TABLE OF CONTENT GROUP CHAIRMAN S ADDRESS SGBL GROUP PROFILE LANDMARKS GROUP STRUCTURE CORPORATE GOVERNANCE CONSOLIDATED FINANCIAL STATEMENTS

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2 TABLE OF CONTENT GROUP CHAIRMAN S ADDRESS 5 SGBL GROUP PROFILE 9 LANDMARKS 13 GROUP STRUCTURE 17 CORPORATE GOVERNANCE SGBL NETWORK 95 CORRESPONDENT BANKS 99 SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

3 EQUITY USD 461M* *including preferred shares series 2010 (+49% vs. Dec.31, 2008) LOANS AND ADVANCES TO CUSTOMERS USD 1,350M (+39% vs. Dec.31, 2008) NET BANKING INCOME USD 159M (+26% vs. Dec.31, 2008) KEY FIGURES AVERAGE ROE AFTER TAX 21.25% AVERAGE ROA AFTER TAX 1.85% DEPOSITS FROM CUSTOMERS USD 3,648M (+41% vs. Dec.31, 2008) TOTAL ASSETS USD 4,764M (+41% vs. Dec.31, 2008) NET PROFIT USD 70M (+60% vs. Dec.31, 2008) SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

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5 GROUP CHAIRMAN S ADDRESS

6 GROUP CHAIRMAN S ADDRESS We take up the challenge of pursuing growth in a highly competitive domestic and regional environment, with assets such as our invaluable teams and more than half a century of experience. Dear shareholders, dear partners, Our Group has registered a good performance in 2009, amid the timid and uncertain recovery trend that started unveiling on international markets. Indeed, on one hand, SGBL s main markets Lebanon ahead of all have shown strong resilience to the global financial turmoil; on the other, we have actively pursued the growth strategy that we have embarked on in 2008, persistently seeking the right opportunities for expansion, and relentlessly striving to optimize efficiency across all our business lines. The year was particularly thriving for the Lebanese banking sector, driven by a buoyant domestic economy and substantial capital inflow, as Lebanon gained international recognition for its high resilience to the severe global crisis. Considerable progress was also witnessed at the level of public finance; perception of sovereign risk improved significantly and the Republic of Lebanon managed to issue new debt instruments at historically low yields. In fact, SGBL has successfully co-lead managed the issuance of five hundred million US dollars in Lebanese sovereign Eurobonds. In addition to the favorable political and economic background, the measures taken by the Central Bank to encourage Lebanese lira lending and reinforce private sector initiative have further contributed to supporting banking activity. 6

7 GROUP CHAIRMAN S ADDRESS Against this backdrop, SGBL s total assets in Lebanon increased by 41% over the year. The Group s performance also materialized into net profits of seventy million US dollars, up 50% from their 2008 level, while our return on equity ratio reached 21.25%. Despite a constraining and highly competitive business environment, our efforts have remained focused on growth and development. On both levels, we have succeeded in steering the Group s growth dynamics while ensuring sound risk management. Looking back, our performance was satisfactory across all market segments. Fully committed to quality and professionalism, in line with the bank s corporate values, SGBL teams have delivered remarkable results across our core businesses, whether in retail, private or corporate banking. Growth on the retail segment was a major driver of the bank s activity in The optimization of the sales setup has confirmed our market share and maintained our positioning among the leading banks in the country. This year has witnessed the introduction of new innovative banking and packaged products tailored to cater to the broadest range of individual customers. Moreover, we have moved on with the plan to relook the bank s branches and to expand SGBL s network across Lebanon, paving the way for the new brand image of our institution. The Bank s achievements at the corporate banking level underline a good performance from the viewpoint of client recruitment and lending volumes. Momentum on the SME segment was particularly perceived: business relations with the small and medium enterprises has yielded satisfactory results, rewarding our marketing efforts as well as our competitive services. As for SGBL Group, 2009 saw its perimeter increase to reach new markets. In the 4th quarter, the bank acquired a majority stake in Société Générale Cyprus, which became part of the Group and was renamed Société Générale Bank Cyprus. This expansion of SGBL Group into Europe comes in the framework of our plans for regional growth and for the consolidation of our activities in markets where we are already present. Still at the Group level, one of the milestones of our strategy over the past couple of years has been to streamline business processes and to promote synergies across business lines and between subsidiaries. We have now started to reap the benefits of our endeavors on this front, and we will be building on our improved operational efficiency to fuel future growth plans. My colleagues at SGBL Group and I wish to ensure you that we will continue to strive to meet your expectations. We will also take up the challenge of pursuing growth in a highly competitive domestic and regional environment, with assets such as our invaluable teams and more than half a century of experience. The Group s achievements in 2009 clearly pave the way for further growth, and we look forward to having you by our side. Antoun N. Sehnaoui Chairman and CEO SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

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9 SGBL GROUP PROFILE

10 SGBL GROUP PROFILE SGBL s.a.l Société Générale de Banque au Liban sal (SGBL) is a joint stock company incorporated in 1953, with a term of 99 years. HEAD OFFICE SGBL s head office is located on Riad El Solh Street, Beirut (Lebanon). The Bank s headquarters are, however, located on Saloumeh Square, Sin El Fil (Lebanon). It is registered with the Commercial Registry of Beirut under No and registered under No.19 on the list of banks licensed by Banque du Liban, the Central bank of Lebanon. STAFF 1335 As at December 31, 2009, in Lebanon, Jordan, and Cyprus. INTERNATIONAL NETWORK SGBL is part of the international network of SOCIETE GENERALE, one of the leading financial services groups in the euro zone, which operates in 83 countries worldwide. ACTIVITIES SGBL is the parent company of SGBL Group, which encompasses subsidiaries whose businesses include a broad range of financial and non financial services, among which: leasing, brokerage, wealth management, insurance, retail, corporate and investment banking, as well as credit card processing. REGIONAL NETWORK With its core business anchored in Lebanon, SGBL Group also operates in Jordan, Syria and Cyprus. Some of the bank s subsidiaries are therefore subject to supervision and examination by the authorities in their respective countries and/or lines of business. 10

11 SGBL GROUP PROFILE SGBL BANKING NETWORK 43* branches in Lebanon 16 branches in Jordan 7 branches in Cyprus 84 ATM s * 43 rd branch opened in 2010 RANKING SGBL ranks among the Alpha Group banks, Lebanon s 12 largest banks in terms of customer deposits (over USD 2 billion). SGBL GROUP Today, SGBL Group enjoys a prime position in the financial markets of the Middle East, and is set to grow beyond these frontiers. Besides, the Group s affiliation to Société Générale Group further broadens its outreach beyond its primary markets. NON-BANK AFFILIATED COMPANIES SOGELEASE LIBAN Pioneer and leader in the leasing market in Lebanon, SOGELEASE LIBAN offers professionals, craftsmen and enterprises of all sizes, solutions for financing their equipment. SOGECAP LIBAN Life insurance company that ranks among the top 10 life insurance companies in Lebanon. SOGECAP LIBAN offers a complete range of life insurance products based on contingency and capitalization. FIDUS Leading financial institution that provides a full range of investment, brokerage, advisory and financial services to a substantial and diversified client base including high net-worth individuals, banks, corporations and financial institutions. Headquartered in Beirut, the firm maintains a dynamic presence in the Levant, the Gulf, Africa and Europe. Through a regional presence and industry leadership, FIDUS seeks to develop a portfolio of offerings designed to serve the full spectrum of financial needs. CENTRE DE TRAITEMENT MONÉTIQUE (CTM) Specialized in credit card management, CTM is an electronic card processing company that is a joint venture between SGBL and Banque Libano- Française. SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

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13 LANDMARKS

14 LANDMARKS 1953 The Bank is incorporated as Banque Belgo-Libanaise sal, a partnership between Michel Sehnaoui & Sons, Banque Belge pour l Etranger and Compagnie Belge de Banque et de Gestion Société Générale France acquires a 25% stake in Banque Belgo-Libanaise, establishing Société Générale Libano- Européenne de Banque sal (SGLEB) Sogelease Liban sal (financial institution Société Générale specialized France in purchases financial leasing) the shares is of incorporated Société Générale as dea subsidiary Banque-Bruxelles of SGLEB. in Lebanon and Cyprus. Société Générale s stake in SGLEB rises to 50% The Bank acquires a majority stake in Fidus sal, a leading financial institution in Lebanon. SGLEB is the first banking institution in Lebanon to enter the Jordanian market by acquiring a 37.3% stake in the Middle East Investment Bank (MEIB) and taking control of its management. SGLEB acquires Inaash Bank sal. SOGECAP LIBAN sal (a subsidiary specialized in life insurance activities) is incorporated. Société Générale Libano Européenne de Banque sal becomes Société Générale de Banque au Liban sal (SGBL). The Bank starts an offshore branch in the free zone in Syria. Centre de Traitement Monétique (CTM), a card processing company, is established by the Bank (50%) and Banque Libano-Française (50%). 14

15 LANDMARKS SGLEB acquires Globe Bank sal. Sogelease Liban sal (financial institution specialized in financial leasing) is incorporated as a subsidiary of SGLEB. SGLEB acquires Banque J. Geagea sal SG Cyprus, the Bank s sister company, starts its onshore activities. SGBL becomes the majority shareholder of MEIB; the subsidiary s name becomes Société Générale de Banque Jordanie (SGBJ). The Bank s Board of Directors appoints Mr. Antoun Sehnaoui as the new Chairman and General Manager of SGBL, following a redistribution of shares among the Sehnaoui family members SGBL acquires a majority share in Société Générale Cyprus, which becomes Société Générale Bank Cyprus (SGBCy). SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

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17 GROUP STRUCTURE

18 GROUP STRUCTURE SHAREHOLDING Holders of common shares as at December 31, 2009 % Nabil SEHNAOUI Antoun SEHNAOUI Yasmina Nabil SEHNAOUI KAMEL Pierre Frédéric KAMEL Khalil André KAMEL Najib EL SAAD Kafinvest Holding Lebanon SAL Holding APY Sehnaoui SAL Société Générale France Didier ALIX Jean Louis MATTEI Total SGBL Société Générale de Banque au Liban s.a.l Sogecap Liban S.A.L. CTM Centre de Traitement Monétique S.A.L. SGBJ Société Générale de Banque Jordanie Ltd Sogelease Liban S.A.L. 75% 50% 50.6%* 100% *SGBL raised its share in SGBJ to 85% in

19 GROUP STRUCTURE Fidus S.A.L. SGSI S.A.R.L Société Générale de Services D'investissements SGLF Société Générale Libanaise Foncière S.A.R.L SGBL Courtage Assurance S.A.R.L. SGBCy Société Générale Bank Cyprus Ltd 49% 100% 100% 100% 57.7% SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

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21 CORPORATE GOVERNANCE

22 CORPORATE GOVERNANCE SGBL s Corporate Governance Charter sets the guidelines for efficient corporate governance that safeguards the interests of the Bank s stakeholders and complies with internationally accepted standards, as well as with the rules and regulations that are in force in the countries where the Group is present. Corporate governance policies and procedures are thoroughly documented as per SG Group standards and in line with the recommendations of the local regulatory bodies and with the guidelines given by the Bank s Board. Sound corporate governance is achieved through: - The Board of Directors - Board Committees - Internal specialized committees that support the Executive Board in its mission. BOARD OF DIRECTORS The management of the Bank is vested in the Board of Directors. The members of the Board of Directors are elected by the General Assembly of Shareholders for a period of three years, renewable at the end of their term. The Board appoints one of its members as Chairman. The Chairman of the Board of Directors, in his capacity as General Manager, has extensive powers to execute the resolutions adopted by the General Assembly, to take the necessary measures to ensure a proper day-to-day operating of the Bank, and overall, to represent the Bank. As at Dec. 31, 2009, the Bank s Board of Directors consists of the following members: CHAIRMAN Antoun SEHNAOUI MEMBERS Nabil SEHNAOUI Khalil André KAMEL Pierre Frédéric KAMEL KAFINVEST HOLDING LEBANON SAL HOLDING A.P.Y. SEHNAOUI SAL SOCIETE GENERALE (France) represented by Jean-Louis MATTEI Jean-Louis MATTEI BOARD COMMITTEES The Bank has established 4 committees derived from the Board of Directors and that report to the Board, the duties and responsibilities of which pertain to audit, risk, governance and compensation. The audit committee is a pillar of the bank s internal control systems as it monitors, on a regular basis, its performance and activities, and implements the rules and regulations of the Central Bank of Lebanon, namely principal circular no. 77 pertaining to internal control in banks. The mission of the risk committee is to analyze periodically the Bank s risk exposure, especially as regards credit and market risks. The compensation committee makes recommendations to the Board regarding the remuneration policy within the Group, benefit packages, profit-sharing mechanisms, compensation packages for managers, processes and issues pertaining to the replacement of administrators, etc. The mission of the corporate governance committee consists of supervising, assessing and upgrading corporate governance mechanisms to ensure that they operate effectively. 22

