual Report ,525 5,056 4,330 3,861 3,333 2,686 1,805 6, ,

11 Evolution of Main Indicators (in USD MIllions or LBP Billions) Change 10/09 Total Assets LBP 33, , % USD 22, , % Customers Deposits LBP 29, , % USD 19, , % Total Net Liquidity LBP 19, , % USD 12, , % Shareholders Equity LBP 2, , % USD 1, , % Capital Funds LBP 2, , % USD 1, , % Total Loans And Advances LBP 7, , % USD 5, , % Net Income After Tax LBP % USD % Consolidated Financial Ratios Liquidity Ratios Net liquidity in LBP % % Net immediate liquidity in Foreign Currency 52.80% 56.76% Liquid assets over total assets 58.87% 62.58% Loans to Deposits Ratios LBP 11.68% 7.63% F/C 32.45% 28.39% Total 26.41% 22.36% Assets Quality - Not Including General Provision Net Doubtful Loans over Total Net Loans 0.46% 0.85% Provision over Doubtful Loans 83.24% 76.24% Total Provision over Total Net loans 2.46% 2.93% Gross Doubtful Loans / Gross Total Loans 2.69% 3.44% Capital Adequacy Ratios After dividend distribution (Basel I) 26.39% 26.33% After dividend distribution (Basel II) 13.81% 13.96% Profitability Ratios Return on average equity 19.20% 19.06% Return on average assets 1.54% 1.52% Earnings per share USD USD 1.46 USD 1.29 Dividend per common share USD USD 0.45 USD 0.40 Dividend payout ratio 31.50% 30.93% Retention Ratio 68.50% 69.07% Net asset value per common share USD USD 7.38 USD 6.46 (in % or USD) 9

12 Strong and continuous growth for the last 7 years Total Assets (in USD Millions) years 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 22, , ,898 16,639 20, , ,835 11,918 Net Profits (in USD Millions) years BLOM BANK s.a.l. Annual Report Tier I & Tier II Capital (in USD Millions) years ,000 1,200 1,400 1,600 1,700 1, , , , , ,

13 BLOM BANK Group Chart BLOM BANK S.A.L. Head Office: Branches: Beirut Lebanon - 61 Branches Cyprus - Damascus Free Zone - Jordan (8 Branches) - Abu Dhabi (Representative Office) BLOM BANK FRANCE S.A % 100% BLOM BANK (SWITZERLAND) S.A. Head Office: Paris Branches: London - Dubai - Sharjah - Jabal Ali Romania (5 Branches) Head Office: Geneva BANK OF SYRIA & OVERSEAS S.A % 52% SYRIA & OVERSEAS FOR FINANCIAL SERVICES Head Office: Damascus Branches: Syria - 27 Branches* *2 under establishment Head Office: Damascus BLOMINVEST BANK S.A.L % 23.5% Head Office: Beirut BLOMINVEST SAUDI ARABIA 10% 50% 51% Head Office: Riyadh BLOM EGYPT SECURITIES S.A.E. BLOM DEVELOPMENT BANK S.A.L. Head Office: Branches: AROPE INSURANCE S.A.L. Head Office: Branches: 33.33% Beirut Lebanon - 2 Branches 88.93% Beirut Lebanon - 8 Branches 66.64% Head Office: Head Office: Branches: Cairo 5% AROPE INSURANCE OF PROPERTIES & RESPONSIBILITIES - Egypt S.A.E. Cairo Egypt - 8 Branches 60% BLOM BANK EGYPT S.A.E % Head Office: Cairo Branches: Egypt - 26 Branches 48.97% 35% 15% 80% 5% BLOM BANK QATAR L.L.C 99.50% Head Office: Doha AROPE LIFE INSURANCE - EGYPT S.A.E. Head Office: Cairo Branches: Egypt - 8 Branches 34% 5% AROPE SYRIA S.A. (Syria International Insurance) 10% Head Office: Damascus Branches: Syria - 5 Branches Representative Offices: 14 11

14 BLOM BANK S.A.L. Organisational Chart Shareholders Board of Directors Board Committees Board Audit Committee Board Risk Management Committee Consulting, Strategy & Corporate Governance Committee Nomination & Renumeration Committee Departments/ Units Accounting Administration Back Office Operations Communications Compliance Corporate Unit Credit BLOM BANK s.a.l. Annual Report 2010 Hedging Advisory Unit Human Resources Information Systems Interest Management Internal Audi Unit International Relations & Treasury Legal Affairs Marketing Procurement Recovery & General Management Secretariat Unit Retail Banking Risk Management SMES - Marketing of Small & Medium Enterprises Strategic Planning & Organization Syndications & Structured Finance Trade Finance 12

15 Branch Managers 61 in Lebanon - 1 in Cyprus 1 in Damascus Free Zone - 8 in Jordan 1 Representative office in Abu Dhabi External Auditors Ernst & Young-Semaan, Gholam & Co. Solicitors Me. Georges ABOU ZAMEL Me. Antoine MERHEB Management Committees Executive Committee Credit Committee 1 Credit Committee 2 Exceptional Credit Committee Follow-up Credit Risk Committee Provisions Committee Retail Credit Committee Assets & Liabilities Committee Investment & Treasury Committee Marketing Committee Information Technology Committee Human Resources Committee Legal Committee Internal Audit Committee Compliance Committee Operations & Internal Procedures Committee Foreign Branches & Subsidiaries Committee Purchasing & Maintenance Committee Information System Security Committee Succession Planning Committee 13

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18 Corporate Governance 1 BLOM BANK S.A.L. Code of Corporate Governance The Code of Corporate Governance was approved at the end of 2007 by the Board of Directors at BLOM BANK. It sets out the structure that identifies the rights and responsibilities of each of the Board members, general management, employees and external stakeholders. It complies with all local laws and regulations to which the Bank is subject, as well as the Basel Committee s principles on Corporate Governance and outlines the expected conduct of all parties in order to achieve the objectives set for the Bank. The Bank recognizes the paramount importance of Corporate Governance for its proper functioning and for the creation of an optimal operational environment. To that end, the Board and management deployed all means for the proper implementation of the Code in The Board itself partly exercises its duties and authorities through four Board Committees (the Audit Committee, the Risk Management Committee, the Consulting Strategy and Corporate Governance Committee in addition to the Nomination and Remuneration Committee) and is the body ultimately responsible for ensuring the best possible practice of Corporate Governance at BLOM BANK. Awareness sessions for all BLOM employees on Corporate Governance were organized and are planned for new employees in order to introduce the Code and related principles, while enhancements will be communicated to all personnel. The Code was also published on the Bank s Website. Relevant information on the Board charter and shareholders rights were made available to the public in compliance with the disclosure requirements of the Code. In light of the current global financial situation, the Bank s Board of Directors view the ongoing development of Corporate Governance as a matter of even greater importance and necessity in enhancing its competitive position by continuing to further raise its standards vis-à-vis internal organization and services to clients. BLOM BANK s.a.l. Annual Report BLOM BANK S.A.L. Major Common Shareholders NAME Address Common Shares in Capital * Bank of New York ** United States Banorabe S.A SPF*** Luxembourg AZA Holding Lebanon 9.33 Actionnaires Unis Lebanon 1.83 Azhari Family Lebanon 2.86 Chaker Family Lebanon 5.39 Nada Oueini Lebanon 5.00 Jaroudi Family Lebanon 3.61 Saade Family Lebanon 2.53 Khoury Family Lebanon 1.97 Rest of Shareholders *Total common shares: 215,000,000 **Starting 1998, and after the issuance of Global Depositary Receipts (GDR) by BLOM Bank Shareholders, the Bank of New York as Depositary, became shareholder on the Bank s register. ***The major shareholders of Banorabe S.A, SPF (formerly Banorabe Holding S.A.) are the same as in BLOM Bank (except Bank of New York and AZA Holding). 16

19 3 BLOM BANK S.A.L. Board of Directors Dr. Naaman W. AZHARI Sheikh Salim B. EL-KHOURY Chairman of BLOM BANK GROUP Honorary Board Member 3.1 List of Board Members NAME Position Background / Competencies Number of directorship years with the Bank Mr. Saad N. AZHARI Chairman & General Manager Master in Engineering & MBA Director since 1996 Chairman and General Manager since 2007 H.E. Sheikh Ghassan I. SHAKER Grand Officier de la Légion d Honneur Director B.A in Finance Director since 1964 Mr. Samer N. AZHARI Director & Secretary General of BLOM BANK Group Master in Civil Engineering & MBA Director since 1997 Secretary General of Blom Bank Group since 2001 H.E. Me Youssef S. TAKLA Director Diploma in Law Director since 2006 Mr. Habib L. RAHAL Director & General Manager B.A. in Accounting Economics Director since 2008 General Manager since 1992 Mr. Nicolas N. SAADE Director MBA in Finance & B.A. in Economics Director since 1990 Dr. Fadi T. OSSEIRAN Director Ph.D. in Economics Director since 2008 Mr. Joseph E. KHARRAT Director B.A. in Ecomomics Director since 1984 Mr. Marwan T. JAROUDI Director MBA in Ecomomics Director since

20 3 BLOM BANK S.A.L. Board of Directors 3.2 Information About Board of Directors Dr. Naaman W. AZHARI Chairman of BLOM BANK Group Sheikh Salim B. EL-KHOURY Honorary Board Member of BLOM BANK S.A.L. Born in 1928 Head of the Nomination and Remuneration Committee at BLOM BANK S.A.L. Born in 1931 Honorary Board Member of BLOM BANK S.A.L. BLOM BANK s.a.l. Annual Report 2010 Dr. Naaman AZHARI started his banking experience in He worked in a French bank in Paris (which became Société Générale). At the end of the 1950s, he established one of the largest banks in Syria, Banque de l Orient Arabe and was appointed Chairman of the Bank. From 1961 to 1962, he occupied the position of Minister of Finance, Economy and Planning in Syria. In 1962, he was appointed General Manager of BLOM BANK S.A.L. From 1971 until 2007, he occupied the position of Chairman and General Manager of BLOM BANK S.A.L. Sheikh Salim EL KHOURY has been a Member of the Board of Directors of BLOM BANK S.A.L. since He holds a degree in French law from the University of Lyon in France and a degree in Lebanese Law from Saint Joseph University s Ecole de Droit de Beyrouth and has completed an Advanced Management Program at Harvard Business School. In 2007 he was appointed Chairman of BLOM BANK Group. Dr. Naaman AZHARI holds a State Degree Ph.D in Economics from the University of Paris I (Sorbonne) and a Diploma in Law and a Diploma in Political Sciences from the Institut des Sciences Politiques in Paris. 18

21 Mr. Saad N. AZHARI Chairman of the Board and General Manager of BLOM BANK S.A.L. Born in 1961 Chairman and General Manager of BLOMINVEST BANK S.A.L. Chairman of BLOM BANK (SWITZERLAND) Chairman of BLOM BANK EGYPT Chairman of BLOM BANK QATAR Board Member of BLOMINVEST Saudi Arabia Board Member of BANK OF SYRIA AND OVERSEAS Board Member of Société Fonçière du Liban et D Outre-Mer S.A.L. H.E. Sheikh Ghassan I. SHAKER Grand Officier de la Légion d Honneur Non-Executive Director of BLOM BANK S.A.L. Born in 1937 Director of BLOM BANK FRANCE Mr. Saad AZHARI started his banking career in 1986 in PBZ Privatbank, an affiliate of the UBS Group, in which he worked until During that time he was promoted to run, from Zurich, the Bank s operations in the Middle East and Hong Kong. He joined BLOM BANK (Switzerland) in 1991 and was appointed its General Manager in In 1998, he was elected Chairman and General Manager of BLOMINVEST BANK S.A.L.. This was followed by his election to the position of Chairman of BLOM BANK (SWITZERLAND) in At the same time, he was appointed Vice Chairman and General Manager of BLOM BANK S.A.L. In 2005 Mr. AZHARI became Chairman of BLOM BANK EGYPT and in 2007 he was elected Chairman & General Manager of BLOM BANK S.A.L. Since 2008, Mr. AZHARI has been Chairman of BLOM BANK Qatar and a Member of the Board and Vice-Chairman of BLOMINVEST SAUDI ARABIA. He is also a Member of the Board of Directors of Bank Of Syria & Overseas as well as being a Member of the Board of BLOM DEVELOPMENT Bank S.A.L. and was its Chairman from 2006 until beginning of Mr. Saad AZHARI is also a Member of the Board of Directors of Société Fonçière du Liban et D Outre-Mer S.A.L. Since 2001, he has held the position of Vice-President of the Association of Banks in Lebanon. Mr. Saad AZHARI holds a Masters Degree in Computer Engineering and an MBA from the University of Michigan-Ann Arbor in the United States. Businessman, banker, industrialist and diplomat, His Excellency Ghassan Ibrahim SHAKER, is among the most highly decorated personalities from the Arab World, including being a Grand Officier de la Légion D Honneur-France. H.E. Sheikh Ghassan SHAKER has been a Member of BLOM BANK S.A.L. Board since 1964 and is also a Board Member of BLOM BANK FRANCE. He is a Personal Advisor to His Majesty The Sultan of Oman and Omani Ambassador at United Nations Geneva, Switzerland. Omani Minister Plenipotentiary at The Court of St James United Kingdom, Omani Economic Counsellor in United Arab Republic and Dean of Goodwill Ambassador at Unesco Paris, France. H.E. Sheikh Ghassan SHAKER is also Chairman and Member of Board of Directors of various companies in Asia and Europe: - Gulf Chinese Trading Corporation, AFZ - Ajman - UAE - Tokio Marine Insurance Company - Saudi Arabia - Orient Telecom F.Z.C. - UAE - Chairman of Gulf Conversion Co. Ltd United Arab Emirates - Member of Group of 50 Investcorp Bank Bahrain. He was educated at Victoria College Alexandria, Egypt ( ) and at St. John s College - Cambridge University, England ( ). He is member of the Board of Trustees, Georgetown University - Washington DC and Law Society - University of Virginia, USA. 19

22 3 BLOM BANK S.A.L. Board of Directors Mr. Samer N. AZHARI Director of BLOM BANK s.a.l. H.E. Me. Youssef S. TAKLA Non-Executive Director of BLOM BANK s.a.l. Born in 1958 Secretary General of BLOM BANK GROUP Chairman and General Manager of BLOM BANK FRANCE Board Member of BLOMINVEST BANK Board Member of BANK OF SYRIA AND OVERSEAS Born in 1937 Member of the Nomination and Remuneration Committee at BLOM Bank s.a.l. BLOM BANK s.a.l. Annual Report 2010 Mr. Samer AZHARI joined Banque Banorabe, affiliated bank of BLOM BANK S.A.L., in Paris in 1985 and became its General Manager in In 1997 he was appointed as General Manager of BLOM BANK S.A.L. and occupied this position until Since 2001, Mr. Samer AZHARI has been Chairman & General Manager of BLOM BANK FRANCE (formerly BANQUE BANORABE). He was Chairman and General Manager of AROPE INSURANCE, an affiliated insurance company of BLOM BANK S.A.L. from 1998 until H.E. Me. Youssef TAKLA has been a Board Member of BLOM BANK S.A.L. since He was a member of the Beirut Bar Association since 1961 and Member of the Paris Bar Association since Between 1993 and 1999, Me. TAKLA was also member of the International Court of Arbitration of the International Chamber of Commerce. He has been additionally since 1992 a Member of the Legislative Commission in the Lebanese Ministry of Justice and a Member of the Committee of Modernization and Coordination of Banking Laws at the Central Bank of Lebanon since From 1999 until 2001, he occupied the position of Vice President of the Association of Banks in Lebanon. Mr. Samer AZHARI has been BLOM BANK Group s Secretary General since Mr. Samer AZHARI holds a Master of Science degree in Civil Engineering from the University of Illinois, USA and an MBA from INSEAD, France H.E. Me. TAKLA was nominated Minister of State in Lebanon in He holds a diploma in law from the Saint-Joseph University in Beirut. 20

23 Mr. Habib L. RAHAL Director & General Manager of BLOM BANK s.a.l. Mr. Nicolas N. SAADE Non- Executive Director of BLOM BANK s.a.l. Born in 1944 Member of the Consulting, Strategy and Corporate Governance Committee at BLOM BANK S.A.L. Chairman & General Manager of AROPE INSURANCE S.A.L. Board Member of BLOMINVEST BANK S.A.L. Board Member of AROPE EGYPT Life Insurance Board Member of AROPE EGYPT Properties Insurance Chairman of Société des Services d Assurances et de Marketing Born in 1950 Head of the Board Audit Committee at BLOM BANK S.A.L. Head of the Board Risk Management Committee at BLOM BANK S.A.L. Member of the Consulting, Strategy and Corporate Governance Committee at BLOM BANK S.A.L. Board Member of BLOM DEVELOPMENT BANK Board Member of BLOM BANK Qatar Mr. Habib RAHAL started his banking experience at Société Centrale de Banques and occupied several managerial positions at Moscow Narodny Bank and Royal Bank of Canada before joining Banque du Crédit Populaire where he was appointed General Manager from 1974 to In 1990, he joined BLOM BANK S.A.L. as Chairman s Advisor and was appointed in 1992 as the Bank s General Manager. Mr. Habib RAHAL has been a Member of the Board of Directors of AROPE INSURANCE since 2004 and was elected its Chairman and General Manager in Mr. RAHAL has been a Board Member of BLOM BANK S.A.L. since 2008 and a Board Member of BLOMINVEST BANK S.A.L. since He is also the Chairman of Société des Services d Assurances et de Marketing since In 2008 he became Board Member of AROPE EGYPT LIFE INSURANCE and a Board Member of AROPE EGYPT PROPERTIES INSURANCE. Mr. Nicolas SAADE has been a Board Director of BLOM BANK S.A.L. since From April 1985 to July 1987, he was Regional Manager of BLOM BANK S.A.L. in Dubai, UAE. Between 1980 and 1985 he was Deputy General Manager of Union de Banques en Cote d Ivoire (BANAFRIQUE). In 1975, he joined the Toronto Dominion Bank in which he stayed until July 1980, occupying various managerial positions. Mr. Nicolas SAADE is the owner and Managing Director of the Nicolas SAADE Est. in Dubai, which is a banking, investment and financial consulting firm. He is also the Managing Director of Elite Consultants International, Inc. in Delaware, USA, an SEC registered investment advisory firm, and owner of Pioneer Auditing in Dubai. Previously, he was Fund Manager at Friends Provident International Elite Fund in the Isle of Man. Mr. Nicolas SAADE is holder of an Honors BA in Economics from McMaster University in Canada and has an MBA from Wharton School, University of Pennsylvania, USA. Mr. RAHAL represents BLOM BANK S.A.L. and sits as Director on the following Boards of Directors: Banque de L Habitat, Société Financière du Liban and IPN. Mr. Habib RAHAL is holder of a Bachelor Degree in Accounting & Economics from ESEC. 21

24 3 BLOM BANK S.A.L. Board of Directors Dr. Fadi T. OSSEIRAN Director of BLOM BANK s.a.l. Born in 1956 General Manager of BLOMINVEST BANK S.A.L. Board Member of BLOM BANK Egypt Board Member of BLOMINVEST SAUDI ARABIA Board Member of BANK OF SYRIA AND OVERSEAS Mr. Joseph T. KHARRAT Non Executive Director of BLOM BANK s.a.l. Born in 1941 Board Member of Audit Committee at BLOM BANK S.A.L. Member of the Nomination and Remuneration Committee at BLOM BANK S.A.L. Board Risk Management Committee Member at BLOM BANK S.A.L. Member of the Consulting, Strategy and Corporate Governance Committee at BLOM BANK S.A.L. Board Member of BLOMINVEST BANK S.A.L. BLOM BANK s.a.l. Annual Report 2010 Dr. Fadi OSSEIRAN started his banking career at BLOM BANK S.A.L. as Assistant Dealer from 1981 to From 1990 until 1993, he was Manager of Corporate Planning and Human Resources Development at Méditerranée Group Services. From 1985 to 1987, he moved to teach in the Economics Department at the American University of Beirut and became Assistant Professor at the Institute of Money and Banking of AUB from 1988 to Since 1994, he has been General Manager of BLOMINVEST BANK S.A.L. and Advisor to the Chairman General Manager of BLOM Bank S.A.L. Dr. Osseiran became a Member of the Board of Directors of BLOM BANK S.A.L. in 2008, and a Member of the Board of BLOM BANK Egypt in He has been a Director of BLOMINVEST BANK Saudi Arabia since Mr. Joseph KHARRAT is a non-executive Director of BLOM BANK S.A.L. since 1984 until to date. He is a Board Member of BLOMINVEST BANK S.A.L. since 1994 until to date. He is Chairman and General Manager of several textile and real estate companies of which: Kamaco S.A.L., Satexi (Abidjian) and Kharrat Immobilière (Abidjian). Mr. Joseph KHARRAT is holder of a Bachelor degree in Economics from Reading University in the U.K. Dr. OSSEIRAN has held the position of President of the Association of Stock Brokers in Beirut since 2004 and has been a Member of the Lebanese Economic Association since He was also Member of the Research Committee ( ) and Member of the Training Committee ( ) of the Association of Banks in Lebanon. He was Board Member of the Lebanese Management Association from 1992 to 1996 and has many publications in the Banking and Economics Fields. Dr. OSSEIRAN is holder of a Ph.D in Economics from New York University (NYU) in the United States. 22

25 Mr. Marwan T. JAROUDI Non-Executive Director of BLOM BANK s.a.l. Head of the Consulting, Strategy and Corporate Governance Committee at BLOM BANK S.A.L. Nomination and Remuneration Committee Member at BLOM BANK S.A.L. Board Audit Committee Member at BLOM BANK S.A.L. Board Audit Committee Member at BLOM BANK FRANCE Board Risk Management Committee Member at BLOM BANK S.A.L. Board Member of BLOM BANK FRANCE Board Member of BLOMINVEST BANK Board Member of BLOMINVEST SAUDI ARABIA Board Member of BLOM BANK QATAR Board Member of AROPE INSURANCE Board Member of AROPE SYRIA Board Member of Banorabe S.A., SPF Board member of BLOM DEVELOPMENT BANK Mr. Marwan JAROUDI currently sits on the Board of Directors of the following Companies : Industry Intelligence Inc., Los Angeles - USA Forestweb, Inc., Los Angeles BLOMINVEST Saudi Arabia BLOMINVEST Bank s.a.l. Arope Insurance s.a.l. Arope Syria, Syria United Shareholders BLOM BANK FRANCE BLOM BANK S.A.L. He has been a Board Member and Vice Chairman of BLOM BANK QATAR since He is Co-Founder, Director in Industry Intelligence Inc., Los Angeles California, since Since 1999, he occupies the position of Co-Founder, Director in Forestweb, Inc., Los Angeles From 1996 until 1999 he was Co-Founder, Managing Director in Pulptrade - Choueifat, Lebanon. From 1985 until 1995, Mr. JAROUDI occupied a number of managerial positions at Saudi Hollandi Bank in Jeddah. From 1989 until 1991 he was Co-Founder and Finance Director at Gulf Medical Co ltd. Mr. JAROUDI is holder of a Master of Arts degree in Economics from Syracuse University in New York and has a BA in Economics from the American University of Beirut. 3.3 Number & Date of Board Meetings Held in 2010 The following BLOM BANK s.a.l. board meetings were held during 2010 on: 5/2/ /3/2010 5/5/ /5/ /7/ /10/ /12/

26 4 Information on Key Members of BLOM BANK S.A.L. Management Mr. Amr N. AZHARI General Manager of BLOM BANK s.a.l. Mr. Elias E. ARACTINGI Deputy General Manager of BLOM BANK S.A.L., in charge of Strategy, Organization and Retail Banking Born in 1970 Vice Chairman of Bank of Syria and Overseas Chairman and General Manager of BLOM DEVELOPMENT BANK Chairman of AROPE SYRIA International Insurance. Chairman of Société Fonçière du Liban et D Outre-Mer s.a.l. Born in 1959 Member of the Board of BLOM BANK EGYPT Member of the Board Audit Committee of BLOM BANK EGYPT BLOM BANK s.a.l. Annual Report 2010 Mr. Amr AZHARI started his banking experience in 1991 at Banque Banorabe Paris. From 1991 to 1992, he worked at Gestion Pictet & Cie Montreal Canada, and from 1995 to 1997 he occupied the position of Assistant Manager Banque Banorient, Geneva Switzerland. From 1997 to 1999, he was Executive General Manager at Banque Banorabe Paris. He moved on to become from 1999 to 2001 the Finance Manager of Banque Banorabe Dubai UAE, followed by Manager of Banque Banorabe Pairs France from In 2004, he became Vice-Chairman of Bank of Syria and Overseas and Assistant General Manager of BLOM BANK S.A.L.. Mr. Elias ARACTINGI started his banking career in 1983 at Bank Audi USA in New York where he was promoted several times until he reached the title of Vice President and Head of Operations. He joined BSI (Banca della Svizzera Italiana) s New York branch in 1988 as Vice President in the International Private Banking Group. In 1990, Mr. ARACTINGI joined Booz.Allen and Hamilton, based in Singapore as an Associate and was promoted to Senior Associate in 1993, then to manager of the Bangkok office in 1994 and finally to Principal in At the end of 1995, he joined BLOM BANK S.A.L in Beirut as Advisor to the Chairman, focusing on branch and head office reengineering. In 1997, he initiated BLOM s Retail Banking activities. In 2006, in addition to the above, Mr. AZHARI became Chairman of AROPE Syria International Insurance. In 2008, Mr. AZHARI became General Manager of BLOM BANK S.A.L., Chairman & General Manager of BLOM DEVELOPMENT BANK S.A.L., Chairman of Société Fonçière du Liban et d Outre- Mer S.A.L., and served as a Board Member of the Damascus Stock Exchange from 2006 to Mr. Amr AZHARI holds the following degrees from McGill University - Montreal, Canada: Master of Business Administration, Bachelor of Civil Law and Bachelor of Arts, major in Economics. In 2005, he was appointed Managing Director and CEO of BLOM BANK EGYPT, a position he held until September He was promoted in 2008 to Deputy General Manager of BLOM BANK S.A.L. In 2009, he was re-appointed as Managing Director and CEO of BLOM BANK EGYPT and was elected Chairman of BLOM Egypt Securities, until March Mr. Elias ARACTINGI holds a Bachelor Degree in Business Administration with distinction from the American University of Beirut and an MBA in Finance from Columbia University s Graduate School of Business. 24

27 Dr. Pierre G. ABOU-EZZE* Assistant General Manager and Head of Human Resources at BLOM BANK s.a.l. Born in 1955 Mr. Talal A. BABA* Assistant General Manager and Chief Financial Officer at BLOM BANK s.a.l. Born in 1967 Dr. Pierre Abou-Ezze has 16 years of hands-on experience in Human Resources. He has been the Head of HR at BLOM BANK S.A.L. since 1998, and he served as Advisor to the Chairman on training issues from 1995 to Prior to joining BLOM BANK S.A.L., Dr. Abou-Ezze was in academia. He served as the Director of the Graduate School of Business and Management at the American University of Beirut from 1993 to 1997, and he was Assistant Professor at the same school since Before moving back to Lebanon, Dr. Abou-Ezze started his career as an Assistant Professor of Economics at the University of Ottawa, Canada and at the University of Kuwait. Mr. Talal Baba is the Chief Financial Officer. He was appointed as Assistant General Manager on July Mr. Baba is committed to maintaining the high level of integrity and transparency that BLOM Bank S.A.L. is known for. He joined BLOM Bank S.A.L. in 1991 where he started to excel and climb his career ladder. He has now over 20 years of banking experience acquired with major banking players on the Lebanese market. He also attended various training programs and workshops in Lebanon and abroad. Mr. Baba earned his Bachelor s degree in Accounting and his Master in Business Administration from the Lebanese American University Beirut. Dr. Abou-Ezze continues to lecture at various Universities in Lebanon, and to lead seminars and workshops in the field of Human Resources. He served as the Chairman of the Human Resources & Social Affairs Committee at the Association of Banks in Lebanon for 2 consecutive terms from 2005 to Dr. Abou-Ezze holds a Ph.D in Economics from McMaster University-Hamilton, Canada. 25

28 4 Information on Key Members of BLOM BANK S.A.L. Management Mr. Antoine N. LAWANDOS* Assistant General Manager and Chief Information Officer at BLOM BANK s.a.l. Born in 1963 Mr. Antoine LAWANDOS started his career in 1986 with Istisharat, a leading software vendor, where he became the head of one of the Istisharat s Banking Systems Development units (ICBS), and where he acquired extensive experience in managing the development, implementation and integration of complex and mission critical universal banking systems, subject to different local and international banking requirements and environments. BLOM BANK s.a.l. Annual Report 2010 Before joining BLOM BANK S.A.L. in 1993, he also held the position of Systems Engineering Department Manager at BML (Business Machines of Lebanon), IBM representatives in Lebanon. After BML, he joined MDSL as project manager for the implementation of an international universal banking package. In 1993, he joined BLOM BANK S.A.L. as Project Director for the core banking application change, and then in 1995, he was appointed Senior Manager for the IT and Systems Development Department until 2006 when he became Chief Information Officer (CIO) of BLOM BANK S.A.L. In 2008, he was appointed Assistant General Manager of BLOM BANK S.A.L. in addition to being CIO. Mr. LAWANDOS holds an MSc. Degree in Electronics and Information Systems Engineering from Ecole Superieure des Ingenieurs de Beyrouth (ESIB), with over 25 years of experience in the ICT field applied to the financial services industry. 5 Blom bank s.a.l. Commercial Arrangements Any commercial arrangement between the Bank and any of its affiliates is pre-approved by the General Assembly of Shareholders of the Bank and of the concerned affiliate according to art. 158 of the Lebanese commerce law, when applicable. No change of control has occurred during * By alphabetical order 26

29 6 General Management of BLOM BANK S.A.L. Mr. Saad AZHARI Mr. Samer AZHARI General Managers Mr. Habib RAHAL Mr. Amr AZHARI Deputy General Manager Mr. Elias ARACTINGI Assistant General Managers (*) Dr. Pierre ABOU EZZE Mr. Talal BABA Mr. Antoine LAWANDOS Advisors (*) Mr. Michel AZZAM Mr. Mustapha GHALAYINI Sheikh Fahim MO DAD Mr. Georges SAYEGH Chairman & General Manager Group Secretary General Retail Banking Department & Strategic Planning & Organization Department Human Resources Department Accounting Department Information Systems Department Formerly, Vice Governor of the Central Bank of Lebanon Management (*) Principal Managers Mr. Grégoire AZAR Mrs. Jocelyne CHAHWAN Mr. Georges CHEDID Mr. Morris KAIROUZ Mr. Samir KASSIS Mr. Mekhael KAZZI Mr. Naoum RAPHAEL Mr. Jacques SABOUNGI Mr. Fouad SAID Me. Aimee SAYEGH Mr. Samih ZEIN EL DINE Managers (A) Mrs. Ayla DAME Mr. Boutros KHOURY Mrs. Isabelle Mansour NAOUM** Mr. Gerard RIZK Managers (B) Mrs. Aline ABI RACHED Mr. Malek COSTA Mr. Gladson DOUGLASS Mr. Michel GHANEM Mr. Rabih HALABI Mr. Imad KADI Mr. Mounir TOUKAN Deputy Managers (A) Mr. Marcel ABOU JAOUDE Mrs. Fadia Bizri BARRAJ Mrs. Rima El Kaissi HAJJAR (EL) Mr. Imad JUNDI Assistant Managers (A) Mr. Charles HADDAD Mrs. Rania Derian KAISSI Departments & Units International Affairs & Treasury Department Retail Banking Department Marketing Department / Syrian Desk Syndications and Structured Finance Unit Corporate Unit Interest Management Department Group Inspection Unit Trade Finance Department Marketing Department / Overseas Legal Affairs Department Administration Department Marketing Strategy / Retail Department Marketing Department / Syrian Desk Communication Department Risk Management Department IT Operations Division Compliance Department Hedging Advisory Unit Marketing Department Strategic Planning & Organization Department & Procurement Department Retail Credit Division Credit Department Marketing Department / Overseas Trade Finance International Affairs Back Office Operations Marketing of Small & Medium Enterprises (SMEs) Unit Internal Audit Department * By alphabetical order ** Joined on July