23 CORPORATE GOVERNANCE EXECUTIVE BOARD / MANAGEMENT TEAM The composition of the Executive Board of the Bank is the following (as of September 2009): Antoun SEHNAOUI Gérard GARZUEL Tarek CHEHAB Georges SAGHBINI Khalil LETAYF Sleiman MAARAOUI Chairman & CEO Chief Operating Officer Deputy General Manager Head of the Commercial Department Retail, Corporate and Private Banking Deputy General Manager Group CFO, Head of Business Development, Strategy, and Corporate Secretariat Deputy General Manager Head of the Resources and Services Department Head of the General Inspection & Audit Division In line with applicable corporate governance guidelines, the Executive Board is supported in its mission by several specialized operational committees with a wide array of responsibilities: credit risk, asset and liability management, anti money laundering, IT security, procurement, etc. SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

24 CORPORATE GOVERNANCE Antoun Sehnaoui Chairman & CEO Born in Holds a BA in Business Administration - major in International Finance and Banking from the University of Southern California (USA). Chairman and General Manager of both SGBL and Fidus. Member of the Board of Directors of the Association of Banks in Lebanon. Gérard Garzuel Chief Operating Officer Born in Holds a degree from the Institut Technique de Banque à l International in Paris. Held several executive positions in SG France namely in the Retail Banking activity across the Société Générale network, as well various positions in SG Group s affiliates abroad. Joined SGBL Group in Tarek Chehab Deputy General Manager Head of the Commercial Department Retail, Corporate and Private Banking Chairman of Sogelease Liban Born in Holds a Master degree in Management - major in Finance. Held several executive positions in France and Lebanon as Group financial controller at Tractel Group and Senior consultant at United Group Consultants in France and as General manager of Fidus. Joined SGBL Group in

25 CORPORATE GOVERNANCE Georges Saghbini Deputy General Manager Group CFO, Head of Business Development, Strategy, and Corporate Secretariat; Chairman of Sogecap Liban Born in Holds a Master degree in Economics and a Post graduate studies diploma in Money, Banking & Finance from the Sorbonne University (Paris). Held several executive positions in the Lebanese banking sector and at SGBL. Joined SGBL Group in Khalil Letayf Deputy General Manager Head of the Resources and Services Department Chairman of CTM Born in Holds a degree in Engineering from Ecole Centrale de Paris. Held different positions in the banking industry in France and Lebanon. Joined SGBL Group in Sleiman Maaraoui Head of the General Inspection & Audit Department Born in Holds a Master degree in Economics major in Finance from the University of Amiens (France). Held several executive positions in the banking sector in France. Joined SGBL Group in SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

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28 SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN S.A.L 31 DECEMBER,

29 INDEPENDENT AUDITORS REPORT TO THE SHAREHOLDERS OF SOCIETE GENERALE DE BANQUE AU LIBAN SAL We have audited the accompanying consolidated financial statements of Société Générale de Banque au Liban SAL (the Bank) and its subsidiaries (the Group), which comprise the consolidated statement of financial position as at 31 December 2009 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 notes. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining in ternal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate for the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of 31 December 2009 and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. 12 April 2010 Except as to Note 39d which is as of 21 July 2010 (date of audit procedures related to the shareholders resolution described in Note 39d). Beirut, Lebanon SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

30 INCOME STATEMENT Year ended 31 December 2009 [In LL million] Notes Interest and similar income 4 323, ,449 Interest and similar expense 5 (171,669) (144,561) NET INTEREST INCOME 152, ,888 Fee and commission income 64,895 64,183 Fee and commission expense (21,589) (18,916) NET FEE AND COMMISSION INCOME 6 43,306 45,267 Net trading income 7 7,113 5,824 Net gain (loss) on financial assets designated at fair value through profit or loss 2,011 (2,248) Net gain on financial investments 8 16,212 2,528 Other operating income 9 18,185 14,708 TOTAL OPERATING INCOME 238, ,967 Net write-back of credit losses 10 2,694 2,360 Write-back of impairment (impairment losses) on financial investments 951 (1,282) NET OPERATING INCOME 242, ,045 Personnel expenses 11 (65,303) (61,724) Depreciation of property and equipment 25 (4,847) (4,152) Amortization of intangible assets 26 (341) (343) Other operating expenses 12 (46,289) (47,953) TOTAL OPERATING EXPENSES (116,780) (114,172) OPERATING PROFIT 125,770 79,873 Share of profit from non-consolidated subsidiaries Net profit from sale or disposal of other assets PROFIT BEFORE TAX 126,726 79,924 Income tax expense 34 (20,413) (14,219) PROFIT FOR THE YEAR 106,313 65,705 Attributable to: Equity holders of the parent 100,013 58,127 Non-controlling interests 6,300 7, ,313 65, The attached notes 1 to 56 form part of these consolidated financial statements.

31 STATEMENT OF COMPREHENSIVE INCOME Year ended 31 December 2009 [In LL million] PROFIT FOR THE YEAR Notes 106,313 65,705 Other comprehensive income Net gain on available-for-sale financial assets 28,770 9,446 Net movement in foreign currency reserve 38 (250) Income tax relating to components of other comprehensive income (5,489) (1,060) Other comprehensive income for the year, net of tax 23,319 8,136 TOTAL COMPREHENSIVE INCOME FOR THE YEAR, NET OF TAX 129,632 73,841 Attributable to: Equity holders of the parent 122,925 66,499 Non-controlling interests 6,707 7, ,632 73,841 The attached notes 1 to 56 form part of these consolidated financial statements. SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

32 STATEMENT OF POSITION At 31 December 2009 [In LL million] ASSETS Cash and balances with the Central Banks Notes , ,776 Deposits with banks and financial institutions , ,363 Amounts due from Head Office, branches and affiliates , ,971 Derivative financial instruments 16 6, Financial assets held-for-trading Financial assets designated at fair value through profit or loss 17 6,967 4,401 Loans and advances to customers, net 18 2,029,016 1,401,753 Loans and advances to related parties, net 19 63,211 55,941 Debtors by acceptances 20 65,929 74,642 Financial investments available-for-sale 21 1,029, ,347 Financial assets classified as loans and receivables 22 1,279,410 1,178,352 Financial investments held-to-maturity , ,824 Investments in non-consolidated subsidiaries 24 2,510 1,606 Property and equipment 25 62,231 53,200 Intangible assets 26 2,561 2,106 Non-current assets held for sale , ,567 Deferred tax assets 34 5,046 2,208 Other assets 28 52,607 72,960 Goodwill 29 15,854 2,706 Total assets 7,134,305 5,048,950 LIABILITIES AND EQUITY LIABILITIES Due to Central Banks , ,101 Due to banks and financial institutions , ,684 Amounts due to Head Office, branches and affiliates , Derivative financial instruments Customers' deposits 33 5,515,275 3,903,315 Related parties deposits 7,808 11,568 Engagements by acceptances 20 65,929 74,642 Current tax liabilities 34 12,310 9,779 Deferred tax liabilities 34 5,489 1,060 Other liabilities , ,726 Provision for risks and charges 36 11,883 12,443 Employees end of service benefits 37 15,394 12,744 Total liabilities 6,551,481 4,578,167 EQUITY Share capital common shares 38a 10,620 10,620 Share capital preferred shares 38b 1,912 1,912 Share premium preferred shares 38b 133, ,121 Cash contribution by shareholders 38c 106, ,746 Reserves related to share capital 39 92,038 75,016 Revaluation reserve of property 41 3,934 3,934 Available-for-sale reserve 42 30,258 7,232 Foreign currency reserve (49) (28) Reserve for non-current assets held for sale 40 10,628 5,261 Profit for the year 100,013 58,127 Retained earnings 17,245 10, , ,565 Non-controlling interests 76,358 58,218 Total equity 582, ,783 Total liabilities and equity 7,134,305 5,048,950 The consolidated financial statements were authorized for issue on behalf of the Board of Directors on 13 February 2010 by: 32 Antoun Sehnaoui Chairman Georges Saghbini Deputy General Manager The attached notes 1 to 56 form part of these consolidated financial statements.

33 STATEMENT OF POSITION At 31 December 2009 [In LL million] Off-balance sheet Financing commitments - Commitments issued to customers 49 29, Commitments issued to financial institutions , ,272 - Undrawn commitments to lend , ,616 Notes Guarantees commitments - Guarantees issued to financial institutions 49 39,138 21,566 - Guarantees issued to customers , ,426 - Guarantees received from financial institutions 160,418 14,777 Foreign currency operations - Foreign currencies to receive ,645 36,906 - Foreign currencies to deliver 138,007 37,389 Commitments on term financial instruments 16 9,849 17,254 Fiduciary deposits , ,066 Financial assets under management non discretionary , ,318 Impaired loans fully provided for transferred to off-balance sheet , ,540 The attached notes 1 to 56 form part of these consolidated financial statements. SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

34 STATEMENT OF CHANGES IN EQUITY Year ended 31 December 2009 Attributable to equity Share capital common shares Share capital preferred shares Share premium preferred shares Cash contribution by shareholders [In LL million] Balance at 1 January , ,746 Profit for the year Other comprehensive income Total comprehensive income Transfer to retained earnings Transfer to reserve for non-current assets held for sale Release of reserve upon sale of non-current assets held for sale (note 40) Transfer to reserves related to share capital (note 39) Issuance of preferred shares (note 38) - 1, ,121 - Net increase in non-controlling interests share due to increase in share capital of SGBJ (note 3) Acquisition of non-controlling interests in Sogecap SAL (note 3) Balance at 31 December ,620 1, , ,746 Profit for the year Other comprehensive income Total comprehensive income Transfer to retained earnings Transfer to reserve for non-current assets held for sale Release of reserve upon sale of non-current assets held for sale (note 40) Transfer to reserves related to share capital (note 39) Acquisition of non-controlling interests in SGBJ (note 3) Acquisition of non-controlling interests in Société Générale Bank Cyprus Ltd (note 3) Dividends paid to equity holders of the parent (note 43) Dividends paid to non-controlling interests Others Balance at 31 December ,620 1, , , The attached notes 1 to 56 form part of these consolidated financial statements.

35 STATEMENT OF CHANGES IN EQUITY Year ended 31 December 2009 holders of the parent Noncontrolling interests Total equity Reserves related to share capital Revaluation reserve of property Availableforsale reserve Foreign currency reserve Reserve for noncurrent assets held for sale Profit for the year Retained earnings Total 67,944 3,934 (1,265) 97-16,486 6, ,033 36, , ,127-58,127 7,578 65, ,497 (125) ,372 (236) 8, ,497 (125) - 58,127-66,499 7,342 73, (16,486) 16, ,513 - (5,513) (252) , (7,072) , , ,637 17, (2,782) (2,782) 75,016 3,934 7,232 (28) 5,261 58,127 10, ,565 58, , , ,013 6, , , , , , , ,925 6, , (58,127) 58, ,830 - (6,830) (1,463) - 1, , (17,823) (3,901) (3,901) ,327 15, (28,334) (28,334) - (28,334) (2) (2) (801) (41) (690) 9 (681) 92,038 3,934 30,258 (49) 10, ,013 17, ,466 76, ,824 SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