30 BLOM BANK s.a.l. Annual Report

31 29

32 BLOM BANK s.a.l. Annual Report

33 Management Discussion & Analysis 2010 Management discussion & analysis OPERATING ENVIRONMENT 2. OVERVIEW 3. EVOLUTION OF TOTAL ASSETS 4. SOURCES OF FUNDS 4.1 Customers Deposits 4.2 Capitalization (Tier I & Tier II Capital) 4.3 Banks & Financial Institutions 5. USES OF FUNDS 5.1 Cash and Balances with the Central Banks 5.2 Lebanese Treasury Bills and Other Governmental Bills and Bonds 5.3 Bonds and Financial Instruments with Fixed Income 5.4 Banks and Financial Institutions 5.5 Loans and Advances to Customers 6. LIQUIDITY 7. PROFITABILITY 7.1 Net Interest Income Interest and Similar Income Interest and Similar Charges Interest Margin (Before Provisions For Doubtful Loans) Net Provisions for Doubtful Loans 7.2 Non-Interest Income 7.3 Staff and Operating Expenses 8. DIVIDEND DISTRIBUTION AND PREFERRED SHARES REVENUE 9. CAPITAL ADEQUACY RATIOS 10. INTEREST RATE RISK 11. RISK MANAGEMENT AND BASEL II PREPARATIONS 11.1 Risk Management 11.2 Corporate Governance 12. UNIVERSAL BANKING SERVICES 12.1 Private and Investment Banking 12.2 Commercial and Corporate Banking 12.3 Retail Banking 12.4 Islamic Banking 12.5 Insurance Products & Services 13. INFORMATION SYSTEMS AND TECHNOLOGY 13.1 Customer Relationship Management 13.2 Advanced Electronic Payment Systems 13.3 Enterprise Application Integration 13.4 Basel II & Regulatory Compliance 13.5 Systems Security & High Availability 13.6 Financial Reporting & Consolidation 14. PEOPLE DEVELOPMENT 14.1 General Overview 14.2 Policies and Procedures Recruitment Training Career Development and Promotion 15. BANK S OPERATIONAL EFFICIENCY 16. LOCAL REGIONAL EXPANSION

34 1 Operating Environment In the context of global headwinds and slow recoveries from the financial crisis, Lebanon was able to record a growth rate of 8.1% in 2010, following the 8.5% recorded in This was supported by the robust financial, real estate and tourism sectors. The bulk of the growth was recorded during the third quarter of the year, mainly driven by a boost of imports of petroleum products that registered a 25.4% growth, claims on the private sector that rose 19.9% and the positive lagged impact of construction permits. Additionally, the economy performed well in the last quarter propelled by exports that rose 15.3%, claims on the private sector that increased by 18.1% and imports of petroleum that improved by 12.1%. The political environment was relatively stable and growth enabling throughout the year. Moderate domestic pressures however, emerged in the second half as political bickering erupted regarding the indictment process of the international tribunal investigating the assassination of ex-prime Minister Mr. Rafik Hariri. Thus, government stalled with fiscal and structural reforms postponed until at least the formation of a new government. The political environment did not however, affect the economic growth throughout the year, primarily due to consumer and investor confidence in the upcoming phase. The real estate sector, a pillar driver of the domestic economy, continued to expand driven by both, higher supply and demand. The number of property sales increased by 40.8% and construction permits rose by 33.3%. Real estate prices picked up but the rise is believed to be fundamental. The tourism sector witnessed comparable trends as it continued to expand at a brisk pace in The number of tourists increased by 17% and their spending grew by 21%. Spending per visit in Lebanon continued to average a high level of $3000. The growth of the sector impacted the economy through different channels, boosting investments and employment. BLOM BANK s.a.l. Annual Report 2010 Strong performances of the other sectors contributed as well to boosting consumer spending considerably through higher household real income. The strong consumer spending is echoed by the increased value of cleared checks that added 20%, 72.8% of which were held in U.S. dollar. On the investment front, the permitting environment enabled a rise in business investment during the year that positively echoed the labor market, creating jobs and lowering unemployment rate. Amidst solid growth, relative political stability, relatively high interest rate differentials with the rest of the world despite the slow decline of domestic interest rates, and the image of Lebanon s banking system as a safe haven for Arab investors, paved way to a robust performance of the banking sector in The growth was backed by large capital inflows from the Gulf region, at a time when international and regional peers were still tied up by the effect of the crisis. Additionally, the strong performance was enabled by high returns made possible through the expansion of bank loan portfolios to the private sector, in addition to the growth in their fees income and income from their portfolio of government bonds. Total private sector deposits grew by 9.7% to reach $88.9 billion. Loans recorded a year-on-year increase of 19.2%, to $538.2 million. The considerable increase in loans contributed to an 11.8% upsurge in total assets. The level of dollarization of deposits declined from 64.5% down to 63.2%, reflecting a higher confidence level in the Lebanese pound. Despite the rapidly growing consumption, the considerable capital inflows, the high growth rate and the mild overheat of some sectors, especially tourism, inflation remained subdued with a yearly average rate broadly unchanged at 3.7%. Consumer Price Index (CPI) was low in the first quarter with the appreciation of the dollar but accelerated slowly throughout the year as energy prices rebounded. Since inflation was tamed and capital was pouring at an extremely high level, the Central Bank (BDL) adopted an accommodative monetary policy which allowed an ease in interest rates. The policy was meant to lower the cost of financing for the real sector, foster sustainable economic expansion and reduce pressure on banking sector profitability margins. As a matter of fact, large capital inflows put a downward pressure on interest rate differentials between the use of funds and deposits. In parallel, the Central Bank tried to absorb the excess of liquidity and help banks find ways to invest their deposits by issuing certificates of deposits (CD) and T-bills and by encouraging lending in all currencies through decreasing reserve requirement rates on deposits against several types of loans to the private sector. On the other hand, abundant funding fueled the upswing in housing prices that mirrored the expansion of demand as well as the rise in the cost of land. Delinquency rates on consumer loans and on most types of 32

35 mortgages remained low. As for businesses, balance sheets were quite liquid, credit quality was good, and most firms enjoyed ready access to funds due to the high liquidity at commercial banks. On the fiscal front, the budget deficit continued to show some improvement in 2010, declining from 8.5% of GDP in 2009 to 7.5% in The enhancement is partly the result of the high real GDP growth rate and the improvement in tax collection. The other two important driving forces are the delay in the approval of the budget and the substantial reduction in the budgetary transfers to Electricite du Liban (EDL). Correspondingly, the primary surplus rose by 14.2% reaching $1.2 billion. Total revenues for the Lebanese Republic retreated by a mere 0.2% to $8 billion in Tax revenues edged up by 11.3%, almost overshadowing the 33.5% decline in non-tax revenues. The increase in tax revenues reflected a 5.2% increase in international trade tax revenues (customs and excise duties) and a 10.5% increase in VAT revenues. The continuous improvement in tax collection contributed partly to the rise in revenues. Total government expenditures edged down by 0.8% to $11.4 billion in Most of the decline was due to a 20.4% drop in subsidies targeting the energy company. The reduction was also partly caused by exogenous factors leading to the decline in crude oil price, and to the switch from the use and purchase of gas oil, mostly imported from Kuwait and Algeria, to natural gas from Egypt which is significantly cheaper. Regarding interest payments, they increased by 1.9% to $3.9 billion. In this context of positive fiscal developments, gross public debt edged up only moderately in 2010 however its ratio over GDP witnessed a significant decline. The overall level of the public debt grew by a 2.8%, as compared to 2009, to $52.6 billion by the end of However, the increase was fully created by domestic debt which rose by 2.2%, while foreign exchange denominated debt declined by 3.4% in Although debt servicing as percentage of total spending increased to 34.6% in 2010, as compared to 33.7% in 2009, total public debt as a percentage of GDP shrank to 135% in 2010, from 148% in 2009 as a result of high economic growth. Lebanon s current account deficit is estimated to have widened to $7.3 billion. The widening of the account coincides with the expansion of the surplus in services following the surge in tourism and the increase in remittances. The trade surplus in services is expected to have exceeded its 2009 level of $2.56 billion while remittances registered a 7.6% rise to $8.2 billion or 20.8% of GDP. The widening of the trade deficit by 7.5% to $13.7 billion, derived from the expansion of the economy and the consequential rise in local demand, coupled with the appreciation of the Real Effective Exchange Rate (NEER) that continued to play a significant role in pushing imports up. The latter registered a 2% rise to 14.8 million tons. The NEER appreciated from in 2009 to 94.9 in 2010, whereas the average dollar-euro exchange rate declined from 1.39 to 1.34 over the same period. The balance of payments narrowed but remained in positive ground in 2010, posting a surplus of $3.3 billion in comparison with the $7.9 billion surplus registered in 2009, backed partially by a 7.6% rise in remittances. Net foreign assets of the Central Bank were $30.6 billion as of December 31, 2010, reflecting an increase of $3.5 billion, compared to Net foreign assets of the Lebanese commercial banks were also on the up rise, summing to $123 million over the same period. The conservative management of commercial banks as well as the regulatory practices of the Central Bank few years ago that banned financial institutions from investing in the subprime market, constituted crucial factors that enhanced confidence in the Lebanese financial system during the global financial crisis. Lebanon s banking system appeared as a safe haven despite its lower rating compared to other regional and international markets. Consequently, capital continued to flow in the market and foreign direct investment (FDI) is estimated to have exceeded its 2009 level and reached $4.7 billion in 2010, the equivalent of 11.3% of GDP. Correspondingly, local financial markets continued to show resilience in 2010 against the global and regional woes. The Central Bank continued to adopt its policy of pegging the value of the Lebanese Pound to the U.S. Dollar within a band of LBP per USD Gross foreign currency reserves grew by 11.5% 33

36 to $28.6 billion or 77% of GDP in Money supply, measured by broad Money M3 grew by 12.3% to $92 billion, as of December 31, The abundant liquidity was due to capital inflows throughout the year, and made it possible for the Central Bank to lower its policy rate, with the average interbank interest rate declining to 2.8% in 2010, down from 3.4% in The performance of the Beirut Stock Exchange experienced mixed phases of volatility in 2010, affected by the political tensions in the country, the European Sovereign crisis, the U.S. slowing recovery, and the volatile regional markets. The BLOM Stock Index diluted 2009 s 33% increase by ending the year 10.7% lower, and market capitalization decreased by 2% over the same period to $11.06 billion as of December 31, The average stock market turnover was also on the downturn, falling to 11.8% in 2010, as compared to 15% in Lebanese stocks appeared to be undervalued in 2010 compared to their peers in the Middle East and North Africa region. The Lebanese banking stocks had an average P/E ratio of 8.17 as opposed to for MENA banks that have a market cap between $500M and $5B. On the fixed income side, Lebanon s bond market fared much better than the stock market with the BLOM Bond Index increasing by an average of 6.5% from 2009 to reach at end The average weighted yield on Eurobonds declined by 200 basis points to reach 4.86% as at year-end 2010, reflecting a higher demand for bonds. 2 Overview In 2010, BLOM BANK witnessed another successful year marked by a solid financial position, a diversification of products and services, and a wider regional presence. BLOM BANK s.a.l. Annual Report 2010 BLOM BANK s strong position as the leading banking group in Lebanon was reflected by maintaining the status of the most awarded bank in 2010: - Best Retail Bank in the Middle East for 2010 from Banker Middle East - Best Investment Bank in the Middle East for 2010 from Banker Middle East - Best Trade Finance Offering in the Middle East for 2010 from Banker Middle East - Best Mutual Fund in the Middle East for 2010 from Banker Middle East - CEO of the Year in the Middle East for 2010 (Mr. Saad Azhari) from EMEA Finance - Best Bank in Lebanon for 2010 from EMEA Finance - Best Local Investment Bank in Lebanon for 2010 from EMEA Finance - Best Brokerage Award for 2010 from EMEA Finance - Best Asset Manager & Broker Bank for 2010 from EMEA Finance - Best Bank in Syria for 2010 from EMEA Finance - Best Trade Finance Bank in Lebanon for 2010 from GTR MENA - Best Consumer Internet Bank for 2010 from Global Finance - No.1 Banking Brand in Lebanon for 2010 from The Banker Financial Times Group - Best Balanced Fund Award for 2010 from MENA FM BLOM BANK also continued to maintain the highest financial ratings in Lebanon. As such, the Bank has been repeatedly rated by Capital Intelligence, a Middle East-specialized rating agency, B, which is the highest financial strength rating in Lebanon. Moreover, Moody s maintained its foreign currency rating of B1, and S&P credit rating B. In 2010, as one of the largest banks in the country, BLOM BANK net profits increased by an annual % to USD million while total assets reached USD 22, million and total customers deposits attained USD 19, million by the end of In terms of strategy, BLOM BANK continued to build on its geographic expansion and business services diversification. Foreign expansion not only spreads the 34

37 risk of operating in Lebanon, but also diversifies the income base by taking advantage of the economic and business opportunities present in regional economies. In 2010, BLOM BANK Group was operational in 12 countries: Lebanon, Syria, Egypt, Jordan, Qatar, UAE, France, Switzerland, England, Cyprus, Kingdom of Saudi Arabia and Romania. In addition, the Bank has developed further its retail network by opening four new branches in Egypt, Jordan and Syria. In Lebanon, the Bank launched two new branches in the areas of Bab Idriss and Tyr-Abbassieh. The other component of the strategy is to diversify business activities towards a universal banking model. As a result, the bank has expanded the operations of its investment arm, BLOMINVEST BANK, by enhancing its private and investment banking and capital market activities, in addition to introducing asset and wealth management services. The latter aims at establishing funds and investment vehicles for retail and high networth investors diversified in their asset composition and geography. Following the success of the BLOM Cedars and Petra Balanced funds that received numerous awards from leading international agencies, BLOMINVEST launched the BLOM BANK Pyramids Fund, BLOM BANK Money Market Fund, and the BLOM Bond Fund. The aim of the new products is the diversification in the sources of income that gives increasing share for non-interest income. To conclude, BLOM Bank will continue to pursue its organic growth strategy in the coming years by capitalizing on its existing resources and capabilities. 3 Evolution of Total Assets BLOM BANK witnessed a 7.93% growth in assets by the end of This resulted from the bank s expansionary policy and the perceived confidence of expatriates in BLOM BANK Group as a trustworthy source of placing their deposits. In fact, with global interest yields at historic lows, the flow of capital into local accounts maintained its pace. Total assets of the bank grew by 7.93% to reach USD 22.3 billion, as compared to USD 20.7 billion recorded in On the other hand, assets denominated in foreign currencies dropped to 70.07% from 70.85% a year earlier due to high yielding LBP accounts. Evolution of Total Assets (in USD Millions) years 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 22, ,898 16,639 20,702 22, , ,835 11, ,786 35

38 4 Sources of Funds BLOM BANK s main sources of funding include customers deposits, capital funds (Tier I & Tier II), banks and financial institutions and other liabilities. Customers deposits constituted the biggest share of sources of funds with 87.75% of total funding in Tier I and Tier II capital constituted 8.46% of total funds for 2010, while the share of banks and financial institutions amounted to 1.12% in 2010 and other liabilities comprised 2.67% Sources of Funds % Sources of Funds % BLOM BANK s.a.l. Annual Report 2010 Customers Deposits Tier I & Tier II Capital Banks & Financial Institutions Other Liabilities 4.1 Customers Deposits Customers Deposits Tier I & Tier II Capital Banks & Financial Institutions Other Liabilities Throughout 2010, deposits at BLOM BANK continued to rise compared to Customers deposits increased by 8.78%, up from USD 18,024 million in 2009 to reach USD 19,606 million in 2010 as BLOM BANK continued to attract depositors who opted for a safe and trustworthy haven for their funds. In fact, the share of customers deposits from total funding went up by 69 basis points to 87.75% compared to 87.06% in In terms of deposits by country, Lebanon maintained the lead share with 74.1%. The rest were distributed between regional and European countries. With regards to foreign currencies share of total deposits, they stabilized by the end of 2010 at 70.94% of total deposits, in line with 70.75% recorded in This partly explains the rise in fiduciary deposits that reached USD 5,976 million in 2010, increasing 43.82% year-on-year. 36

39 Customers Deposits (in USD Millions) years 0 5,000 10,000 15,000 20, ,024 19, , , ,161 11, , ,686 On the other hand, BLOM BANK s market share in terms of customers deposits within Alpha Group (banks with deposits over USD 2 billion) accounted for 17.44% in Capitalization (Tier I & Tier II Capital) Tier I and Tier II capital increased 10.68% yearly to USD 1, million at the end of 2010, bringing its contribution of total funds to 8.46% from 8.25% in Tier I Capital alone increased by 11.61% to USD 1, million at the end of 2010 compared to an increase of 12.56% by the end of Tier I increase can be mainly attributed to retained profits of the year 2010 amounting to USD million after dividend distribution. This measure falls in line with the bank s strategy of growing organically and at a steady pace. Moreover, Tier II capital s increasing trend was reversed in 2010, falling to USD 73.6 million as a result of the cumulative change in fair values due to the correction in financial assets prices. Tier I & Tier II Capital (in USD Millions) years ,000 1,200 1,400 1,600 1,800 2, , , , , , Tier I Capital Tier II Capital 37

40 4 Sources of Funds 4.3 Banks and Financial Institutions As the world started its gradual recovery from the global recession, financial institutions remained vulnerable to this recovery from the perspective of clearing up their books. Consequently, this was reflected in the drop of Banks and Financial Institutions contribution to BLOM BANK s funds. This share fell from 2.26% in 2009 to 1.12% by the end of 2010 to USD million. That said, the decline was more than offset by the increase in depositor base. 5 Uses of Funds BLOM Bank s strategy stresses on the maintenance of high asset quality and a strong portfolio of investments. The risk component, which has always been the Bank s primary consideration while assessing the uses of funds, is reflected in the return on assets ratio that has always been at the forefront of listed Lebanese banks. The 2010 return on assets ratio stood at a formidable 1.54%. Within the overall use of funds, the share of Lebanese Pound Treasury Bills as well as other governmental debt securities to total assets declined to 19.96% in 2010, down from 21.93% in This was followed by a drop in the share of cash and deposits at the Central Bank to total assets to 30.36% in 2010 from 31.57% in The Bank s placements with other banks and financial institutions amounted to 17.91% of total assets in 2010 compared to 18.87% in On the other hand, the share of bonds and financial instruments with fixed income inched up to 5.82% in 2010, from 5.46% in Perhaps the main version behind the reshuffling of fund use has been the bank s strategy to expand its loan portfolio. As a result, loans granted to customers constituted 23.18% of total assets in BLOM BANK s.a.l. Annual Report Uses of Funds % Uses of Funds % Lebanese Treasury Bills and other government bonds Cash and Central banks Banks & Financial Institutions Bonds and Financial Instruments with fixed Income Loans to Customers Others Lebanese Treasury Bills and other government bonds Cash and Central banks Banks & Financial Institutions Bonds and Financial Instruments with fixed Income Loans to Customers Others

41 5.1 Cash and Balances with the Central Banks Overall cash and central banks reserves stood at USD 6,784 million in 2010, up 3.79% from last year. The share of subscription in Certificates of Deposit amounted to 58.46% of total cash and balances with central banks, up from 52.36% in 2009 as the bank sought to diversify its portfolio holding of government debt. Central Banks reserves in 2010 dropped to 39.73% of total cash and balances with central banks as compared to 45.93% in This is attributable to the Lebanese Central Bank s easing of reserve requirements of banks in an attempt to stimulate lending and economic growth. Finally, cash represented the remaining USD 123 million, slightly up from its contribution of USD 112 million in The cash and central banks category includes non-interest bearing balances held by the Bank at the Lebanese Central Bank (Banque Du Liban) in compliance with the obligatory reserve requirements for all banks operating in Lebanon on commitments in Lebanese Pounds (calculated on the basis of 25% of sight and 15% of term commitments). The requirement also applies to interest bearing placements at the rate of 15% of total deposits in foreign currencies, as well as the certificates of deposit issued by the Lebanese Central Bank (Banque Du Liban). Distribution of Cash and balances with the Central Banks USD Millions % of Total USD Millions % of Total Cash % % Central Bank 2, % 3, % CD's 3, % 3, % Total 6, % 6, % 5.2 Lebanese Treasury Bills and Other Governmental Bills and Bonds The Bank s portfolio of Lebanese Treasury Bills and other governmental debt securities decreased by 1.80% to reach USD 4, million in 2010 from USD 4, million in This came as the bank replaced its holding of Treasury Bills with relatively better yielding instruments. Moreover, the currency composition of the portfolio witnessed a shift from Lebanese pounds denominated treasury bills that edged down to 55.24% of the total portfolio as compared to 57.18% in 2009 due to diversification into higher yielding instruments. Hence, foreign currency-denominated governmental bonds constituted 44.76% of the total in 2010 as compared to 42.82% in

42 5 Uses of Funds The treasury portfolio according to the new IFRS (International Financial Reporting Standards) classification adopted since January 2005 shows the following: Distribution of the Treasury Portfolio in USD Millions Investments Held For Trading: Treasury Bills and Bonds Accrued interest Available for Sale: 2, , Treasury Bills and Bonds 2, , Accrued interest Unrealized Premiums Unrealized Discounts (0.54) (12.05) Held to Maturity: Treasury Bills and Bonds Accrued interest Unrealized Premiums Unrealized Discounts (0.67) (0.51) Loans and Receivables: 1, , Treasury Bills and Bonds 1, , Accrued interest Unrealized Premiums Unrealized Discounts (4.80) (16.06) Total 4, , BLOM BANK s.a.l. Annual Report Distribution of the Treasury Portfolio % Distribution of the Treasury Portfolio % Lebanese Treasury Bills Lebanese Treasury Bills Other Governmental Bonds in Foreign Currencies Other Governmental Bonds in Foreign Currencies

43 5.3 Bonds and Financial Instruments with Fixed Income Bonds and financial instruments with fixed income increased by 14.98% in 2010 to USD 1, million from USD 1, million a year earlier as the Bank opted for a diversification of its investments into higher yielding instruments as global interest rates hit a rock bottom and the inflow of capital into Lebanon depressed the yields of short term instruments. This caption includes bonds and certificates of deposit that are classified as follows: - Held for Trading - Available for Sale - Held to Maturity - Loans and Receivables - Fair Value through Profit & Loss Distribution of Bonds & Financial Instruments with Fixed Income in USD Millions Investments Held For Trading: Bonds Accrued interest Available for Sale: Bonds Unrealized Premiums Unrealized Discounts (3.55) (4.88) Accrued interest CD's Unrealized Premiums Unrealized Discounts 0.00 (0.03) Accrued interest Funds Held to Maturity: Bonds Unrealized Premiums Unrealized Discounts (12.27) (11.41) Less: provision for impairment (0.27) 0.00 Accrued interest CD's Accrued interest Loans and Receivables: Bonds Unrealized Premiums Unrealized Discounts (6.88) (8.35) Accrued interest CD's Unrealized Premiums Unrealized Discounts (0.06) (0.11) Accrued interest Fair Value Through Profit & Loss: Convertible Bonds Accrued interest Total 1, ,

44 5 Uses of Funds 5.4 Banks and Financial Institutions BLOM BANK s deposits at banks and financial institutions increased by 2.46% in 2010 to USD 4,003 million as compared to USD 3,907 million in This came as the bank sought better yields in other investment vehicles amid historic low global interest rates amidst the abundance of the liquidity at the bank. Time deposits constituted 92.48% of total deposits with banks and financial institutions in 2010, up from 90.58% in To note that 98.35% of the current and time deposits are denominated in foreign currencies. 5.5 Loans and Advances to Customers Following BLOM BANK s adoption of a conservative loan strategy in order to maintain a high asset quality, the ratio of net loans and advances to total deposits, which has been successfully maintained at relatively low levels, increased from 22.30% in 2009 to 26.41% in This was driven by the bank s strategy to expand its loan book that was coupled by the easing of local reserve requirements of the Central Bank. Thus, outstanding loans reached USD 5,178 million at the end of 2010, increasing 28.86% from last year. BLOM BANK s market share in terms of total loans and advances within Alpha Group (banks with deposits over USD 2 billion) reached 14.30% in 2010, up from 13.94% in Evolution of Loans and Advances (in USD Millions) years - 1,000 2,000 3,000 4,000 5,000 6,000 BLOM BANK s.a.l. Annual Report , , , , , ,164 The Credit risk classification of the Bank s Loans portfolio is as follows: 4,019 5,178 Credit Risk Classification of Total Net Loan Portfolio in USD Millions Regular Accounts 5, , Special Attention Accounts Net Substandard Net Doubtful Accounts Collective Provisions For Commercial & Consumer Loans (29.53) (26.04) Bad Debt Accounts - - Total 5, ,

45 The above loan classification is in accordance with the Lebanese Central Bank s (Banque Du Liban) classification under decree N dated November, 10th, 1998 relating to bad debt classification dated December Below is a briefing about the basis of loan classification defining each category s characteristics. - Regular Accounts: A- Unconditional: Covers accounts which display regular movements sufficient to repay the loan in accordance with the repayment schedule. The latest financial statements should be available and adequate collateral should be taken to cover the loan. B- Incomplete file: As in point (A), adequate collateral and repayment on schedule are foreseen. However, the file is considered incomplete because the client is late in submitting his financial statements. - Special Attention Accounts: Display signs of irregular movements or exceed the credit limit on a continuous basis. Recent financial statements are unavailable and adverse economic conditions may affect the borrower s ability to repay the debt. Collateral has not been evaluated for the last three years. Such an account may be considered recoverable. However, it should be closely monitored for a year, at the end of which the account is reclassified if the previously mentioned conditions are not regularized. - Non-performing Accounts: Covers loans which display most or all of the following: - A significant drop in the client s profitability - A drop in the flow of cash into the account for a period exceeding 2 years, and thus resulting in repetitive delays in repayment exceeding a period of 3 months. - A noticeable depreciation in the value of the collateral provided and repetitive delays in repayment for a period not exceeding three months. - Credit facilities are not used partially or in whole for the purpose specified in the loan agreement. The credit risk committee will review the repayment schedule with the client and will keep the account under close observation. However, interest and commissions will be classified as unrealized until the account is regularized. - Doubtful Accounts: Represent loans which display all of the conditions of a non-performing account in addition to having a complete lack of credit movement into the account for a period of six months and a delay in payments of the rescheduled loan which exceeds three months from the date of maturity. The Bank will make a partial provision for the loan and consider interest and commission as unrealized. - Bad Debt Accounts: Includes all Doubtful Accounts which are considered unrecoverable due to the lack of a collateral or to the loss of contact with the client. In this case, interest ceases to be accrued and a provision of 100% of the principal amount of the loan is made. The account is under litigation until a ruling by the court is made, after which it is written-off. The improving quality of the loan portfolio due to the enhanced risk and control measures was further highlighted by a decrease in the Bank s ratio of gross doubtful debts to gross total loans to 2.69% in 2010 from 3.44% in The coverage of doubtful accounts (including collective provisions) increased to % in 2010 from 94.41% in Provisions and unrealized interest for doubtful debts and non-performing accounts increased to reach USD million at the end of 2010, compared to USD million in The amount includes provisions for commercial loans not classified at the end of 2010 amounting to USD million. 43

46 5 Uses of Funds The ratio of foreign currency loans with respect to total loans in 2010 decreased from 90.09% to 87.15% while the ratio of foreign currency loans to foreign currency deposits increased to 32.45% in 2010, up from 28.28% in The breakdown of the loan portfolio by maturities shows that medium and long term loans with maturities exceeding one year constituted 28.93% of the bank s outstanding net loans in 2010 as compared to 32.36% in 2009, whereas short term loans, with maturities of less than one year, constituted 71.07% of the total net commercial loans, compared to 67.64% in As for the breakdown of the loan portfolio by economic sectors, the highest share of loans was granted to consumer activities at USD 1,582 million or 29.64% of total loans, up from 26.16% in This is followed by the services and trade sectors respectively. Loans to the agriculture sector witnessed an increase to 2.95% of the total loan portfolio in 2010 from 0.39% in Loans granted to the manufacturing sector decreased to 10.17% in 2010 down from 10.70% in On the other hand, the global economic recession in 2009 continued to have an adverse effect on commerce, as trade loans decreased from 18.09% in 2009 to 17.04% in 2010 with 2.41% of the portfolio granted to retail trade and 15.68% to wholesale trade. Moreover, loan portfolio to the services sector decreased to 22.42% in 2010 down from 27.09% a year earlier. The construction sector witnessed an increase in real estate activity and accounted for 13.63% of the loan portfolio for the year 2010, up from 12.80% in Loans given to freelance professions have decreased from 4.77% in 2009 to 4.15% in BLOM BANK s.a.l. Annual Report Distribution of Loans by Economic Sector% 2009 Distribution of Loans by Economic Sector % Agriculture and Forestry 2.95 Agriculture and Forestry 0.39 Manufacturing Manufacturing Trade Trade Services Services Construction Construction Freelance Professions 4.15 Freelance Professions 4.77 Consumer Loans Consumer Loans

47 Additionally, the analysis of the loan portfolio by type of collateral reveals that the retail loans accounted for the largest share of the 2010 portfolio, rising from 26.16% in 2009 to 29.64% in Moreover, advances against personal guarantees increased, representing 13.29% of the total loans portfolio in 2010, up from 12.86% in Advances against cash collateral went down to 14.04% in 2010 from 16.18% in The share of LC financing increased to 1.44% in 2010, up from 1.21% in 2009, whereas syndicated loans were 4.42% in 2010 compared to 4.91% in Commercial loans secured by mortgages recorded a decrease in 2010, with its share in the total loan portfolio going down to 22.06% in 2010 from 28.91% in Loans to members of staff slightly decreased to 0.12% while loans to directors and related parties accounted for 0.25%, up from 0.18% in Overdraft increased in 2010, representing 14.74% of the total loans portfolio up from 9.37% in Distribution of Loans by Type of Collateral % Distribution of Loans by Type of Collateral % Commercial Loans Secured Commercial Loans Secured by Mortgages by Mortgages Advances Against Personal Advances Against Personal Guarantees Guarantees LC Financing 1.44 LC Financing 1.21 Advances Against Cash Collateral Advances Against Cash Collateral Syndicated Loans 4.42 Syndicated Loans 4.91 Retail Loans Retail Loans Loans to Member of Staff 0.12 Loans to Member of Staff 0.21 Loans to Directors and Related Loans to Directors and Related Parties 0.25 Parties 0.18 Overdraft Overdraft

48 6 Liquidity BLOM BANK s ability to maintain high liquidity levels, minimize risks and ensure high quality of assets has been at the center of liquidity management and core objectives of the Group. The Bank has successfully maintained ample liquidity in 2010 where overall liquidity stood at 67.16%. As such, the Lebanese Pound liquidity ratio (including Lebanese government Treasury Bills) was % in 2010, reflecting high liquidity levels. Moreover, the immediate liquidity (cash & banks) in foreign currencies accounted for 52.80% of foreign currency deposits in 2010, decreasing from 56.76% in Maturity mismatch between assets and liabilities, which characterizes the Lebanese banking sector, was also noticeable in BLOM BANK accounts. In 2010, the gap was negative in the maturities from zero to one month and from one to three months, amounting to USD 8,737 million and USD 2,362 million respectively. After three months, the maturity gaps turn positive, reaching a maximum of USD 5,435 million for maturities of two to five years. Assets-Liabilities Maturity Gap (2010) BLOM BANK s.a.l. Annual Report 2010 USD Millions 7 Up to 1 month Profitability from 1 to 3 months from 3 to 6 months from 6 months to 1 year from 1 to 2 years from 2 to 5 years over 5 years Total Assets 6,060 1,494 1,956 1,595 2,508 5,622 3,109 22,344 Total Liabilities & Shareholder's Equity 14,797 3, ,997 22, Liquidity Gap Cumulative Maturity Gap BLOM BANK preserved its position as one of the most profitable and the best performing bank in Lebanon for the year The bank recorded net profits of USD million, increasing by a considerable 12.82% compared to the year 2009 where net profits stood at USD million. BLOM BANK s Lebanese operations still constitute the lion s share with 85.10% of total net income. BLOM Bank s profits contributed to a considerable portion of the total banking sector profits as it accounted for a share of 20.58% of the Alpha Group (banks with deposits over USD 2 billion). Total (8,737) (2,362) 1,146 1,125 2,281 5,435 1,112 - (8,737) (11,099) (9,953) (8,828) (6,547) (1,112) - BLOM BANK s performance was also reflected in attaining the highest profitability ratios. Return-on-average common equity stood at 21.15% in 2010, slightly decreasing from 21.30% a year earlier. Return-on-average assets for the year 2010 reached 1.54%, improving from 1.52% recorded in On the other hand, earnings per share increased to USD 1.46 in 2010 from USD 1.29 in

49 Evolution of Net Income (in USD Millions) years Net Interest Income Net interest income registered an 18.21% increase in 2010 to USD million. The growth came as a result of a 5.88% increase in interest and similar income to USD 1, million in 2010, and a 1.32% decrease in interest charges in 2010 to reach USD million. On the other hand, net interest revenue after provisions and doubtful loans, went up by 13.33% to reach USD million in 2010 as compared to USD million in The growth of net interest income will be further elaborated through the breakdown of net interest income into interest and similar income, interest and similar charges, interest margin as well as net provisions for doubtful loans Interest and similar income Interest and similar income witnessed a 5.88% increase in Average interest earning assets increased by 13.83% to reach USD 19,315 million in 2010, up from USD 16,968 million in The below table illustrates the breakdown of average interest earning assets by currency at the end of 2010: Breakdown of Average Interest Earning Assets (2010) USD Millions LBP FC Total Lebanese Treasury Bills and other governmental Bills 2,673 1,942 4,615 Deposits with banks and Central Banks 118 5,046 5,164 Bonds& other Financial Inst. with Fixed Income Including 2,484 2,353 4,837 Certificates of Deposits Loans and Advances 538 4,161 4,699 Total 5,813 13,502 19,315 47