36 STATEMENT OF CASH FLOWS Year ended 31 December [In LL million] OPERATING ACTIVITIES Notes Profit before income tax 126,726 79,924 Adjustments for: Depreciation and amortization 25 & 26 5,188 4,495 (Write-back of) impairment on financial investments available-for-sale 21 (951) 963 Share of profit from non-consolidated subsidiaries 24 (904) - Amortization of the deferred costs resulting from the acquisition of Inaash Bank SAL 28 24,435 27,430 Provision for impaired loans customers 18 14,571 11,696 Provision for impaired loans related parties Loans written off ,480 Net provision for other impaired debit balances ,313 Recoveries of credit losses 10 (18,463) (18,849) Provision for employees end of service benefits 37 1,394 4,527 Gain on sale of property and equipment (52) (40) Gain on sales of non-current assets held for sale 27 (8,920) (2,937) Write-back of provisions on non-current assets held for sale (989) (303) Write-off of intangible assets Net provision for risks and charges (2,191) 2,687 Unrealized (gain) loss on financial assets carried at fair value through profit or loss (2,011) 2,240 Unrealized gain on derivative financial instruments (7,121) , ,074 Working capital changes: Cash and balances with the Central Banks (134,611) (1,022) Deposits with banks and financial institutions (1,408) 126 Amounts due from Head Office, branches and affiliates 17,712 85,252 Due to Central Banks 9 8,840 Due to banks and financial institutions (3,421) 16,577 Due to Head Office, branches and affiliates (17,293) (1,526) Loans and advances to customers (96,619) (212,546) Loans and advances to related parties (6,974) (28,435) Other assets (3,320) (5,428) Customers deposits 1,110, ,843 Related parties deposits (4,790) (2,676) Other liabilities 1,870 1,634 Cash from operations 993, ,713 Employees end of service benefits paid 37 (1,524) (1,541) Taxation paid (17,426) (9,407) Net cash from operating activities 974, ,765 INVESTING ACTIVITIES Proceeds from sale (purchase) of financial assets held-for-trading 894 (609) Net (purchase) proceeds upon maturity of financial investments held-to-maturity (161,167) 14,003 Net (purchase) proceeds from sales of financial assets carried at fair value through profit or loss (555) 12,079 Net purchase of financial assets classified as loans and receivables (101,058) (703,662) Net purchase of financial investments available-for-sale (610,877) (132,273) Net purchase of property and equipment 25 (11,538) (3,914) Purchase of intangible assets 26 (847) (1,818) Proceeds from sale of property and equipment 84 1,133 Acquisition of additional shares in Société Générale de Banque - Jordanie 3 (5,287) (1,544) Proceeds from sales of non-current assets held for sale 37,412 14,467 Net cash acquired with the acquisition of Société Générale - Cyprus Ltd 3 237,237 - Acquisition of additional shares in Sogecap Liban 3 - (3,365) Net cash used in investing activities (615,702) (805,503) FINANCING ACTIVITIES Issuance of preferred shares 38b - 1,912 Share premium preferred shares 38b - 133,121 Dividend paid (28,334) - Minority interest share due to increase of subsidiary s capital - 18,160 Net cash (used in) from financing activities (28,334) 153,193 Effect of exchange rate changes and other adjustments INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 330,830 (154,560) Cash and cash equivalents at 1 January , ,256 CASH AND CASH EQUIVALENTS AT 31 DECEMBER , , The attached notes 1 to 56 form part of these consolidated financial statements.

37 NOTES TO THE 1. ACTIVITIES Société Générale de Banque au Liban SAL (the Bank) is a shareholding company registered in Beirut, Lebanon. It was registered in 1953 under no at the Commercial Registry of Beirut and no. 19 on the list of banks published by the Bank of Lebanon. The headquarters of the Bank are located at Saloumé Square, Sin El Fil, Lebanon. The Bank is 19% owned by Société Générale SA (France), which is referred to in these financial statements as the Head Office. The Bank, together with its subsidiaries (the Group), Société Générale Bank Cyprus Ltd, Société Générale de Banque - Jordanie, Sogelease Liban SAL, Sogecap Liban SAL and Fidus SAL are involved in insurance, banking and financial services activities (commercial, investment and private). The Bank is regulated by the Laws in Lebanon mainly the Code of Commerce, the Money and Credit Act and the circulars issued by the Bank of Lebanon and the Banking Control Commission. The Bank provides a full range of banking activities through its headquarters and its branches in Lebanon. 2. ACCOUNTING POLICIES 2.1 Basis of preparation 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 derivatives and financial assets held-for-trading and available-for-sale financial instruments and fair value through profit or loss investments (related to unit-linked contracts) investments. The consolidated financial statements are presented in million of Lebanese Lira (LL million), which is the functional currency of the Bank, and all values are rounded to the nearest million (LL million) except when otherwise indicated. All other currencies are denominated in units. Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), and the regulations of the Bank of Lebanon and the Banking Control Commission. 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 (non-current) is presented in note 51. 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 realise the assets and settle the liability simultaneously. Income and expense will not be offset in the income statement unless required or permitted by any accounting standard or interpretation, as specifically disclosed in the accounting policies of the Bank. Basis of consolidation The consolidated financial statements comprise the financial statements of Société Générale de Banque au Liban SAL and its controlled subsidiaries drawn up to 31 December each year. The financial statements of the subsidiaries are prepared for the same reporting year as the Bank, using consistent accounting policies. All intra-group balances, transactions, income and expenses are eliminated in full. Subsidiaries are fully consolidated from the date on which control is transferred to the Bank. Control is achieved where the Bank has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the date of acquisition or up to the date of disposal. SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

38 NOTES TO THE Non-controlling interests represent the portion of profit or loss and net assets not owned, directly or indirectly, by the Bank and are presented separately in the consolidated income statement, consolidated statement of comprehensive income and within equity in the consolidated statement of financial position, separately from parent shareholders equity. Acquisitions of non-controlling interests are accounted for using the parent entity extension method, whereby, the difference between the consideration and the fair value of the share of the net assets acquired is recognized as goodwill. The consolidated financial statements represent the financial statements of the Bank and the following subsidiaries: Percentage of share capital owned by the Bank Name Country of Activities incorporation Société Générale Bank - Cyprus Ltd Cyprus Banking 57.70% Société Générale de Banque - Jordanie Jordan Banking 54.33% 50.62% Fidus SAL* Lebanon Brokerage services 49.00% 49.00% Sogelease Liban SAL Lebanon Leasing 99.75% 99.75% Sogecap Liban SAL Lebanon Insurance 75.00% 75.00% * Effective 1 January 2004, the Group obtained control, by virtue of agreement with other investors, over Fidus SAL, and consequently, the financial statements of Fidus SAL have been consolidated with those of the Group. 2.2 Significant accounting judgements and estimates 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 uses 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, the 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 market data where possible, but where observable market data are not available, judgment is required to establish fair values. The judgments include considerations of liquidity and model inputs such as volatility for longer dated derivatives and discount rates, prepayment rates and default rate assumptions for asset backed securities. The valuation of financial instruments is described in more detail in note 50. Impairment losses on loans and advances The Group reviews its individually significant loans and advances at each consolidated statement of financial position date to assess whether an impairment loss should be recorded in the consolidated income statement. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. In estimating these cash flows, the Group makes judgments about the borrower s financial situation and the net realisable value of collateral. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance. 38

39 Loans and advances that have been assessed individually and found not to be impaired and all individually insignificant loans and advances are then assessed collectively, in groups of assets with similar risk characteristics, to determine whether provision should be made due to incurred loss events for which there is objective evidence but whose effects are not yet evident. The collective assessment takes account of data from the loan portfolio (such as credit quality, levels of arrears, credit utilisation, loan to collateral ratios etc.), 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 note 10 and note 18. Impairment of available-for-sale investments The Group reviews its debt securities classified as available-for-sale investments at each consolidated 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. 2.3 Changes in accounting policies The accounting policies adopted are consistent with those used in the previous financial year except that the Group has adopted the following standards, amendments and interpretations which did not have any effect on the financial performance or position of the Group. They did, however, give rise to additional disclosures. IAS 1 Presentation of financial statements This standard requires an entity to present all owner changes in equity and all non-owner changes to be presented in either one consolidated statement of comprehensive income or in two separate statements of income and comprehensive income. The revised standard also requires that the income tax effect of each component of comprehensive income be disclosed. In addition, it requires entities to present a comparative consolidated statement of financial position as at the beginning of the earliest comparative period when the entity has applied an accounting policy retrospectively, has made a retrospective restatement, or has reclassified items in the consolidated financial statements. The Group has elected to present comprehensive income in two separate statements of income and comprehensive income. The Group has not provided a restated comparative set of financial position for the earliest comparative period, as it has not adopted any new accounting policies retrospectively, or has made a retrospective restatement, or retrospectively reclassified items in the consolidated financial statements. Amendments to IFRS 7 Financial Instruments: Disclosures - Improving Disclosures about Financial Instruments The amendments to IFRS 7 were issued in March 2009 to enhance fair value and liquidity disclosures. With respect to fair value, the amendments require disclosure of a three-level fair value hierarchy, by class, for all financial instruments recognized at fair value and specific disclosures related to the transfers between levels in the hierarchy and detailed disclosures related to level 3 of the fair value hierarchy. In addition, the amendments modify the required liquidity disclosures with respect to derivative transactions and assets used for liquidity management. Comparative information has been restated although this is not strictly required by the transition provisions of the amendment. NOTES TO THE SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

40 NOTES TO THE In addition, the following standards and interpretations are effective for the financial year The adoption of these standards and interpretations did not have any effect on the financial performance or position of the Group: - IAS 23 Borrowing costs (Revised) - Amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements, Puttable Financial Instruments and Obligations Arising on Liquidation - Amendment to IFRS 2 Share-based Payment Vesting Conditions and Cancellations - Amendments to IFRIC 9 Reassessment of Embedded Derivatives and IAS 39 Financial Instruments: Recognition and Measurement Embedded Derivatives - IFRIC 13 Customer Loyalty Programmes - IFRIC 15 Agreements for the Construction of Real Estate - IFRIC 16 Hedges of a Net Investment in a Foreign Operation - Improvements to International Financial Reporting Standards (issued 2008) - Improvements to International Financial Reporting Standards (issued 2009) Future changes in accounting policies Below is the list of standards issued but not yet effective for the year ended 31 December 2009: - IFRS 2 Share based Payment: Group Cash-settled Share - based Payment Transactions - IFRS 3 Business Combinations (Revised) and IAS 27 Consolidated and Separate Financial Statements (Amended) - Amendment to IAS 39 Financial Instruments: Recognition and Measurement Eligible Hedged items - IFRIC 17 Distributions on Non-cash Assets to Owners - 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. Improvements to IFRSs In May 2008 and April 2009 the IASB issued an omnibus of amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. There are separate transitional provisions for each standard. The amendments to the following standards below did not have any impact on the accounting policies, financial position or performance of the Group: IFRS 5: Non-current Assets Held for Sale and Discontinued Operations IAS 7: Statement of Cash Flows IAS 8: Accounting Policies, Change in Accounting Estimates and Error IAS 10: Events after the Reporting Period IAS 16: Property, Plant and Equipment IAS 18: Revenue IAS 19: Employee Benefits IAS 20: Accounting for Government Grants and Disclosures of Government Assistance IAS 28: Investment in Associates IAS 31: Interest in Joint ventures IAS 34: Interim Financial Reporting IAS 36: Impairment of Assets IAS 38: Intangible Assets IAS 39: Financial Instruments: Recognition and Measurement IAS 40: Investment Properties 2.4 Summary of significant accounting policies (1) Foreign currency translation The consolidated financial statements are presented in Lebanese Lira. Each entity in the Group determines its own fuctional currency and items included in the financial statements of each entity are measured using that functional currency. 40

41 (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 consolidated statement of financial position date. All differences arising on non-trading activities are taken to the consolidated income statement, with the exception of differences on foreign currency borrowings that provide effective hedge against a net investment in a foreign entity. These differences are taken directly to equity until the disposal of the net investment, at which time they are recognized in the consolidated income statement. Tax charges and credits attributable to exchange differences on those borrowings are also recorded in equity. 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 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 At the reporting date, the assets and liabilities of subsidiaries are translated into the Bank s presentation currency at the rate of exchange as at 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 consolidated income statement in Other operating expenses or Other operating income. (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 regular way trades : purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. (ii) 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 interest rate swaps and forward foreign exchange contracts. 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 held-for-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. (iv) Financial assets or financial liabilities held-for-trading Financial assets or financial liabilities 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. NOTES TO THE SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

42 NOTES TO THE (v) Day 1 profit or loss When the transaction price is different to the fair value from other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets, the Bank immediately recognizes the difference between the transaction price and fair value (a Day 1 profit or loss) in Net trading income. In cases where fair value is determined using data which is not observable, the difference between the transaction price and model value is only recognized in the consolidated income statement when the inputs become observable, or when the instrument is derecognized. (vi) Held-to-maturity financial investments Held-to-maturity financial instruments are non-derivative financial assets with fixed or determinable payments and have fixed maturities and which the Group has the intention and ability to hold to maturity. After initial measurement, held-to-maturity financial investments are subsequently measured at amortized cost using the effective interest method, less allowance for 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 under impairment losses on financial investments. If the Group were to sell or reclassify more than an insignificant amount of held-to-maturity investments before maturity (other than in certain specific circumstances), the entire category would be tainted and would have to be reclassified as available-for-sale. Furthermore, the Group would be prohibited from classifying any financial asset as held to maturity during the following two years. (vii) Financial assets designated at fair value through profit or loss Financial assets 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 recognizing gains or losses on them on a different basis; or The assets are part of a group of financial assets which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or The financial instrument contains one or more embedded derivatives which significantly modify the cash flows that would be otherwise required by the contract. Financial assets 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 designated at fair value through profit or loss. Interest earned is accrued in Interest income using the effective interest rate, while dividend income is recorded in Other operating income when the right to the payment has been established. Included in this classification are listed equities and bonds held to cover unit-linked liabilities. (viii) 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. After initial measurement, available-for-sale financial investments are subsequently measured at fair value. Unrealized gains and losses are recognized directly in equity in the available-for-sale reserve. When the investment is disposed of the cumulative gain or loss previously recognized in equity is recognized in the income statement. Interest earned whilst holding available-for-sale financial investments is reported as interest income using the effective interest rate method. 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 as Impairment losses on financial investments and removed from the available-for-sale reserve. 42

43 (ix) Financial assets classified as loans and receivables Loans and receivables, include 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 amortized cost using the effective interest rate method, 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 amortisation 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 Impairment losses on financial instruments. Gains or losses are recognized in the consolidated income statement when the investments are derecognized or impaired. The losses arising from impairment are recognized in the consolidated income statement in Credit loss expenses. (x) 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: a. 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; b. Those that the Group, upon initial recognition, designates as available-for-sale; or c. 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. (xi) Reclassification of financial assets Effective from 1 July 2008, the Group may 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-to maturity categories. From this date it may also reclassify, in certain circumstances, financial instruments out of the Availablefor-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. The Group may reclassify a non-derivative trading asset out of the Held-for-trading 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. 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 equity 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 equity is recycled to the consolidated income statement. Reclassification is at the election of management, and is determined on an instrument by instrument basis. NOTES TO THE SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

44 NOTES TO THE (3) Derecognition of financial assets and financial liabilities Financial assets A financial asset (or where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when: The rights to receive cash flows from the asset have expired, or The Group has transferred its rights to receive cash flows from the asset, or has assumed an obligation to pay the received cash flow 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 Bank 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 and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is derecognized to the extent of the Group s continuing involvement in the asset. 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. 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. Financial liabilities A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expired. 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 and the difference in the respective carrying amount is recognized in the consolidated income statement. (4) Repurchase and reverse repurchase agreements Securities sold under agreements to repurchase at a specified future date are not derecognized from the consolidated statement of financial position as the Group retains substantially all the risks and rewards of ownership. The corresponding cash received is recognized in the consolidated statement of financial position as an asset with a corresponding obligation to return it, including accrued interest as a liability, reflecting the transaction s economic substance as a loan to the Group. The difference between the sale and repurchase prices is treated as interest expense and is accrued over the life of the agreement using the effective interest rate. Conversely, securities purchased under agreements to resell at a specified future date are not recognized in the consolidated statement of financial position. The consideration paid, including accrued interest, is recorded in the consolidated statement of financial position, reflecting the transaction s economic substance as a loan by the Bank. The difference between the purchase and resale prices is recorded in Net interest income and is accrued over the life of the agreement using the effective interest rate. If securities purchased under agreement to resell are subsequently sold to third parties, the obligation to return the securities is recorded as a short sale within Financial liabilities held-for-trading and measured at fair value with any gains or losses included in Net trading income. (5) Securities lending and borrowing Securities lending and borrowing transactions are usually collateralised by securities or cash. The transfer of the securities to counterparties is only reflected on the consolidated statement of financial position if the risks and rewards of ownership are also transferred. Cash advanced or received as collateral is recorded as an asset or liability. Securities borrowed are not recognized on the consolidated statement of financial position, unless they are then sold to third parties, in which case the obligation to return the securities is recorded as a trading liability and measured at fair value with any gains or losses included in Net trading income. 44

45 (6) Determination of fair value The fair value for financial instruments traded in active markets at the consolidated 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, option pricing models, credit models and other relevant valuation models. Certain financial instruments are recorded at fair value using valuation techniques in which current market transactions or observable market data are not available. Their fair value is determined using a valuation model that has been tested against prices or inputs to actual market transactions and using the Bank s best estimate of the most appropriate model assumptions. Models are adjusted to reflect the spread for bid and ask prices to reflect costs to close out positions, counterparty credit and liquidity spread and limitations in the models. Also, profit or loss calculated when such financial instruments are first recorded ( Day 1 profit or loss) is deferred and recognized only when the inputs become observable or on derecognition of the instrument. An analysis of fair values of financial instruments and further details as to how they are measured are provided in note 50. (7) Impairment of financial assets The Group assesses at each consolidated statement of financial position date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, the probability that they will enter bankruptcy or other financial reorganisation, default or delinquency in interest or principal payments and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. (i) Financial assets carried at amortized cost For financial assets carried at amortized cost (such as deposits with bank and financial institutions, amounts due from head office, branches and affiliates, loans and advances to customers, loans and advances to related parties, held to maturity financial instruments and financial assets classified as loans and receivables), 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 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 realised or has been transferred to the Group. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was 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. NOTES TO THE SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

46 NOTES TO THE 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 determined at the reclassification date. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs 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 on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable data from year to year (such as changes in unemployment rates, property prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. (ii) Available-for-sale financial investments For available-for-sale financial investments, the Group assess at each statement of financial position date whether there is objective evidence that an investment is impaired. In the case of debt instruments classified as available-for-sale, the Bank 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 a credit event occurring after the impairment loss was recognized in the consolidated income statement, the impairment loss is reversed through the consolidated income statement. 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. 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 equity 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. (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. (8) Hedge accounting The Group makes use of derivative instruments to manage exposures to interest rate and foreign currency risks. 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. 46

47 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 the designated risk in the hedged item. 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 recognized 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 recognized in the 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 amortized cost, the difference between the carrying value of the hedged item on termination and the face value is amortized over the remaining term of the original hedge using the effective interest rate. If the hedged item is derecognized, the unamortized fair value adjustment is recognized 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 recognized directly in equity in the Cash flow hedge reserve. The ineffective portion of the gain or loss on the hedging instrument is recognized immediately in the consolidated income statement. When the hedged cash flow affects the 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 recognized when the hedged forecast transaction is ultimately recognized in the consolidated income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the consolidated income statement. (iii) Hedge of a net investment Hedges of net investments in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment, are accounted for in a way similar to cash flow hedges. Gains or losses on the hedging instrument relating to the effective portion of the hedge are recognized directly in equity while any gains or losses relating to the ineffective portion are recognized in the consolidated income statement. On disposal of the foreign operation, the cumulative value of any such gains or losses recognized directly in equity is transferred to the consolidated income statement. (9) Offsetting financial instruments Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realise 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. (10) Leasing The determination of whether an arrangement is a lease, or it contains a lease, is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. Group as a lessee Leases which do not transfer to the Group substantially all the risks and benefits incidental to ownership of the leased items are operating leases. Operating lease payments are recognized as an expense in the consolidated income statement on a straight line basis over the lease term. Contingent rents payable are recognized as an expense in the period in which they are incurred. NOTES TO THE SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

48 NOTES TO THE Group as a lessor Leases where the Group does not transfer substantially all the risk and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and recognized over the lease term on the same basis as rental income. Contingent rents are recognized as revenue in the period in which they are earned. (11) Recognition of income and expense 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. (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 2.4 (2) 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: 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. 48

49 (12) Cash and cash equivalents Cash and cash equivalents as referred to in the consolidated statement of cash flows comprise cash and balances with the Central Banks, treasury bills, deposits with banks and financial institutions, amounts due from head office, branches and affiliates, due to banks and other financial institutions and amounts due to head office, branches and affiliates with an original maturity of three months or less. (13) Investments in subsidiaries and associates Investments in subsidiaries and associates are carried at cost less impairment. Subsidiaries are enterprises which the Bank controls, normally where it holds more than 50% of the voting power. Associates are enterprises in which the Bank exercises significant influence, but not control, normally where it holds 20% to 50% of the voting power. (14) Property and equipment Property and equipment are initially recorded at cost less accumulated depreciation and any impairment in value. Buildings acquired prior to 1 January 1994 were restated for the changes in the general purchasing power of Lebanese Lira after the approval of the Bank of Lebanon. Net surplus arising on restatement is credited to Revaluation reserve of property. Changes in the expected useful life are accounted for by changing the depreciation period or method, as appropriate, and treated as changes in accounting estimates. Depreciation is calculated using the straight line method on all tangible fixed assets. The rates of depreciation are based upon the following estimated useful lives: NOTES TO THE Buildings Furniture and fixtures Installations Vehicles 50 years 5 to 12.5 years years 10 years Property and equipment is derecognized 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 the asset is derecognized. (15) Business combinations and goodwill Business combinations are accounted for using the purchase method of accounting. This involves recognizing identifiable assets (including previously unrecognized intangible assets) and liabilities (including contingent liabilities but excluding future restructuring) of the acquired business at fair value. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognized as goodwill. If the cost of acquisition is less than the fair values of the identifiable net assets acquired, the discount on acquisition is recognized directly in the income statement in the year of acquisition. Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business combination over the Group s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Bank s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units. Each unit or group of units to which the goodwill is allocated: represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and is not larger than a segment in accordance with IFRS 8 Operating Segments. Where goodwill forms part of a cash generating unit or a group of cash generating units and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

50 NOTES TO THE 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. When subsidiaries are sold, the difference between the selling price and the net assets plus cumulative translation differences and goodwill is recognized in the consolidated income statement. (16) Intangible assets The Group s 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 Bank. 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. The useful lives of intangible assets are assessed to be either 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. Amortization is calculated using the straight line method to write down the cost of intangible assets to their residual values over 5 years. (17) 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 net realizable value of the related loans and advances and the current fair value of such assets based on the instructions of the regulators. Gains or losses on disposal, and revaluation losses, are recognized in the consolidated income statement for the period. (18) Deferred costs Deferred costs are the difference between the cost of the acquisition and the Bank s interest in the net assets of Inaash Bank SAL. Deferred costs are amortized over the period of the soft loan granted by the Bank of Lebanon following the acquisition. Amortization expense is reported as a contra revenue account on interest revenue on treasury bills as the soft loan received from the Bank of Lebanon is invested in Lebanese treasury bills. Deferred costs are stated at cost less accumulated amortization and accumulated impairment losses. (19) 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 (CGU) fair value less costs to sell and its value in use. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators. For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the Group estimates the asset s or CGU 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 50

51 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. Impairment losses relating to goodwill cannot be reversed in the future periods. (20) Customers deposits All customer deposits are carried at the amortized cost, less amounts repaid and adjustments for effective hedges. (21) 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 recognized in the financial statements (within Other liabilities ) at fair value, being the premium received. Subsequent to initial recognition, the Group s liability under each guarantee is measured at the higher of the amount initially 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 income statement in Credit loss expense. The premium received is recognized in the consolidated income statement in Net fees and commission income on a straight line basis over the life of the guarantee. (22) Taxation (i) Current tax Current tax assets and liabilities for the current and prior years are measured at the amount expected to be recovered from or paid to the tax authorities. The tax rates and tax law used to compute the amount are those that are enacted or substantively enacted by the statement of financial positon date. The Bank s profits from operation 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 (ii)deferred tax Deferred tax is provided on temporary differences at the consolidated statement of financial position date between the tax bases of assets and liabilities and their carrying amounts in the financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except: Where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a trans action that is not a business combination and, at the time of the transaction, affects neither the accounting prof it nor taxable profit or loss; and 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; and 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 foresee able future and taxable profit will be available against which the temporary differences can be utilized. 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 NOTES TO THE SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

52 NOTES TO THE 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 tax authority. (23) Provision for risks and charges Provisions are recognized when the Bank has a present obligation (legal or constructive) arising from a past event and the costs to settle the obligation are both probable and can be reliably measured. (24) Employees end of service benefits The Group makes contributions to the National Social Security Fund and provides for end of service benefits to its employees. The entitlement to these benefits is based upon the employees length of service, the employees salaries, the Bank s contributions to the National Social Security Fund and other requirements outlined in the Lebanese Labor Law. The expected costs of these benefits are accrued over the period of employment. (25) 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 financial statements, as they are not the assets of the Group. (26) Dividends on ordinary and preferred shares Dividends on preferred shares are recognized as a liability and deducted from equity when they are approved by the Bank s shareholders. Interim dividends are deducted from equity when they are declared and no longer at the discretion of the Bank. Dividends for the year that are approved after the statement of financial position date are disclosed as an event after the statement of financial position date. (27) Off-balance sheet items Off-balance sheet balances include commitments which may take place in the Group s normal operations such as financial commitments, letters of guarantees, and letters of credit. (28) Accounting policies of subsidiary-insurance company The financial statements of the subsidiary insurance company have been prepared in accordance with International Financial Reporting Standards and the requirements of the local regulations related to insurance and reinsurance companies in Lebanon. The key accounting policies are as follows: (i) Product classification The Company issues life insurance contracts which are linked to investment contracts. Where contracts contain both an investment component and an insurance component and the cash flows from the two components are distinct, the underlying amounts are unbundled. Any premiums relating to the insurance component are accounted for through the consolidated income statement and the remaining element is accounted through the consolidated statement of financial position as explained below: Insurance contracts Insurance contracts are defined as those containing significant insurance risk at the inception of the contract, or those where at the inception of the contract there is a scenario with commercial substance where the level of insurance risk may be significant over time. The significance of insurance risk is dependent on both the probability of an insurance event and the magnitude of its potential effect. 52