50 7 Profitability In 2010, the weights of interest and similar interest generating assets changed from those of the year Lebanese and other governmental bills accounted for 23.89% of total average interest earning assets in 2010, decreasing from 26.15% in The average deposits with banks and central banks stood at 26.74% of the total in 2010, down from 29.27% in The share of bonds and other financial instruments with fixed income, including certificates of deposit, accounted for 25.04% up from 22.84%, a year earlier and the weight of loans and advances increased to 24.33% in 2010, compared to 21.74% in The breakdown of Interest and Similar Income is detailed in the following table: Breakdown of Interest and Similar Income USD Millions % of Total USD Millions % of Total Lebanese Treasury Bills and other governmental Bills % % Deposits with banks and Central Banks % % Bonds& other Financial Inst. with Fixed Income Including Certificates of Deposits % % Loans and Advances (including related parties) % % Total 1, % 1, % BLOM BANK s.a.l. Annual Report 2010 The breakdown of interest and similar income reveals a decrease in the share of Lebanese Treasury Bills and other governmental bills to 30.39% in 2010 compared to 34.38% in On the other hand, the portion of income generated from deposits with banks and central banks dropped to 7.84% from 9.39%. This is attributed to the diversification of interest income generating instruments where the bank opted to make better use of resources by transferring into relatively safer and better yielding bonds and certificates of deposit and by extending loans. As a result, the contribution of bonds and other financial instruments with fixed income (including certificates of deposit) stood at 31.81% in 2010, up from 30.12% a year earlier. Finally, interest income generated from loans and advances including related parties represented 29.96% of the total in 2010, increasing from 26.11% in 2009 due to the increase in retail lending Breakdown of Interest and Similar Income % Lebanese TB s and Other Governmental Bills Deposits with Banks and Central Banks Bonds & Other Financial Instruments with Fixed Income including CD s Loans and Advances (including related parties) Breakdown of Interest and Similar Income Lebanese TB s and Other Governmental Bills Deposits with Banks and Central Banks Bonds & Other Financial Instruments with Fixed Income including CD s Loans and Advances (including related parties) %

51 7.1.2 Interest and Similar Charges Interest and similar charges declined by 1.32% to USD million in 2010 down from USD million in 2009, while average interest bearing liabilities went up by 14.44% to USD 19,175 million compared to USD 16,756 million a year earlier. Deposits from customers including related parties accounted for the largest share of the average interest bearing liabilities, amounting to 99.36% in 2010 while deposits from banks and financial institutions represented the remaining 0.64%. Breakdown of Average Interest Bearing Liabilities (2010) USD Millions LBP FC Total Deposits and Similar Accounts from Banks and Financial Institutions Deposits from Customers Including Related Parties 5,619 13,433 19,052 Total 5,621 13,554 19,175 The breakdown of the interest and similar charges shows a decrease in the portion of deposits and similar accounts from banks and financial institutions to 0.49% in 2010, down from 0.97% in 2009 while the share of interest paid on customers deposits slightly increased to 99.51% in 2010 compared to 99.03% in Finally, charges from notes and fixed income financial instruments remained nil for the third year in a row. Breakdown of Interest and Similar Charges 2010 USD Millions % of Total Deposits & Similar accounts from Banks and Financial Institutions % Deposits from Customers Including Related Parties % Total % Breakdown of Interest and Similar Charges % Deposits from Customers Including Related Parties Deposits and Similar Accounts from Banks and Financial Institutions Breakdown of Interest and Similar Charges Deposits from Customers Including Related Parties Deposits and Similar Accounts from Banks and Financial Institutions %

52 7 Profitability Interest Margin (Before Provisions for Doubtful Loans) The Bank s Net Interest Income before provisions for doubtful loans rose by 18.21% in 2010 to USD million, while the net interest margin before provisions on doubtful loans stood at 2.29% in 2010, up from 2.18% in The ratio of interest charges to interest income decreased to 58.84% down from 63.13% in 2009 due to a slight decrease in interest charges and a higher increase in interest income. Net Interest Income (in USD Millions) years BLOM BANK s.a.l. Annual Report Net Interest Margin years 0.00% % % 1.50% 2.00% 2.29% 2.18% 2.42% 2.50% % % % % % % 50

53 Interest Cost / Interest Income Ratio years 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% % 63.13% 62.10% % 67.81% 70.66% 71.25% 70.91% 70.40% Net Provisions for Doubtful Loans The net provisions for doubtful loans decreased from a positive balance of USD 3.46 million in 2009 to a negative balance of USD million in 2010, in the wake of the consequences of the global recession. 7.2 Non Interest Income Non-interest income increased by % year-on-year, amounting to USD million in 2010 compared to USD million in Breakdown of Non-Interest Income Change USD Millions % of Total USD Millions % of Total % Net Commissions % % 19.35% Net Trading Income % % 7.73% Net Gain /Loss on Financial assets & liabilities designated at fair value through profit & loss % % (91.16)% Net Gain /Loss on Financial Operations % % 97.93% Other Operating Income % % (23.06)% Total % % 23.76% Net commissions increased from 2009 by 19.35% to USD million in 2010, and still maintained the largest share of total non-interest income, accounting for 52.72%, down from 54.67% in Moreover, net trading income recorded a year- on- year increase of 7.73% to USD million, representing 14.10% of the total noninterest income as compared to 16.20% in Net gain on financial assets and liabilities designated at fair value through Profit & Loss decreased from USD 4.98 million in 2009 to USD 0.44 million in 2010, accounting for 0.24% of the total and decreasing from 3.37% in Net income from financial operations, which rose 97.93% to USD million stood at 27.69% of total non-interest income, increasing sharply from 17.31% in Finally, other operating income decreased by 23.06% to USD 9.61 million in 2010, representing 5.25% of the total compared to 8.45% in

54 7 Profitability Constituents of Non-Interest Income % Constituents of Non-Interest Income % Net Commissions Net Commissions BLOM BANK s.a.l. Annual Report 2010 Net Trading Income Net Gain/Loss on Financial Assets and Liabilities designated at Fair Value through Profit and Loss Net Gain/Loss on Financial Operations Other Operating Income 7.3 Staff and Operating Expenses Net Trading Income Net Gain/Loss on Financial Assets and Liabilities designated at Fair Value through Profit and Loss Net Gain/Loss on Financial Operations Other Operating Income Staff and operating expenses reached USD million in 2010, registering a year-on-year increase of 11.51% as the bank expanded its operations locally and regionally. Staff expenses (salaries and related benefits) increased by 14.79% in 2010 to USD million while operating expenses went up by 6.19% to reach USD million. Thus, staff expenses accounted for the largest share of staff and operating expenses with 63.65% of the total while operating expenses stood at 36.35%. That said, BLOM Bank is still maintaining a relatively low cost-to-income ratio, reflecting the Bank s efficient cost-containment policy. The cost-to-income ratio fell to % in 2010 compared to 35.58% Distribution of Staff and Operating Expenses Change USD Millions % of Total USD Millions % of Total % Staff Expenses % % 14.79% Operating Expenses % % 6.19% Total % % 11.51% 52

55 Cost to Income Ratio 50.00% 48.00% 46.00% 47.34% 44.00% 42.00% 40.00% 42.56% 40.93% 38.00% 38.09% 38.58% 39.77% 36.00% 38.37% 36.80% 35.10% 37.26% 35.04% 34.00% 34.11% 34.63% 32.00% 35.58% 30.00% years 8 Dividend Distribution and Preferred Shares Revenue During BLOM BANK s Annual General Assembly, on April , the distribution of dividends for the year 2010 was approved. Holders of preferred shares series 2004 and 2005 received a respective of USD 0.85 and USD 0.95 per share. As for holders of common stocks and Global Depositary Receipts (GDR), they received the equivalent of LBP 675 per share. All distributed dividends are subject to a 5% tax. Worth noting that BLOM exercised a share split of 1/10 for a total of 215 million shares in October Capital Adequacy Ratios (Basel I) The Bank s capital adequacy ratio (Basel I) reached 26.39% (after dividend distribution) at the end of 2010, which is almost three folds the international ratio of 8% required by the Basel Commission. For Tier I capital alone, the capital adequacy ratio stood at 25.24% at the end of

56 9 Capital Adequacy Ratios (Basel I) Capital Adequacy Ratios after Dividend Distribution (Basel I) (In percentage) 40.00% 36.10% 35.00% 33.23% 35.33% 30.00% 25.00% 29.88% 26.06% 29.76% 28.02% 28.22% 27.34% 30.71% 28.60% 29.05% 27.85% 27.61% 26.33% 26.39% 25.24% 20.00% 24.96% 15.00% years Tier I Capital Tier I + Tier II Capital BLOM BANK s.a.l. Annual Report Interest Rate Risk Interest rate risk arises from adverse movements in interest rates, thus affecting the bank s interest earning assets and liabilities. Interest rate risk is well managed through the continuous re-pricing of assets and liabilities. Most assets and liabilities are re-priced within one year. Given that the majority of the bank s deposits are repriced within the three months interval, while most of the bank s treasury bills and government bonds portfolio are re-priced after the three months period, interest rate risk continues to remain within this period. The bank s interest rate sensitivity position based on contractual re-pricing arrangements as of December 31, 2010 is as follows: Interest-Rate Sensitivity Position USD Millions Up to 1 month from 1 to from 3 to from 6 3 months 6 months months to 1 year from 1 to 2 years from 2 to 5 years over 5 years Non Sensitive to Interest Rate Risk Total Assets 4,658 1,554 1,894 1,687 2,315 5,516 3,095 1,625 22,344 Total Liabilities & Shareholder's 13,499 3, ,483 22,344 Equity Interest Rate Sensitivity Gap for (8,841) (2,209) 1,111 1,278 2,096 5,346 3,077 (1,858) Cumulative Interest Rate Sensitivity Gap (8,841) (11,050) (9,939) (8,661) (6,565) (1,219) 1,858 - Total 54

57 11 Risk Management and Basel II Preparations 11.1 Risk Management The consolidated Basel II Capital Adequacy ratio of the group reached 13.81% by the end of 2010 against 13.96% in 2009, which is above the 10.5% Basel III requirement once the capital conservation buffer element is fully implemented. This ratio is calculated in accordance with the Standardized Approach for Credit Risk, the Basic Indicator Approach for Operational Risk and the Standardized Measurement for Market Risk. BLOM BANK Group (excl. Arope) Capital Adequacy Ratio / Tier I Ratio years 12.00% 12.50% 13.00% 13.50% 14.00% CAR Tier I Ratio For regulatory as well as internal purposes, the Bank calculates Basel Capital Adequacy Ratio on a group consolidated basis and by individual legal entity, allowing for close monitoring of the capital position of each banking subsidiary. In the latter case, every single entity achieved a Basel II Capital Adequacy Ratio above the minimum 8% international requirement. By type of risk, Credit Risk comprises the largest proportion of Risk Weighted Assets, accounting for some 90% of the total. This position is relatively affected by Lebanon s sovereign rating of B which impacts the Risk Weighting of Foreign Currency government securities holdings of the bank. BLOM BANK Group (excl. Arope) Risk Weighted Assets by Risk Type years 5,000,000 10,000,000 15,000,000 20,000, Market Risk Operational Risk Credit Risk 55

58 11 Risk Management and Basel II Preparations The Bank s capital position is closely monitored by General Management and Group Risk Management. The latter is delegated by the Board of Directors to ensure sound, comprehensive and effective Risk Management practices and processes are in place throughout the Group. To help achieve this, Group Risk Management has developed a plan to implement a variety of systems that cover the three broad areas of risk and help the bank comply with some of the more advanced approaches under Pillar I of Basel II. Group Risk Management has implemented a Risk Management Structure within the Group whereby each country in which the Bank is present has its own Risk Manager that reports to the Group Chief Risk Officer. Currently, there are eight country Risk Managers. All areas of risk coverage by the Group underwent continued development during 2009: Under Credit Risk, the generation of Internal Ratings for our commercial and corporate credit portfolios continued with new specialized scorecards for SMEs introduced in Application scorecards developed by Fair Isaac for Retail Banking products were implemented in The retail products covered include car loans, personal loans and credit cards. Implementation of the Sungard Capital Manager (Basel II) system, which automates Basel II Capital Adequacy calculation and reporting, continued in This system has extensive stress test and scenario generation capability which would allow the Bank to meet Pillar II requirements in relation to the credit portfolio. BLOM BANK s.a.l. Annual Report 2010 For Market Risk, static and dynamic ALM for BLOM BANK Lebanon was implemented under the Sungard Focus ALM system project, in addition to the launch of the Funds Transfer Pricing model. Similar to the Capital Manager system, the ALM system has extensive stress testing and scenario generating capabilities which in addition to helping the Bank meet Pillar II requirements that are also extensively used by ALCO. The Market Risk team closely monitors the Bank s funding and liquidity position and performs various scenarios to take into account changes in the operating environment in Lebanon and the region. The Bank places importance on maintaining high liquidity to meet short term needs, as well as a strong base of core deposits. In addition, through the Focus ALM system, tracking of Interest Rate Risk has been automated with detailed Interest Rate Sensitivity Gaps, Earnings at Risk and Interest Rate and Foreign Exchange Rate shock scenarios. The Operational Risk team of Group Risk Management ensures that all activities are covered by clear policies and procedures taking into account all relevant risk aspects which are highlighted through periodic risk assessments. The Bank maintains a detailed Loss Incidence Database reflecting Basel requirements whereby business lines and loss types are clearly highlighted. Moreover, the Operational Risk team prepared a new and more comprehensive Business Continuity Plan that covers potential emergency scenarios and ensures that Business Continuity policies are in conformity with best practices Corporate Governance The Board exercises its oversight function to a large degree through four dedicated Board Committees. These are Audit, Risk Management, Consulting Strategy and Corporate Governance and Nomination and Remuneration board committees. The Board Audit Committee s responsibility is to monitor and assess the integrity of the Bank s financial accounting. The audit committee also assesses the competence of External Auditors as well as the Internal Audit Department, in addition to internal controls and compliance with the Bank s by-laws and internal regulations. The Board Risk Management Committee periodically reviews and evaluates the Risk Management function of the Group, and reports and drafts recommendations to the Board. The Consulting Strategy and Corporate Governance Committee oversees the development of the strategic plan and monitors its progress throughout the Group. It approves and monitors large projects, develops corporate governance policies and practices, and advises the Board on overall business development. The Nomination and Remuneration Committee provides assistance to the Board in identifying individuals qualified for directorship to sit on Board committees. Also, it plans the succession of executive and nonexecutive directors and evaluates the performance of top management, including Board members. The Bank in its Corporate Governance Code has established independence criteria for non executive members 56

59 of the Board who must constitute a majority of the Board. The Board Committees are fully functional and meet in accordance with stipulated frequency. The Bank firmly believes in the basic principles of accountability, reporting and transparency throughout the organizational structure. Senior management exercises the authority delegated to it by the Board through clear and segregated reporting channels, including Management Committees covering all areas of operations. They also ensure that internal risk and control procedures and structures are overseen by respective departments, namely Internal Audit, Risk Management and Compliance. The Bank makes sure that all employees act professionally, ethically and with the utmost integrity in accordance with an established Code of Ethics and Conduct. Additionally, the Bank recognizes the value of its Human Resources as a prime stakeholder in the institution, endeavoring to treat all employees in the most equitable manner. As such, all employees are required to attend presentations on the Bank s Code of Conduct and Corporate Governance. The Bank will continue to develop its Corporate Governance practices while seeking to protect and enhance stakeholders interests from shareholders to employees. 12 Universal Banking Services In line with its aim of maximizing customer satisfaction and increasing shareholders value, BLOM BANK has adopted the policy of diversification of its products and services. BLOM Bank provides the following universal banking services that suit all customers needs: - Private and investment banking - Commercial banking and corporate banking - Retail banking - Islamic banking - Insurance services 12.1 Private and Investment Banking BLOM BANK provides private banking services such as investment consulting and wealth management through both its investment-banking arm BLOMINVEST Bank Sal, its Geneva-based affiliate BLOM BANK Switzerland, BLOM BANK Qatar and BLOMINVEST Saudi Arabia. Some of these services include: Investment Products: include a variety of investment funds and structured products focusing on Lebanese and foreign instruments. Based on its pioneering success in launching mixed class mutual funds, the Bank successfully rolled the BLOM BANK Pyramids Fund as well as a reset class of the highly demanded BLOM Cedars Balanced Fund in Project Finance: consists of extending medium and long term financing and participating in bank loan syndications. Treasury & Capital Market Services: includes brokering on the Beirut Stock Exchange (BSE), advising on trades in international equities, trading in debt securities and dealing in foreign exchange markets. Investment Banking: participates in the underwriting and distribution of Lebanese and other debt instruments, provides advice on mergers and acquisitions as well as privatization. Asset & Portfolio Management: covers management of portfolios of shares, bonds and term placements in all currencies. 57

60 12 Universal Banking Services Research Department: produces daily, weekly and quarterly reports on the Lebanese economy, and analyzes leading Lebanese economic sectors. In addition, it provides country reports on regional economies, especially those where BLOM BANK has a presence. It publishes as well the BLOM Stock Index (BSI), Lebanon s first financial market index that covers all stocks quoted on the BSE, and conducts equity research on major Lebanese and regional companies Commercial and Corporate Banking During 2010, and as the international financial markets started to pick up after the 2008 worldwide crisis, BLOM Bank continued to expand its credit portfolio taking advantage of its high liquidity, the availability of excess deposits, and revised BDL incentives related to extending credits against decrease in reserve requirements. Accordingly, and in line with the conservative credit practices of BLOM BANK, several new loans were extended to corporate clients in the area of project finance, real estate development, and industrial as well as tourism related projects. This was reflected by the increase in our loan portfolio by 29% in Moreover, BLOM BANK mandated and participated in several syndicated loans to finance projects in Lebanon and other Arab countries throughout its network. In parallel, the bank sustained its policy of increasing its loan portfolio to small and medium sized businesses operating in different sectors of the economy, through its entire branch network. In addition to the conventional banking services, the bank developed its existing products and services to provide financing in compliance with Islamic Shariaa through its subsidiary BLOM DEVELOPMENT BANK. BLOM BANK s.a.l. Annual Report 2010 As for our new subsidiary in Qatar, BLOM BANK Qatar, it consolidated its contributions by extending credit facilities to corporate clients in Qatar benefiting from the booming economy that is expected to continue its growth during the coming decade with Qatar hosting the 2022 Football world cup event. In brief, BLOM BANK will maintain its objective of contributing to the development of the Lebanese and Arab economies while ensuring a conservative and sound lending policy Retail Banking In 2010, BLOM BANK introduced new retail products, and developed its portfolio of existing payment cards, loans and services. Payment cards BLOM BANK offers a wide range of payment cards that target different customers, provide different methods of payments and meet different purposes. These cards vary in type and in currency. The segmentation of cards takes into consideration the various types of customers and their card needs such as debit, charge, credit, cobranded and prepaid. Accordingly, BLOM cards come under Visa and MasterCard and range from Electronic, Classic, Gold, Titanium, Platinum, Black Platinum, and Corporate (Business Platinum, Platinum Corporate, and Classic Corporate cards). Moreover, the Bank has Internet cards dedicated for Internet users, a Euro card for those who visit Europe frequently, and prepaid cards mini for those wishing to have a card without opening an account. In addition to the above, BLOM also has Watan, a card launched solely for the Lebanese army, internal security and national security forces. 58

61 BLOM was the first bank in Lebanon to launch the Personalize your card service whereby cardholders can add on the front of their card a personal image of their choice, or an image from BLOM s unique Image Library, which includes categories like sports, wildlife, romance, pets, holidays and special occasions to name a few. BLOM exclusively offers the possibility of having this service completed online or physically through any branch. As part of its Corporate Social Responsibility activities, BLOM BANK launched two new programs in 2010 that were considered unique in Lebanon; the BLOM Shabeb and MasterCard Giving card. The BLOM Shabeb Program targets the Youth who consist of middle and high school students, university students, and future professionals. The program offers the youth an array of banking services, especially catered to their lifestyles and needs. The retail department has introduced three types of cards to suit the needs of the youth: prepaid cards, debit cards, and preapproved credit cards for students of predetermined universities. On another front, BLOM BANK launched the MasterCard Giving card, first of its kind in the world, in collaboration with the Lebanese Mine Action Center (LMAC), a unit of the Lebanese Army. The program offers a Gold MasterCard or a Titanium MasterCard, which combine the benefits of a credit card, with the ability to donate to the LMAC, which is in charge of demining the Lebanese territory, spreading awareness and caring mine victims. Donations are made whenever BLOM MasterCard Giving Affinity cardholders pay the card s annual fee and use their cards for purchases or for cash withdrawals. POS Machines Merchants wishing to install BLOM POS machines have a choice between: GPRS machines: wireless that requires no electricity or fixed line. With a SIM card provided by BLOM BANK, our GPRS machines are mobile, allowing merchants to move them anywhere they desire. They accept dual currencies (USD- LBP) Hypercom POS machines: require electricity and a fixed telephone line. They are a dual currency machines: USD and LBP. Veriphone machines: require electricity and a fixed telephone line. They are a single currency machine: USD or LBP. The BLOM machines accept payment cards under the brands of Visa, Visa Electron, MasterCard, MasterCard Electronic, and Maestro. The machines are equipped with the latest EMV technology that allows acceptance of Chip cards. This technology provides ultimate security to both the cardholder and the merchant. BLOM provides merchants with a next day settlement of the transaction amount, with a one day value date as of the settlement of the amounts. BLOM BANK also dedicates an account manager to handle all inquiries and suggestions concerning POS issues. In addition, BLOM BANK offers a 24 hour merchant call center which is tailored to cater for all needed support. Reward Programs The BLOM Golden Points Loyalty program enables customers to win a variety of gifts -such as airline tickets, free stays at the finest hotels, electronics and much more- by accumulating Golden points with every $100 of purchases using the card. The BLOM Gifts Loyalty program allows cardholder to win valuable gifts for purchases at certain merchants over a period of 6 months. The Shabeb Loyalty program is a recently launched program dedicated to the BLOM Shabeb cardholders that entitles them for discounts and special deals at reputable merchants across Lebanon. Our co-branded card, Alfa BLOM MasterCard, offers free talk time to cardholders on a monthly basis and on card spending. 59

62 12 Universal Banking Services Consumer loans BLOM BANK s customers can take advantage of a number of consumer loans to satisfy their various needs: KARDI for personal loans SAYARATI for car loans (new or used vehicles), winner of the Best Car Loan in the Middle East for 2011 Award, from The Baker Middle East. DARATI for housing loans (principal home, or non-principal home) Housing loans in Collaboration with the Corporation for Public Housing (CPH) Housing Loan for projects under construction In 2010, BLOM BANK launched a consumer loan in partnership with Khoury Home. This loan offers the optimal solution to purchase the latest electronics, and home appliances. The loan duration ranges between 1 & 4 years and its pricing includes a life insurance policy covering the amount of the outstanding loan amount. Another characteristic is the 0% interest charge with no initial down payment. This association between Lebanon s best bank and Lebanon s leading retailer of household products has resulted in winning the award for Best Personal Loan in the Middle East for 2011 from the Banker Middle East. SME loans Small and medium enterprises, or even self employed or business owners can benefit from a variety of loans tailored for their needs: BLOM BANK s.a.l. Annual Report 2010 SMALL BUSINESS LOAN for SMEs BUSINESS LOAN for financing an office, a warehouse, a clinic, etc. KAFALAT is a subsidized loan for small business owners Bancassurance Services AROPE Insurance, BLOM BANK s subsidiary, offers all kinds of insurance services from personal accident, to health, fire, car insurance and so on. BLOM BANK also offers investment programs coupled with a life insurance policy in collaboration with Arope Insurance. New and more flexible products in USD were launched; DAMANATI Plus, a retirement plan coupled with life insurance and WALADI Plus, a child s education program, coupled with life insurance. Investment Products BLOM BANK offers a variety of investment products to help manage an individual s finances in a better, safer and more profitable way. Accordingly, BLOM BANK, in collaboration with BLOMINVEST Bank, offers a number of Mutual Fund programs. Special Accounts BLOM BANK offers a number of special accounts, catered for special needs. In addition to the traditional savings and current accounts, the bank offers Maksabi, a special savings account, utility bills accounts and salary domiciliation accounts. There are also three types of bundled accounts that offer the client current accounts with various services for a monthly fee: Account Plus Classic, Account Plus Gold and Account Plus Platinum. Furthermore, BLOM BANK enriched its Wedding List Account. Interested clients can now benefit from personalized debit cards, a preapproved credit card along with exclusive offers that are related to the memorable day. The primary aim of BLOM BANK is to better serve its customers by offering the best products and services. In addition to the traditional branches which are conveniently distributed throughout Lebanon, BLOM has already opened 5 Retail Branches which offer faster transactions in terms of Retail services. All BLOM branches have ATM s which allow around the clock cash withdrawal. 60

63 Sales Force BLOM has more than one sales channel which range from Direct Sales, to indoor Sales, to telemarketing teams that promote and sell available Retail products and services. Call Center BLOM customers can enjoy the convenience of a 24-hour call center, ready to cater for all their needs and inquiries. The retail department also has a telemarketing team to make outbound informative calls to existing clients. The Call Center s monitoring system has been upgraded to a better examination and control of fraud and scans. E-Banking BLOM BANK offers to its customers phone banking services such as Allô BLOM ( a 24-hour customer service) as well as internet banking services such as e-blom. This service allows users to complete many of their routine banking transactions in the comfort of their home/office. The client may even apply for a card, issue a prepaid card, or even perform outgoing transfers. SMS Alert Service The Bank provides a convenient SMS ALERT service, enabling customers to receive alerts whenever the balance of accounts changes or a transaction is being performed. Public Website BLOM retail products and services enjoy an independent, user-friendly website where users can make use of simulators and online application through: Workflow BLOM developed internally a workflow system to process car loans, personal loans, credit cards and debit cards electronically, thus benefiting from Electronic Archiving, as well as fast approval and response cycles (e.g.: 1 hour for car loans). In 2010, BLOM BANK enhanced the workflow to include Housing Loan applications Islamic Banking BLOM DEVELOPMENT BANK (BDB) S.A.L. increased its market share in the Lebanese market during Although the footprint of the Islamic banking sector is still very modest when compared to the conventional sector as a whole, the Islamic financial sector is proving to be a viable alternative to financing and investment in a socially responsible frame of mind. In fact, BDB assets increased by 21% over 2009, deposits soared by 242% and the facilities extended locally and regionally exhibited a rise of 338% over BDB entrenched its presence in the local market and in the regional arena as well. In the Lebanese market, BDB inaugurated successfully its Tripoli branch in the first semester of The facility is located in a prime area in the center of North Lebanon s economic hub. It comprises of a modern premise across three floors with state of the art ICT infrastructure. On the other hand, BDB finalized the building plan of its new headquarters in Beirut s Corniche el Mazraa area that will be operational in Internally, BDB expanded its credit department and created an operations department as a result of demand activity in Islamic Finance. Regionally, BDB widened its presence in neighboring economies through multi-layer financing facilities as well as international trade financing activities. The expansion is substantial both in the clients substrate as well as in the volume of operations. The need for a sophisticated and efficient Sharia compliant trade financing services in the region are only matched with the BDB precision and peace of mind approach to Islamic financing. The year 2010 witnessed the initial phase of BDB strategic expansion plan which engulfed the opening of new branches in key areas in Lebanon and the establishment of BDB as a nascent player among the Islamic corporate financial service providers regionally. 61

64 12 Universal Banking Services 12.5 Insurance Products & Services In line with the rest of the financial sector in Lebanon, the insurance sector performed well during Overall premiums increased by 13.10% from The economic growth in Lebanon and the development of bancassurance products contributed positively to this result. AROPE continued its steady growth and development to register a yearly increase of 60.32% in net profits. AROPE stood strong in spite of all the challenges and ranked 5th in total life and non-life segments of the market. AROPE s Non-Life premiums grew by 15.60% to USD million, representing a market share of 6.85%. On the other hand, life premiums, registered a growth of 9.90%, capturing 10.54% of the market among 52 insurance firms operating in the Lebanese market. Regionally, the Syrian insurance market produced good results in In both, Life and Non-Life segments, AROPE Syria took advantage of the industry s performance and increased substantially its market share by registering a combined annual growth of 31.50%. This was in turn reflected in the rankings of Syrian insurance companies where AROPE Syria gained the 2nd position. In Egypt, our subsidiaries, AROPE Egypt for Properties and Liabilities and AROPE Life Insurance, dedicated the year to develop the human resources and improve the efficiency of the Egyptian operation. Both companies are investing in building strong pillars and setting up effective management strategies to enable them excel in the market. 13 Information Systems and Technology BLOM BANK s.a.l. Annual Report 2010 In today s technology-driven world, the effective use of banking technologies remains the key to differentiation, competitive advantage and institutional growth. That is the reason why we are constantly seeking to grow and evolve our business by proactively using powerful information technologies in order to enhance customer experiences and enrich our products and services portfolio. In fact, we have been using state-of-the-art systems infrastructures to diversify our delivery channels, innovate in payments and cards technologies, manage risks and enhance systems security, address national and international compliance and regulatory requirements and gain customer insights and business intelligence Customer Relationship Management During 2010, we kept on enhancing our on-line, real-time, around the clock banking services using a variety of channels including IVR, Internet, ATMs, SMS, Call Center, in addition to the traditional branches, in order to interact with our customers however, wherever and whenever they desire. This 360⁰ view of customers activity with the bank is enabled by our eblom suite of integrated electronic banking delivery channels that consist of: eblom ALLO BLOM the Bank s Interactive Voice Response system. eblom Internet Banking our online banking service that offers a wide array of services which are continuously expanded, enhanced and adapted to customers needs and demands. eblom Self Service using the bank Network of ATMs deployed all over Lebanon where additional services are being constantly planned and added. eblom SMS Alerts a real-time alerting system based on delivering messages to our customers mobile phones to inform them instantly about events in relation to their accounts or cards. eblom Contact Center our contact center is available 24 hours a day all year long and is benefiting from continuous enhancements based on CTI and IP telephony to achieve seamless integration with the Bank s CRM application. eblom Live Information Broadcasting System a system that enables the bank to broadcast in real-time over large LCD screens deployed at the branches, live and updated information covering stock and foreign exchange quotes, news feeds, marketing campaigns, new promotions, TV commercials etc.. 62

65 eblom Targeted Information Passing System a campaign management and lead referral tool that allows the profiling of customers using a centralized knowledge base that offers over-the-counter customers new products and services tailored to their needs. These custom offerings are presented to customers during their presence at the branch. In order to provide an integrated banking web site experience, we developed the eblom Portal project to provide a unified authentication platform for BLOM BANK and its subsidiary companies in order to securely establish the identity of individuals accessing the various electronic services offered through the Internet covering all the universal banking services. The eblom Portal allows BLOM BANK and its affiliated companies to provide access to their electronic services via a single interface thus paving the way to offering the single sign-on feature to customers. In addition, this versatile authentication platform aims to provide a verification methodology to protect the customer against identity theft while following the industry s best practices. In effect, the authentication methodology that was adopted was based on two factors of authentication including the customer s username and password which are the part of the credential that a customer knows. This was coupled by an SMS-based One-Time-Password (OTP) which is the other part of the credential that the customer would need to retrieve from a personal mobile phone Advanced Electronic Payment Systems In 2010, we kept on growing our VisaCard and MasterCard offerings and enhancing the reliability and effectiveness of our payment systems. We also kept on delving into the business-to-business (B2B) market by providing Point of Sales to merchants across Lebanon. Furthermore, we kept on reaping the benefits of our online card fraud monitoring system capable of sending real-time alerts to the bank s call center agents, thus enabling immediate action and insight as well as reporting and tracking should a fraud pattern be detected. This card fraud monitoring system drastically reduced fraud losses and incidences Enterprise Application Integration (EAI) During this year, we kept on developing our Service Oriented Architecture (SOA) framework to achieve the highest degree of integration between our different information systems through the use of web-services and of a powerful and flexible workflow engine. This allowed us to manage the complexity and control the quality and cost of business processes throughout their lifecycle involving people and systems. In addition, this EAI framework was applied to many processes, in particular, our consumer loans processing systems consisting of a loan origination system, a loan assessment system, and a loan granting system. This framework has allowed us to offer an instant loan granting system aimed at instantaneously granting walk-in customers a personal loan specially targeted to their needs. The EAI framework was also applied to many processes, such as the processing of incoming checks from the national clearing house with the objective of de-materializing the clearing process through scanning and electronically sending the check images to the branches instead of sending the physical checks Basel II & Regulatory Compliance This year, we continued to address compliance requirements through the use of state-of-the-art systems for corporate and commercial credit risk rating systems acquired from MOODYS. Other software-based systems related to Assets & Liabilities Management, Funds Transfer Pricing and Capital Management were also acquired from SUNGARD. Some of these project phases were completed in 2010 while others are planned for execution during In addition, we kept on building our credit scorecards by integrating to the loan origination workflow a credit scoring system for loans based on Fair Isaac scoring models. 63

66 13 Information Systems and Technology 13.5 Systems Security & Infrastructure Reliability As a financial institution that has been around for over 55 years, we recognize that our systems and data are very important assets for our business continuity. Therefore, we kept on improving our IT Infrastructure reliability. For this purpose, we introduced server virtualization and consolidation and enterprise storage consolidation. In 2010, we kept on investing in our data center facilities and disaster recovery sites as part of our strategy to protect the bank s assets. In fact, these facilities would ensure higher availability and protect the bank s information systems from losses in case of an unforeseen disaster. It also accelerates the development of new services to meet the bank s future demands for expansion. It is worthwhile noting that the Data Center also features efficient power consumption in accordance with green data center requirements and was designed in full compliance with the ANSI 942 standard, which sets requirements for assuring the highest levels of continuity, security and performance. We also kept on raising employee awareness and developing Information Security Policies and Procedures to address and prevent security threats and to pro-actively monitor systems activity through implementing advanced preventive and detective controls and online monitoring Financial Reporting & Consolidation During 2010, we continued the implementation of the IBM Cognos 8 Controller which is a comprehensive web-based solution that offers powerful financial reporting and consolidation. It also offers built-in financial intelligence and advanced analytics to provide timely and accurate information and improved decision support. This solution has allowed us to consolidate the financial statements across BLOM BANK Group. BLOM BANK s.a.l. Annual Report People Development 14.1 General Overview BLOM BANK Management continues to stress the importance of the role of human resources in keeping the bank on its path to become a major player in the regional financial markets. Staff at BLOM are considered the most valuable resource, and the talent of employees is recognized as essential for the effective functioning of the Bank. People at BLOM BANK are managed in a fair, ethical and transparent manner. A set of standards and procedures guide the treatment of employees in regard to hiring, advancement, compensation, training, and other terms and privileges of employment. BLOM BANK policies in this regard offer equal opportunities to all employees and applicants and prohibit discrimination of any type on the basis of gender, religion, ethnicity, age and disability. All employees, on the other hand, are required to comply with a set of policies concerning safety, information security and a general code of conduct. They are expected to adhere to the highest standards of ethical behavior in what relates to confidentiality, professionalism, transparency, conflict of interest and integrity. The most visible characteristic of BLOM BANK employees is their high level of education, in addition to their relative young age. At the end of 2010, the majority of employees (74.9 percent) held a university level degree or higher, while the average age of employees was 36.2 years. The following table represents the structure and distribution of BLOM BANK employees across the various units of BLOM Group, and according to various criteria. 64

67 Distribution of BLOM Employees Across the Various Units of the Group by Gender, Age, Level of Education and Function as at 31/12/2010 BLOM (Lebanon, Cyprus & Jordan) BLOM Invest BLOM Dev. BLOM FRANCE BLOM Switz d BLOM Egypt Other Units * BSO Arope Total** Gender Male 1, ,455 Female ,589 Total 1, ,044 Age < , Total 1, ,044 Average Age Level of Graduate Education Degrees Professional Certificates Bachelor Degrees ,431 Technical Certificates Others Total 1, ,044 Functions Managers and Above Deputies/ Assistant Managers Supervisors Employees 1, ,004 Total 1, ,044 Number of Branches * Other Units include (Abu Dhabi, BLOMINVEST KSA & Qatar) ** Excluding BLOM Egypt Securities & Syria & Overseas for Financial Services 14.2 Policies and Procedures BLOM BANK recognizes the importance of a talented labor force in keeping the bank highly competitive. Appropriate policies were implemented so that the creation and development of talent is maintained through attracting, developing and retaining the best and the brightest employees Recruitment Providing the bank with the required human capital to meet its operational and strategic goals is a challenging task that we continuously strive to accomplish. To this end, we adopt a strategic approach for recruiting and selecting the right number of people with the required set of skills at the time they are needed. 65

68 14 People Development The recruitment and selection process ensures the recruitment of the best available and most appropriate staff in line with the principles of non-discrimination and equal opportunities for all. It commences upon complete evaluation of the need for new employees based on our geographical expansion and business needs. Unit managers identify open positions early enough to allow for timely recruitment. Applicants are interviewed by unit managers and recruitment officers, and for high level positions, by the General Manager. The final decision is given by the HR committee and the accepted applicants are then reference checked and screened by the compliance department for thorough background checking. Different sources are exploited to widen the candidate pool for each vacancy including internal employees, internal candidate database, on-line recruitment systems, job fairs, university career service centers, interns and other external recruitment partners. During the year 2010, the various units of BLOM BANK group recruited a total of 892 new employees to support the expansion of the bank across the region and to replace departing and retiring employees (see table below). The majority of the new recruits were in BLOM Lebanon, (32%), BSO (29%), BLOM Egypt (17%), and AROPE (13%) New Recruits and turnover rates of the various Units of BLOM Group in 2010 New Recruits Turnover Rate BLOM (Lebanon, Cyprus & Jordan) BLOM Invest BLOM Dev. BLOM FRANCE BLOM Switz d BLOM Egypt New Units * Arope BSO Total BLOM BANK s.a.l. Annual Report 2010 * New Units include (Abu Dhabi, BLOM Invest KSA & Qatar) Training BLOM BANK considers continuous training as essential to ensure a competent workforce that is able to adapt to the constantly changing business environment. BLOM BANK invests in different types of in house and external trainings covering a wide range of topics among which are Banking Techniques, Management, Marketing & Sales, Information Technology and Languages. The HR department, in collaboration with line managers, performs the Training Needs Assessment (TNA) during the last quarter of every year and the training plan for the coming year is set accordingly. Technical in-house seminars are usually developed and delivered by field experts from BLOM BANK, while soft skill development seminars are delivered by professional trainers from local and international training firms. BLOM Group delivered 86,725 training hours during 2010 amounting to an average of 21.4 training hours per employee. Distribution of Training Activities Across the Various Units of BLOM Group in 2010 BLOM (Lebanon, Cyprus & Jordan) BLOM Invest BLOM Dev. BLOM FRANCE BLOM Switz d BLOM Egypt New Units * Arope BSO Total Hours of training 44,038 1, , ,908 19,704 86,725 * New Units include (Abu Dhabi, BLOM Invest KSA & Qatar) 66

69 Career development and promotion Career development at BLOM is considered a powerful employee motivator and retention tool, and gives the bank a competitive strength in attracting new talent. Career development is emphasized because of its importance in creating large pools of highly competitive and qualified people who have the necessary skills and competencies required for top-level performance. In addition to the individual training programs that are designed for high potential employees, two particular programs, the Management Training Program (MTP), and the Fast Track Program (FTP), were designed to provide the bank with the needed talent for the future. While the MTP gives participants the opportunity to branch out through serving on cross-functional teams and completing short-term assignments, the FTP allows the participants to gain in-depth knowledge in a particular area of expertise. The selection of candidates for these programs follows a very rigorous and transparent process where the immediate supervisors, the line managers and the HR department are all involved to ensure that the best performers with the highest potential are selected from the pool of young, ambitious and motivated employees. Because we strongly believe that the bank s value lies in its human capital, we try to keep our people on the frontiers of their professions to better serve our customers. 15 Bank s Operational Efficiency In 2010, the group s operational efficiency continued to show improvements. Net profit per branch rose by 5.1% to reach USD 2,264,390 at a time when the number of branches expanded by 7.3%. In addition, average assets per branch showed a slight increase to reach USD 153,042,328 at the end of year 2010, compared to USD 152,223,411 recorded in BLOM Group s Operational Efficiency Indicators Number of Employees ,559 Number of Branches USD Average Assets per Branch 153,042, ,223,411 USD Net Profit per Branch 2,264,390 2,154, Local and Regional Expansion BLOM BANK Group will continue its geographical expansion policy in the region by opening new branches locally and abroad. In Lebanon, BLOM BANK opened 2 branches in Tyr-Abbassieh and Bab Idriss during the year 2010 and is planning on opening 2 other branches in Kfar Hbab and Jib Jannine in early BLOM BANK also plans on adding 5 new branches to its network: Amyoun, Dekerman (Saida), Ghobeiry (in addition to the currently available branch in Ghobeiry), Baabda and Broumana, expected to open in 2011 and 2012, bringing the number of branches to a total of 66. In terms of the regional expansion, BLOM BANK JORDAN opened a branch in Abdoun in 2010 and plans to open another branch in early 2011 in Wadi Saqra. In addition, BLOM BANK JORDAN expects to expand its branch network in 2011 and 2012 by opening in Aqaba, Abdali and Taj Mall (Abdoun), therefore increasing the total number of branches to 12. On the other hand, BSO (Bank of Syria and Overseas) opened 2 new branches in Mouhardeh (Hama) and Al Rawda (Damascus) in 2010 and plans to further expand by introducing 2 new branches in Deir Al Zour and Al Kameshli in This brings the total of BSO branches to 27. In Egypt, BLOM BANK EGYPT opened a branch in Haram in 2010 bringing the total number of branches to

70

71

72 BLOM BANK s.a.l. Annual Report

73 Consolidated Financial Statements at 31 December 2010 BLOM BANK S.A.L. CONSOLIDATED FINANCIAL STATEMENTS 1. Auditors report 2. Consolidated income statement year ended 31 December Consolidated statement of comprehensive income year ended 31 December Consolidated statement of financial position at 31 December Consolidated statement of cash flows for the year ended 31 December Consolidated statement of changes in equity for year ended 31 December 2010 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Corporate Information 2. Accounting Policies 2.1 Basis of preparation 2.2 Basis of consolidation 2.3 Changes in accounting policies and disclosures 2.4 Impact of the adoption of IFRS 9 effective 1 January 2011 on the amounts reported 2.5 Summary of significant accounting policies 2.6 Significant accounting judgments, estimates and assumptions 3. Acquisition of Additional Interest In Bank of Syria and Overseas SA 4. Segmental Information 5. Interest and Similar Income 6. Interest and Similar Expenses 7. Net Fee and Commission Income 8. Net Trading Income 9. Net Gain on Financial Investments 10. Credit Loss (Expense) Income 11. Personnel Expenses 12. Other Operating Expenses 13. Income Tax 14. Earnings Per Share 15. Cash and Balances with Central Banks 16. Due from Banks and Financial Institutions 17. Derivative Financial Instruments 18. Financial Assets Held-For-Trading 19. Financial Assets Designated at Fair Value Through Profit or Loss Loans and Advances to Customers 21. Bank Acceptances / Engagements By Acceptances 22. Non-Current Assets Held For Sale 23. Financial Investments 24. Property And Equipment 25. Intangible Assets 26. Other Assets 27. Goodwill 28. Due to Banks and Financial Institutions 29. Customers Deposits 30. Current Tax Liabilities 31. Other Liabilities 32. Provisions for Risks and Charges 33. Retirement Benefits Obligation 34. Share Capital and Premiums 35. Capital Reserves 36. Treasury Shares 37. Available-For-Sale Reserve 38. Cash And Cash Equivalents 39. Dividends Declared and Paid 40. Related Party Transactions 41. Contingent Liabilities, Commitments and Leasing Arrangements 42. Fiduciary Assets, Assets Under Management and Custody Accounts 43. Fair Value of the Financial Instruments 44. Maturity Analysis of Assets and Liabilities 45. Legal Cases and Contingent Liabilities 46. Risk Management 46.1 Credit risk 46.2 Liquidity risk and funding management Analysis of financial assets and liabilities by remaining contractual maturities 46.3 Market risk Interest rate risk Currency risk Prepayment risk 46.4 Operational risk 47. Capital Management 48. Notes to the Consolidated Statement of Cash Flows 49. Comparative Information 50. Subsequent Events

74 INDEPENDENT AUDITORS REPORT TO THE SHAREHOLDERS OF BLOM BANK SAL We have audited the accompanying consolidated financial statements of BLOM Bank SAL (the Bank) and its subsidiaries (the Group), which comprise the consolidated statement of financial position as at 31 December 2010 and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. 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, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors 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 about whether the financial statements are free from material misstatement. BLOM BANK s.a.l. Annual Report 2010 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 auditors judgment, 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 auditors consider internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the 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 financial position of the Group as at 31 December 2010, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. 72

75 Consolidated Income Statement For the year ended 31 December 2010 Notes 2010 LL million 2009 LL million Interest and similar income 5 1,813,668 1,712,928 Interest and similar expense 6 (1,067,129) (1,081,395) Net interest income 746, ,533 Fee and commission income 176, ,735 Fee and commission expense (31,333) (22,957) Net fee and commission income 7 145, ,778 Net trading income 8 38,862 36,081 Net gain on financial assets designated at fair value through profit or loss 657 7,507 Net gain on financial investments 9 76,321 38,558 Other operating income 14,373 18,836 Total operating income 1,022, ,293 Credit loss (expense) income 10 (24,892) 5,215 Write back of provision on financial investments 23-15,721 Net operating income 997, ,229 Personnel expenses 11 (220,503) (192,083) Depreciation of property and equipment 24 (34,690) (33,118) Amortization of intangible assets 25 (2,493) (1,770) Other operating expenses 12 (134,497) (120,676) Total operating expenses (392,183) (347,647) Net operating profits 605, ,582 Net profit from sale or disposal of other assets Profit before tax 605, ,711 Income tax expense 13 (106,745) (85,982) Profit for the year 498, ,729 Attributable to: Equity holders of the parent 483, ,558 Non-controlling interests 15,005 12, , ,729 Basic/diluted earnings per share attributable to equity holders of the parent for the year LL 14 2,197 1,942 LL 73

76 Consolidated Statement of Comprehensive Income For the year ended 31 December LL million 2009 LL million Profit for the year 498, ,729 Other comprehensive (loss) income Net (loss) gain on available-for-sale financial assets Exchange differences on translation of foreign operations Other comprehensive (loss) income for the year (9,963) 104,864 (15,951) (9,882) (25,914) 94,982 Total comprehensive income for the year 472, ,711 Attributable to: Equity holders of the parent 458, ,441 Non-controlling interests 14,247 14, , ,711 BLOM BANK s.a.l. Annual Report

77 Consolidated Statement of Financial Position At 31 December 2010 Notes 2010 LL million 2009 LL million Assets Cash and balances with central banks 15 4,248,229 4,693,974 Due from banks and financial institutions 16 5,931,237 5,787,117 Derivative financial instruments 17 46,692 33,544 Financial assets held-for-trading 18 54,816 24,763 Financial assets designated at fair value through profit or loss , ,402 Loans and advances to customers 20 7,797,136 6,046,601 Loans and advances to related parties 40 9,398 11,522 Bank acceptances , ,637 Non-current assets held for sale 22 28,062 29,846 Financial investments available-for-sale 23 4,116,261 4,694,221 Other financial assets classified as loans and receivables 23 9,559,006 8,200,247 Financial investments held-to-maturity , ,997 Investment properties Property and equipment , ,850 Intangible assets 25 6,281 6,727 Other assets , ,510 Goodwill 27 63,145 63,268 Total assets 33,683,852 31,208,844 Liabilities and equity Liabilities Due to banks and financial institutions , ,438 Derivative financial instruments 17 36,465 23,526 Customers' deposits 29 29,363,177 26,940,185 Related parties deposits , ,554 Engagements by acceptances , ,637 Current tax liabilities 30 70,924 48,588 Other liabilities , ,388 Provisions for risks and charges 32 78,828 38,421 Retirement benefits obligation 33 45,075 38,558 Total liabilities 30,833,270 28,633,295 Equity attributable to equity holders of parent Share capital - common shares , ,600 Share capital - preferred shares 34 18,200 18,200 Share premium on common shares , ,059 Share premium on preferred shares , ,310 Capital reserves , ,051 Treasury shares 36 (75,793) (58,723) Reserves for revaluation variance - real estate 24 14,727 14,727 Available-for-sale reserve 37 96, ,184 Foreign currency translation reserve 21,976 37,169 Other reserves Results of the financial period profit 483, ,558 Retained earnings 444, ,061 2,724,112 2,446,527 Non-controlling interests 126, ,022 Total equity 2,850,582 2,575,549 Total liabilities and equity 33,683,852 31,208,844 The accompanying notes 1 to 50 form part of these consolidated financial statements. 75

78 Consolidated Statement of Financial Position At 31 December 2010 Off financial position Notes 2010 LL million 2009 LL million Financing commitments - Commitments issued to financial institutions 41 2,778 17,805 - Commitments received from financial institutions 74,460 33,089 - Commitments issued to customers , ,711 Guarantees commitments - Guarantees issued to financial institutions , ,040 - Guarantees received from financial institutions 45,026 45,050 - Guarantees issued to customers , ,602 - Guarantees received from customers 46-1 (A) 12,635,982 9,561,921 Foreign currency operations - Foreign currencies to receive 17 1,708,020 3,699,075 - Foreign currencies to deliver 1,715,062 3,708,139 BLOM BANK s.a.l. Annual Report 2010 Commitments on term financial instruments ,262 1,110,062 Other commitments 181, ,810 Fiduciary assets , ,344 Financial assets under management 42 8,264,163 5,312,368 Impaired loans fully provided for and transferred to off financial position 20 84,935 82,695 76

79 Consolidated Statement of Cash Flows For the year ended 31 December 2010 Notes 2010 LL million 2009 LL million Operating Activities Profit for the financial period before income tax 605, ,711 Adjustments for: Other adjustment related to a subsidiary company (7,056) - Depreciation of property and equipment 24 34,690 33,118 Amortization of intangible assets 25 2,493 1,770 Profit from sale of property and equipment (107) (129) Provision (write-back of provision) for loans and advances to customers 10 17,885 (5,215) Write back of provision for impairment of financial assets 23 - (15,721) Provision for placements with other banks 16 4, Unrealized profit from investment properties - (37) Provision for retirement benefits obligation 33 8,204 6,484 Net provision for risks and charges 32 10,912 1,575 Net provision for outstanding claims and IBNR reserves 32 24,474 7,056 Profit from sale of non-current assets held for sale (1,341) (2,474) Gain from sale of other financial assets classified as loans and receivables 9 (60,888) (23,398) Gain from sale of available-for-sale financial investments 9 (14,641) (14,265) Unrealized gain on financial assets designated at fair value through profit or loss (657) (7,507) Unrealized gain on financial assets held-for-trading (1,934) (7,336) 621, ,690 Changes in operating assets and liabilities: Financial assets held-for-trading (28,119) (3,163) Financial assets designated at fair value through profit or loss (24,466) (49,940) Banks and financial institutions debit 48 (616,889) (142,676) Derivative financial instruments debit (13,148) 6,323 Loans and advances to customers (1,768,420) (810,939) Loans and advances to related parties 2,124 (4,596) Non-current assets held for sale 1, Other assets 1,241 36,090 Derivative financial instruments credit 12,939 (33,253) Banks and financial institutions credit (8,611) (125,650) Customers' deposits 2,422,992 4,242,740 Related parties deposits (37,837) 90,276 Other liabilities 48 66,375 41,527 Cash from operations 631,655 3,748,681 Taxes paid (84,867) (91,055) Settlement of provisions for risks and charges - (1,915) Retirement benefits obligation paid 33 (1,141) (2,551) Net cash from operating activities 545,647 3,653,160 Investing activities Term deposits with central banks (179,825) 70,238 Financial investments available-for-sale 581, ,717 Other financial assets classified as loans and receivables 48 (1,297,871) (2,067,550) Financial assets held-to-maturity (137,298) (140,041) Purchase of intangible assets 25 (1,872) (3,451) Purchase of property and equipment 24 (80,285) (106,261) Cash proceeds from the sale of property and equipment 1,460 23,406 Net cash used in investing activities (1,114,282) (2,121,942) Financing Activities Purchase of treasury shares, net (17,070) (18,846) Net gain of sale of treasury shares 15,184 1,718 Acquisition of non-controlling interests 3 (38,366) - Non-controlling interests (668) (6,447) Dividends paid 39,36 (149,458) (136,906) Net cash used in financing activities (190,378) (160,481) Effect of exchange rate changes (8,085) (8,908) (Decrease) increase in cash and cash equivalents (767,098) 1,361,829 Cash and cash equivalents at 1 January 6,837,672 5,475,843 Cash and cash equivalents at 31 December 38 6,070,574 6,837,672 Operational cash flows from interest and dividends Interest paid 1,066,306 1,053,850 Interest received 1,787,470 1,693,483 Dividend received 1,455 1,500 77

80 Consolidated Statement of Changes in Equity For the year ended 31 December 2010 Attributable to equity holders of the parent Share Share Share Share capital- capital- premium premium Reserves for on on Capital Treasury revaluation common preferred common preferred reserves shares variance-real shares shares shares shares estate LL million Balance at 1 January ,600 18, , , ,051 (58,723) 14,727 Results of the financial period profit for the year Other comprehensive income Total comprehensive income BLOM BANK s.a.l. Annual Report 2010 Non-controlling interests share in capital increase of subsidiary company Dividends distribution (note 39) Appropriation of 2009 profit (note 35) , Transfer to reserve for increase of share capital Purchase of treasury shares (note 36) (159,092) - Sales of treasury shares (note 36) , ,022 - Non-controlling interests share from dividends distribution in subsidiary companies Other adjustment related to a subsidiary Acquisition of non-controlling interests (note 3) Balance at 31 December ,600 18, , , ,086 (75,793) 14,727 78

81 Availablefor- sale reserve Foreign currency translation reserve Other reserves Retained Earnings Results of the financial period - profit Total Noncontrolling interests Total equity 106,184 37, , ,558 2,446, ,022 2,575, , ,376 15, ,381 (9,963) (15,193) (25,156) (758) (25,914) (9,963) (15,193) , ,220 14, , (149,458) (149,458) - (149,458) ,345 (280,100) (230) (159,092) (90) (159,182) , , (745) (745) (7,056) - (7,056) - (7,056) (22,235) - (22,235) (16,131) (38,366) 96,221 21, , ,376 2,724, ,470 2,850,582 79

82 Consolidated Statement of Changes in Equity For the year ended 31 December 2010 Attributable to equity holders of the parent Share Share Share Share capital- capital- premium premium Reserves for on on Capital Treasury revaluation common preferred common preferred reserves shares variance-real shares shares shares shares estate LL million Balance at 1 January ,600 18, , , ,391 (39,877) 14,727 Results of the financial period profit for the year Other comprehensive income Total comprehensive income BLOM BANK s.a.l. Annual Report 2010 Non-controlling interests share in capital increase of subsidiary company Dividends distribution (note 39) Appropriation of 2008 profits (note 35) , Purchase of treasury shares (note 36) (78,373) - Sales of treasury shares (note 36) ,718 59,527 - Non-controlling interests share from dividends distribution in subsidiary companies Dividends on treasury shares (note 36) Balance at 31 December ,600 18, , , ,051 (58,723) 14,727 80

83 Availablefor- sale reserve Foreign currency translation reserve Other reserves Retained Earnings Results of the financial period - profit Total Noncontrolling interests Total equity 3,905 46, , ,271 2,078, ,199 2,199, , ,558 12, , ,279 (9,396) ,883 2,099 94, ,279 (9,396) , ,441 14, , (142,181) (142,181) - (142,181) ,923 (223,090) (78,373) (13) (78,386) , , (6,522) (6,522) ,275-5,275-5, ,184 37, , ,558 2,446, ,022 2,575,549 81

84 Notes to the Consolidated Financial Statements 31 December Corporate Information BLOM Bank SAL (the Bank ), a Lebanese joint stock company, was incorporated in 1951 and registered under No 2464 at the commercial registry of Beirut and under No 14 on the banks list published by the Central Bank of Lebanon. The headquarters of the Bank are located in Verdun, Rashid Karameh Street, Beirut, Lebanon. The Bank, together with its affiliated banks and subsidiaries (the Group), provides a wide range of banking (commercial, investment and private) as well as insurance and brokerage services. On 14 February 2008, the Central Bank of the United Arab Emirates licensed BLOM Bank SAL to open a representative office in Abu Dhabi. This license is valid for five years. 2 Accounting Policies 2.1 Basis of preparation BLOM BANK s.a.l. Annual Report 2010 The consolidated financial statements are prepared under the historical cost convention as modified for the restatement of certain tangible real estate properties in Lebanon according to the provisions of law No 282 dated 30 December 1993, and for the measurement at fair value of derivative financial instruments, financial assets held-for-trading, financial assets designated at fair value through profit or loss and financial investments available-for-sale. The consolidated financial statements have been presented in million of Lebanese Lira (LL million), which is the functional currency of the Group. Balances denominated in other currencies have been presented in thousands. Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by International Accounting Standards Board (IASB), and the regulations of the Central Bank of Lebanon and the Banking Control Commission. Presentation of the consolidated financial statements The Group presents its consolidated statement of financial position broadly in order of liquidity. An analysis regarding recovery or settlement within 12 months after the consolidated statement of financial position date (current) and more than 12 months after the consolidated statement of financial position date (noncurrent) is presented in note

85 Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position only when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liability simultaneously. Income and expense will not be offset in the consolidated income statement unless required or permitted by any accounting standard or interpretation, as specifically disclosed in the accounting policies of the Group. 2.2 Basis of consolidation Basis of consolidation from 1 January 2010 The consolidated financial statements comprise the financial statements of the Group and its subsidiaries as at 31 December each year. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date when such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intra-group balances, transactions, unrealised gains and losses resulting from intra-group transactions and dividends are eliminated in full. Losses within a subsidiary are attributed to the non-controlling interest even if that results in a deficit balance. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it: Derecognises the assets (including goodwill) and liabilities of the subsidiary; Derecognises the carrying amount of any non-controlling interest; Derecognises the cumulative translation differences, recorded in equity; Recognises the fair value of the consideration received; Recognises the fair value of any investment retained; Recognises any surplus or deficit in profit or loss; Reclassifies the parent s share of components previously recognised in other comprehensive income to profit or loss or retained earnings, as appropriate. 83

86 Notes to the Consolidated Financial Statements 31 December 2010 Basis of consolidation prior to 1 January 2010 Certain of the above-mentioned requirements were applied on a prospective basis. The following differences, however, are carried forward in certain instances from the previous basis of consolidation: Acquisitions of non-controlling interests, prior to 1 January 2010, were accounted for using the parent entity extension method, whereby, the difference between the consideration and the book value of the share of the net assets acquired were recognised in goodwill. Losses incurred by the Group were attributed to the non-controlling interest until the balance was reduced to nil. Any further excess losses were attributed to the parent, unless the non-controlling interest had a binding obligation to cover these. Losses prior to 1 January 2010 were not reallocated between noncontrolling interest and the parent shareholders. Upon loss of control, the Group accounted for the investment retained at its proportionate share of net asset value at the date control was lost. The carrying values of such investments at 1 January 2010 have not been restated. The consolidated financial statements include the financial statements of BLOM Bank SAL and the subsidiaries listed in the following table: BLOM BANK s.a.l. Annual Report 2010 Notes Country of incorporation Activities % effective equity interest 31 December 2010 % 31 December 2009 % BLOM Bank France SA France Banking activities BLOM Bank (Switzerland) SA Switzerland Banking activities BLOM Invest Bank SAL e Lebanon Banking activities BLOM Development Bank SAL e Lebanon Islamic banking activities Bank of Syria and Overseas SA a Syria Banking activities Arope Insurance SAL Lebanon Insurance activities Syria International Insurance (Arope Syria) SA a and b Syria Insurance activities BLOM Bank Egypt SAE Egypt Banking activities BLOM Egypt Securities SAE e Egypt Brokerage activities BLOM Invest Saudi Arabia e Saudi Arabia Banking activities BLOM Bank Qatar LLC d Qatar Banking activities Arope Life Insurance Egypt SAE Egypt Insurance activities Arope Insurance of Properties and Responsibilities Egypt SAE Egypt Insurance activities Syria and Overseas Company for Financial Services a and c Syria Brokerage activities

87 (a) Effective 1 January 2004, the Group obtained control, by virtue of agreement with other investors, over Bank of Syria and Overseas SA, and consequently, the financial statements of Bank of Syria and Overseas SA have been consolidated with those of the Group. During 2010, the Group acquired additional 10% interest in Bank of Syria and Overseas SA (note 3) which resulted in dilution of non-controlling interests in other related subsidiaries. (b) Effective 1 January 2006, the Group obtained control, by virtue of agreement with other investors, over Syria International Insurance (Arope Syria) SA, and consequently, the financial statements of Syria International Insurance (Arope Syria) SA have been consolidated with those of the Group. (c) Syria and Overseas Company for Financial Services is 52% owned by Bank of Syria and Overseas SA. Consequently, the financial statements of Syria and Overseas Company for Financial Services have been consolidated with those of the Group. (d) The ownership interest of this subsidiary was affected by the share capital increase of the respective subsidiary which resulted in dilution of noncontrolling interests. (e) The ownership interests of these subsidiaries were affected by the insignificant purchase of some non-controlling interests shares. 2.3 Changes in accounting policies and disclosures New and amended standards and interpretations The accounting policies adopted are consistent with those of the previous financial year. Amendments resulting from improvements to IFRSs to the following standards did not have any impact on the accounting policies, financial position or performance of the Group: IFRS 2 Share-based payment: Group Cash-settled Share-based Payment Transactions effective 1 January 2010 IFRS 3 Business Combinations (Revised) and IAS 27 Consolidated and Separate Financial Statements (Amended) effective 1 July 2009, including consequential amendments to IFRS 2, IFRS 5, IFRS 7, IAS 7, IAS 21, IAS 28, IAS 31 and IAS 39 IAS 39 Financial instruments: Recognition and Measurement Eligible Hedged items effective 1 July 2009 IFRIC 17 Distributions of Non-cash Assets to Owners effective 1 July

88 Notes to the Consolidated Financial Statements 31 December 2010 IFRS 3 Business Combinations (Revised) and IAS 27 Consolidated and Separate Financial Statements (Amended) IFRS 3 (Revised) introduces significant changes in the accounting for business combinations occurring after this date. Changes affect the valuation of noncontrolling interest, the accounting for transaction costs, the initial recognition and subsequent measurement of a contingent consideration and business combinations achieved in stages. These changes will impact the amount of goodwill recognised, the reported results in the period that an acquisition occurs and future reported results. IAS 27 (Amended) requires that a change in the ownership interest of a subsidiary (without loss of control) is accounted for as a transaction with owners in their capacity as owners. Therefore, such transactions will no longer give rise to goodwill, nor will it give rise to a gain or loss. Furthermore, the amended standard changes the accounting for losses incurred by the subsidiary as well as the loss of control of a subsidiary. The changes by IFRS 3 (Revised) and IAS 27 (Amended) will affect future acquisitions or loss of control of subsidiaries and transactions with non-controlling interests. The change in accounting policy was applied prospectively and had no material impact on earnings per share. Improvements to IFRSs BLOM BANK s.a.l. Annual Report 2010 Issued in April 2009 IFRS 2 Share-based Payment IAS 1 Presentation of Financial Statements IAS 17 Leases IAS 38 Intangible Assets IAS 39 Financial Instruments : Recognition and Measurement IFRIC 9 Reassessment of Embedded Derivatives Future changes in accounting policies Below is the list of standards issued but not yet effective for the year ended 31 December 2010: IAS 24 Related Party Disclosures (Amendment) IAS 32 Financial Instruments: Presentation Classification of Right Issues (Amendment) IFRS 9 Financial Instruments: Classification and Measurement IFRIC 14 Prepayments of a Minimum Funding Requirement (Amendment) IFRIC 18 Transfers of Assets from Customers IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments Management does not expect the above standards to have a significant impact on the Group s financial statements when implemented in future years except for IFRS 9. 86

89 IFRS 9 as issued reflects the first phase of the IASBs work on the replacement of IAS 39 and applies to classification and measurement of financial assets and liabilities as defined in IAS 39. The standard is effective for annual periods beginning on or after 1 January However, it will be early adopted by the Group beginning 1 January 2011, in accordance with the Banking Control Commission Circular No. 265 issued on 23 September 2010, and this early adoption will have an impact on amounts reported in respect of the Group s financial statements as summarized under section 2.4 below. Improvements to IFRSs (issued in May 2010) The IASB issued Improvements to IFRSs, an omnibus of amendments to its IFRS standards. The amendments have not been adopted as they become effective for annual periods on or after either 1 July 2010 or 1 January The amendments are listed below: IFRS 3 Business Combinations IFRS 7 Financial instruments: Disclosures IAS 1 Presentation of Financial Statements IAS 27 Consolidated and Separate Financial Statements IFRIC 13 Customer Loyalty Programs The management of the Group, however, does not expect that the adoption of the above improvements will have a significant impact on the Group s financial position or performance. 2.4 Impact of the adoption of IFRS 9 effective 1 January 2011 on the amounts reported As discussed in section 2.3 above, IFRS 9 will be adopted in the Group s financial statements for the annual period beginning 1 January Management s preliminary assessment of the impact of the application of IFRS 9 is summarized as follows: In accordance with the provisions of IFRS 9, adoption by the Group in 2011 will be applied retrospectively and comparative amounts will not be restated as permitted by IFRS 9. Effective 1 January 2011, the Group s available-for-sale financial assets under IAS 39 will be classified as financial assets at amortized cost, financial assets designated at fair value through profit or loss and financial assets designated at fair value through other comprehensive income. As a result, the cumulative change in fair value of available-for-sale reserve is expected to decrease by an amount of LL 117,141 million against a decrease in the opening balance of retained earnings in the amount of LL 1,911 million, a decrease in financial assets at amortized cost in the amount of LL 124,761 million, an increase in financial assets designated at fair value through profit or loss in the amount of LL 5,892 million and an increase in other comprehensive income in the amount of LL 183 million. 87