53 Once a contract has been classified as an insurance contract, it remains an insurance contract for the remainder of its lifetime, even if the insurance risk reduces significantly during this period. Investment contracts Any contracts not considered insurance contracts under IFRS are classified as investment contracts. Amounts collected under investment contracts are not accounted for through the income statement but are accounted for directly through the consolidated statement of financial position as an adjustment to investment contract liabilities. (ii) Premiums earned on insurance contracts Premiums are recognized as revenues over the premium paying period of the related policies. (iii) Claims Claims, comprising amounts payable to contract holders and third parties and related loss adjustment expenses, are charged to the income statement as incurred. Claims comprise the estimated amounts payable, in respect of claims reported to the Company and those not reported at the consolidated statement of financial position date. The Company generally estimates its claims based on previous experience. Claims requiring court or arbitration decisions are estimated individually. In addition a provision based on management s judgement and the Company s prior experience is maintained for the cost of settling claims incurred but not reported at the statement of financial position date. Any difference between the provisions at the statement of financial position date and settlements and provisions for the following year is included in the underwriting account for that year. The Company does not discount its liability for unpaid claims. (iv) Reinsurance contracts held In order to minimize financial exposure from large claims the Company enters into agreements with other parties for reinsurance purposes. Claims receivable from reinsurers are estimated in a manner consistent with the claim liability and in accordance with the reinsurance contract. These amounts are shown as part of reinsurers share of technical provisions in the consolidated statement of financial position until the claim is paid by the Company. At each reporting date, the Company assesses whether there is any indication that a reinsurance asset may be impaired. Where an indicator of impairment exists, the Company marks a formal estimate of recoverable amount. Where the carrying amount of a reinsurance asset exceeds its recoverable amount the asset is considered impaired and is written down to its recoverable amount. (v) Insurance contracts liabilities Mathematical reserve The mathematical reserve is determined by actuarial valuation of future policy benefits. Actuarial assumptions include a margin for adverse deviation and generally take account of the type of policy, year of issue and policy duration. Mortality and withdrawal rate assumptions are based on experience. Adjustments to the reserves are made in the consolidated income statement. Liability adequacy test At each statement of financial position date the Company assesses whether its recognized insurance liabilities are adequate using current estimates of future cash flows under its insurance contracts. If that assessment shows that the carrying amount of its insurance liabilities is inadequate in the light of estimated future cash flows, the entire deficiency is immediately recognized in the consolidated income statement and an unexpired risk provision created. (vi) Investment contracts liabilities The provision for investment contract liabilities is calculated on the basis of a prudent prospective actuarial valuation method through the use of prospective discounted cash flow techniques or the current unit fund price. The actuarial valuation includes a provision for participation which is the amount the Company expects to pay investment contract holders in addition to their guaranteed returns. NOTES TO THE SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

54 NOTES TO THE 3. BUSINESS COMBINATIONS Acquisitions in 2009 Société Générale de Banque - Jordanie (SGBJ) On 13 May 2009, the Bank purchased an additional 1,500,000 shares of the total outstanding shares of SGBJ for a price of US$ 3,507,155 equivalent to LL 5,287 million. [In LL million] 13 May 2009 Fair value of net assets of SGBJ 105,286 Group s share (3.7077%) 3,901 Goodwill arising from purchase of additional shares 1,386 Cost of acquisition 5,287 Société Générale Bank Cyprus Ltd On 30 July 2009, the General Assembly of the Bank s shareholders approved the acquisition of 57.7% of the total voting shares of Société Générale Cyprus Ltd for EUR 15,433,541 (equivalent to LL 33,357 million). On 16 December 2009, the Central Council of the Central Bank of Lebanon approved the Bank s acquisition. The Group recognized goodwill in relation to the above as follows: [In LL million] 16 December 2009 Fair value of net assets of Société Générale Cyprus Ltd 36,235 Group s share (57.70%) 20,908 Goodwill arising from acquisition 12,449 Cost of acquisition 33,357 Cash inflow on acquisition of the subsidiary: Net cash acquired with the subsidiary 270,594 Cash paid (33,357) Net cash inflow 237,237 Acquisitions in 2008 Société Générale de Banque - Jordanie (SGBJ) During January 2008, Société Générale de Banque - Jordanie (SGBJ) increased its capital whereby each shareholder had a pre-emptive right to subscribe to one share for every two shares he or she previously owned at an issue price of JD 1.27 per share allocated between JD 1 par value per share and JD 0.27 per share issue premium. The gross amount of the capital increase amounted to LL 36,530 million detailed as follows: [In LL million] 16 December 2009 Gross amount of capital increase of SGBJ 36,530 Minority share from capital increase (6,733,199 shares) (18,239) Group s share from capital increase (6,752,078 shares) 18,291 On 29 February 2008, the Bank subscribed to its share of the capital increase in the amount of US$ 12,133,182 or LL 18,291 million to retain its percentage of ownership at 50.07%. Minority shareholders owning 0.55% of the total shares did not subscribe to their share of the capital increase, accordingly the unsubscribed shares were placed at the quoted market price of JD On 30 April 2008, the Bank purchased all the unsubscribed shares of 222,374 shares (representing 1.65% of the total capital increase of SGBJ or 0.55% of the overall capital) for a purchase price of US$ 1,024,

55 NOTES TO THE [In LL million] 30 April 2008 Fair value of net assets of SGBJ 97,714 Group s share (0.55%) 537 Goodwill from the arising increase in share 1,007 Cost of acquisition 1,544 Sogecap Liban SAL On 12 November 2008, the Board of Directors approved the acquisition of additional shares in Sogecap SAL previously owned by related parties totaling 8,620 shares for a price of US$ 2,232,149 or LL 3,365 million. Accordingly, the Bank s share in Sogecap increased by 25%. [In LL million] 12 November 2008 Fair value of net assets of Sogecap 11,129 Group s share (24.97%) 2,782 Goodwill arising from purchase of additional shares 583 Cost of acquisition 3, INTEREST AND SIMILAR INCOME [In LL million] Financial investments available-for-sale 51,727 44,275 Financial assets classified as loans and receivables 18,594 4,020 Financial investments held-to-maturity 11,505 7,071 Deposits with banks and financial institutions 114,109 76,102 Deposits with Head Office, branches and affiliates 8,095 21,864 Loans and advances to customers 116, ,776 Loans and advances to related parties 2,819 2, , , INTEREST AND SIMILAR EXPENSE [In LL million] Deposits from banks and financial institutions 7,086 7,636 Deposits from Head Office, branches and affiliates Deposits from customers and other credit balances 161, ,630 Deposits from related parties 2,335 2, , , NET FEE AND COMMISSION INCOME [In LL million] Credit related fees and commissions 19,328 18,098 Portfolio and other management fees 37,215 38,391 Other commissions received 8,352 7,694 64,895 64,183 Commissions paid (21,589) (18,916) 43,306 45,267 SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

56 NOTES TO THE 7. NET TRADING INCOME [In LL million] Equities 9 (2) Debt securities - - Foreign exchange 7,104 5,826 7,113 5,824 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 debt securities as well as related interest income. Foreign exchange income includes gains and losses from spot and forward contracts. 8. NET GAIN ON INVESTMENTS [In LL million] Dividend income 2,300 2,340 Gain on sale of financial investments available-for-sale (note 42) 9, Gain on sale of financial assets classified as loans and receivables 4,857 - Other losses (173) (3) 16,212 2, OTHER OPERATING INCOME In LL million] Income from services rendered Other operating income 8,338 10,647 Net provisions written back against risks and charges Gain from sale of assets taken in recovery of bad debts (note 27) 8,920 2,937 18,185 14, NET WRITE-BACK OF CREDIT LOSSES [In LL million] Provision for doubtful corporate loans (note 18) (6,795) (8,103) Provision for doubtful retail loans (note 18) (7,776) (3,593) Provision for doubtful corporate loans - related parties (note 19) (661) - Provision for other doubtful debit balances - other assets (658) (3,313) Loans written off (154) (1,480) (16,044) (16,489) Less: Write-back of provision for doubtful corporate loans (note 18) 14,633 12,992 Write-back of provision for doubtful retail loans (note 18) 3,830 5,857 Write-back of provisions on other doubtful debit balances 275-2,694 2, PERSONNEL EXPENSES [In LL million] Salaries and wages 43,805 38,180 National Social Security Fund contributions 6,333 5,686 Provisions for employees end of service benefits (note 37) 1,394 4,527 Other allowances 13,771 13,331 65,303 61,724 56

57 NOTES TO THE 12. OTHER OPERATING EXPENSES [In LL million] Telecommunication and postage 6,030 5,454 Rent 4,773 4,485 Professional services 6,280 7,211 Maintenance and repairs 4,019 3,382 Taxes and fees 3,350 3,317 Net provisions for risks and charges Premiums for guarantee of deposits 1,775 1,761 Electricity, water and fuel 2,234 2,239 Publicity and advertising 4,521 3,921 Printings and stationery 1,842 1,734 Travelling expenses and entertainment 2,106 4,879 Legal expenses 974 2,012 Insurance premiums 999 1,011 Transportation and vehicles maintenance Donations Other operating charges 6,421 5,228 46,289 47, CASH AND BALANCES WITH THE CENTRAL BANKS [In LL million] Cash 52,014 46,100 Current accounts with the Central Banks 196, ,138 Time deposits with the Central Banks 630, , , ,776 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. SGBJ and Société Générale Bank Cyprus Ltd are also subject to obligatory reserve requirements with varying percentages, according to the banking rules and regulations of the Kingdom of Jordan and the Republic of Cyprus respectively. 14. DEPOSITS WITH BANKS AND INSTITUTIONS [In LL million] Current accounts 70,821 56,617 Time deposits 79,246 80,002 Checks for collection 51,146 41,949 Discounted bills 1, Pledged account Debtor accounts against creditor accounts, net , ,363 Most current accounts represent balances deposited at correspondent banks for operating activities and do not generate interest revenues. SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

58 NOTES TO THE 15. AMOUNTS DUE FROM HEAD OFFICE, BRANCHES AND AFFILIATES [In LL million] Sight deposits 33, ,662 Time deposits 773, ,027 Discounted bills , ,971 Time deposits include an amount of LL 64,798 million (equivalent to Euro 30 million) as of 31 December 2009 (2008: Euro 30 million, equivalent to LL 64,106 million) pledged in favour of Société Générale SA Paris in guarantee of documentary letters of credit and guarantees issued in favour of the Bank s clients with any of the entities under Société Générale Group. 16. DERIVATIVE 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 year-end and are indicative of neither the market risk nor the credit risk. [In LL million] Assets Liabilities Notional amount Assets Liabilities Notional amount Derivatives designated as fair value Hedges Interest rate swaps - - 9, ,254 Derivative held-fortrading Forward foreign exchange contracts 6,937 (299) 144, (783) 36,906 6,937 (299) 154, (783) 54,160 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. The Group s exposure under derivative contracts is closely monitored as part of the overall management of the Group s market risk (note 52.1). Forwards Forward 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. The Group has credit exposure to the counterparties of forward contracts. Forward contracts are settled gross and are, therefore, considered to bear a higher liquidity risk. Forward contracts result in market risk exposure. 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. 58