90 Notes to the Consolidated Financial Statements 31 December 2010 Effective 1 January 2011, part of the Group s financial assets measured at amortized cost (comprising of a) loans and receivables, b) held to maturity and c) available-for-sale securities that were reclassified in 2008 to loans and receivables due to the global financial crisis) under IAS 39 will be measured through profit or loss. As a result, the financial assets measured at amortized cost are expected to decrease by an amount of LL 36,853 million against a decrease in the opening balance of retained earnings by an amount of LL 50,523 million and an increase in the cumulative change in fair value of available-for-sale reserve in the amount of LL 13,670 million. Effective 1 January 2011, part of the Group s financial assets measured at amortized cost (comprising mainly of available-for-sale securities which were reclassified in 2008 to loans and receivables due to the global financial crisis) under IAS 39 will remain measured at amortized cost. As a result, the cumulative change in fair value of available-for-sale reserve is expected to increase by an amount of LL 5,764 million against a decrease in the opening balance of retained earnings of LL 2,012 million and an increase in financial assets measured at amortized cost in the amount of LL 3,752 million. BLOM BANK s.a.l. Annual Report 2010 Effective 1 January 2011, part of the Group s financial assets measured at amortized cost (comprising mainly of held-to-maturity securities which were reclassified in prior years to available-for-sale securities) under IAS 39 will be classified as financial assets designated at fair value through profit or loss. As a result, the cumulative change in fair value of available-for-sale reserve is expected to increase by an amount of LL 1,486 million against a decrease in the opening balance of retained earnings of LL 18,029 million and a decrease in financial assets measured at amortized cost in the amount of LL 16,543 million. 2.5 Summary of significant accounting policies (1) Foreign currency translation The consolidated financial statements are presented in Lebanese Lira which is the Group s functional and presentation currency. Each entity in the group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. (i) Transactions and balances Transactions in foreign currencies are initially recorded at the functional currency at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange at the statement of financial position date. All differences arising on non-trading activities are taken to the income statement, with the exception of differences on foreign currency borrowings that provide an effective hedge against a net investment in a foreign entity. These differences are taken directly to other comprehensive income until the disposal of the net investment, at which time they are recognized in the income statement. 88

91 Tax charges and credits attributable to exchange differences on those borrowings are also recorded in other comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operations and translated at closing rate. (ii) Group companies As at the reporting date, the assets and liabilities of subsidiaries and overseas branches are translated into the Group s presentation currency at the rate of exchange as at the statement of financial position date, and their income statements are translated at the weighted average exchange rates for the year. Exchange differences arising on translation are taken directly to a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognized in equity relating to that particular foreign operation is recognized in the income statement in Other operating expenses or Other operating income, respectively. (2) Financial instruments initial recognition and subsequent measurement (i) Date of recognition All financial assets and liabilities are initially recognized on the trade date, i.e. the date that the Group becomes a party to the contractual provisions of the instrument. This includes purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. (ii) Initial measurement of financial instruments The classification of financial instruments at initial recognition depends on the purpose and the management s intention for which the financial instruments were acquired and their characteristics. All financial instruments are measured initially at their fair value plus transaction costs, except in the case of financial assets and financial liabilities recorded at fair value through profit or loss. (iii) Derivatives recorded at fair value through profit or loss The Group uses derivatives such as forward foreign exchange contracts and options on foreign currencies. Derivatives are recorded at fair value and carried as assets when their fair value is positive and as liabilities when their fair value is negative. Changes in the fair value of derivatives are included in Net trading income. Derivatives embedded in other financial instruments, such as the conversion option in an acquired convertible bond, are treated as separate derivatives and recorded at fair value if their economic characteristics and risks are not closely related to those of the host contract, and the host contract is not itself heldfor-trading or designated at fair value through profit or loss. The embedded derivatives separated from the host are carried at fair value in the trading portfolio with changes in fair value recognized in the consolidated income statement. 89

92 Notes to the Consolidated Financial Statements 31 December 2010 (iv) Financial assets held-for-trading Financial assets held-for-trading are recorded in the consolidated statement of financial position at fair value. Changes in fair value are recognized in Net trading income. Interest and dividend income or expense is recorded in Net trading income according to the terms of the contract, or when the right to the payment has been established. Included in this classification are debt securities and equities which have been acquired principally for the purpose of selling or repurchasing in the near term. (v) Financial assets and financial liabilities designated at fair value through profit or loss Financial assets and financial liabilities classified in this category are those that have been designated by management on initial recognition. Management may only designate an instrument at fair value through profit or loss upon initial recognition when the following criteria are met, and designation is determined on an instrument by instrument basis: The designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognising gains or losses on them on a different basis. BLOM BANK s.a.l. Annual Report 2010 The assets and liabilities are part of a group of financial assets, financial liabilities or both which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy. The financial instrument contains one or more embedded derivatives which significantly modify the cash flows that otherwise would be required by the contract. Financial assets and financial liabilities at fair value through profit or loss are recorded in the consolidated statement of financial position at fair value. Changes in fair value are recorded in Net gain or loss on financial assets and liabilities designated at fair value through profit or loss. Interest earned or incurred is accrued in Interest income or Interest expense, respectively, using the effective interest rate (EIR), while dividend income is recorded in Other operating income when the right to the payment has been established. (vi) Available-for-sale financial investments Available-for-sale investments include equity and debt securities. Equity investments classified as available-for-sale are those which are neither classified as held-for-trading nor designated at fair value through profit or loss. Debt securities in this category are those which are intended to be held for an indefinite period of time and which may be sold in response to needs for liquidity or in response to changes in the market conditions. 90

93 After initial measurement, available-for-sale financial investments are subsequently measured at fair value. Unrealized gains or losses are recognized as other comprehensive income in the available-for-sale reserve. When the investment is disposed of, the cumulative gain or loss previously recognized in other comprehensive income is recognized in the consolidated income statement in Net gain / loss on financial investments. Where the Group holds more than one investment in the same security they are deemed to be disposed of on a first-in first-out basis. Interest earned whilst holding available-for-sale financial investments is reported as interest income using the effective interest rate. Dividends earned whilst holding available-for-sale financial investments are recognized in the consolidated income statement as Net gain on financial investments when the right of the payment has been established. The losses arising from impairment of such investments are recognized in the consolidated income statement in Impairment losses on financial investments and removed from the Available-for-sale reserve. (vii) Held-to-maturity financial investments Held-to-maturity financial investments are non-derivative financial assets with fixed or determinable payments and fixed maturities, which the Group has the intention and ability to hold to maturity. After initial measurement, held-tomaturity financial investments are subsequently measured at amortized cost using the effective interest rate, less impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. The amortization is included in Interest and similar income in the consolidated income statement. The losses arising from impairment of such investments are recognized in the consolidated income statement line Credit loss expense. If the Group were to sell or reclassify more than an insignificant amount of held-tomaturity investments before maturity (other than in certain specific circumstances), the entire category would be tainted and would have to be reclassified as availablefor-sale. Furthermore, the Group would be prohibited from classifying any financial assets as held-to-maturity during the following two years. (viii) Other financial assets classified as loans and receivables Other financial assets classified as loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. These financial assets are initially recognized at cost, being the fair value of the consideration paid for the acquisition of the investment. All transaction costs directly attributed to the acquisition are also included in the cost of investment. After initial measurement, loans and receivables are measured at amortised cost, using the effective interest rate method, less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees that are integral part of the effective interest rate. The amortisation is included in Interest and similar income in the consolidated income statement. Gain or losses are recognized in the consolidated income statement when the investments are derecognised or impaired. The losses arising from impairment are recognized in the consolidated income statement in Credit loss expense. 91

94 Notes to the Consolidated Financial Statements 31 December 2010 (ix) Due from banks and loans and advances to customers Due from banks and Loans and advances to customers, include non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: Those that the Group intends to sell immediately or in the near term and those that the Group upon initial recognition designates as at fair value through profit or loss. Those that the Group, upon initial recognition, designates as available-for-sale. Those for which the Group may not recover substantially all of its initial investment, other than because of credit deterioration. After initial measurement, amount Due from banks and Loans and advances to customers are subsequently measured at amortized cost using the effective interest rate, less allowance for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the effective interest rate. The amortization is included in Interest and similar income in the consolidated income statement. The losses arising from impairment are recognized in the consolidated income statement in Credit loss expense. The Group may enter into certain lending commitments where the loan, on drawdown, is expected to be classified as held-for-trading because the intent is to sell the loans in the short term. These commitments to lend are recorded as derivatives and measured at fair value through profit or loss. BLOM BANK s.a.l. Annual Report 2010 Where the loan, on drawdown, is expected to be retained by the Group, and not sold in the near future, the commitment is recorded only when the commitment is an onerous contract and it is likely to give rise to a loss (for example, due to a counterparty credit event). (x) Reclassification of financial assets Effective from 1 July 2008, the Group was permitted to reclassify, in certain circumstances, non-derivative financial assets out of the Held-for-trading category and into the Available-for-sale, Loans and receivables, or Held-tomaturity categories. From this date, it was also permitted to reclassify, in certain circumstances, financial instruments out of the Available-for-sale category and into the Loans and receivables category. Reclassifications are recorded at fair value at the date of reclassification which becomes the new amortized cost. For a financial asset reclassified out of the Available-for-sale category, any previous gain or loss on that asset that has been recognized in other comprehensive income is amortized to profit or loss over the remaining life of the investment using the effective interest rate. Any difference between the new amortized cost and the expected cash flows is also amortized over the remaining life of the asset using the effective interest rate. If the asset is subsequently determined to be impaired, then the amount recorded in other comprehensive income is recycled to the consolidated income statement. 92

95 The Group may reclassify a non-derivative trading asset out of the Held-fortrading category and into the Loans and receivables category if it meets the definition of loans and receivables and the Group has the intention and ability to hold the financial asset for the foreseeable future or until maturity. If a financial asset is reclassified, and if the Group subsequently increases its estimates of future cash receipts as a result of increased recoverability of those cash receipts, the effect of that increase is recognized as an adjustment to the effective interest rate from the date of the change in estimate. Reclassification is at the election of management, and is determined on an instrument by instrument basis. The Group does not reclassify any financial instrument into the fair value through profit or loss category after initial recognition. An analysis of reclassified assets is disclosed in Note 43. (3) Derecognition of financial assets and financial liabilities (i) Financial assets A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when: the rights to receive cash flows from the asset have expired. the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a pass-through arrangement; and either: (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group s continuing involvement in the asset. In that case, the Group also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects rights and obligations that the Group has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. (ii) Financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference between the carrying value of the original financial liability and the consideration paid is recognized in profit or loss. 93

96 Notes to the Consolidated Financial Statements 31 December 2010 (4) Determination of fair value The fair value for financial instruments traded in active markets at the statement of financial position date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. For all other financial instruments not traded in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include the discounted cash flow method, comparison to similar instruments for which market observable prices exist, options pricing models, credit models and other relevant valuation models. An analysis of fair values of financial instruments and further details as to how they are measured are provided in Note 43. (5) Impairment of financial assets The Group assesses at each statement of financial position date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. BLOM BANK s.a.l. Annual Report 2010 Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, the probability that they will enter bankruptcy or other financial reorganization, default or delinquency in interest or principal payments and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. (i) Financial assets carried at amortised cost For financial assets carried at amortised cost (such as amounts due from banks, loans and advances to customers, other financial assets classified as loans and receivables as well as held-to-maturity investments), the Group first assesses individually whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future 94

97 expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the consolidated income statement. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realized or has been transferred to the Group. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to the Credit loss expense. The present value of the estimated future cash flows is discounted at the financial asset s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. If the Group has reclassified trading assets to loans and advances, the discount rate for measuring any impairment loss is the new effective interest rate (Refer to Note 2.5 (2) (x) above) determined at the reclassification date. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the Group s internal credit grading system, that considers credit risk characteristics such as asset type, industry, geographical location, collateral type, past-due status and other relevant factors. Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the Group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the years on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable data from year to year (such as changes in unemployment rates, property prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the Group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. See Note 23 for details of impairment losses on financial assets carried at amortized cost and Note 20 for an analysis of impairment allowance on loans and advances by class. (ii) Available-for-sale financial investments For available-for-sale financial investments, the Group assesses at each statement of financial position date whether there is objective evidence that an investment is impaired. 95

98 Notes to the Consolidated Financial Statements 31 December 2010 (ii) Available-for-sale financial investments (continued) In the case of debt instruments classified as available-for-sale, the Group assesses individually whether there is objective evidence of impairment based on the same criteria as financial assets carried at amortized cost. However, the amount recorded for impairment is the cumulative loss measured as the difference between the amortized cost and the current fair value, less any impairment loss on that investment previously recognized in the consolidated income statement. Future interest income is based on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of Interest and similar income. If, in a subsequent period, the fair value of a debt instrument increases and the increase can be objectively related to credit event occurring after the impairment loss was recognized in the consolidated income statement, the impairment loss is reversed through the consolidated income statement. BLOM BANK s.a.l. Annual Report 2010 In the case of equity investments classified as available-for-sale, objective evidence would also include a significant or prolonged decline in the fair value of the investment below its cost. The Group treats significant generally as 20% and prolonged as greater than six months. Where there is evidence of impairment, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognized in the consolidated income statement is removed from other comprehensive income and recognized in the consolidated income statement. Impairment losses on equity investments are not reversed through the consolidated income statement; increases in the fair value after impairment are recognized directly in equity through other comprehensive income. (iii) Renegotiated loans Where possible, the Group seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, any impairment is measured using the original effective interest rate as calculated before the modification of terms and the loan is no longer considered past due. Management continuously reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan s original effective interest rate. (6) Hedge accounting The Group makes use of derivative instruments to manage exposures to interest rate, foreign currency and credit risks, including exposures arising from forecast transactions and firm commitments. In order to manage particular risks, the Group applies hedge accounting for transactions which meet the specified criteria. At inception of the hedge relationship, the Group formally documents the relationship between the hedged item and the hedging instrument, including the nature of the risk, the objective and strategy for undertaking the hedge and the method that will be used to assess the effectiveness of the hedging relationship. Also at the inception of the hedge relationship, a formal assessment is undertaken to ensure the hedging instrument is expected to be highly effective in offsetting 96

99 the designated risk in the hedged item. Hedges are formally assessed quarterly. A hedge is expected to be highly effective if the changes in fair value or cash flows attributable to the hedged risk during the period for which the hedge is designated are expected to offset in a range of 80% to 125%. For situations where that hedged item is a forecast transaction, the Group assesses whether the transaction is highly probable and presents an exposure to variations in cash flows that could ultimately affect the consolidated income statement. (i) Fair value hedges For designated and qualifying fair value hedges, the change in the fair value of a hedging derivative is recognised in the consolidated income statement in Net trading income. Meanwhile, the change in the fair value of the hedged item attributable to the risk hedged is recorded as part of the carrying value of the hedged item and is also recognised in the consolidated income statement in Net trading income. If the hedging instrument expires or is sold, terminated or exercised, or where the hedge no longer meets the criteria for hedge accounting, the hedge relationship is terminated. For hedged items recorded at amortised cost, the difference between the carrying value of the hedged item on termination and the face value is amortised over the remaining term of the original hedge using the effective interest rate. If the hedged item is derecognised, the unamortised fair value adjustment is recognised immediately in the consolidated income statement. (ii) Cash flow hedges For designated and qualifying cash flow hedges, the effective portion of the gain or loss on the hedging instrument is initially recognised directly in equity in the Cash flow hedge reserve. The ineffective portion of the gain or loss on the hedging instrument is recognised immediately in Net trading income. When the hedged cash flow affects the consolidated income statement, the gain or loss on the hedging instrument is recorded in the corresponding income or expense line of the consolidated income statement. When a hedging instrument expires, or is sold, terminated, exercised, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the hedged forecast transaction is ultimately recognised in the consolidated income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the consolidated income statement. (iii) Hedge of a net investment Hedge of a net investment in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment, are accounted for in a way similar to cash flow hedges. Gains or losses on the hedging instrument relating to the effective portion of the hedge are recognised directly in equity while any gains or losses relating to the ineffective portion are recognised in the consolidated income statement. On disposal of the foreign operation, the cumulative value of any such gains or losses recognised directly in equity is transferred to the consolidated income statement. 97

100 Notes to the Consolidated Financial Statements 31 December 2010 (7) Offsetting financial instruments Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position, if, and only if, there is currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, therefore, the related assets and liabilities are presented gross in the consolidated statement of financial position. (8) Leasing Bank as a lessee Leases where the lessor retains substantially all the risks and benefits incidental to ownership of the leased items are operating leases. Operating lease payments are recognized as an expense in the consolidated income statement on a straight-line basis over the lease term. Contingent rental payable are recognized as an expense in the period in which they are incurred. (9) Recognition of income and expenses Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized: BLOM BANK s.a.l. Annual Report 2010 (i) Interest and similar income and expenses For all financial instruments measured at amortized cost, interest bearing financial assets classified as available-for-sale and financial instruments designated at fair value through profit or loss, interest income or expense is recorded using the effective interest rate, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Group revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate. However, for a reclassified financial asset (see Note 2.5 (2) (x)) for which the Group subsequently increases its estimates of future cash receipts as a result of increased recoverability of those cash receipts, the effect of that increase is recognized as an adjustment to the effective interest rate from the date of the change in estimate. Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. (ii) Fee and commission income The Group earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories: 98

101 Fee income earned from services that are provided over a certain period of time Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission income and asset management, custody and other management and advisory fees. Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (together with any incremental costs) and recognized as an adjustment to the effective interest rate on the loan. When it is unlikely that a loan be drawn down, the loan commitment fees are recognized over the commitment period on a straight line basis. Fee income from providing transaction services Fees arising from negotiating or participating in the negotiation of a transaction for a third party, such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses, are recognized on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognized after fulfilling the corresponding criteria. (iii) Dividend income Dividend income is recognized when the Group s right to receive the payment is established. (iv) Net trading income Results arising from trading activities include all gains and losses from changes in fair value and related interest income or expense and dividends for financial assets and financial liabilities Held-for-trading. This includes any ineffectiveness recorded in hedging transactions. (10) Cash and cash equivalents Cash and cash equivalents as referred to in the cash flow statement comprise balances with original maturities of a period of three months or less including: cash and balances with central banks, deposits with banks and financial institutions, deposits due to banks and financial institutions, and treasury bills. (11) Property and equipment Property and equipment are stated at cost less accumulated depreciation and accumulated impairment in value. Certain tangible real estate properties purchased prior to 1 January 1994 were restated for the changes in the general purchasing power of the Lebanese Lira according to the provisions of law No 282 dated 30 December The net surplus arising on revaluation is credited to the account of Reserves for revaluation variance real estate recognized in shareholders equity. Replacement or major inspection costs are capitalized when incurred and if it is probable that future economic benefits associated with the item will flow to the entity and the cost of the item can be measured reliably. 99

102 Notes to the Consolidated Financial Statements 31 December 2010 Depreciation is calculated on a straight line basis to write down the cost of property and equipment to their residual values over their estimated useful lives. Freehold land is not depreciated. The estimated useful lives are as follows: Buildings Vehicles Furniture, office installations and computer equipment 50 years 6.67 years ( ) years The assets residual values, useful lives and method of depreciation are reviewed at each financial year end and adjusted prospectively, if appropriate. Impairment reviews are performed when there are indications that the carrying value may not be recoverable. Impairment losses are recognized in the consolidated income statement as an expense. Property and equipment is derecognised on disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognized in Net profit from sale or disposal of other assets in the consolidated income statement in the year in which the asset is derecognised. BLOM BANK s.a.l. Annual Report 2010 (12) Business combinations and goodwill Business combinations from 1 January 2010 Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the Group measures the non controlling interest in the acquiree at the proportionate share of the acquiree s identifiable net assets. Acquisition costs incurred are expensed and included in administrative expenses. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the business combination is achieved in stages, the acquisition date fair value of the acquirer s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through the profit or loss. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability will be recognised in accordance with IAS 39 either in profit or loss or as a change to other comprehensive income. If the contingent consideration is classified as equity, it should not be remeasured until it is finally settled within equity. 100

103 Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognised in profit or loss. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group s cashgenerating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained. Business combinations prior to 1 January 2010 In comparison to the above-mentioned requirements, the following differences applied: Business combinations were accounted for using the purchase method. Transaction costs directly attributable to the acquisition formed part of the acquisition costs. The non-controlling interest (formerly known as minority interest) was measured at the proportionate share of the acquiree s identifiable net assets. Business combinations achieved in stages were accounted for as separate steps. Any additional acquired share of interest did not affect previously recognised goodwill. When the Group acquired a business, embedded derivatives separated from the host contract by the acquiree were not reassessed on acquisition unless the business combination resulted in a change in the terms of the contract that significantly modified the cash flows that otherwise would have been required under the contract. Contingent consideration was recognised if, and only if, the Group had a present obligation, the economic outflow was more likely than not and a reliable estimate was determinable. Subsequent adjustments to the contingent consideration were recognised as part of goodwill. (13) Intangible assets The Group s other intangible assets include the value of computer software and key money. An intangible asset is recognized only when its cost can be measured reliably and it is probable that the expected future economic benefits that are attributable to it will flow to the Group. Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. 101

104 Notes to the Consolidated Financial Statements 31 December 2010 The useful lives of intangible assets are assessed to be finite or indefinite. Intangible assets with finite lives are amortized over the useful economic life. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the consolidated income statement in the expense category consistent with the function of the intangible asset. Amortisation is calculated using the straight-line method to write down the cost of intangible assets to their residual values over their estimated useful lives as follows: Key money: Software development cost: lower of lease period or 5 years 2-5 years (14) Non current assets held for sale The Group occasionally acquires real estate in settlement of certain loans and advances. Such real estate is stated at the lower of the amount of the related loans and advances and the current fair value of such assets based on the instructions of the Regulatory Authorities. Gains or losses on disposal, and revaluation losses, are recognized in the consolidated income statement for the period. BLOM BANK s.a.l. Annual Report 2010 (15) Impairment of non-financial assets The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset s recoverable amount. An asset s recoverable amount is the higher of an asset s or cash-generating unit s fair value less costs to sell and its value in use. Where the carrying amount of an asset or cash-generating unit exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pretax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators. For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the Group estimates the asset s or cash-generating unit s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceeds the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated income statement. 102

105 Impairment losses relating to goodwill cannot be reversed in future periods. (16) Financial guarantees In the ordinary course of business, the Group gives financial guarantees, consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognised in the consolidated financial statements (within Customers deposits ) at fair value, being the premium received. Subsequent to initial recognition, the Group s liability under each guarantee is measured at the higher of the amount initially recognized less, when appropriate, cumulative amortization recognized in the consolidated income statement and the best estimate of expenditure required to settle any financial obligation arising as a result of the guarantee. Any increase in the liability relating to financial guarantees is recorded in the consolidated income statement in Credit loss expense. The premium received is recognized in the consolidated income statement in Net fee and commission income on a straight-line basis over the life of the guarantee. (17) Customers deposits All customers deposits are carried at the fair value of the consideration received, less amounts repaid. (18) Taxation (i) Current tax Taxation is provided for in accordance with the fiscal regulations of the respective countries in which the Group and its branches and subsidiaries operate. Current tax assets and liabilities for the current and prior years are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the statement of financial position date. The Group s profits from operations in Lebanon are subject to a tax rate of 15% after deducting the 5% tax on interest received according to Law no. 497/2003 dated 30 January Dividends are subject to a flat 10% tax, reducible to 5% provided that the Bank is listed on a regulated stock exchange. (ii) Deferred tax Deferred tax is provided on temporary differences at the statement of financial position date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except: 103

106 Notes to the Consolidated Financial Statements 31 December 2010 Where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. In respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets are recognized for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilized except: Where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. In respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized. BLOM BANK s.a.l. Annual Report 2010 The carrying amount of deferred tax assets is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each statement of financial position date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the statement of financial position date. Current tax and deferred tax relating to items recognized directly in other comprehensive income are also recognized in other comprehensive income and not in the consolidated income statement. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. (19) Provisions for risks and charges Provision are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The expense relating to any provision is presented in the consolidated income statement net of any reimbursement. 104

107 (20) Retirement benefits obligation The Group provides retirement benefits obligation to its employees. The entitlement of these benefits is based upon the employees final salary, length of services and other local regulations where the Group operates. The expected costs of these benefits are accrued over the period of employment. For the Bank and its branches operating in Lebanon, end-of-service benefit subscriptions paid and due to the National Social Security Fund (NSSF) are calculated on the basis of 8.5% of the staff salaries. The final end-of-service benefits due to employees after completing 20 years of service, at the retirement age, or if the employee permanently leaves employment, are calculated based on the last salary multiplied by the number of years of service. The Bank is liable to pay to the NSSF the difference between the subscriptions paid and the final end-of-service benefits due to employees. The Bank provides for end-of-service benefits on that basis. (21) Treasury shares Own equity instruments of the Bank which are acquired by it or by any of its subsidiaries (treasury shares) are deducted from equity and accounted for at weighted average cost. Consideration paid or received on the purchase sale, issue or cancellation of the Bank s own equity instruments is recognized directly in equity. No gain or loss is recognized in the consolidated income statement on the purchase, sale, issue or cancellation of the Bank s own equity instruments. When the Bank holds own equity instruments on behalf of its clients, those holdings are not included in the Bank s statement of financial position. (22) Fiduciary assets The Group provides trust and other fiduciary services that result in the holding or investing of assets on behalf of its clients. Assets held in a fiduciary capacity are not reported in the consolidated financial statements, as they are not the assets of the Group; and accordingly are recorded as off financial position items. (23) Dividends on ordinary shares Dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Bank s shareholders. Dividends for the year that are approved after the statement of financial position date are disclosed as an event after the statement of financial position date. (24) Segment reporting The Group s segmental reporting is based on the following operating segments: Retail banking, corporate banking, treasury, money and capital markets and asset management and private banking. 105

108 Notes to the Consolidated Financial Statements 31 December 2010 (25) Accounting policies of subsidiary-insurance companies The financial statements of the subsidiary insurance companies have been prepared in accordance with International Financial Reporting Standards and the requirements of the regulations related to insurance and reinsurance companies where the subsidiaries operate. The key accounting policies are as follows: Premiums earned Net premiums and accessories (gross premiums) are taken to income over the terms of the policies to which they relate using the prorata temporis method for non-marine business and 25% of gross premiums for marine business. Unearned premiums reserve represents the portion of the gross premiums written relating to the unexpired period of coverage. If the unearned premiums reserve is not considered adequate to cover future claims arising on these premiums, a premium deficiency reserve is created. Commissions earned and paid Commissions earned are recognized at the time policies are written. Commissions paid are expensed over the terms of the policies to which they relate using the prorata temporis method for non-marine business and 25% of commissions paid for marine business. Deferred acquisition costs represent the portion of commissions paid relating to the unexpired period of coverage. BLOM BANK s.a.l. Annual Report 2010 (26) Bank acceptances Bank acceptances represent term documentary credits which the Group has committed to settle on behalf of its clients against commitments by those clients (acceptances). The commitments resulting from these acceptances are stated as a liability in the consolidated statement of financial position for the same amount. 2.6 Significant accounting judgments, estimates and assumptions In the process of applying the Group s accounting policies, management has exercised judgment and estimates in determining the amounts recognized in the consolidated financial statements. The most significant use of judgment and estimates are as follows: Going concern The Group s management has made an assessment of the Group s ability to continue as a going concern and is satisfied that the Group has the resources to continue in business for the foreseeable future. Furthermore, management is not aware of any material uncertainties that may cast significant doubt upon the Group s ability to continue as a going concern. Therefore, the consolidated financial statements continue to be prepared on the going concern basis. Fair value of financial instruments Where the fair values of financial assets and financial liabilities recorded on the consolidated statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The inputs to these models are derived from observable 106

109 market data where possible, but where observable market data are not available, judgment is required to establish fair values. The valuation of financial instruments is described in more detail in Note 43. Impairment losses on loans and advances The Group reviews its individually significant loans and advances at each statement of financial position date to assess whether an impairment loss should be recorded in the consolidated income statement. In particular, management judgment is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance. Loans and advances that have been assessed individually and found not to be impaired and all individually insignificant loans and advances are then assessed collectively, in groups of assets with similar risk characteristics, to determine whether provision should be made due to incurred loss events for which there is objective evidence but whose effects are not yet evident. The collective assessment takes account of data from the loan portfolio (such as levels of arrears, credit utilization, loan to collateral ratios, etc.), and judgments to the effect of concentrations of risks and economic data (including levels of unemployment, real estate prices indices, country risk and the performance of different individual groups). The impairment loss on loans and advances is disclosed in more detail in notes 10 and 20 to the consolidated financial statements. Impairment of available-for-sale investments The Group reviews its debt securities classified as available-for-sale investments at each statement of financial position date to assess whether they are impaired. This requires similar judgment as applied to the individual assessment of loans and advances. The Group also records impairment charges on available-for-sale equity investments when there has been a significant or prolonged decline in the fair value below their cost. The determination of what is significant or prolonged requires judgment. In making this judgment, the Group evaluates, among other factors, historical share price movements and the duration and extent to which the fair value of an investment is less than its cost. Deferred tax assets Deferred tax assets are recognized in respect of tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profits, together with future tax planning strategies. 107

110 Notes to the Consolidated Financial Statements 31 December Acquisition of Additional Interest In Bank of Syria and Overseas SA In its meeting held on 5 May 2010, the Bank s board of directors approved the increase of ownership in Bank of Syria and Overseas SA up to 60% as follows: At a first stage, increase the ownership from 39% to 49% by acquiring International Finance Corporation s (IFC) shares (720,000 shares) in Bank of Syria and Overseas SA. The acquisition is subject to the approval of the Central Bank of Lebanon and the Central Bank of Syria. The remaining 11% increase to reach 60% will be performed at a later stage. On 22 July 2010 and on 4 October 2010, the Bank obtained the approvals of the Central Bank of Lebanon and the Central Bank of Syria, respectively to acquire IFC shares in Bank of Syria and Overseas SA. Accordingly, on 25 October 2010, the Group acquired an additional 10% interest of the voting shares of Bank of Syria and Overseas SA, increasing its ownership interest to 49%. A cash consideration of LL 38,366 million was paid to the non-controlling interest shareholders. The carrying value of the net assets of Bank of Syria and Overseas SA at the acquisition date was LL 161,310 million, and the carrying value of the additional interest acquired was LL 16,131 million. The difference of LL 22,235 between the consideration and the carrying value of the interest acquired has been recognized in retained earnings within equity. 4 Segmental Information BLOM BANK s.a.l. Annual Report 2010 The Group s segments provide products or services subject to different risks and returns than other segments. The Group operates in four major business segments: retail, corporate, treasury, money and capital markets, and asset management and private banking. Retail Banking: Principally handling individual, customers deposits and providing consumer loans, overdrafts, credit cards facilities and funds transfer facilities. Corporate Banking: Principally handling loans and other credit facilities and deposit and current accounts for corporate and institutional customers. Treasury, Money and Capital Markets: Principally handling various investment services including operations in the money market for the Group s customers, trading operations (locally and internationally) and management of the liquidity risks and market risks. This segment also handles the management of the Group s portfolio of equities, debt securities and other financial instruments. Asset Management and Private Banking: Principally providing investment products and services to institutional investors and intermediaries. Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss which in certain respects is measured differently from operating profit or loss in the consolidated financial statements. Income taxes are managed on a group basis and are not allocated to operating segments. 108

111 Interest income is reported net since the majority of the segments revenues are from interest. Management primarily relies on net interest revenue as performance measure, not the gross revenue and expense amounts. No revenue from transactions with a single external customer or counterparty amounted to 10% or more of the Group s total revenues in 2010 or Transfer prices between operating segments are on an arm s length basis in a manner similar to transactions with third parties. The following table presents income and profit and certain asset and liability information regarding the Group s operating segments. Treasury, Asset money and Corporate Retail management capital banking banking and private Unallocated Total LL million markets banking Revenues Net interest income 522, ,134 93,189 3, ,539 Net fee and commission income 29,130 48,650 20,260 20,592 26, ,342 Net trading income 7,468-31, ,862 Net gain on financial assets designated at fair value through profit or loss Net gain on financial investments 76, ,321 Other operating income , , Total operating income 636, , ,216 23,948 26,710 1,022,094 Credit loss expense (4,544) (24,051) 3, (24,892) Net operating income 631, , ,919 23,948 26, ,202 Unallocated expenses Income tax expense (392,076) (106,745) Profit for the year 498,381 Segment s assets 25,033,061 5,536,162 2,351, , ,711 33,683,852 Segment s liabilities 21,001,623 5,303,341 3,736, , ,247 30,833,

112 Notes to the Consolidated Financial Statements 31 December 2010 Treasury, Asset money and Corporate Retail management capital banking banking and private Unallocated Total LL million markets banking Revenues Net interest income 466, ,679 58,043 4, ,533 Net fee and commission income 11,200 67,343 16,140 9,537 17, ,778 Net trading income 11,639-24, ,081 Net gain on financial assets designated at fair value 7, ,507 through profit or loss Net gain on financial investments 38, ,558 Other operating income , , Total operating income 535, , ,461 13,731 17, ,293 Credit loss expense - 6,915 (1,700) - - 5,215 Write-back of provision on financial investments 15, ,721 BLOM BANK s.a.l. Annual Report 2010 Net operating income 551, , ,761 13,731 17, ,229 Unallocated expenses (347,518) Income tax expense (85,982) Profit for the year 441,729 Segment s assets 24,348,265 4,459,503 1,618, , ,819 31,208,844 Segment s liabilities 20,536,777 4,799,102 2,554, , ,955 28,633,295 Geographic information The Group operates in two geographic markets based on the location of its markets and customers. The local market represents the Lebanese market and the international market represents markets outside Lebanon. The following table shows the distribution of the Group s external net operating income, total assets and capital expenditure by geographical segment. 110