59 NOTES TO THE Interest rate swaps relate to contracts taken out by the Group with other financial institutions in which the Group either receives or pays a floating rate of interest in return for paying or receiving, respectively, a fixed rate of interest. The payment flows are usually netted against each other, with the difference being paid by one party to the other. 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. Derivative financial instruments held or issued 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 credit and market risks. This is achieved by hedging specific financial instruments, portfolios of fixed rate financial instruments and forecast transactions as well as strategic hedging against overall financial position exposures. The accounting treatment, explained in note 2.4 (8) Hedge accounting, depends on the nature of the item hedged and compliance with the IAS 39 hedge accounting criteria. Fair value hedges Fair value hedges are used by the Group to protect it against changes in the fair value of financial assets and financial liabilities due to movements in exchange rates and interest rates. The financial instruments hedged for interest rate risk include loans and advances. The Group uses interest rate swaps to hedge interest rate risk. 17. ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS These instruments are held to cover unit-linked liabilities associated with certain contracts, for which the investment risk lies predominantly with the contract holder. [In LL million] Listed funds - SGAM bonds 1, SGAM equities 5,909 3,807 6,967 4,401 The movement in investments held to cover unit-linked liabilities at 31 December was as follows: [In LL million] Beginning balance at 1 January 4,401 18,774 Add: Purchases 2,759 4,821 Unrealized gain (loss) 1,752 (2,240) Realized gain (loss) 259 (9) Less: Sales (2,204) (16,945) Ending balance at 31 December 6,967 4, LOANS AND ADVANCES TO CUSTOMERS, NET [In LL million] Corporate loans 1,449,016 1,192,927 Retail loans 1,128, ,379 2,577,326 1,896,306 Less: Allowance for impairment losses (548,310) (494,553) 2,029,016 1,401,753 SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

60 NOTES TO THE A reconciliation of the allowance for impairment losses by class, is as follows: [In LL million] 2009 Corporate Retail Total Balance at 1 January 419,359 75, ,553 Charge for the year (note 10) 6,795 7,776 14,571 Unrealized interest for the year 46,453 10,462 56,915 Arising from acquisition of a subsidiary 64,204 16,146 80,350 Transfers from provisions on loans to related parties (note 19) , , ,715 Less: Recoveries (note 10) (14,633) (3,830) (18,463) Less: Provisions written off (26,254) (3,067) (29,321) (40,887) (6,897) (47,784) Transfers to off-balance sheet (note 46) (39,202) (12,176) (51,378) Transfers from off-balance sheet (note 46) (38,660) (12,168) (50,828) Difference of exchange Balance at 31 December 457,683 90, ,310 Gross amount of loans individually determined to be impaired 493, , ,892 [In LL million] 2008 Corporate Retail Total Balance at 1 January 395,484 69, ,381 Charge for the year (note 10) 8,103 3,593 11,696 Unrealized interest for the year 48,682 10,737 59, ,269 84, ,496 Less: Recoveries (note 10) (12,992) (5,857) (18,849) Less: Provisions written off (21,888) (2,633) (24,521) (34,880) (8,490) (43,370) Transfers to off-balance sheet (note 46) (2,706) (433) (3,139) Transfers from off-balance sheet (note 46) 5,334-5, ,017 75, ,321 Difference of exchange (658) (110) (768) Balance at 31 December 419,359 75, ,553 Gross amount of loans individually determined to be impaired 478, , ,966 Collateral repossessed During the year, the Group took possession of various real estates with carrying value of LL 6,280 million which the Group is in the process of selling (note 27). According to the Central Bank of Lebanon regulations and Banking Control Commission Circular no. 240 dated 8 January 2004, bad debts and related allowance for credit losses meeting the criteria set out in the circular have been transferred to the off-balance sheet accounts. The fair value of collateral that the Group holds relating to loans individually determined to be impaired as at 31 December 2009 amounted to LL 125,632 million (2008: LL 155,606 million). The collateral consists of cash, securities, letters of guarantee and properties. 19. LOANS AND ADVANCES TO RELATED PARTIES, NET [In LL million] Corporate loans 59,762 49,375 Retail loans 4,152 6,812 63,914 56,187 Less: Allowance for impairment losses (703) (246) 63,211 55,941 60

61 A reconciliation of the allowance for impairment losses for loans and advances to related parties, by class, is as follows: [In LL million] 2009 Corporate Retail Total Balance at 1 January Unrealized interest for the year Charge for the year (note 10) Transfers to provisions on loans and advances to Customers (note 18) (326) - (326) Balance at 31 December NOTES TO THE [In LL million] 2008 Corporate Retail Total Balance at 1 January Unrealized interest for the year Balance at 31 December DEBTORS BY ACCEPTANCES Acceptances resulted from letters of credit opened for the customers accounts for which settlement is delayed and is guaranteed by the Group. 21. INVESTMENTS AVAILABLE-FOR-SALE [In LL million] Quoted: Lebanese treasury bills Eurobonds 570,850 5,845 Shares 9,304 13,564 Corporate Bonds 14,943 10,223 Funds ,097 29,641 Unquoted: Lebanese treasury bills denominated in LL 430, ,722 Shares 4,684 2, , ,152 Impairment allowance (446) (446) 434, ,706 1,029, ,347 All unquoted available-for-sale shares are recorded at cost due to the unpredictable nature of future cash flows and lack of suitable other markets for reaching at a reliable fair value. During 2008, the Group recognized impairment losses against quoted shares due to the significant decline in value for LL 963 million. During 2009, impairment losses previously booked on quoted shares held by the Group were written back to the consolidated income statement in the amount of LL 951 million. SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

62 NOTES TO THE 22. ASSETS CLASSIFIED AS LOANS AND RECEIVABLES [In LL million] Quoted: Treasury bills Eurobonds 186, ,520 Unquoted: Certificates of deposit Central Bank of Lebanon 1,093, ,302 Certificates of deposit Central Bank of Jordan - 6,530 1,093, ,832 1,279,410 1,178, INVESTMENTS HELD-TO-MATURITY [In LL million] Quoted: Lebanese treasury bills Eurobonds 27,553 27,846 Corporate bonds 3,252 1,560 30,805 29,406 Unquoted: Lebanese treasury bills denominated in LL 330, ,798 Other governmental bonds 125,991 42,387 Corporate bonds 13,189 2, , , , ,824 Held to maturity treasury bills include a gross amount of LL 342,920 million net of interest received in advance of LL 14,932 million as of 31 December 2009 (2008: LL 342,920 million net of interest received in advance of LL 35,500 million) pledged in favour of the Central Bank of Lebanon against a soft loan (note 30). 24. INVESTMENTS IN NON- SUBSIDIARIES Investments in non-conoslidated subsidiaries represent the following: Ownership % Activity LL million LL million Société Générale Libanaise Foncière SARL Real Estate 9 14 Société Générale de Services d Investissements SARL Services and studies SGBL Courtage Assurance SARL Brokerage Centre de Traitement Monétique SAL Financial services 1,501 1, Bassatine Tarablos SAL Investments and management ,608 1,704 Less: Provision for impairment Société Générale de Service et d Investissements SARL (98) (98) 2,510 1,606 During 2009, the Group s share of profits from non-consolidated subsidiaries amounted to LL 904 million. 62

63 NOTES TO THE 25. PROPERTY AND EQUIPMENT [In LL million] Advances on Land and Furniture Installations Vehicles Total purchase of buildings and fixtures fixed assets Cost: At 1 January ,338 53,859 44,369 30, ,454 Additions 4,649 3,373 2, ,538 Arising from acquisition of a subsidiary 2,728-5, ,113 Disposals - - (84) (48) (223) (355) Transfers (1,412) Write-off - - (1,462) - - (1,462) Other adjustments At 31 December ,303 57,232 51,375 31,093 1, ,291 Depreciation: At 1 January ,127 38,029 27, ,897 Provided during the year ,613 1, ,847 Arising from acquisition of a subsidiary 1,914-3, ,742 Relating to disposals - - (78) (41) (204) (323) Relating to write-off - - (1,462) - - (1,462) Other adjustments At 31 December ,914 11,120 42,855 28, ,703 Impairment: At 1 January 2009 and 31 December , ,357 Net carrying amount: At 31 December ,389 44,755 8,520 2, ,231 [In LL million] Advances on Land and Furniture Installations Vehicles Total purchase of buildings and fixtures fixed assets Cost: At 1 January ,155 54,799 43,335 28,644 1, ,955 Additions 1, ,038 1, ,914 Disposals - (1,315) (713) (173) (192) (2,393) Transfers (1,214) Write-off - - (3) - - (3) Other adjustments (1) - (11) (7) - (19) At 31 December ,338 53,859 44,369 30, ,454 Depreciation: At 1 January ,024 36,172 26, ,060 Provided during the year ,556 1, ,152 Relating to disposals - (302) (689) (173) (136) (1,300) Relating to write-off - - (3) - - (3) Other adjustments - - (7) (5) - (12) At 31 December ,127 38,029 27, ,897 Impairment: At 1 January 2008 and 31 December , ,357 Net carrying amount: At 31 December ,338 42,375 6,340 2, ,200 SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

64 NOTES TO THE According to the provisions of law no. 282 dated 31 December 1993 and the Central Bank of Lebanon circulars, the Bank restated the cost of buildings acquired prior to 1 January 1994 for the changes in the general purchasing power of the Lebanese Lira. The restatement amounted to LL 3,934 million as of 31 December 2009 (2008: same) and was added to property and equipment with a corresponding entry to revaluation reserve included in shareholders equity (note 41). 26. INTANGIBLE ASSETS [In LL million] Advances Key money Licenses Total intangible and software assets Cost: At 1 January ,842 6,383 8,522 Additions Arising from acquisition of a subsidiary 2-1,315 1,317 Write-off - - (318) (318) Transfers (86) At 31 December ,842 7,829 10,368 Amortization: At 1 January ,842 4,574 6,416 Provided during the year Arising from acquisition of a subsidiary - - 1,050 1,050 Relating to write-off At 31 December ,842 5,965 7,807 Net book value: At 31 December ,864 2,561 [In LL million] Advances Key money Licenses Total intangible and software assets Cost: At 1 January ,860 5,086 7,095 Additions ,319 1,818 Write-off - (124) (267) (391) Transfers (245) At 31 December ,842 6,383 8,522 Amortization: At 1 January ,842 4,242 6,084 Provided during the year Relating to write-off - - (11) (11) At 31 December ,842 4,574 6,416 Net book value: At 31 December ,809 2,106 64

65 NOTES TO THE 27. NON-CURRENT ASSETS HELD FOR SALE [In LL million] Cost: At 1 January 165, ,730 Additions 6,280 9,283 Disposals (28,492) (11,526) Other adjustments (20) (825) 143, ,662 Impairment: At 1 January 22,095 22,835 Write-back during the year (989) (303) Other adjustments (4) (437) At 31 December 21,102 22,095 Net carrying amount: At 31 December 122, ,567 As at 31 December 2009, the fair value of the fixed assets acquired in settlement of debts as estimated by the Group amounted to LL 180,976 million (2008: LL 177,193 million). During the year, the Group disposed of non-current assets with carrying value of LL 27,503 million (2008: LL 11,223 million) and recognized a gain of LL 7,931 million (2008: LL 2,634 million), in addition to the release of reserves for non-current assets held for sale amounting to LL 1,463 million to retained earnings (2008: LL 252 million). This amount relates to appropriations previously booked on property acquired in settlement of debts. 28. OTHER ASSETS [In LL million] Net deferred costs resulting from the acquisition of Inaash Bank SAL 27,345 51,780 Prepaid expenses 3,239 2,951 Stamps Printed materials and stationery Credit cards inventory Precious metals 5 5 Other debtors 20,880 17,199 52,607 72,960 The net deferred costs resulting from the Inaash Bank SAL acquisition consist of the following: [In LL million] 2009 Additional deferred costs Initial deferred resulting costs from the subsequent to the acquisition acquisition Total Gross deferred costs: At 1 January 2009 and 31 December ,120 10, ,673 Amortization: At 1 January ,968 6, ,893 Amortization for the year 23,116 1,319 24,435 At 31 December ,084 8, ,328 Net deferred costs: At 31 December ,036 2,309 27,345 At 31 December ,152 3,628 51,780 SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