113 Domestic International Total LL million Revenues Net interest income 622, , , , , ,533 Net fee and commission income 90,983 71,566 54,359 50, , ,778 Net trading income 21,079 13,419 17,783 22,662 38,862 36,081 Net (loss) gain on financial assets designated at fair value through profit or loss (317) 7, ,507 Net gain on financial investments 64,301 31,619 12,020 6,939 76,321 38,558 Other operating income 8,130 7,411 6,243 11,425 14,373 18,836 Credit loss (expense) income (6,439) 8,269 (18,453) (3,054) (24,892) 5,215 Write back of provision on financial investments ,721-15,721 Total external net operating income 800, , , , , ,229 Total operating expenses (222,076) (188,734) (170,107) (158,913) (392,183) (347,647) Net profit from sale or disposal of other assets (37) Profit before tax 578, ,147 26,544 61, , ,711 Non-current assets 227, , , , , ,309 Non-current assets consist of property and equipment, intangible assets, goodwill, investment properties and non-current assets held for sale. The Group s major business segment is banking. Insurance activities represent 3% (2009: 2%) of profit before income tax and 1% (2009: 1%) of total assets. 111

114 Notes to the Consolidated Financial Statements 31 December Interest and Similar Income LL million Financial investments available-for-sale 360, ,128 Financial investments loans and receivables 731, ,444 Financial investments held-to-maturity 31,734 27,648 Interest income on financial assets designated at fair value through profit or loss 4,434 3,625 Deposits and similar accounts with banks and financial institutions 142, ,777 Loans and advances to customers 543, ,272 Loans and advances to related parties 352 1,034 1,813,668 1,712,928 6 Interest and Similar Expenses BLOM BANK s.a.l. Annual Report 2010 LL million Deposits and similar accounts from banks and financial institutions 5,223 10,534 Deposits from customers and other credit balances 1,051,827 1,064,548 Deposits from related parties 10,079 6,313 1,067,129 1,081,395 7 Net Fee and Commission Income LL million Fee and commission income Trade finance 30,216 26,538 Credit related fees and commissions 26,358 22,263 Asset management and private banking 20,592 9,537 Electronic banking 14,797 12,258 General banking income 29,130 29,741 Insurance premiums commissions 26,710 17,558 Other services 28,872 26, , ,735 Fee and commission expense: Correspondents accounts (31,333) (22,957) Net fee and commission income 145, ,

115 8 Net Trading Income LL million Debt securities (146) 1,793 Equities 5,366 6,808 Foreign exchange 33,642 27,480 38,862 36,081 Equities income includes the results of buying and selling, and changes in the fair value of equity securities. Debt securities income includes the results of buying and selling and changes in the fair value of trading debt securities as well as the related interest income and expense. Foreign exchange income includes gains and losses from spot and forward contracts and other currency derivatives. 9 Net Gain on Financial Investments LL million Dividend income from available-for-sale financial investments Gain from sale of other financial assets classified as loans and receivables 60,888 23,398 Gain from sale of available-for-sale financial investments 14,641 14,265 Profit from non-trading investments 33-76,321 38, Credit Loss (Expense) Income LL million Provision on due from financial institutions Investment in a financial institution (note 16) (4,544) - (4,544) - Provision for loans and advances: Commercial loans (note 20) (29,226) (6,744) Consumer loans (note 20) (8,295) (3,331) Commitment by signature (note 32) (2,463) - (39,984) (10,075) Write-back of provisions for loans and advances: Commercial loans (note 20) 3,027 4,980 Consumer loans (note 20) 11,999 1,631 Unrealized interest (note 20) 3,272 2,412 Recoveries from loans reflected as off-financial position 1,338 5,529 Settled legal suits Risks and charges ,636 15,290 (24,892) 5,

116 Notes to the Consolidated Financial Statements 31 December Personnel Expenses LL million Wages and salaries 111, ,726 Social security contributions 19,832 17,709 Provisions for retirement benefits obligation (note 33) 8,204 6,484 Additional allowances 28,979 22,482 Bonus paid 51,545 44, , , Other Operating Expenses BLOM BANK s.a.l. Annual Report 2010 LL million Board of directors attendance fees 1,369 1,238 Taxes and fees 10,729 12,346 Fee for guarantee of deposits 10,345 8,225 Rent and related charges 9,215 9,117 Electricity and fuel 4,866 4,670 Professional fees 11,430 13,036 Postage and telecommunications 10,250 9,972 Maintenance and repairs 11,439 10,800 Travel expenses 4,094 3,378 Insurance 1,257 1,791 Marketing and advertising 11,856 9,604 Stationary and printings 6,071 5,162 Fiscal stamps 6,355 4,119 Others 35,221 27, , , Income Tax The components of income tax expense for the years ended 31 December 2010 and 2009 are: LL million % tax paid on interest revenue during the year 38,156 32,327 Income tax on profit for the year (note 30) 68,589 53, ,745 85,

117 Reconciliation of total tax charge The relationship between taxable profit and accounting profit of BLOM Bank SAL and its foreign branches and subsidiaries is as follow: LL million Profit before income tax 605, ,711 Less: Results of the subsidiary insurance company located in Lebanon(*) (11,269) (7,702) Accounting profit before income tax 593, ,009 Add: Provisions non tax deductible 23,070 4,761 Other non tax deductible charges 70,755 41,681 Unrealized loss on difference of exchange , ,319 Less: Dividends received and previously subject to income tax (7,844) (3,969) Remunerations already taxed (9,337) (8,571) 4% of a subsidiary s capital eligible to be tax deductible (400) (400) Write-back of provisions previously subject to income tax (7,017) (30,505) Non taxable income (29,129) (6,582) Permanent deductible charges - (13,895) Losses related to prior years - (41,655) Others (132) (172) Taxable profit 633, ,570 Effective income tax rate 17.64% 16.29% Income tax expense in the consolidated income statement 106,745 85,982 (*) The insurance company in Lebanon is subject to income tax at the rate of 15% calculated based on gross insurance premiums weighted differently for each class of business. 14 Earnings Per Share Basic earnings per share amounts are calculated by dividing the net profit for the year attributable to ordinary equity holders of the Bank by the weighted average number of ordinary shares outstanding during the year. The following table shows the income and share data used in the basic earnings per share calculations: Net profit for the year LL million 498, ,729 Less :Proposed dividends on preferred shares (note 39) LL million (23,931) (23,931) Non-controlling interests LL million (15,005) (12,171) Net profit attributable to ordinary equity holders of the parent LL million 459, ,627 Weighted average number of ordinary shares for basic earnings per share 209,128, ,859,970 Basic earnings per share LL 2,197 1,

118 Notes to the Consolidated Financial Statements 31 December 2010 The weighted average number of shares outstanding and the earnings per share figures for 2009 were restated to reflect the effect of the 1 to 10 stock split that took place during No figure for diluted earnings per share has been presented as the Bank has not issued any instruments which would have an impact on earnings per share when exercised. There have been no transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of approval of these consolidated financial statements. 15 Cash and Balances with Central Banks LL million Cash on hand 185, ,331 Current accounts with Central Banks 1,436,706 1,870,986 Deposits with the Central Banks 2,626,186 2,654,657 4,248,229 4,693,974 BLOM BANK s.a.l. Annual Report 2010 Cash and balances with the Central Banks include non-interest bearing balances held by the Group at the Central Bank of Lebanon in coverage of the obligatory reserve requirements for all banks operating in Lebanon on deposits in Lebanese Lira as required by the Lebanese banking rules and regulations. This obligatory reserve is calculated on the basis of 25% of sight commitments and 15% of term commitments. In addition to the above, all banks operating in Lebanon are required to deposit with the Central Bank of Lebanon interest- bearing placements at the rate of 15% of total deposits in foreign currencies regardless of nature. Foreign subsidiaries are also subject to obligatory reserve requirements with varying percentages, according to the banking rules and regulations of the countries in which they are located. 16 Due from Banks and Financial Institutions LL million Current accounts Current accounts 453, ,720 Time deposits Time deposits 5,477,958 5,231,027 Doubtful accounts with banks 17,588 5,197 Less: Impairment allowance for placements with other banks (17,473) (3,769) Less: Unrealized interest for placements with other banks (115) (58) 5,477,958 5,232,397 5,931,237 5,787,

119 Movement of impairment allowance and unrealized interest for doubtful accounts with banks is as follows: LL million Balance at 1 January 3,827 3,765 Transfer from Provision for risks and charges (note 32) 9,160 - Charge for the year (note 10) 4,544 - Provision for unrealized interest Foreign exchange difference - 4 Balance at 31 December 17,588 3,827 - Time deposits include US$ nil (2009: US$ 185 million) being guarantees against short term cash advances in the amount of Euro nil (2009: Euro 105 million). According to the contracts entered into with these banks, the Group can withdraw these term deposits upon the settlement of the short-term cash advances. - The transfer from Provision for risks and charges amounting to LL 9,160 million represents transfer of the provision against probable default of Investment Dar S.A.K. Kuwait (TID) to settle the fiduciary deposits of BLOM Development Bank SAL s (a subsidiary) customers during In 2010, and due to settlement difficulties witnessed by TID, the Group booked additional provision amounting to LL 4,180 million (USD 2,773,293) based on the approval of the Banking Control Commission on 2 February 2011 to fully provide against this doubtful account. As a result the total provision booked against TID amounted to LL 16,240 million as at 31 December 2010 (2009: LL 2,900 million). 17 Derivative Financial Instruments The table below shows the fair values of derivative financial instruments, recorded as assets or liabilities, together with their notional amounts. The notional amount, recorded gross, is the amount of a derivative s underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured. The notional amounts indicate the volume of transactions outstanding at the year end and are indicative of neither the market risk nor the credit risk. LL million Derivatives held-for-trading Forward foreign exchange contracts Assets Total Liabilities notional Assets Liabilities amount Total notional amount 6,036 9,160 1,383,888 21,632 18,454 3,466,008 Equity swaps and options 6, ,769 5,072 5,072 1,110,062 Futures on commodities 27,143 27, , ,499 36,465 1,762,150 26,704 23,526 4,576,070 Derivatives used as fair value hedges Currency swaps , Hedge of net investment in foreign operations Forward foreign exchange contracts 7, ,532 6, ,067 46,692 36,465 2,086,282 33,544 23,526 4,809,

120 Notes to the Consolidated Financial Statements 31 December 2010 Derivatives often involve at their inception only a mutual exchange of promises with little or no transfer of consideration. However, these instruments frequently involve a high degree of leverage and are very volatile. A relatively small movement in the value of the asset, rate or index underlying a derivative contract may have a significant impact on the profit or loss of the Group. Over-the-counter derivatives may expose the Group to the risks associated with the absence of an exchange market on which to close out an open position. Forwards and futures Forward and futures contracts are contractual agreements to buy or sell a specified financial instrument at a specific price and date in the future. Forwards are customised contracts transacted in the over-the-counter market. Futures contracts are transacted in standardised amounts on regulated exchanges and are subject to daily cash margin requirements. The main differences in the risk associated with forward and futures contracts are credit risk and liquidity risk. The Group has credit exposure to the counterparties of forward contracts. The credit risk related to future contracts is considered minimal because the cash margin requirements of the exchange help ensure that these contracts are always honoured. Forward contracts are settled gross and are, therefore, considered to bear a higher liquidity risk than the futures contracts which are settled on a net basis. Both types of contracts result in market risk exposure. BLOM BANK s.a.l. Annual Report 2010 Swaps Swaps are contractual agreements between two parties to exchange streams of payments over time based on specified notional amounts, in relation to movements in a specified underlying index such as an interest rate, foreign currency rate or equity index. In a currency swap, the Group pays a specified amount in one currency and receives a specified amount in another currency. Currency swaps are mostly gross-settled. Options Options are contractual agreements that convey the right, but not the obligation, for the purchaser either to buy or sell a specific amount of a financial instrument at a fixed price, either at a fixed future date or at any time within a specified period. The Group purchases and sells options through regulated exchanges and in the over-the-counter markets. Options purchased by the Group provide the Group with the opportunity to purchase (call options) or sell (put options) the underlying asset at an agreed-upon value either on or before the expiration of the option. The Group is exposed to credit risk on purchased options only to the extent of their carrying amount, which is their fair value. 118

121 Derivative financial instruments held-for-trading purposes Most of the Group s derivative trading activities relate to deals with customers which are normally offset by transactions with other counterparties. The Group may also take positions with the expectation of profiting from favorable movements in prices, rates or indices. Also included under this heading are any derivatives entered into for hedging purposes which do not meet the IAS 39 hedge accounting criteria. Derivative financial instruments held for hedging purposes As part of its asset and liability management, the Group uses derivatives for hedging purposes in order to reduce its exposure to currency risk. The Group uses forward foreign exchange contracts to hedge against specifically identified currency risks. Hedge of net investment in foreign operations Forward foreign exchange contracts (to sell Euros and buy US Dollars) designated as a hedge of the Group s net investment in its French subsidiary, and is being used to hedge the Group s investment exposure to foreign exchange risk on this investment amounting to Euro 107,904 thousand (2009: same). The notional amount of these contracts amounted to Euro 107,904 thousand (LL 215,532 million) as at 31 December 2010 (2009: LL 233,067 million). The forward foreign exchange contracts were revalued as of 31 December 2010 and resulted in unrealized gain of LL 7,193 million (2009: unrealized gain of LL 6,840 million). The contracts mature on 28 February 2011 at latest. 18 Financial Assets Held-For-Trading LL million Debt securities 18,538 8,654 Equities 13,880 13,397 Investment funds 22,398 2,712 54,816 24, Financial Assets Designated at Fair Value Through Profit or Loss LL million Convertible bonds 65,989 66,305 Investments related to unit-linked contracts (i) 74,012 73,097 Subordinated convertible notes 24, , ,402 (i) The unrealized gain on investments related to unit-linked contracts amounted to LL 3,583 million for the year ended 31 December 2010 (2009: unrealized gain of LL 3,497 million). 119

122 Notes to the Consolidated Financial Statements 31 December Loans and Advances to Customers LL million Commercial loans 5,649,255 4,621,866 Consumer loans 2,384,153 1,641,713 8,033,408 6,263,579 Less: Allowance for impairment losses (190,386) (178,946) Allowance for unrealized interest on impaired loans (45,886) (38,032) 7,797,136 6,046,601 Breakdown by economic sector LL million Agriculture and forestry 237,607 24,454 Manufacturing 818, ,633 Trade retail 239, ,063 Trade wholesale 1,130, ,881 Services 1,793,110 1,653,459 Construction 1,095, ,133 Freelance professions 334, ,243 Consumer loans 2,384,153 1,641,713 8,033,408 6,263,579 BLOM BANK s.a.l. Annual Report 2010 A reconciliation of the allowance for impairment losses for loans and advances, by class, is as follows: LL million Commercial loans Consumer loans Total Commercial loans Consumer loans Balance at 1 January 156,120 22, , ,159 21, ,260 Add: Charge for the year 29,226 8,295 37,521 6,744 3,331 10,075 Foreign exchange difference , ,108 Reclassification (14,262) 14, ,084 45, , ,986 24, ,443 Less: Provisions written-off (591) - (591) (4,685) - (4,685) Write-back of provisions (3,027) (11,999) (15,026) (4,980) (1,631) (6,611) Provision transferred to off financial position (4,390) - (4,390) (5,144) - (5,144) Foreign exchange difference (4,956) (1,118) (6,074) (57) - (57) (12,964) (13,117) (26,081) (14,866) (1,631) (16,497) Total Balance at 31 December 158,120 32, , ,120 22, ,946 Individual impairment 121,206 24, , ,618 5, ,694 Collective impairment 36,914 7,601 44,515 21,502 17,750 39, ,120 32, , ,120 22, ,946 Gross amount of loans individually determined to be impaired 174,831 41, , ,828 13, ,

123 A reconciliation of allowance for unrealized interest on impaired loans, by class, as follows: LL million 2010 Commercial loans 2009 Commercial loans Balance at 1 January 38,032 35,819 Add: Unrealized interest for the year 26,967 35,118 Foreign exchange difference (1,010) (1,553) 63,989 69,384 Less: Recoveries of unrealized interest (3,272) (2,412) Amounts written-off (14,195) (26,505) Transferred to off-financial position (636) (2,435) Balance at 31 December 45,886 38,032 Unrealized interest on substandard loans 11,925 13,000 Unrealized interest on doubtful loans 33,961 25,032 45,886 38,032 As required by the Central Bank of Lebanon regulations, impaired loans fulfilling certain conditions have been transferred to off financial position, together with the related allowance for impairment losses provisions and allowance for unrealized interest. The movement of allowance for impairment losses and allowance for unrealized interest against fully impaired loans included in the off financial position accounts is as follows: LL million Balance at 1 January 82,695 83,928 Add: Unrealized interest for the year 7,324 6,747 Provision and unrealized interest transferred from the statement of financial position 5,026 7,579 Foreign exchange difference ,045 98,290 Less: Recoveries / Provisions written-back (1,338) (5,529) Amounts written-off (8,508) (10,066) Foreign exchange difference (264) - (10,110) (15,595) Balance at 31 December 84,935 82, Bank Acceptances / Engagements By Acceptances LL million Acceptances as of 31 December 205, ,637 Acceptances resulted from letters of credit opened for accounts of customers, with deferred payments. 121

124 Notes to the Consolidated Financial Statements 31 December Non-Current Assets Held For Sale LL million Cost At 1 January 32,631 34,765 Additions 2,432 14,411 Disposals (2,804) (16,608) Translation difference (1,412) 63 At 31 December 30,847 32,631 Impairment At 1 January (2,785) (7,204) Related to disposals - 4,419 At 31 December (2,785) (2,785) Net carrying value At 31 December 28,062 29, Financial Investments BLOM BANK s.a.l. Annual Report 2010 Availablefor- sale investments Other financial assets classified as loans & receivables Held-tomaturity investments Availablefor- sale investments Other financial assets classified as loans & receivables Held-tomaturity investments LL million Quoted investments Equities Debt securities 229, , Certificates of deposit commercial banks and financial institutions 247, , Investment funds 5, , , Unquoted investments Government debt securities 3,601,367 2,752, ,903 4,313,911 2,256, ,835 Other debt securities (i) 10, , ,102 13, , ,809 Certificates of deposit Central Bank of Lebanon - 5,978, ,158,477 - Certificates of deposit commercial banks and financial institutions 15,262 74,339 72,290 72, ,637 30,353 Equities (ii) 6, , Granted financial loans - 103, ,551 - Investment fund (iii) ,633,889 9,559, ,295 4,406,581 8,200, ,997 4,116,261 9,559, ,295 4,694,221 8,200, ,997 All unquoted available-for-sale financial investments are recorded at fair value as of 31 December except for the following: LL million Other debt securities (i) 10,650 13,858 Equities (ii) 6,441 6,201 Investment fund (iii) ,260 20,

125 All unquoted available-for-sale financial investments listed above are recorded at cost since their fair value cannot be reliably estimated. There is no market for these investments, and the Group intends to hold them for the long term. Collective impairment allowance for other financial assets classified as loans and receivables and heldto- maturity A reconciliation of the collective impairment allowance for other financial assets classified as loans and receivables and held-to-maturity is as follows: LL million At 1 January - 15,725 Write-back during the year - (15,721) Difference on exchange - (4) At 31 December - - In 2008 and due to the financial crisis in international markets and the ongoing decrease in the market value of some financial instruments, the Group s management decided to provide for a collective provision covering any upcoming decrease in the value of its financial assets amounting to USD 10,431 thousand (LL 15,725 million) for the year ended 31 December This provision was reversed during 2009 taking into consideration the significant increase in the market value of these financial instruments. 24 Property And Equipment LL million Freehold land and buildings Vehicles Furniture, office installations and computer equipment Advances on acquisition of fixed assets and construction in progress Cost At 1 January ,405 5, ,393 50, ,094 Additions 17,250 1,622 15,730 45,683 80,285 Disposals (46) (462) (2,605) (1,109) (4,222) Transfers (note 25) 18,899-8,259 (27,459) (301) Translation difference (3,524) (107) (4,298) (1,038) (8,967) Total At 31 December ,984 6, ,479 66, ,889 Depreciation At 1 January ,546 2, , ,244 Charge for the year 6,530 1,028 27,132-34,690 Relating to disposals (13) (462) (2,394) - (2,869) Translation difference (435) (75) (2,040) - (2,550) At 31 December ,628 3, , ,515 Net carrying value At 31 December ,356 2,786 87,966 66, ,

126 Notes to the Consolidated Financial Statements 31 December 2010 LL million Freehold land and buildings Vehicles Furniture, office installations and computer equipment Advances on acquisition of fixed assets and construction in progress Cost At 1 January ,575 4, ,002 47, ,795 Additions 24,587 1,110 22,383 58, ,261 Disposals (2,043) (639) (4,013) (19,721) (26,416) Transfers (note 25) 28, ,989 (35,910) (225) Translation difference 650 (231) (2,968) 228 (2,321) At 31 December ,405 5, ,393 50, ,094 Depreciation At 1 January ,672 2, , ,219 Charge for the year 5, ,345-33,118 Relating to disposals - (590) (2,983) - (3,573) Translation difference (85) (147) (2,288) - (2,520) At 31 December ,546 2, , ,244 Net carrying value At 31 December ,859 2,224 93,578 50, ,850 Total BLOM BANK s.a.l. Annual Report 2010 Certain freehold land and buildings purchased prior to 1 January 1999 were restated in previous years for the changes in the general purchasing power of the Lebanese Lira giving rise to a net surplus amounting to LL 14,727 million, which was credited to equity under reserves for revaluation variance real estate. 25 Intangible Assets Software development Key money Advances on acquisition of intangible assets LL million Cost At 1 January ,477 9, ,055 Additions 1, ,872 Transfers (note 24) (688) 301 Translation difference 285 (2,484) (59) (2,258) Total At 31 December ,936 6, ,970 Amortization At 1 January ,501 6,827-14,328 Charge for the year 2, ,493 Translation difference 295 (2,427) - (2,132) At 31 December ,140 4,549-14,689 Net carrying value At 31 December ,796 2, ,

127 LL million Software development Key money Advances on acquisition of intangible assets Cost At 1 January ,299 9, ,822 Additions 3, ,451 Disposals (149) - (434) (583) Transfers (note 24) (8) 225 Translation difference (17) 140 At 31 December ,477 9, ,055 Total Amortization At 1 January ,900 6,615-12,515 Charge for the year 1, ,770 Relating to disposals (149) - - (149) Translation difference At 31 December ,501 6,827-14,328 Net carrying value At 31 December ,976 2, , Other Assets LL million Compulsory deposits (i) 16,927 15,094 Precious metals and stamps Customers transactions between head office and branches 12,388 13,505 Prepaid expenses 23,995 22,275 Transactions pending between consolidated subsidiaries 5,425 6,252 Sundry debtors (ii) 6,144 8,874 Other revenues to be collected 4,015 7,754 Reinsurer s share of technical reserves 31,787 21,846 Investment in a non-consolidated subsidiary (iii) Other assets 26,877 33, , ,

128 Notes to the Consolidated Financial Statements 31 December 2010 (i) Compulsory deposits represent amounts deposited with local authorities based on local regulations of the countries in which the subsidiaries are located, and are detailed as follows: LL million BLOM Invest SAL 1,500 1,500 Bank of Syria and Overseas SA 10,927 9,094 BLOM Development Bank SAL 4,500 4,500 16,927 15,094 (ii) Sundry debtors LL million Sundry debtors 8,874 11,613 Less: Provision against sundry debtors (2,730) (2,739) 6,144 8,874 The movement of provision against sundry debtors is summarized as follows: LL million BLOM BANK s.a.l. Annual Report 2010 Balance at 1 January 2,739 2,737 Translation difference (9) 2 Balance at 31 December 2,730 2,739 (iii) The book value of the subsidiary s equity which was not consolidated because it is immaterial to the consolidated financial statements as at 31 December is detailed as follows: Shareholders equity LL million Société de Services d Assurances et de Marketing SAL Goodwill LL million Cost: At 1 January 63,268 63,145 Translation difference (123) 123 At 31 December 63,145 63,

129 Impairment testing of goodwill Goodwill acquired through business combinations has been allocated to group of cash-generating units, which are also reportable segments, for impairment testing as follows: LL million Corporate and retail banking (BLOM Bank Egypt SAE) 61,876 61,550 Asset management and private banking (BLOM Bank (Switzerland) SA) 1,269 1,718 63,145 63,268 Key assumptions used in value in use calculations The recoverable amount of BLOM Bank Egypt SAE has been determined based on a value in use calculation, using cash flow projections based on financial budgets approved by senior management covering a ten-year period. The following rates are used by the Group % 2009 % Discount rate Projected growth rate (average during the first 5 years) Projected growth rate beyond the five year period 0 0 The calculation of value in use for BLOM Bank Egypt SAE is most sensitive to the following assumptions: Interest margins; Discount rates; Projected growth rates; Gross domestic product of the country where the subsidiary operates; Local inflation rates. Interest margins Interest margins are based on average values achieved in the 13 months proceeding of the budget period. These are increased over the budget period for anticipated market conditions. Discount rates Discount rates reflect management s estimate of return on capital employed. Discount rates are calculated by using the cost of equity. Projected growth rates, GDP and local inflation rates Assumptions are based on management analysis and published industry research. Sensitivity to changes in assumptions Management believes that no reasonable possible change in any of the above key assumptions would cause the carrying value of the units to exceed their recoverable amount. 127

130 Notes to the Consolidated Financial Statements 31 December Due to Banks and Financial Institutions LL million Current accounts 200, ,063 Time deposits 177, , , , Customers Deposits BLOM BANK s.a.l. Annual Report 2010 LL million Customers deposits at amortized cost: At 1 January 2009 Reclassified Sight deposits 4,051,993 3,666,255 2,632,131 Time deposits 13,876,302 12,600,479 10,532,384 Saving accounts 10,175,083 9,539,939 8,696,333 Credit accounts and deposits against debit 1,139,580 1,022, ,247 accounts Margins on letters of credit 71,292 81,134 61,350 29,314,250 26,909,834 22,697,445 Customers deposits designated at fair value 48,927 30,351 - through profit or loss 29,363,177 26,940,185 22,697,445 As at 31 December 2010, the derivatives contracts fair value, related to the customers deposits designated at fair value through profit or loss, amounted to LL 6,158 million. Customers deposits include coded deposit accounts in BLOM Bank SAL and BLOM Invest Bank SAL amounting to LL 73,677 million as of 31 December 2010 (2009: LL 82,778 million). 30 Current Tax Liabilities LL million Income tax liability 70,924 48,588 Income tax payable is detailed as follows: At 1 January 48,588 53,159 Tax expense for the year 68,589 53,655 Tax paid during the year (46,711) (58,728) Exchange difference At 31 December 70,924 48,

131 31 Other Liabilities LL million Deposits related to entities under constitution Transactions pending between consolidated subsidiaries Advances from customers for acquisition of securities At 1 January 2009 Reclassified 5,360 1, ,509 21,322 17,024 27,750 22,119 18,757 Sundry creditors 35,339 39,799 45,819 Dividends payable Accrued expenses 55,681 44,887 40,686 Transactions pending between branches Unearned premiums and liability related to unit linked insurance contracts Complementary taxes due related to a subsidiary bank (i) 43,919 56,698 17, , , ,993 11,743 10,136 50,269 Other taxes due 12,846 17,586 12,789 Other liabilities 6,235 6, , , ,861 (i) Complementary taxes due related to a subsidiary bank represents mainly accruals for additional complementary taxes in a subsidiary resulting from inspection by tax authorities for the years from 1991 onwards. The subsidiary bank settled an amount of LL 40,133 million in Provisions for Risks and Charges LL million Provision for risks and charges (i) 13,036 4,378 Provision for fiduciary customers commitments (note 10) (ii) - 9,160 Provision for outstanding claims and IBNR reserves related to subsidiary- insurance companies (iii) 62,475 24,088 Provision on commitment by signature (note 10) 2,463 - Other provisions ,828 38,

132 Notes to the Consolidated Financial Statements 31 December 2010 (i) Provisions for risks and charges LL million Balance at 1 January 4,378 4,679 Charge for the year 8,622 1,567 Provisions paid during the year - (1,915) Provisions written-back during the year (232) - Exchange difference Balance at 31 December 13,036 4,378 (ii) The provision for fiduciary customers commitments amounting to LL 9,160 million represents a provision against probable default of Investment Dar S.A.K. - Kuwait to settle the fiduciary deposits of BLOM Development Bank SAL s (a subsidiary) customers. This provision was transferred in 2010 to impairment allowance on due from banks and financial institutions (note 16). (iii) Provisions for outstanding claims and IBNR reserves related to subsidiary-insurance companies BLOM BANK s.a.l. Annual Report 2010 LL million Balance at 1 January 24,088 16,855 Provision for outstanding claims and IBNR reserves charged for the year 24,474 7,056 Transfer from unearned premiums and liability related to unit linked insurance contracts to IBNR reserve 14,343 - Exchange difference (430) 177 Balance at 31 December 62,475 24, Retirement Benefits Obligation LL million Balance at 1 January 38,558 34,534 Charge for the year (note 11) 8,204 6,484 Benefits paid (1,141) (2,551) Exchange difference (546) 91 Balance at 31 December 45,075 38,

133 34 Share Capital and Premiums LL million Common shares Authorized, issued and fully paid 215,000,000 shares at LL 1,040 per share as of 31 December 2010 (31 December 2009: 21,500,000 shares at LL 10,400 per share) Share capital Share premium Share capital Share premium 223, , , , LL million Preferred shares Authorized, issued and fully paid 7,500,000 preferred shares (2004 issue) of LL 1,040 per share as of 31 December 2010 (31 December 2009: 750,000 preferred shares (2004 issue) of LL 10,400 per share) 10,000,000 preferred shares (2005 issue) of LL 1,040 per share as of 31 December 2010 (31 December 2009: 1,000,000 preferred shares (2005 issue) of LL 10,400 per share) Share capital Share premium Share capital Share premium 7, ,590 7, ,590 10, ,720 10, ,720 18, ,310 18, ,310 Preferred shares consist of the following: 4 June 2004 issue 17 September 2005 issue Number of shares Premium (denominated in USD) Non cumulative benefits 7,500,000 preferred shares (2009: 750,000 preferred shares) LL 105,590 million (USD 70,043 thousand) An annual amount for each share equal to USD 8.5 based on the exchange rate on the date of the General Assembly Meeting (subject to the approval of the Shareholders General Assembly Meeting and the availability of a non-consolidated distributable net income for the year). Due to the stock split of 1 to 10 on 5 October 2010, the annual amount for each share will be equal to USD ,000,000 preferred shares (2009: 1,000,000 preferred shares) LL 140,720 million (USD 93,347 thousand) 2005 distributions to be based on a fixed amount of USD 3.75 per share and thereafter at an annual amount equal to 6% of the net consolidated profit of the Bank, with a minimum of 7.5% and a maximum of 9.5% of the issue price of LL 151,120 (subject to the approval of the Shareholders General Assembly Meeting and the availability of a non-consolidated distributable net income for the year). 131

134 Notes to the Consolidated Financial Statements 31 December 2010 Based on the decision of the Extraordinary General Assembly meeting held on 21 June 2010, the shareholders agreed to perform a stock split of 1 to 10 as follows: - Split the 21,500,000 common shares listed in the market into 215,000,000 common shares with a nominal value of LL 1,040 per share. Out of the 21,500,000 common shares, 7,389,601 shares which are listed as Global Depository Receipts (GDRs) on the Luxembourg Stock Exchange (Euro MTF market) will accordingly be split to 73,896,010 shares with a nominal value of LL 1,040 per share. - Split the 750,000 preferred shares (2004 issuance) into 7,500,000 preferred shares with a nominal value of LL 1,040 per share. - Split the 1,000,000 preferred shares (2005 issuance) into 10,000,000 preferred shares with a nominal value of LL 1,040 per share. On 5 October 2010, and according to the decision of the Extraordinary General Assembly meeting held on 21 June 2010 and the approval of the Central Bank of Lebanon on 9 August 2010, the common shares, the preferred shares and the Global Depository Receipts of BLOM Bank SAL were split into 1 to 10. The total number of preferred shares is 17,500,000 shares as of 31 December 2010 (2009: 1,750,000 shares). These preferred shares (2004 and 2005 issues) are redeemable 60 days after the annual general assemblies dealing with the accounts for the years 2009 and 2010 respectively, pursuant to the exercise of that option. In the event of any liquidation, dissolution or winding-up of the Bank, the holders of series 2004 and 2005 preferred shares shall be entitled to be paid out of the assets of the Bank available for distribution to its shareholders on a pro rata basis, before any payment shall be made to common shareholders. BLOM BANK s.a.l. Annual Report 2010 All of the Bank s common and preferred shares are listed in the Beirut Stock Exchange starting 20 June Out of the total common shares, 73,896,010 shares are listed as Global Depository Receipts (GDRs) in the Luxembourg Stock Exchange. 35 LL million Capital Reserves Reserve for general banking risks Legal reserve General reserve Reserve for increase of share capital Non distributable reserves At 1 January , , ,286 26,658 56, ,391 Appropriation of 2008 profits 12,699 41,122 55,828 7, ,942 Net gain on sale of treasury shares ,718-1,718 Total At 31 December , , ,114 35,669 56, ,051 Appropriation of 2009 profits 59,397 41,332 39,332 7, ,621 Net gain on sale of treasury shares ,184-15,184 Transfer to reserve for increase of share capital At 31 December , , ,446 58,643 56, ,