66 NOTES TO THE The initial costs resulting from the acquisition of Inaash Bank SAL amounted to LL 180,120 million. The costs are deferred and amortized over the period of future economic benefits from the soft loan (LL 250,000 million) and related facilities received from the Central Bank of Lebanon. The Bank used the proceeds of the soft loan to subscribe to two-year treasury bills which were pledged in favour of the Central Bank of Lebanon as a guarantee for the settlement of the soft loan. On 10 January 2003, the Central Council of the Bank of Lebanon approved granting the Bank an additional soft loan amounting to LL 45,567 million to cover the additional costs of LL 10,553 million (US$ 7 million) incurred subsequent to Inaash Bank SAL s acquisition by the Bank. The loan bears interest determined by reference to interest rates on Lebanese treasury bills or any other benchmark set by the Bank of Lebanon less the margin needed to cover the costs. This rate is reset on a regular basis. The proceeds from the loan were invested in financial instruments issued by the Bank of Lebanon which are pledged in favour of the Bank of Lebanon as a guarantee for the settlement of the soft loan. The additional costs are deferred and amortized over the period of the future economic benefits from the soft loan. 29. GOODWILL [In LL million] Cost: At 1 January 2,706 1,102 Additions 13,587 1,604 Adjustments (439) - At 31 December 15,854 2,706 Goodwill acquired through business combinations with indefinite lives have been allocated to four individual cash-generating units, which are subsidiaries of the Bank: Société Générale de Banque Jordanie Fidus SAL Sogecap Liban SAL Société Générale Bank - Cyprus Ltd The carrying amount of goodwill to each of the subsidiaries is as follows: [In LL million] Société Générale de Banque Jordanie 2,393 1,635 Fidus SAL Sogecap Liban SAL Société Générale Bank Cyprus Ltd 12,449-15,854 2, DUE TO CENTRAL BANKS [In LL million] Term soft loans 305, ,101 Term soft loans include: - 10-year term loan amounting to LL 250,000 million granted in 2000 from the Central Bank of Lebanon as a result of the acquisition of Inaash Bank SAL with an effective interest rate of two-year treasury bills less 8.22% (note 28); - 8-year term loan amounting to LL 45,567 million granted in 2003 from the Central Bank of Lebanon subsequent to the acquisition of Inaash Bank SAL with an interest rate determined by the Central Bank of Lebanon every 2 years. The effective interest rate for 2009 was 6.77% (2008: 6.77%) (note 28). - 5-year term loan amounting to LL 8,431 million granted in 2008 from the Central Bank of Lebanon to cover 60% of the replacement costs of the Bank s damaged buildings and installations and to cover 60% of the Bank s credit losses relating to debtors directly affected by the July 2006 war. The effective interest rate for 2009 was 5.07% (2008: 5.07%). 66

67 NOTES TO THE 31. DUE TO BANKS AND INSTITUTIONS [In LL million] Sight deposits 55,273 20,798 Time deposits 110,352 98,610 Creditor accounts against debtor accounts, net 2,033 6,734 Pledged accounts - 1, , , AMOUNTS DUE TO HEAD OFFICE, BRANCHES AND AFFILIATES [In LL million] Sight deposits 36, Time deposits 279,684 - Creditor accounts against debtor accounts, net , CUSTOMERS DEPOSITS [In LL million] 2009 Corporate Retail Total Sight deposits 468, ,129 1,088,185 Net creditor accounts against debtor accounts and blocked margins 58, , , , ,455 1,297,701 Time deposits 717,066 1,491,631 2,208,697 Savings accounts 46,351 1,962,526 2,008,877 1,289,663 4,225,612 5,515,275 [In LL million] 2008 Corporate Retail Total Sight deposits 244, , ,109 Net creditor accounts against debtor accounts and blocked margins 71,762 65, , , , ,053 Time deposits 266,983 1,110,941 1,377,924 Savings accounts 47,221 1,683,117 1,730, ,880 3,272,435 3,903,315 Included in customers deposits as at 31 December 2009 are coded accounts amounting to LL 20,483 million (2008: LL 8,675 million). These accounts are opened in accordance with article 3 of the Banking Secrecy Law dated 3 September Included in customers deposits as of 31 December 2009, are deposits from related parties amounting to LL 1,967 million (2008: LL 751 million). SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

68 NOTES TO THE 34. INCOME TAX The components of income tax expense for the years ended 31 December 2009 and 2008 are: [In LL million] Current tax Current income tax 19,719 13,595 Deferred tax Relating to origination and reversal of temporary differences ,413 14,219 Reconciliation of the total tax charge The reconciliation between the tax expense and the accounting profit for the years ended 31 December 2009 and 2008 is as follows: [In LL million] Accounting profit before tax 125,822 79,924 Less: Revenues previously subject to tax (17,054) (10,916) Add: Non-deductible expenses 6,821 11,499 Taxable profit 115,589 80,507 Effective income tax rate 17.66% 17.66% Income tax expense reported in the consolidated income statement 20,413 14,219 Current tax liabilities [In LL million] Income tax due 20,413 14,219 Less: tax withheld on interest (7,735) (4,215) Less: Deferred tax amortized to the consolidated income statement (144) (225) Less: others (224) - 12,310 9,779 Deferred tax The following table shows deferred tax recorded on the consolidated statement of financial position and changes recorded in the income tax expense: [In LL million] Deferred tax Deferred tax Income Deferred tax Deferred tax Income assets liabilities statement assets liabilities statement Revaluation of financial investments available-for-sale - 5, ,060 - Non-current assets held for sale (144) (225) Depreciation of property and equipment 3, Provision for doubtful loans 1,199 - (550) 1,468 - (399) Others ,046 5,489 (694) 2,208 1,060 (624) 68

69 NOTES TO THE 35. OTHER LIABILITIES [In LL million] Margins on letters of credit 6,764 7,243 Due to the National Social Security Fund Balances payable as a result of Inaash Bank SAL acquisition Accrued expenses 17,626 10,984 Interest and commissions received in advance 6,844 5,211 Customers transactions between head office and branches 3,195 20,076 Other creditors 29,043 22,486 Accrued interest 1,832 1,913 Insurance contracts liabilities 5,853 5,148 Investment contracts liabilities (i) 55,681 44, , ,726 (i) Investment contract liabilities insurance business The change in investment contract liabilities may be analyzed as follows: [In LL million] 2009 Deposit Unit-linked Provision for Total component liabilities participation At 1 January 35,639 8, ,865 Investment component of premiums received 8,521 5,182-13,703 Surrenders paid and cancellations (4,209) (2,986) - (7,195) 39,951 11, ,373 Change in investment contract liabilities: Accrued interest, net 1, ,789 Unrealized loss - 1,752-1,752 Provision for participation Others (383) ,203 2, ,308 At 31 December 41,154 13, ,681 [In LL million] 2008 Deposit Unit-linked Provision for Total component liabilities participation At 1 January 31,390 22, ,995 Investment component of premiums received 7,766 5,014-12,780 Surrenders paid and cancellations (4,982) (16,379) - (21,361) Transfers of provision for participation (106) - 34,280 11, ,414 Change in investment contract liabilities: Accrued interest, net 1, ,421 Unrealized loss - (2,240) - (2,240) Provision for participation ,359 (2,178) 270 (549) At 31 December 35,639 8, ,865 The investment contract liabilities have been determined and certified on 11 January 2010 by an independent sworn actuary. SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

70 NOTES TO THE 36. PROVISION FOR RISKS AND CHARGES [In LL million] Provision for miscellaneous risks 9,682 10,067 Provisions for contingencies and charges 1,766 2,114 Other provisions ,883 12, EMPLOYEES END OF SERVICE BENEFITS Movements in the provision for end of service benefits recognized in the consolidated statement of financial position is as follows: [In LL million] Balance at 1 January 12,744 9,758 Provided during the year (note 11) 1,394 4,527 Arising from acquisition of a subsidiary 2,780 - Paid during the year (1,524) (1,541) Balance at 31 December 15,394 12, SHARE CAPITAL a] Common shares The authorized, issued and fully paid share capital as of 31 December 2009 comprised of 50,000 shares of nominal value of LL 212,400 each (2008: same). b] Preferred shares On 22 July 2008, the Bank issued 9,000 preferred shares (Series 2008) for a nominal amount of LL 212,400 each (a total of LL 1,912 million) plus a share premium denominated in US Dollars of US$ 9,859. Accordingly, share premium of LL 133,121 represents a premium of US$ 88,731,675 (or LL 133,763 million) less issuance costs of LL 642 million. The payment of dividends for preferred shareholders is dependent on: (1) The availability of non-consolidated net income for a specific year after appropriation of legal and other regulatory reserves; (2) The continuous compliance with the laws and regulations imposed by the Central Bank of Lebanon and the Banking Control Commision; and (3) The approval of the Ordinary General Assembly of shareholders to distribute those dividends. c] Cash contribution by shareholders Cash contribution to capital of US$ 70,810,000 was paid by the shareholders in prior years. These contributions were granted by the shareholders of the Bank in order to support and develop the activities of the Bank, in accordance with the following conditions: - Every shareholder is committed to retain the contributions during the lifetime of the Bank; - The shareholders commit to cover any loss using their contributions according to the provisions of article 4 (A-B) of circular N 1114 of the Bank of Lebanon and article 134 of the Money and Credit Act; - The shareholders have the right to use or not to use these contributions in case of a capital increase; and - Interest rate applied on these contributions is determined based on the latest 3-year Eurobond issue less 0.5% and payment is subject to the approval of the Banking Control Commission and the shareholders general assembly meeting. The Central Bank did not pay any interest on the cash contribution during the year 2009 (2008: same). Both the Central Council of the Central Bank of Lebanon and the Ordinary General Assembly of the Bank approved these contributions. 70

71 NOTES TO THE 39. RESERVES RELATED TO SHARE CAPITAL [In LL million] Reserve for Legal General general banking reserve reserve risks Total At 1 January ,051 12,213 30,680 67,944 Transfer to reserves 2,068 1,709 3,295 7,072 At 31 December ,119 13,922 33,975 75,016 Transfer to reserves 6,192 8,184 3,447 17,823 Others (727) (483) 409 (801) At 31 December ,584 21,623 37,831 92,038 a) Reserve for general banking risks In compliance with main circular No. 50 issued by the Central Bank of Lebanon, the Bank should appropriate from its net profit for the year, a minimum amount of 2 per thousand and a maximum of 3 per thousand from the total risk weighted assets and off-balance sheet items based on the rates specified by the Central Bank of Lebanon as a reserve for general banking risks. The accumulated balance of this reserve should not be less than 2% of the total risk weighted assets and off balance sheet items at the end of the financial year In addition, Société Générale de Banque - Jordanie and Société Générale Bank Cyprus Ltd are also required to appropriate reserves for general banking risks in accordance with local requirements. b)legal reserve As required by Local regulations where the Group operates a percentage of the net profit should be transferred to legal reserve. This reserve is non available for dividend distribution. c) General reserve General reserves relate to the Group s operations in Lebanon, Cyprus and Jordan. These reserves were appropriated according to resolutions by the General Ordinary Assembly of shareholders of respective entities. These reserves are distributable. d)reserve for capital increase The shareholders resolved during the general assembly meeting dated 21 July 2010 to appropriate LL 2,634 million to reserve for capital increase as required by the regulators relating to the profit on sale of property acquired in settlement of debts (note 27). 40. RESERVE FOR NON-CURRENT ASSETS HELD FOR SALE In compliance with pronouncement 10/2008 of the Banking Control Commission issued on 2 April 2008, when properties acquired in settlement of debts are not sold within the timeframe required by local regulators, the Bank should appropriate an amount equal to 5% or 20% of the carrying value of such properties. The annual appropriation, which is from the net profit of the respective year after appropriations to legal reserve and reserve for general banking risks, is reported under reserve for non-current assets held for sale. The Bank shall make a transfer from this reserve into retained earnings in the following circumstances: a) The reserve appropriated in prior years related to a property disposed of; or b) The reserve appropriated in prior years (equal or up to) an impairment loss recognized in the income statement against the acquired property. 41. REVALUATION RESERVE FOR PROPERTY [In LL million] Revaluation amount 5,499 5,499 Book value (945) (945) Sale of real estate (620) (620) Revaluation variance 3,934 3,934 The Central Bank of Lebanon and the tax authorities approved on 29 March 1995 and on 18 April 1995, respectively, the revaluation of some of the buildings owned by the Bank and used for operating purposes in accordance with the law no. 282 dated 30 December 1993 (note 25). SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