135 Reserves for general banking risks According to the Central Bank of Lebanon regulations, banks in Lebanon are required to appropriate from their annual net profit a minimum of 0.2 percent and a maximum of 0.3 percent of total risk weighted assets and off-financial position accounts based on rates specified by the Central Bank of Lebanon to cover general banking risks. The consolidated ratio should not be less than 1.25 percent of these risks at the end of year ten (2007) and 2 percent at the end of year twenty (2017). This reserve is part of the Group s equity and cannot be distributed as dividends. This reserve is based on the denomination (Lebanese Lira and US Dollars) of the risk weighted assets and off-financial position accounts. Legal reserve According to the Lebanese Code of Commerce and to the Money and Credit Act, banks and companies operating in Lebanon have to transfer 10% of their annual net profit to a legal reserve. This reserve cannot be distributed as dividends. General reserve The Group appropriated general reserves from its retained earnings to strengthen its equity. This reserve amounting to LL 365,446 million as at 31 December 2010 (2009: LL 326,114 million) is available for dividends distribution. Reserve for increase of share capital The balance amounting to LL 58,643 million (2009: LL 35,669 million) represents a regulatory reserve pursuant to circular no. 167 issued by the Banking Control Commission. This reserve cannot be distributed as dividends. Details of the reserve for increase of share capital are as follows: LL million Recoveries of provisions for doubtful debts 39,482 31,922 Revaluation reserves for fixed assets sold Gain on sale of treasury shares 18,493 3,309 58,643 35,669 Non distributable reserves Non distributable reserves resulted mainly from the increase of share capital of subsidiaries through transfer from the general reserves and retained earnings. 36 Treasury Shares Movement of treasury shares recognized in the consolidated statement of financial position is as follows: 2010 No. of common shares Amount LL million At 1 January 581,719 58,723 Movement of treasury shares before stock split Purchase of treasury shares 826, ,537 Sale of treasury shares (910,783) (117,508) Balance before stock split 497,428 59,752 Stock split of 1 to 10 on 5 October ,974,280 59,752 Purchase of treasury shares 2,728,362 40,555 Sale of treasury shares (1,598,431) (24,514) At 31 December 6,104,211 75,

136 Notes to the Consolidated Financial Statements 31 December 2010 No. of common shares Amount LL million At 1 January 333,732 39,877 Purchase of treasury shares 834,968 78,373 Sale of treasury shares (586,981) (59,527) At 31 December 581,719 58, The treasury shares represent Global Depository Receipts (GDR) purchased by the Bank. The market value of one GDR was USD as of 31 December 2010 due to the stock split of 1 to 10 as of 5 October 2010 (2009: USD 89.90). During 2009, the Bank refunded the distribution of dividends on the treasury shares amounting to LL 5,275 million resulting from the distribution of dividends for all ordinary shares in The Group generated gains of LL 15,184 million from the sale of treasury shares during the year 2010 (2009: LL 1,718 million). Gain and loss are reflected under Reserve for increase of share capital in the Capital reserves (note 35). 37 Available-For-Sale Reserve BLOM BANK s.a.l. Annual Report 2010 The available-for-sale reserve related to available-for-sale investments are as follows: LL million Unrealized gains on Lebanese Treasury Bills available-forsale denominated in LL 121, ,032 Unrealized gains on bonds available-for-sale (8,238) (15,918) Unrealized losses on Lebanese Treasury Bills classified as (5,765) loans and receivables denominated in foreign currencies (939) Unrealized losses on bonds classified as loans and receivables (13,671) (16,714) Unrealized losses on shares available-for-sale (95) - Unrealized gains on other sovereign treasury bills available-for-sale 1,998 (277) 96, ,184 Movement of available-for-sale reserve is as follows: LL million Balance at 1 January 106,184 3,905 Net unrealized gain on available-for-sale financial investments (6,880) 126,849 Net unrealized gain on available-for-sale and loans and receivables financial investments reclassified to the (3,083) (24,570) consolidated income statement Balance at 31 December 96, ,

137 38 Cash And Cash Equivalents LL million Cash and balances with central banks 2,210,694 2,836,264 Deposits with banks and financial institutions (whose original maturities are less than 3 months) 4,161,649 4,620,657 Debt securities (whose original maturities are less than three months) - 1,229 6,372,343 7,458,150 Less: Due to banks and financial institutions (whose original maturities are less than 3 months) (301,769) (620,478) 6,070,574 6,837, Dividends Declared and Paid According to the resolution of the General Assembly meeting held on 9 April 2010, the following dividends were declared and paid, from the 2009 profits. Number of shares before the stock split of 1 to 10 The dividends on common shares, declared on 9 April 2010, were paid net of the treasury shares as of that date. According to the resolution of the General Assembly meeting held on 8 April 2009, the following dividends were declared and paid, from the 2008 profits Dividends per share in LL Total LL million Dividends for preferred shares 2004 issue 750,000 12, ,610 Dividends for preferred shares 2005 issue 1,000,000 14, ,321 Dividends for common shares 20,921,151 6, , ,458 Number of shares before the stock split of 1 to Dividends per share in LL Total LL million Dividends for preferred shares 2004 issue 750,000 12, ,610 Dividends for preferred shares 2005 issue 1,000,000 14, ,321 Dividends for common shares 21,500,000 5, , ,

138 Notes to the Consolidated Financial Statements 31 December 2010 In the meeting held on 16 March 2011, the board of directors proposed the distribution of dividends from 2010 profits for approval at Annual General Assembly as follows (not recognized as a liability as at 31 December): LL million Common shares (LL 675 per share) 145,125 Preferred shares issue 2004 (LL 1,281/31 per share) 9,610 Preferred shares issue 2005 (LL 1,432/10 per share) 14, , Related Party Transactions The Group enters into transactions with shareholders, directors, senior management, and their related concerns, and entities controlled, jointly controlled or significantly influenced by such parties in the ordinary course of business at commercial interest and commission rates. All the loans and advances to related parties are performing advances and are free of any provision for possible credit losses. The transactions with related parties are as follows: BLOM BANK s.a.l. Annual Report 2010 LL million Shareholders Board of directors and senior management Other related parties Deposits 119,766 43,088 29, , ,554 Loans and advances 1,268 4,078 4,052 9,398 11,522 Financial assets held-for trading ,398 22,398 - Financial investments available for sale - - 5,274 5,274 - Indirect facilities - 1, , Interest received from loans and advances ,034 Interest paid on deposits 7,479 2, ,079 6,313 Management services - - 5,427 5,427 2,600 Net trading income Accounting services revenues from a non-consolidated subsidiary

139 The board of directors and senior management remunerations are as follows: LL million Board of directors and senior management remunerations 32,161 30,960 Long term benefits 3,378 3,035 35,539 33,995 The remunerations paid to board of directors and senior management are short term in nature. 41 Contingent Liabilities, Commitments and Leasing Arrangements Credit related commitments To meet the financial needs of customers, the Group enters into various irrevocable commitments and contingent liabilities. These consist of financial guarantees, letters of credit and other undrawn commitments to lend. Even though these obligations may not be recognized on the consolidated statement of financial position, they do contain credit risk and are therefore part of the overall risk of the Group. Letters of credit and guarantees (including standby letters of credit) commit the Group to make payments on behalf of customers in the event of a specific act, generally related to the import or export of goods. Guarantees and standby letters of credit carry a similar credit risk to loans. The Group has the following credit related commitments: LL million Commitments issued to financial institutions 2,778 17,805 Commitments issued to customers 423, ,711 Guarantees issued to financial institutions 233, ,040 Guarantees issued to customers 655, ,602 Acceptances (note 21) 205, ,637 1,520,412 1,260,795 Commitments to lend 2,647,141 2,658,602 4,167,553 3,919,397 Capital and operating lease commitments Capital expenditures and lease payments that were not provided for as of the consolidated statement of financial position date are as follows: 137

140 Notes to the Consolidated Financial Statements 31 December 2010 Lease arrangements The commitments on capital expenditures and operating lease commitments at the statement of financial position date, which were not provided for, were as follows: LL million Capital commitments Property and equipment 29,786 24,731 Operating lease commitments Group as lessee Future minimum lease payments under operating leases as at 31 December are as follows: During one year 2,199 1,779 More than 1 year and less than five years 6,277 6,340 More than five years 8,922 9,660 Total operating lease commitments at the statement of financial position date 17,398 17, Fiduciary Assets, Assets Under Management and Custody Accounts BLOM BANK s.a.l. Annual Report 2010 LL million Fiduciary assets 744, ,344 Financial assets under management 8,264,163 5,312, Fair Value of the Financial Instruments 9,008,204 6,263,712 Fiduciary accounts and financial assets under management include notes, checks, policies, treasury bills/bonds, shares and documents for collection held by the Group to the order of third parties. A. Determination of fair value and fair value hierarchy The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities; Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. 138

141 The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy: 31 December 2010 LL million Level 1 Level 2 Level 3 Total Financial assets Derivative financial instruments: Forward foreign exchange contracts - 13,229-13,229 Equity swaps and options - 6,320-6,320 Futures on commodities 27, ,143 27,143 19,549-46,692 Financial assets held for trading: Debt securities 18, ,538 Equities 13, ,880 Investment funds 22, ,398 54, ,816 Financial investments designated at fair value through profit or loss: Investments related to unitlinked contracts - 74,012-74,012 Convertible bonds 65, ,989 Subordinated convertible notes 24, ,524 90,513 74, ,525 Financial investments available-for-sale: Quoted financial assets Debt securities 229, ,573 Certificates of deposit commercial banks and 247, ,525 financial institutions Investment funds 5, , , ,372 Unquoted financial assets: Government debt securities - 3,601,367-3,601,367 Certificates of deposit commercial banks and - 15,262-15,262 financial institutions - 3,616,629-3,616,629 Financial liabilities Derivative financial instruments: Forward foreign exchange contracts - 9,160-9,160 Equity swaps and options Futures on commodities 27, ,143 27,143 9,322 36,

142 Notes to the Consolidated Financial Statements 31 December December 2009 BLOM BANK s.a.l. Annual Report 2010 LL million Level 1 Level 2 Level 3 Total Financial assets Derivative financial instruments: Forward foreign exchange contracts - 28,472-28,472 Equity swaps and options - 5,072-5,072-33,544-33,544 Financial assets held for trading: Debt securities 8, ,654 Equities 13, ,397 Investment funds 2, ,712 24, ,763 Financial investments designated at fair value through profit or loss: Investments related to unitlinked contracts - 73,097-73,097 Convertible bonds 66, ,305 66,305 73, ,402 Financial investments available-for-sale: Quoted financial assets Debt securities 166, ,349 Equities Certificates of deposit commercial banks and 121, ,279 financial institutions 287, ,640 Unquoted financial assets: Government debt securities - 4,313,911-4,313,911 Certificates of deposit commercial banks and - 72,460-72,460 financial institutions - 4,386,371-4,386,371 Financial liabilities Derivative financial instruments: Forward foreign exchange contracts - 18,454-18,454 Equity swaps and options - 5,072-5,072-23,526-23,526 Financial instruments recorded at fair value The following is a description of the determination of fair value for financial instruments which are recorded at fair value using valuation techniques. These incorporate the Group s estimate of assumptions that a market participant would make when valuing the instruments. 140

143 Derivatives Derivative products valued using a valuation technique with market observable inputs are forward foreign exchange contracts, future contracts and equity swaps and options. The most frequently applied valuation technique include forward pricing model and swap models, using present value calculations. The models incorporate various inputs including the credit quality of counterparties, foreign exchange spot and forward rates and interest rate curves. Financial investments available-for-sale Available-for-sale financial assets valued using a valuation technique or pricing models primarily consist of unquoted debt securities and certificates of deposit. These assets are valued using models which sometimes only incorporate data observable in the market. Set out below is a comparison, by class, of the carrying amounts and fair values of the Group s financial instruments that are not carried at fair value in the consolidated financial statements. This table does not include the fair value of non-financial assets and non-financial liabilities. LL million Carrying value Fair value Carrying value Fair value Financial assets Cash and balances with central banks 4,248,229 4,307,399 4,693,974 4,804,854 Due from banks and financial institutions 5,931,237 5,935,596 5,787,117 5,817,238 Loans and advances to customers 7,797,136 7,917,172 6,046,601 6,049,797 Loans and advances to related parties 9,398 9,718 11,522 11,907 Other financial assets classified as loans and receivables 9,559,006 10,092,122 8,200,247 8,831,695 Financial investments held-to-maturity 912, , , ,966 Financial liabilities Due to banks and financial institutions 378, , , ,011 Customers' deposits 29,363,177 29,428,253 26,940,185 27,011,179 Related parties deposits 192, , , ,852 Fair value of financial assets and liabilities not carried at fair value The following describes the methodologies and assumptions used to determine fair values for those financial instruments which are not already recorded at fair value in the consolidated financial statements: (i) Assets for which fair value approximates carrying value For financial assets and financial liabilities that have a short term maturity (less than three months) it is assumed that the carrying amounts approximate to their fair value. This assumption is also applied to demand deposits, and savings accounts without a specific maturity. 141

144 Notes to the Consolidated Financial Statements 31 December 2010 (ii) Fixed rate financial instruments The fair value of fixed rate financial assets and liabilities carried at amortised cost are estimated by comparing market interest rates when they were first recognised with current market rates for similar financial instruments. The estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing money-market interest rates for debts with similar credit risk and maturity. For quoted debt issued, the fair values are determined based on quoted market prices. For those notes issued where quoted market prices are not available, a discounted cash flow model is used based on a current interest rate yield curve appropriate for the remaining term to maturity and credit spreads. For other variable rate instruments, an adjustment is also made to reflect the change in required credit spread since the instrument was first recognized. B. Reclassification of financial assets Following the amendments to IAS 39 and IFRS 7 Reclassification of Financial Assets (effective from 1 July 2008), the Group undertook a review of assets that were classified as Held-for-trading and Available-forsale, in order to determine whether this classification remains appropriate. Where it was determined that the market for an asset is no longer active and that the Group no longer intends to trade, management have reviewed the instrument to determine whether it was appropriate to reclassify it to Loans and receivables. The following table shows the carrying amount and fair value of financial assets reclassified from Availablefor-sale to the Loans and receivables category, as at the date of reclassification and as at the reporting date. All transfers occurred on 1 July 2008 and thereafter. There were no reclassifications prior to 1 July Available-for-sale BLOM BANK s.a.l. Annual Report Carrying Carrying Fair value Fair value LL million value value Financial assets reclassified during 2008 as at year end 1,576,873 1,619,881 2,433,100 2,517,836 The following table shows the carrying amount and fair value of financial assets reclassified from Held-fortrading to the Loans and receivables category, as at the date of reclassification and as at the reporting date. All transfers occurred on 1 July 2008 and thereafter. There were no reclassifications prior to 1 July Held-for-trading LL million Financial assets reclassified during the year as at the date of reclassification Carrying value Fair value Carrying value Fair value 263, , Financial assets reclassified during the year as at year end 242, , Financial assets reclassified during 2008 as at year end 9,142 10,336 25,059 28,

145 The following table shows the total fair value gains and losses recorded on trading and available for sale assets reclassified to the Loans and receivables category, up until the date of transfer. It also shows the undiscounted amount of cash flows expected to be recovered from and the expected effective interest rate applied to, reclassified assets, as assessed at the date of reclassification. LL million Debt securities held-for-trading Debt securities available-for-sale Cost of securities transferred 332,803 2,772,702 Fair value losses recognized in net trading income/equity: Recorded during ,632 - Recorded during ,493 Recorded during (2,214) Recorded prior to (16,037) Carrying amount at date of reclassification 336,011 2,771,944 Expected undiscounted cash recoveries, as assessed at the date of reclassification 411,879 3,410,339 Anticipated average effective interest rate over the remaining life of the assets 6.37% 6.81% The following table shows the total fair value gains or losses and the difference in net interest income that would have been recognized during the period subsequent to reclassification if the Group had not reclassified financial assets from the Held-for-trading and Available-for-sale to the Loans and receivables category. This disclosure is provided for information purposes only; it does not reflect what has actually been recorded in the consolidated financial statements of the Group. Debt securities LL million Consolidated income statement Equity Consolidated income statement Equity Fair value gains and losses which would otherwise have been recorded after reclassification, during the current period 2,490 16,557 5, ,307 The following table shows the net profit or loss actually recorded on assets reclassified to loans and receivables subsequent to reclassification: LL million Debt securities held-fortrading Debt securitiesavailable for sale Debt securities held-fortrading Debt securitiesavailable for sale Net interest income 7, ,358 5, ,401 Write-back of provision ,073 Net profit 7, ,358 5, ,

146 Notes to the Consolidated Financial Statements 31 December Maturity Analysis of Assets and Liabilities The table below shows an analysis of assets and liabilities analyzed according to when they are expected to be recovered or settled. The maturity profile of the Group s assets and liabilities as at 31 December 2010 is as follows: BLOM BANK s.a.l. Annual Report 2010 LL million Less than one year More than one year ASSETS Cash and balances with central banks 2,576,410 1,671,819 4,248,229 Due from banks and financial institutions 5,526, ,123 5,931,237 Derivative financial instruments 40,372 6,320 46,692 Financial assets held-for-trading 1,693 53,123 54,816 Financial assets designated at fair value through profit or loss , ,525 Loans and advances to customers 5,539,780 2,257,356 7,797,136 Loans and advances to related parties 8,161 1,237 9,398 Bank acceptances 203,349 2, ,546 Non-current assets held for sale - 28,062 28,062 Financial investments available-for-sale 1,794,832 2,321,429 4,116,261 Other financial assets classified as loans and receivables 878,664 8,680,342 9,559,006 Financial investments held-to-maturity 61, , ,295 Investment properties Property and equipment - 412, ,374 Intangible assets - 6,281 6,281 Other assets 109,688 18, ,278 Goodwill - 63,145 63,145 TOTAL ASSETS 16,741,463 16,942,389 33,683,852 LIABILITIES Due to banks and financial institutions 350,983 27, ,118 Derivative financial instruments 36, ,465 Customers' deposits 28,762, ,942 29,363,177 Related parties` deposits 192, ,717 Engagements by acceptances 203,349 2, ,546 Current tax liabilities 70, ,924 Other liabilities 429,203 33, ,420 Provisions for risks and charges 1,310 77,518 78,828 Retirement benefits obligation 2,761 42,314 45,075 Total TOTAL LIABILITIES 30,049, ,638 30,833,270 NET (13,308,169) 16,158,751 2,850,

147 The maturity profile of the Group s assets and liabilities as at 31 December 2009 is as follows: LL million Less than one year More than one year ASSETS Cash and balances with central banks 2,894,017 1,799,957 4,693,974 Due from banks and financial institutions 5,721,689 65,428 5,787,117 Derivative financial instruments 33,544-33,544 Financial assets held-for-trading 5,047 19,716 24,763 Financial assets designated at fair value through profit or loss , ,402 Loans and advances to customers 4,086,173 1,960,428 6,046,601 Loans and advances to related parties 11,522-11,522 Bank acceptances 194,475 3, ,637 Non-current assets held for sale - 29,846 29,846 Financial investments available-for-sale 1,149,870 3,544,351 4,694,221 Other financial assets classified as loans and receivables 939,245 7,261,002 8,200,247 Financial investments held-to-maturity 192, , ,997 Investment properties Property and equipment - 374, ,850 Intangible assets - 6,727 6,727 Other assets 112,648 16, ,510 Goodwill - 63,268 63,268 TOTAL ASSETS 15,341,083 15,867,761 31,208,844 Total LIABILITIES Due to banks and financial institutions 637,157 68, ,438 Derivative financial instruments 23,526-23,526 Customers' deposits 26,465, ,584 26,940,185 Related parties` deposits 230, ,554 Engagements by acceptances 194,475 3, ,637 Current tax liabilities 48,588-48,588 Other liabilities 386,966 23, ,388 Provisions for risks and charges - 38,421 38,421 Retirement benefits obligation 3,204 35,354 38,558 TOTAL LIABILITIES 27,990, ,224 28,633,295 NET (12,648,988) 15,224,537 2,575,

148 Notes to the Consolidated Financial Statements 31 December Legal Cases and Contingent Liabilities Litigation is a common occurrence in the banking industry due to the nature of the business undertaken. The Group has formal controls and policies for managing legal claims. Once professional advice has been obtained and the amount of loss reasonably estimated, the Group makes adjustments to account for any adverse effects which the claims may have on its financial standing. At year end, the Group had several unresolved legal claims. Management, after discussing with its counselors all such cases and proceedings against the Group, considers that the aggregate liability or loss, if any, resulting from an adverse determination would not have a material effect on the consolidated financial position of the Group. During 2009, the Bank s records in Lebanon were subject to a review by the tax authorities for the years 2006 and However, the outcome of this review has not been issued as of the audit report date. The Bank s books in Lebanon have not been reviewed by the tax authorities for the years 2008 to The ultimate outcome of any review by the tax authorities on the Bank s books in Lebanon for these years cannot be presently determined. The Bank s books in Lebanon have not been reviewed by the National Social Security Fund (NSSF) since The ultimate outcome of any review by the NSSF on the Bank s books in Lebanon from 1998 to 2010 cannot be presently determined. Management considers that the outcome of any review by the NSSF would not have material impact on the consolidated financial position of the Group. 46 Risk Management BLOM BANK s.a.l. Annual Report 2010 The Group manages its business activities within risk management guidelines as set by the Group s Risk Management Policy approved by the Board of Directors. The Group recognizes the role of the Board of Directors and executive management in the risk management process as set out in the Banking Control Commission circular 242. In particular, it is recognized that ultimate responsibility for establishment of effective risk management practices and culture lies with the Board of Directors as does the establishing of the Group s risk appetite and tolerance levels. The Board of Directors delegates through its Risk Management Committee the day to day responsibility for establishment and monitoring of risk management process across the Group s group to the Chief Risk Officer, who is directly appointed by the Board of Directors, in coordination with executive management at BLOM Bank SAL. The Group is mainly exposed to credit risk, liquidity risk, market risk and operational risk. The Board s Risk Management Committee has the mission to periodically (1) review and assess the risk management function of the Group, (2) review the adequacy of the Group s capital and its allocation within the Group, and (3) review risk limits and reports and make recommendations to the Board. The Chief Risk Officer undertakes his responsibilities through the Risk Management Department in Beirut which also acts as Group Risk Management, overseeing and monitoring risk management activities throughout the Group. The Chief Risk Officer is responsible for establishing the function of Risk Management and its employees across the Group. BLOM Bank s Group Risk Management aids executive management in monitoring, controlling and actively managing and mitigating the Group s overall risk. The department mainly ensures that: Risk policies and methodologies are consistent with the Group s risk appetite. Limits and risk across banking activities are monitored throughout the Group. Through a comprehensive risk management framework, transactions and outstanding risk exposures are quantified and compared against authorized limits, whereas non-quantifiable risks are monitored against policy guidelines as set by the Group s Risk Management Policy. Any discrepancies, breaches or deviations are escalated to executive senior management in a timely manner for appropriate action. 146

149 In addition to the Group s Risk Management in Lebanon, risk managers and / or risk officers were assigned within the Group s foreign subsidiaries or branches to report to the Group Risk Management and executive senior management in a manner that ensures: Standardization of risk management functions and systems developed across the Group. Regional consistency of conducted business in line with the Board s approved risk appetite. The major objective of risk management is the implementation of sound risk management practices and the Basel II framework as well as all related regulatory requirements within the group. Pillar I capital adequacy calculations have been generated since December 2004, while preparations for moving on to the more advanced approaches of pillar I have been initiated. Group Risk Management is progressively complying with the requirements of pillars II and III of the Basel framework. Excessive risk concentration Concentrations arise when the Group has significant exposure to one borrower or a group of related borrowers or to a number of counter parties engaging in similar business activities or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the Group s performance developments affecting a particular industry or geographic location. In order to avoid excessive concentrations of risk, the Group s policies and procedures include specific guidelines to focus on maintaining a diversified portfolio. Identified concentrations of credit risks are controlled and managed accordingly. Selective hedging is used within the Group to manage risk concentrations at both the relationship and industry levels Credit risk Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Group attempts to control credit risk by monitoring credit exposures, limiting transactions with specific counter parties, and continuously assessing the creditworthiness of counter parties. The Group manages credit risk in line with the guidelines set by the Basel Framework and regulatory guidance. The Group has set a credit risk policy which lays down norms for credit risk governance, methodologies and procedures for credit risk management and measurement. It consists of the following: The permissible activities, segments, programs and services that the Group intends to deliver and the acceptable limits; The mechanism of the approval on credit-facilities; The mechanism for managing and following up credit-facilities; and The required actions for analyzing and organizing credit files. The debt securities included in investments are mainly sovereign risk and standard grade securities. Analysis of investments by counterparty is provided in note 23. For details of the composition of the loans and advances refer to note 20. Information on credit risk relating to derivative instruments is provided in note 17 and for commitments and contingencies in note 41. The information on the Group s net maximum exposure by economic sectors is given in note (A) below. The Group s Risk Management is designed to identify and to set appropriate risk limits and to monitor the risk adherence to limits. Actual exposures against limits are monitored daily, monthly and periodically. Group Risk Management is responsible for monitoring the risk profile of the Group s loan portfolio by producing internal reports highlighting any exposure of concern in corporate, commercial and consumer lending. The Group examines the level of concentration whether by credit quality, client groupings or economic sector and collateral coverage. Further, the Group monitors non-performing loans and takes the required provisions for these loans. The Group in the ordinary course of lending activities holds collaterals and guarantees as security to mitigate credit risk in the loans and advances. Collaterals and guarantees are continuously monitored and revaluated. These collaterals mostly include cash collateral, quoted shares and debt securities, real estate mortgages, personal guarantees and others. In addition, the Recovery Unit in the Group dynamically manages and takes remedial actions for non-performing loans. 147

150 Notes to the Consolidated Financial Statements 31 December 2010 The Group uses an internal classification system based on risk ratings for its corporate and middle market customers. The risk rating system, which is managed by an independent unit, provides a rating based on client and transaction level. The classification system includes six grades, of which three grades relate to the performing portfolio (regular credit facilities: risk ratings 1 and 2 and special mention watch list: risk rating 3 ), one grade relates to substandard loans (risk rating 4 ) and two grades relate to non-performing loans (risk ratings 5 and 6 ). Credit cards, personal loans, car loans, housing loans and other loans related to these loans are classified as regular as they are performing and have timely repayment with no past dues; except for those loans that have unsettled payments due for more than 90 days. Each individual borrower is rated based on an internally developed debt rating model that evaluates risk based on financial as well as qualitative inputs. The associated loss estimate norms for each grade have been calculated based on the Group s historical default rates for each rating. These risk ratings are reviewed on a regular basis. Introduction of the Moody s Risk Analyst credit analysis and internal ratings system in the domestic market has provided the Group with an additional tool to enhance risk measurement and assessment of the corporate and commercial loan portfolios. This system will be gradually extended to all group entities over time. At the same time, implementation of consumer loan application and behavioral scorecards will aid significantly in meeting Basel II requirements for the retail portfolio as well as making available new quality management resources. Non-performing loans are closely monitored and well provisioned as required with remedial actions taken and managed proactively by a dedicated Recovery Unit. In line with Basel II, the Group considers payments that are past due for more than 90 days as being non-performing. The Group uses its internal grading system and Moody s for the classification of the financial assets portfolio. A- Risk concentrations: maximum exposure to credit risk without taking account of any collateral and other credit enhancements BLOM BANK s.a.l. Annual Report 2010 The Group concentrations of risk are managed by client/counterparty, by geographical region. The maximum credit exposure to any client or counterparty as of 31 December 2010 was LL 301,500 million (2009: LL 306,123 million) before taking account of collateral or other credit enhancements and LL 6,212 million (2009: fully covered) net of such protection. The following table shows the maximum exposure to credit risk for the components of the consolidated statement of financial position, including derivatives, by geography of counterparty before the effect of mitigation through the use of master netting and collateral agreements. Where financial instruments are recorded at fair value, the amounts shown represent the current credit risk exposure but not the maximum risk exposure that could arise in the future as a result of changes in values. LL million Domestic International Total Financial assets Balances with central banks 2,868,070 1,194,822 4,062,892 Due from banks and financial institutions 640,911 5,290,326 5,931,237 Derivative financial instruments - 46,692 46,692 Financial assets held-for-trading 42,306 12,510 54,816 Financial assets designated at fair value through profit or loss 140,001 24, ,525 Loans and advances to customers 4,369,992 3,427,144 7,797,136 Loans and advances to related parties 4,983 4,415 9,398 Bank acceptances 107,468 98, ,546 Financial investments available-for-sale 3,317, ,345 4,116,261 Other financial assets classified as loans and receivables 8,838, ,916 9,559,006 Financial investments held-to-maturity - 912, , Total credit exposure 20,329,737 12,530,067 32,859,

151 2009 LL million Domestic International Total Financial assets Balances with central banks 2,922,610 1,603,033 4,525,643 Due from banks and financial institutions 585,292 5,201,825 5,787,117 Derivative financial instruments - 33,544 33,544 Financial assets held-for-trading 13,724 11,039 24,763 Financial assets designated at fair value through profit or loss 139, ,402 Loans and advances to customers 3,074,309 2,972,292 6,046,601 Loans and advances to related parties 3,879 7,643 11,522 Bank acceptances 97, , ,637 Financial investments available-for-sale 3,921, ,069 4,694,221 Other financial assets classified as loans and receivables 7,607, ,115 8,200,247 Financial investments held-to-maturity - 774, ,997 Total credit exposure 18,365,045 12,070,649 30,435,694 Collateral and other credit enhancements The amount, type and valuation of collateral are based on guidelines specified in the risk management framework. The main types of collateral obtained include real estate, quoted shares, cash collateral and bank guarantees. The revaluation and custody of collaterals are performed independent of the business units. Guarantees received from customers are detailed as follows: LL million Personal guarantees received from customers 6,284,986 4,565,176 Real estate guarantees received 5,291,482 4,020,476 Cash collateral received 1,059, ,269 12,635,982 9,561,921 Management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance for impairment losses. It is the Group s policy to dispose of repossessed properties in an orderly fashion. The proceeds are used to reduce or repay the outstanding claim. In general, the Group does not occupy repossessed properties for business use. 149

152 Notes to the Consolidated Financial Statements 31 December 2010 B- Credit quality per class of financial assets The credit quality of financial assets is managed by the Group using internal credit ratings. The table below shows the credit quality by class of asset for all financial assets exposed to credit risk, based on the Group s internal credit rating system and the relationship with external credit rating. The amounts presented are gross of impairment allowances BLOM BANK s.a.l. Annual Report 2010 Sovereign Neither past due nor impaired Neither past due nor impaired Non-Sovereign Past due but not impaired Individually impaired Regular Regular Regular and special and special and special Sub-standard Non LL million mention mention mention performing Total Balances with central banks 4,062, ,062,892 Due from banks and financial institutions - 5,931, ,588 5,948,825 Derivative financial instruments - 46, ,692 Financial assets held-fortrading - 54,816 54,816 Financial assets designated at fair value through profit or loss - 164, ,525 Loans and advances to customers - 7,548, ,818 54, ,044 8,033,408 Loans and advances to related parties - 9, ,398 Financial investments available-for-sale Quoted: Debt securities - 229, ,573 Certificate of deposit commercial banks and - 247, ,525 financial institutions Investment funds - 5, ,274 Unquoted: Debt securities 3,601,367 10, ,612,017 Certificate of deposit commercial banks and - 15, ,262 financial institutions Investment fund Other financial assets classified as loans and 8,731, , ,559,006 receivables Financial investments-held-tomaturity 350, , ,295 Total Total 16,746,689 15,652, ,818 54, ,632 32,901,677 Moody s equivalent Aa2 - B1 Aa1 - B1* Not rated Not rated Not rated (*) The regular and special mention grades, under non sovereign, include derivative financial instruments, loans and advances to customers, loans and advances to related parties which are not rated by Moody s. 150

153 Sovereign Neither past due nor impaired Neither past due nor impaired 2009 Non-Sovereign Past due but not impaired Individually impaired Regular Regular Regular and special and special and special Sub-standard Non LL million mention mention mention performing Total Balances with central banks 4,525, ,525,643 Due from banks and financial institutions - 5,785, ,197 5,790,944 Derivative financial instruments - 33, ,544 Financial assets held-fortrading - 24, ,763 Financial assets designated at fair value through profit or loss - 139, ,402 Loans and advances to customers - 5,866, ,030 31, ,053 6,263,579 Loans and advances to related parties - 11, ,522 Quoted: Debt securities - 166, ,349 Certificate of deposit commercial banks and - 121, ,279 financial institutions Unquoted: Debt securities 4,313,911 13, ,327,769 Certificate of deposit commercial banks and - 72, ,460 financial institutions Investment fund Other financial assets classified as loans and 7,414, , ,200,247 receivables Financial investments-held-tomaturity 267, , ,997 Total Total 16,522,083 13,527, ,030 31, ,250 30,452,649 Moody s equivalent Aa3 - B2 Aaa - Baa2* Not rated Not rated Not rated (*) The regular and special mention grades, under non sovereign, include derivative financial instruments, loans and advances to customers, loans and advances to related parties which are not rated by Moody s. 151

154 Notes to the Consolidated Financial Statements 31 December 2010 C- Aging analysis of past due but not impaired financial assets, by class LL million Less than 30 days to 60 days 61 to 90 days More than 90 days Commercial loans 96,504 7,467 9,081 8, ,598 Consumer loans 56,217 23,832 13,171-93, ,721 31,299 22,252 8, ,818 Total LL million Less than 30 days to 60 days 61 to 90 days More than 90 days Commercial loans 63,889 16,707 4,922-85,518 Consumer loans 45,542 16,334 2,636-64, ,431 33,041 7, ,030 Total BLOM BANK s.a.l. Annual Report 2010 See note 20 for more detailed information with respect of the allowance for impairment losses on loans and advances to customers. The fair value of collateral that the Group holds relating to loans and advances to corporate customers individually determined to be impaired amounts to LL 329,310 million as of 31 December 2010 (LL 179,329 million as of 31 December 2009). The collateral consists of cash, securities, letters of guarantee and properties. As for the consumer loans that are individually determined to be impaired, the fair value of the collateral that the Group holds exceed the carrying value of these loans at the statement of financial position date. Collateral repossessed During the year, the Group took possession of real estates with a carrying value of LL 2,432 million (2009: LL 14,411 million) at the consolidated statement of financial position date, which the Group is in the process of selling. Carrying amount of financial assets presented in the consolidated statement of financial position whose terms have been renegotiated: The table below shows the carrying amount of renegotiated financial assets. LL million Loans and advances to customers 8,971 38,

155 Impairment assessment For accounting purposes, the Group uses an incurred loss model for the recognition of losses on impaired financial assets. This means that losses can only be recognized when objective evidence of a specific loss event has been observed. This approach differs from the expected loss model used for regulatory capital purposes in accordance with Basel II. The main considerations for the loan impairment assessment include whether any payments of principal or interest are overdue by more than 90 days or whether there are any known difficulties in the cash flows of counterparties, credit rating downgrades, or infringement of the original terms of the contract. The Group addresses impairment assessment in two areas: individually assessed allowances and collectively assessed allowances. Individually assessed allowances The Group determines the allowances appropriate for each individually significant loan or advance on an individual basis, including any overdue payments of interests, credit rating downgrades or infringement of the original terms of the contract. Items considered when determining allowance amounts include the sustainability of the counterparty s business plan, its ability to improve performance once a financial difficulty has arisen, projected receipts and the expected payout should bankruptcy ensue, the availability of other financial support, the realizable value of collateral, and the timing of the expected cash flows. Impairment allowances are evaluated at each reporting date, unless unforeseen circumstances require more careful attention. Collectively assessed allowances Allowances are assessed collectively for losses on loans and advances and for held to maturity debt investments that are not individually significant (including credit cards, residential mortgages and unsecured consumer lending) and for individually significant loans and advances that have been assessed individually and found not to be impaired. The Group generally bases its analyses on historical experience. However, when there are significant market developments, regional and/or global, such as the market turmoil in 2007/2008, the Group would include macroeconomic factors within its assessments. These factors include, depending on the characteristics of the individual or collective assessment: unemployment rates, current levels of bad debts, changes in laws, changes in regulations, bankruptcy trends, and other consumer data. The Group may use the aforementioned factors as appropriate to adjust the impairment allowances. Allowances are evaluated separately at each reporting date with each portfolio. The collective assessment is made for groups of assets with similar risk characteristics, in order to determine whether provision should be made due to incurred loss events for which there is objective evidence but whose effects are not yet evident in the individual loans assessments. The collective assessment takes account of data from the loan portfolio (such as historical losses on the portfolio, levels of arrears, credit utilization, loan to collateral ratios and expected receipts and recoveries once impaired) or economic data (such as current economic conditions, unemployment levels and local or industry-specific problems). This approximate delay between the time a loss is likely to have been incurred and the time it will be identified as requiring an individually assessed impairment allowance is also taken into consideration. Local management is responsible for deciding the length of this period which can extend for as long as one year. The impairment allowance is then reviewed by credit management to ensure alignment with the Group s overall policy. Financial guarantees and letters of credit are assessed and provisions are made in a similar manner as for loans. Commitments and guarantees To meet the financial needs of customers, the Group enters into various irrevocable commitments and contingent liabilities. Even though these obligations may not be recognized on the consolidated statement of financial position, they do contain credit risk and are therefore part of the overall risk of the Group. 153

156 Notes to the Consolidated Financial Statements 31 December 2010 The table below shows the Group s maximum credit risk exposure for commitments and guarantees. The maximum exposure to credit risk relating to a financial guarantee is the maximum amount the Group could have to pay if the guarantee is called on. The maximum exposure to credit risk relating to a loan commitment is the full amount of the commitment. In both cases, the maximum risk exposure is significantly greater than the amount recognized as a liability in the consolidated statement of financial position. LL million Financial guarantees 889, ,642 Letters of credit 425, ,516 Other undrawn commitments to lend 2,647,141 2,658,602 Other commitments and guarantees 181, ,810 4,143,314 3,895, Liquidity risk and funding management Liquidity risk is defined as the risk that the Group will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. Liquidity risk arises because of the possibility that the Group might be unable to meet its payment obligations when they fall due under normal and stress circumstances. Liquidity risk can be caused by market disruptions or credit downgrades which may cause certain sources of funding to dry up immediately. To limit this risk, management has arranged diversified funding sources in addition to its core deposit base, and adopted a policy of managing assets with liquidity in mind and of monitoring future cash flows and liquidity on a daily basis. BLOM BANK s.a.l. Annual Report 2010 The management of liquidity risk is currently governed by the Group s Asset Liability Management policy. The main objectives converge around the following: - Set targets and ranges for key financial position or income statement ratios to assure that the needed liquidity capacity of the Group is maintained at all times, while providing sufficient flexibility to enable the Group to address short term fluctuations in liquidity pressures. - Provide general guidance on the sequence to be followed in drawing on the Group s funding sources to meet a liquidity drain. - Review the current and prospective liquidity positions and monitor alternative funding sources. - Develop parameters for the pricing and maturity distributions of deposits, loans and investments. - Promulgate a contingency liquidity plan that identifies early indicators of stress conditions and describe actions to be taken in the event of financial difficulties arising from systemic or other crises, while minimizing adverse long-term implications for the Group s business. All asset liability management issues are subject to review and monitoring by the Asset Liability Committee, which receives regular reports from the Group Risk Management as well as Treasury. 154

157 In accordance with Lebanese banking rules and regulations, the Group is required to maintain 40% of its Tier 1 Capital in Lebanese Lira in liquid assets. It is also required to maintain non-interest bearing balances at the Central Bank of Lebanon calculated on the basis of 25% of sight commitments and 15% of term commitments in Lebanese Lira. Regarding foreign currencies, the Group maintains interest-bearing placements at the Central Bank of Lebanon at the rate of 15% of total deposits in foreign currencies regardless of nature. Foreign subsidiaries are also subject to obligatory reserve requirements with varying percentages, according to the banking rules and regulations of the countries in which they are located. The liquidity position is assessed and managed under a variety of scenarios, giving due consideration to stress factors relating to both the market in general and specifically to the Group. One of these methods is to maintain limits on the ratio of liquid assets to customers deposits, to reflect market conditions. Net liquid assets consist of cash, short-term deposits and liquid debt securities available for immediate sale less deposits for banks and financial institutions due to mature within the next month. The ratios during the year were as follows: Liquidity ratios 2010 % Advances to deposit ratios 2009 % Year-end Maximum Minimum Average The Group stresses the importance of current accounts and savings accounts as sources of funds to finance lending to customers. They are monitored using the advances to deposit ratio, which compares loans and advances to customers as a percentage of core customer current and savings accounts, together with term funding with a remaining term to maturity in excess of one year. Loans to customers that are part of reverse repurchase arrangements, and where the Group receives securities which are deemed to be liquid, are excluded from the advances to deposits ratio. Net liquid assets to customer liabilities ratios 2010 % 2009 % At 31 December Average during the year Highest Lowest Net liquid assets are liquid assets less all funds maturing in the next 30 days from wholesale market sources and from customers who are deemed to be professional. The Group defines liquid assets for the purposes of the liquidity ratio as cash balances, short-term interbank deposits and highly rated debt securities available for immediate sale and for which a liquid market exists. 155

158 Notes to the Consolidated Financial Statements 31 December Analysis of financial assets and liabilities by remaining contractual maturities The table below summarizes the maturity profile of the undiscounted cash flows of the Group s financial assets and liabilities as at 31 December. Trading derivatives are shown at fair value in a separate column. All derivatives used for hedging purposes are shown by maturity, based on their contractual undiscounted repayment obligations. Repayments which are subject to notice are treated as if notice were being given immediately. However, the Group expects that many customers will not request repayment on the earliest date the Group could be required to pay and the table does not reflect the expected cash flows indicated by the Group s deposit retention history. 31 December 2010 BLOM BANK s.a.l. Annual Report 2010 LL million On demand Less than 3 months 3 to 12 months 1 to 5 years Over 5 years Financial assets Cash and balances with central banks 1,622, , ,720 1,712,617-4,315,582 Due from banks and financial institutions 453,279 4,460, , ,993-5,989,840 Net settled derivative assets - 46, ,692 Financial assets held-fortrading ,428 9,229 51,022 63,110 Financial assets designated at fair value through profit or loss - 1,224 4, ,220 24, ,170 Loans and advances to customers - 3,132,632 2,689,311 2,328, ,792 8,615,518 Loans and advances to related parties - 8, ,420 10,283 Bank acceptances - 142,032 61,317 2, ,546 Financial investments available - for - sale - 591,066 1,430,061 2,404, ,264 4,551,051 Other financial assets classified as loans and - 361,400 1,252,426 7,345,685 3,647,161 12,606,672 receivables Financial investments- heldto-maturity - 17,821 71, , ,932 1,000,111 Total undiscounted financial assets Total 2,075,322 9,602,727 6,293,184 14,926,060 4,683,282 37,580,575 Financial liabilities Due to banks and financial institutions 200, ,615 22,377 28, ,964 Net settled derivatives liabilities - 36, ,465 Customers deposits 4,051,285 23,012,216 1,818, ,228 31,311 29,534,181 Related parties Deposits - 193, ,051 Engagements by acceptances - 142,032 61,317 2, ,546 Total undiscounted financial liabilities Net undiscounted financial assets / (liabilities) 4,251,895 23,513,379 1,901, ,787 31,311 30,350,207 (2,176,573) (13,910,652) 4,391,349 14,274,273 4,651,971 7,230,

159 LL million On demand Less than 3 months 31 December to 12 months 1 to 5 years Over 5 years Financial assets Cash and balances with central banks 2,039, ,328 34,351 1,828,528-4,744,524 Due from banks and financial institutions 554,720 4,636, ,013 67,226-5,811,335 Net settled derivative assets - 33, ,544 Financial assets held-fortrading - 3,849 1,743 5,735 17,224 28,551 Financial assets designated at fair value through profit or loss - 1,015 3, , ,411 Loans and advances to customers - 2,263,518 2,049,789 2,014, ,212 6,685,977 Loans and advances to related parties - 12, ,184 Bank acceptances - 142,442 52,033 3, ,637 Financial investments available - for - sale - 330,796 1,137,038 3,768, ,086 5,389,508 Other financial assets classified as loans and - 575,524 1,010,255 6,847,706 2,454,175 10,887,660 receivables Financial investments- heldto-maturity - 88, , , , ,038 Total Total undiscounted financial assets 2,594,037 8,929,920 4,951,465 14,964,965 3,304,982 34,745,369 Financial liabilities Due to banks and financial institutions 305, ,859 2,963 43,965 32, ,215 Net settled derivatives liabilities - 23, ,526 Customers deposits 3,665,254 20,949,082 1,985, ,053 28,501 27,131,593 Related parties Deposits - 230, ,926 Engagements by acceptances - 142,442 52,033 3, ,637 Total undiscounted financial liabilities Net undiscounted financial assets / (liabilities) 3,970,317 21,678,778 2,040, ,180 60,866 28,300,897 (1,376,280) (12,748,858) 2,910,709 14,414,785 3,244,116 6,444,

160 Notes to the Consolidated Financial Statements 31 December 2010 The table below shows the contractual expiry by maturity of the Group s contingent liabilities and commitments: LL million On demand Less than 3 months 3 to 12 months to 5 years Over 5 years Commitments issued to financial institutions 2, ,778 Commitments issued to customers - 423, ,004 Guarantees issued to financial institutions 233, ,972 Guarantees issued to customers 655, ,112 Foreign currencies to receive - 1,708, ,708,020 Other commitments - 181, ,307 Commitments to lend 2,647, ,647,141 Commitments on term financial instruments , ,262 Total 3,539,003 2,312, , ,229,596 Total BLOM BANK s.a.l. Annual Report 2010 On demand Less than 3 months 3 to 12 months to 5 years Over 5 years LL million Commitments issued to financial institutions 17, ,805 Commitments issued to customers - 330, ,711 Guarantees issued to financial institutions 209, ,040 Guarantees issued to customers 505, ,602 Foreign currencies to receive - 3,699, ,699,075 Other commitments - 173, ,810 Commitments to lend 2,658, ,658,602 Commitments on term financial instruments - - 1,110, ,110,062 Total 3,391,049 4,203,596 1,110, ,704,707 The Group expects that not all of the contingent liabilities or commitments will be drawn before expiry of the commitments Market risk Total Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in market prices. Market risks arise from open positions in interest rate and currency rate as well as equity positions, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as interest rates and foreign exchange rates. Group Risk Management is responsible for generating internal reports quantifying the Group s earnings at risk due to extreme movements in interest rates, while daily monitoring the sensitivity of the Group s trading portfolio of fixed income securities to changes in market prices and / or market parameters. Interest rate sensitivity gaps are reported to executive management and to the Banking Control Commission unconsolidated on a monthly basis and consolidated (Group level) on a semi- annual basis. The Group s Asset and Liability Management (ALM) policy assigns authority for its formulation, revision and administration to the Asset / Liability Management Committee (ALCO) of BLOM Bank SAL. Group Risk Management is responsible for monitoring compliance with all limits set in the ALM policy ranging from core foreign currency liquidity to liquidity mismatch limits to interest sensitivity gap limits. The Group is implementing an Asset and Liability Management system Focus ALM in the process of automating the risk measurement of the Group s assets and liabilities from static and dynamic perspectives including stress testing and extensive scenario analysis. 158

161 Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect future profitability or the fair values of financial instruments. The Group is exposed to interest rate risk as a result of mismatches of interest rate repricing of assets and liabilities and off-financial position items that mature or reprice in a given period. The Group manages this risk by matching the repricing of assets and liabilities through risk management strategies. Interest rate sensitivity The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Group s income statement or statement of changes in equity. The sensitivity of the consolidated income statement is the effect of the assumed changes in interest rates on the net interest income for one year, based on the floating rate on non-trading financial assets and financial liabilities held at the year end, including the effect of hedging instruments. The sensitivity of equity is calculated by revaluing the available-for-sale investments, based on the assumption that there are parallel shifts in the yield curve. The sensitivity of equity is analyzed by maturity of the assets or cash flow hedge swaps. All the non-trading book exposures are monitored and analyzed in currency concentrations and relevant sensitivities are disclosed in local currency. The sensitivity analysis does not take account of action by the Group that might be taken to mitigate the effect of such changes Sensitivity of equity Increase Sensitivity Currency in basis of net 0 to 6 6 months (1 5) LL million points interest months to 1 year years income More than 5 years Lebanese Lira +0.5% (13,371) (6,804) (4,346) (7,872) - (19,022) United States Dollar +0.5% 6,585 (327) (310) (1,561) (134) (2,332) Euro +0.25% 1,296 (7) (7) Others +0.25% 2,084 (226) (200) (934) (6) (1,366) 2010 Sensitivity of equity Decrease Sensitivity Currency in basis of net 0 to 6 6 months (1 5) LL million points interest months to 1 year years income More than 5 years Lebanese Lira -0.5% 13,371 6,644 4,407 8,004-19,055 United States Dollar -0.5% (6,585) , ,526 Euro -0.25% (1,296) Others -0.25% (2,084) , Sensitivity of equity Increase Sensitivity Currency in basis of net 0 to 6 6 months (1 5) More than LL million points interest months to 1 year years 5 years income Total Lebanese Lira +0.5% (16,234) (7,389) (7,047) (14,864) (6) (29,306) United States Dollar +0.5% 5,485 (572) (436) (1,612) (277) (2,897) Euro +0.25% 1,581 (7) (7) Others +0.25% 1,660 (2,585) (2,585) (10,065) (976) (16,211) 2009 Sensitivity of equity Decrease Sensitivity Currency in basis of net 0 to 6 6 months (1 5) LL million points interest months to 1 year years income More than 5 years Lebanese Lira -0.50% 16,234 7,037 6,687 13, ,486 United States Dollar -0.50% (5,485) , ,538 Euro -0.25% (1,581) Others -0.25% (1,660) 2,637 2,638 10, ,549 Total Total Total 159

162 Notes to the Consolidated Financial Statements 31 December 2010 Interest rate sensitivity gap Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in market prices. Market risks arise from open positions in interest rate and currency rate as well as equity positions, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as interest rates and foreign exchange rates. BLOM BANK s.a.l. Annual Report Up to 1 month ASSETS Cash and balances with central banks Due from banks and financial institutions Derivative financial instruments Financial assets held-for-trading Financial assets designated at fair value through profit or loss Loans and advances to customers Loans and advances to related parties 1 to 3 months 3 to months 1 year (1 2) years (2 5) years More than 5 years Non interest sensitive Total 457, , , , , ,537 1,096,911 4,248,229 3,718, , ,239 7, ,960 16, ,706 5,931, ,692 46, ,396 1,231 4,372 33,680 14,137 54, ,772-24,492 2, ,525 2,599, ,276 2,696, ,628 1,069, ,989 (296,481) 7,797,136 7, ,200-9,398 Bank acceptances , ,546 Financial investments available-for-sale 228, ,634 1,249,890 1,334, , ,170 79,070 4,116,261 Other financial assets classified as loans and , ,943 5,162,470 3,204, ,938 9,559,006 receivables Financial investments held-to-maturity 8,934 92,444 51, , , ,949 (9,956) 912,295 TOTAL ASSETS 7,021,198 2,343,287 5,398,208 3,490,460 8,314,984 4,666,180 1,810,824 33,045,141 LIABILITIES Due to banks and financial institutions 134,050 17,382 21,262-27, , ,118 Derivative financial instruments ,465 36,465 Customers' deposits 20,027,015 5,651,119 1,774, , ,500 27,765 1,322,467 29,363,177 Related parties` deposits 188,472 4, ,717 Engagements by acceptances , ,546 Other liabilities , ,420 TOTAL LIABILITIES 20,349,537 5,672,727 1,796, , ,635 27,765 2,205,206 30,638,443 Total interest rate sensitivity gap (13,328,339) (3,329,440) 3,602,179 3,159,916 8,058,349 4,638,415 (394,382) 2,406,

163 2009 Up to 1 month ASSETS Cash and balances with central banks Due from banks and financial institutions Derivative financial instruments Financial assets held-for-trading Financial assets designated at fair value through profit or loss Loans and advances to customers Loans and advances to related parties Bank acceptances Financial investments available-forsale Other financial assets classified as loans and receivables Financial investments held-to-maturity 1 to 3 months 3 to months 1 year (1 2) years (2 5) years More than 5 years Non interest sensitive Total 810,099 37,237 11, ,938 1,302,481 95,199 1,947,979 4,693,974 4,256, , ,698 81, ,369 5,787, ,544 33, , ,305 2,371 16,234 24, ,097 65, ,402 1,980, ,140 1,760, , , , ,956 6,046,601 11, , , ,637 45, , ,055 1,745,176 1,541, , ,197 4,694,221 18, , , ,558 4,317,752 1,758, ,098 8,200,247 58,425 90, ,818 3, , ,127 34, ,997 TOTAL ASSETS 7,181,254 1,334,480 3,722,687 3,759,941 8,153,068 2,502,292 3,950,303 30,604,025 LIABILITIES Due to banks and financial 306,644 18, , , ,438 institutions Derivative financial instruments ,526 23,526 Customers' deposits 18,422,323 5,155,646 1,862, , ,051 25,387 1,035,230 26,940,185 Related parties` deposits 228, , ,554 Engagements by acceptances , ,637 Other liabilities , ,388 TOTAL LIABILITIES 18,957,399 5,174,610 1,862, , ,231 25,387 2,012,553 28,507,728 Total interest rate sensitivity gap (11,776,145) (3,840,130) 1,859,720 3,548,360 7,889,837 2,476,905 1,937,750 2,096,

164 Notes to the Consolidated Financial Statements 31 December Currency risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rate. The Group protects its capital and reserves by holding a foreign currency position in US Dollars representing 60% of its shareholders equity after adjustment according to specific requirements set by the Central Bank of Lebanon. The Group is also allowed to hold a net trading position not exceeding 1 percent of its net shareholders equity, as long as the global foreign position does not exceed, at the same time, 40 percent of its net shareholders equity, and that the related banks are abiding in a timely and consistent manner with the required solvency rate (Central Bank of Lebanon circular number 32). The table below indicates the consolidated statement of financial position detailed by currency. The following consolidated statement of financial position as of 31 December 2010, is detailed in Lebanese Lira (LL) and foreign currencies, translated into LL. Foreign currencies in Lebanese Lira BLOM BANK s.a.l. Annual Report 2010 LL million LL million US Dollar Euro Other foreign currencies Total foreign currencies Assets Cash and balances with central banks 730,137 2,413,008 59,002 1,046,082 3,518,092 4,248,229 Due from banks and financial institutions 21,789 3,097,434 1,393,076 1,418,938 5,909,448 5,931,237 Derivative financial instruments 7,193 32,043-7,456 39,499 46,692 Financial assets held-for-trading ,077-4,291 54,368 54,816 Financial assets designated at fair value through profit or loss - 140,001-24, , ,525 Loans and advances to customers 999,838 4,020, ,519 2,505,266 6,797,298 7,797,136 Loans and advances to related parties 3,635 2,548 1,264 1,951 5,763 9,398 Bank acceptances - 147,776 34,704 23, , ,546 Non-current assets held for sale (2,291) 5,326-25,027 30,353 28,062 Financial investments available-for-sale 3,312, ,952 19, , ,617 4,116,261 Other financial assets classified as loans and 4,726,373 4,708, , ,832,633 9,559,006 receivables Financial investments heldto-maturity - 463,686 48, , , ,295 Investment properties Property and equipment 223, , , ,374 Intangible assets 1, ,521 4,908 6,281 Other assets 57,800 28,034 7,796 34,648 70, ,278 Goodwill ,145 63,145 63,145 Total Assets 10,082,571 15,589,667 1,960,458 6,051,156 23,601,281 33,683,852 Liabilities Due to banks and financial institutions 2, ,733 63, , , ,118 Derivative financial instruments 3,174 25,886-7,405 33,291 36,465 Customers' deposits 8,510,216 14,604,293 1,673,936 4,574,732 20,852,961 29,363,177 Related parties` deposits 79,261 99,472 5,043 8, , ,717 Engagements by acceptances - 147,777 34,704 23, , ,546 Current tax liabilities 45,101 (98) 2,612 23,309 25,823 70,924 Other liabilities 172, ,753 14,031 47, , ,420 Provisions for risks and charges 23,570 5,543-49,715 55,258 78,828 Retirement obligation benefits 31,282 2, ,834 13,793 45,075 Total Liabilities 8,867,517 15,321,102 1,793,631 4,851,020 21,965,753 30,833,270 Net Exposure 1,215, , ,827 1,200,136 1,635,528 2,850,582 Total 162

165 The following consolidated statement of financial position as of 31 December 2009, is detailed in Lebanese Lira (LL) and foreign currencies, translated into LL. Foreign currencies in Lebanese Lira LL million LL million US Dollars Euro Other foreign currencies Total foreign currencies Assets Cash and balances with central banks 902,039 2,222,384 84,959 1,484,592 3,791,935 4,693,974 Due from banks and financial institutions 51,223 2,791,059 1,638,576 1,306,259 5,735,894 5,787,117 Derivative financial instruments 9, ,635 23,635 33,544 Financial assets held-for-trading - 20,502-4,261 24,763 24,763 Financial assets designated at fair value through profit or loss - 139, , ,402 Loans and advances to customers 599,775 3,296, ,755 1,915,587 5,446,826 6,046,601 Loans and advances to related parties 350 3,842 2,597 4,733 11,172 11,522 Bank acceptances - 149,400 23,263 24, , ,637 Non-current assets held for sale (3,258) 7,523-25,581 33,104 29,846 Financial investments available-for-sale 3,916, ,299 13, , ,443 4,694,221 Other financial assets classified as loans and 3,385,441 4,687, ,861 6,103 4,814,806 8,200,247 receivables Financial investments heldto-maturity - 444, , , ,997 Investment properties Property and equipment 189,216 1, , , ,850 Intangible assets 1, ,359 5,557 6,727 Other assets 45,547 28,046 4,745 51,172 83, ,510 Goodwill ,268 63,268 63,268 Total Assets 9,098,190 14,140,944 2,124,716 5,844,994 22,110,654 31,208,844 Liabilities Due to banks and financial institutions 1, , , , , ,438 Derivative financial instruments ,526 23,526 23,526 Customers' deposits 7,811,193 13,047,069 1,632,442 4,449,481 19,128,992 26,940,185 Related parties` deposits 56, ,060 3,862 56, , ,554 Engagements by acceptances - 149,400 23,263 24, , ,637 Current tax liabilities 30,708-3,055 14,825 17,880 48,588 Other liabilities 129, ,195 14,183 69, , ,388 Provisions for risks and charges 15,775 13,554-9,092 22,646 38,421 Retirement obligation benefits 26,121 2,305-10,132 12,437 38,558 Total Liabilities 8,071,296 13,792,530 1,950,807 4,818,662 20,561,999 28,633,295 Net Exposure 1,026, , ,909 1,026,332 1,548,655 2,575,549 Total 163

166 Notes to the Consolidated Financial Statements 31 December 2010 The table below indicates the extent to which the Group was exposed to currency risk at 31 December 2010 on its foreign currency positions. The analysis calculates the effects of a reasonably possible movement of the currency rate against the Lebanese Lira, with all other variables held constant, including the effect of hedging instruments, on the consolidated income statement (due to the fair value of currency sensitive non-trading monetary assets and liabilities) and equity (due to the change in fair value of currency swaps and forward foreign exchange contracts used as cash flow hedges). The effect on equity is not significant. A negative amount in the table reflects a potential net reduction in consolidated income statement or equity, while a positive amount reflects a net potential increase. Currency Change in currency rate % Effect on profit before tax LL million Change in currency rate % Effect on profit before tax LL million USD ± 1% ± 1,935 ± 1% ± 174 EUR ± 3% ± 12,506 ± 3% ± 14, Prepayment risk Prepayment risk is the risk that the Group incurs a financial loss because its customers and counterparties repay or request repayment earlier than expected, such as fixed rate housing loans when interest rates fall. The fixed rate assets of the Group are not significant compared to the total assets. Moreover, other market conditions causing prepayment are not significant in the markets in which the Group operates. Therefore, the Group considers the effect of prepayment on net interest income as not material after taking into account the effect of any prepayment penalties. BLOM BANK s.a.l. Annual Report Operational risk Operational risk is the risk of loss arising from systems failure, human error, fraud or external events. When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. The Group cannot expect to eliminate all operational risks, but through a control framework and by monitoring and responding to potential risks, the Group is able to manage the risks. Controls include effective segregation of duties, access, authorization and reconciliation procedures, staff education and assessment processes, including the use of internal audit. 47 Capital Management The Bank maintains an actively managed capital base to cover risks, inherent in the business. The adequacy of the Bank s capital is monitored using, among other measures, the rules and ratios established by the Central Bank of Lebanon and the Banking Control Commission. The primary objectives of the Bank s capital management are to ensure that the Bank complies with externally imposed capital requirements and that the Bank maintains strong credit ratings and healthy capital ratios in order to support its business and to maximize shareholders value. Banks should maintain a required capital adequacy ratio (not less than 8%) based on their capital funds over the total risk weighted assets. The Bank complies in full with all its externally imposed capital requirements (2009: the same). The Bank manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Bank may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities. No changes were made in the objectives, policies and processes from the previous years; however, it is under constant scrutiny of the Board. 164

167 Regulatory capital At 31 December 2010 and 2009, the capital consists of the following: LL million Tier 1 capital 2,421,525 2,156,828 Tier 2 capital 39,432 43,591 Total capital 2,460,957 2,200,419 Risk weighted assets Credit risk 15,854,502 14,139,893 Market risk 446, ,026 Operational risk 1,512,618 1,298,738 Total risk weighted assets 17,813,871 15,760,657 The capital adequacy ratio as of 31 December (including profit for the year less proposed dividends) is as follows: Tier 1 capital ratio 13.59% 13.68% Total capital ratio 13.81% 13.96% 48 Notes to the Consolidated Statement of Cash Flows (1) Non cash transactions in the operating activities include a decrease in due from banks and financial institutions in the amount of LL 9,160 million, against a decrease in provisions for risks and charges for the same amount during (2) Non cash transactions in the operating activities include a decrease in other liabilities in the amount of LL 14,343 million, against an increase in provision for risks and charges for the same amount during (3) Non cash transactions in the investing activities include an increase in other financial assets classified as loans and receivables in the amount of LL 921,530 million, against a decrease in financial investments available-for-sale for the same amount during Comparative Information Margins on letters of credit were reclassified from Other liabilities to Customers deposits. Comparative figures amounting to LL million 81,134 were reclassified accordingly. This change has been made to improve the quality of information presented (refer to Appendix A) and had no impact on previously reported results. 165

168 Notes to the Consolidated Financial Statements 31 December Subsequent Events During 2011, substantial events took place in Egypt that will impact the economic environment of future periods, however no indicators came to the attention of the Group management which may change and affect the items of assets, liabilities and results of business for the year ended 31 December The Group management is still evaluating the impact of these events to consider them in future periods. Notes At 1 January 2009 LL million Reclassified Assets Cash and balances with central banks 15 4,248,229 4,693,974 3,580,467 Due from banks and financial institutions 16 5,931,237 5,787,117 5,817,382 Derivative financial instruments 17 46,692 33,544 39,867 Financial assets held-for-trading 18 54,816 24,763 14,264 Financial assets designated at fair value through profit or loss , ,402 81,955 Loans and advances to customers 20 7,797,136 6,046,601 5,230,447 Loans and advances to related parties 40 9,398 11,522 6,926 Bank acceptances , , ,211 Non-current assets held for sale 22 28,062 29,846 27,561 Financial investments available-for-sale 23 4,116,261 4,694,221 4,691,986 Other financial assets classified as loans and receivables 23 9,559,006 8,200,247 6,094,232 Financial investments held-to-maturity , , ,306 Investment properties Property and equipment , , ,576 Intangible assets 25 6,281 6,727 5,307 Other assets , , ,600 Goodwill 27 63,145 63,268 63,145 BLOM BANK s.a.l. Annual Report 2010 Total assets 33,683,852 31,208,844 26,980,813 Liabilities and equity Liabilities Due to banks and financial institutions , ,438 1,196,746 Derivative financial instruments 17 36,465 23,526 56,779 Customers' deposits 29 29,363,177 26,940,185 22,697,445 Related parties deposits , , ,278 Engagements by acceptances , , ,211 Current tax liabilities 30 70,924 48,588 53,159 Other liabilities , , ,861 Provisions for risks and charges 32 78,828 38,421 31,481 Retirement benefits obligation 33 45,075 38,558 34,534 Total liabilities 30,833,270 28,633,295 24,781,494 Equity attributable to equity holders of parent Share capital - common shares , , ,600 Share capital - preferred shares 34 18,200 18,200 18,200 Share premium on common shares , , ,059 Share premium on preferred shares , , ,310 Capital reserves , , ,391 Treasury shares 36 (75,793) (58,723) (39,877) Reserves for revaluation variance - real estate 24 14,727 14,727 14,727 Available-for-sale reserve 37 96, ,184 3,905 Foreign currency translation reserve 21,976 37,169 46,565 Other reserves Results of the financial period profit 483, , ,271 Retained earnings 444, , ,863 2,724,112 2,446,527 2,078,120 Non-controlling interests 126, , ,199 Total equity 2,850,582 2,575,549 2,199,319 Total liabilities and equity 33,683,852 31,208,844 26,980,

169 Correspondant Banks, BLOM BANK Group Management & Directory BLOM BANK WORLDWIDE CORRESPONDENT BANKS BLOM BANK GROUP MANAGEMENT & DIRECTORy 1. BANKS BLOM BANK BLOMINVEST BANK BLOM Development BANK BLOM BANK FRANCE BLOM BANK (Switzerland) Bank of Syria & Overseas Syria & Overseas for Financial Services BLOM BANK Egypt BLOM Egypt Securities BLOMINVEST Saudi Arabia BLOM BANK Qatar 2. Insurance COMPANIES Arope Insurance Arope Syria Arope Egypt Insurance Arope Egypt Life Insurance

170 BLOM BANK s.a.l. Annual Report

171 169