72 NOTES TO THE 42. AVAILABLE-FOR-SALE RESERVE [In LL million] At 1 January 7,232 (1,265) Net realized gains on financial investments available-for-sale reclassified to the income statement (note 8) (9,228) (191) Impairment losses transferred to the income statement (note a) Net unrealized gains on financial investments available for-sale 36,549 8,785 Deferred tax liability (4,429) (1,060) Other adjustments Net movement 23,026 8,497 At 31 December 30,258 7,232 (a) For the year ended 31 December 2008, the quoted share price of Société Générale SA Paris witnessed a significant decline in value. As a result, the Bank recognized impairment losses against these shares for LL 963 million. 43. DIVIDENDS PAID TO EQUITY HOLDERS OF THE PARENT [In LL million] Declared and paid during the year Dividends on ordinary shares (LL 482,400 per share) 24,120 - Dividend on preferred shares (LL 468,350 per share) 4,214-28,334 - On 30 April 2009, the Ordinary General Assembly of shareholders approved the above dividend distributions. 44. CASH AND CASH EQUIVALENTS [In LL million] Cash and balances with the Central Banks 879, ,776 Treasury Bills 1,538,969 1,048,008 Deposits with banks and financial institutions 203, ,363 Amounts due from Head Office, branches and affiliates 806, ,971 Due to Central Banks (305,110) (305,101) Due to banks and other financial institutions (167,658) (127,684) Amounts due to Head Office, branches and affiliates (316,386) (322) 2,639,223 1,895,011 Less: balances with maturities exceeding 3 months Cash and balances with the Central Banks 601, ,883 Deposits with banks and financial institutions 3,160 1,689 Amounts due from Head Office, branches and affiliates 175, ,466 Treasury Bills 1,538,969 1,003,389 Due to Central Banks (305,110) (305,101) Due to banks and other financial institutions (66,371) (55,011) Amounts due to Head Office, branches and affiliates (279,685) - 1,667,697 1,254,315 Cash and cash equivalents at 31 December 971, ,696 72

73 NOTES TO THE 45. RELATED PARTY TRANSACTIONS The Group enters into transactions with major shareholders, directors, senior management and their related concerns in the ordinary course of business at commercial interest and commission rates. Except for a few loans to related parties (note 19), all the loans and advances to related parties are performing advances and are free of any allowance for credit losses. The following transactions have been entered into with related parties during 2009: [In LL million] 2009 Major Other Total shareholders related parties Loans and advances (customers, Head Office, branches and affiliates) 595,723 25, ,712 Customers deposits (customers, Head Office, branches and affiliates) 2,113 8,053 10,166 Letters of guarantees 6, ,522 Interest received / loans 9, ,340 Interest paid / deposits 3,196 1,360 4,556 Dividends received Commissions received Technical assistance fees paid 1, ,146 Technical assistance received Rent paid 2,686-2,686 Commission paid The following transactions have been entered into with related parties during 2008: [In LL million] 2009 Major Other Total shareholders related parties Loans and advances (customers, Head Office, branches and affiliates) 402,948 89, ,141 Customers deposits (customers, Head Office, branches and affiliates) 18,940 15,373 34,313 Letters of guarantees 2,065 1,111 3,176 Interest received / loans 22,656 1,314 23,970 Interest paid / deposits 1,509 2,065 3,574 Commissions received Technical assistance fees paid 4,282-4,282 Technical assistance received Rent paid 2,618-2,618 Commission paid Compensation of the key management personnel is as follows: [In LL million] Board remunerations and attendance fees paid 3,408 1, IMPAIRED LOANS FULLY PROVIDED FOR TRANSFERRED TO OFF-BALANCE SHEET [In LL million] Corporate loans 55, ,765 Retail loans 125,348 2, , ,540 SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

74 NOTES TO THE As per Banking Control Commission Circular no. 240, banks are required to transfer to the off-balance sheet doubtful loans fully provided for and which meet some additional criteria outlined in the circular. The movement in allowance for impairment losses for doubtful loans fully provided for was as follows: In LL million] Balance at 1 January 125, ,073 Impairment loss during the year 6,359 4,683 Transfer from the statement of financial position (note 18) 51,378 3,139 Transfer to the statement of financial position (note 18) (550) (5,334) Less: write-offs (1,756) (9,935) Difference of exchange 4 (86) Balance at 31 December 180, , FIDUCIARY DEPOSITS A summary of the Bank s fiduciary accounts according to law no. 520 dated 6 June 1996 relating to the development of financial markets and fiduciary contracts is as follows: [In LL million] Deposits with banks 83, ,990 Loans and advances 13,568 13,568 Equity instruments 97,518 1,908 Certificates of deposit 9,675 9, , , ASSETS UNDER MANAGEMENT NON DISCRETIONARY [In LL million] Treasury bills and Eurobonds 89,951 84,090 Bonds and other debt instruments 61,804 46,939 Equity instruments 3,604 3,957 Certificates of deposit 9,753 9,677 Funds 355, ,492 Stocks 270, , , , COMMITMENTS AND CONTINGENT LIABILITIES 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 (note 52.1). The total outstanding commitments and contingent liabilities are as follows: [In LL million] Contingent liabilities Commitments issued to customers 29, Commitments issued to financial institutions 105, ,272 Guarantees issued to customers 178, ,426 Guarantees issued to financial institutions 39,138 21,566 Debtors by acceptances 65,929 74, , ,778 Commitments Undrawn commitments to lend 367, ,616 Fiduciary deposits 203, ,066 Financial assets under management non discretionary 791, ,318 1,363,461 1,369,000

75 NOTES TO THE Contingent liabilities Letters of credit, guarantees (including standby letters of credit) and acceptances 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 the same credit risk as loans. Legal claims 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. Undrawn commitments to lend Commitments to extend credit represent contractual commitments to make loans and revolving credits. Commitments generally have fixed expiry dates, or other termination clauses. Since commitments may expire without being drawn upon, the total contract amounts do not necessary represent future cash requirements. However, the potential credit loss is less than the total unused commitments since most commitments to extend credit are contingent upon customers maintaining specific standards. The Group monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorterterm commitments. Capital commitments At 31 December 2009, the Group had capital commitments in respect of premises and equipment purchases amounting to LL 390 million (2008: LL 1,363 million). Operating lease commitments Future minimum rentals payable under non-cancelable operating leases mainly in connection with the Group s branch premises are as follows as of 31 December: [In LL million] Within one year 5,374 3,673 After one year but not more than five years 17,201 16,799 More than five years ,903 20,472 Other commitments The Bank s books and records are being reviewed by the Department of Income Tax for the years 2006 and 2007 (inclusive). The ultimate outcome of this review cannot be presently determined. The Bank s contributions to the National Social Security Fund (NSSF) have not been reviewed since May The ultimate outcome of the review that may take place cannot be presently determined. The Bank s books and records have not yet been reviewed by the department of Value Added Tax since inception. The ultimate outcome of any tax review that might take place cannot be presently determined. Sogecap Liban SAL contributions to the National Social Security Fund (NSSF) have not been reviewed by the NSSF since The ultimate outcome of any review that may take place cannot presently be determined. Sogecap Liban SAL books and records have not been reviewed by the Department of Income Tax since 2006 (inclusive). The ultimate outcome of any review that may take place cannot presently be determined. Fidus SAL books and records have not been reviewed by the Department of Income Tax for the years 2007 to The ultimate outcome of any review that may take place cannot presently be determined. Fidus SAL contributions to the National Social Security Fund (NSSF) have not been reviewed by the NSSF since The ultimate outcome of any review that may take place cannot presently be detemined. SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

76 NOTES TO THE 50. FAIR VALUE OF INSTRUMENTS 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. [In LL million] Level 1 Level 2 Level 3 Total 31 December 2009 Financial assets: Derivative financial instruments: Interest rate swaps Forward foreign exchange contracts - 6,937-6,937-6,937-6,937 Financial assets held-for-trading: Equities Financial assets designated at fair value through profit or loss: Financial instruments to cover unit linked liabilities 6, ,967 Financial investments available-for-sale: Lebanese treasury bills (LL) - 430, ,550 Lebanese treasury bills (Eurobonds) 570, ,850 Equities 9, ,542 Debt 14, , , ,550-1,029,885 Financial liabilities: Derivative financial instruments: Forward foreign exchange contracts 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. Derivatives Derivative products valued using a valuation technique with market observable inputs are mainly interest rate swaps and forward foreign exchange contracts. The most frequently applied valuation technique include forward pricing. The model incorporates various inputs including 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. These assets are valued using models which only incorporate data observable in the market. 76

77 NOTES TO THE Financial assets held-for-trading Held-for-trading financial assets comprise over the counter financial instruments purchased from an international bank. Fair value is provided using valuation models which use discounted cash flow analysis which incorporates either only observable data or both observable and non-observable data. 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 financial statements: 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. Fixed rate financial instruments The fair value of fixed rate financial assets and liabilities carried at amortized cost are estimated by comparing market interest rates when they were first recognized with current market rates for similar financial instruments. The Group does not have fixed interest bearing deposits with a maturity greater than one year. 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 financial statements. The table does not include the fair values of non-financial assets and non-financial liabilities. [In LL million] Level Carrying value Fair value Carrying value Fair value Financial assets Cash and balances with the Central Banks 879, , , ,776 Deposits with banks and financial institutions 203, , , ,363 Amounts due from Head Office, branches and affiliates 806, , , ,971 Loans and advances to customers, net 2,029,016 2,059,151 1,401,753 1,402,590 Loans and advances to related parties, net 63,211 63,211 55,941 55,941 Financial assets classified as loans and receivables 1,279,410 1,336,386 1,178,352 1,175,343 Financial investments held-to-maturity 500, , , ,163 5,761,417 5,842,885 4,299,980 4,264,147 Financial liabilities Due to Central Banks 305, , , ,861 Due to banks and financial institutions 167, , , ,684 Amounts due to Head Office, branches and affiliates 316, , Customers deposits 5,515,275 5,515,275 3,903,315 3,903,315 Related parties deposits 7,808 7,808 11,568 11,568 6,312,237 6,309,936 4,347,990 4,344,750 B. Reclassification of financial assets Following the amendments to IAS 39 and IFRS 7 Reclassification of Financial Assets (effective from 1 July 2008) and as a result of the contraction in the market for many classes of assets, the Group has undertaken a review of assets that are classified as available-for-sale, 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 has reviewed the instrument to determine whether it is appropriate to reclassify it to Loans and Receivables. This reclassification has only been performed where the Group, at the reclassification date, has the clear intention and ability to hold the financial asset for the foreseeable future or until maturity. SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

78 NOTES TO THE The following tables show the carrying amount and fair value of financial assets reclassified from Available-for-Sale to the Loans and Receivables category, as at the reporting date. All transfers occurred on 1 July [In LL million] Level 1 Available-for-sale Carrying amount Fair value Carrying amount Fair value Financial assets reclassified during the year as at the date of reclassification: Lebanese treasury bills - Eurobonds , ,667 Financial assets reclassified during 2008 as at year end: Lebanese treasury bills - Eurobonds 163, , , ,262 The following table shows the total fair value gains and losses recorded on 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. [In LL million] Lebanese treasury bills denominated in foreign currency Cost of securities transferred 252,204 Fair value losses recognized in equity: Recorded during 2008 and in prior years (1,537) Carrying amount at date of reclassification 250,667 Expected undiscounted cash recoveries, as assessed at the date of reclassification 319,057 Anticipated average effective interest rate over the remaining life of the assets 7.45% 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 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 financial statements of the Group. [In LL million] Level 1 Available-for-sale Available-for-sale Income statement Equity Income statement Equity Gain on sale of financial investments 4, Fair value gains and losses which would otherwise have been recorded after reclassification, during the current period - 14,684 - (7,206) Net interest income which would otherwise have been recorded after reclassification, during the current period Total income or expense which would otherwise have been recorded during the year since reclassification 4,857 14,684 - (7,206) The following table shows the net profit or loss actually recorded on assets reclassified to loans and receivables subsequent to reclassification: [In LL million] Level 1 Available-for-sale Net interest income 18,594 4,020 78

79 NOTES TO THE 51. 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. [In LL million] At 31 December 2009 Less than More than Total one year one year ASSETS Cash and balances with the Central Banks 441, , ,086 Deposits with banks and financial institutions 203, ,718 Amounts due from Head Office, branches and affiliates 806, ,604 Derivative financial instruments 6,937-6,937 Financial assets held-for-trading Financial assets designated at fair value through profit or loss 6,967-6,967 Loans and advances to customers, net 1,016,707 1,012,309 2,029,016 Loans and advances to related parties, net 62, ,211 Debtors by acceptances 65,929-65,929 Financial investments available-for-sale 216, ,504 1,029,885 Financial assets classified as loans and receivables 79,222 1,200,188 1,279,410 Financial investments held-to-maturity 417,770 82, ,372 Investments in non-consolidated subsidiaries - 2,510 2,510 Property and equipment 2,780 59,451 62,231 Intangible assets 1,045 1,516 2,561 Non-current assets held for sale 121, ,328 Deferred tax assets 150 4,896 5,046 Other assets 46,259 6,348 52,607 Goodwill - 15,854 15,854 TOTAL ASSETS 3,496,206 3,638,099 7,134,305 LIABILITIES Due to Central Banks 251,114 53, ,110 Due to banks and financial institutions 127,331 40, ,658 Amounts due to Head Office, branches and affiliates 316, ,386 Derivative financial instruments Customers deposits 5,421,427 93,848 5,515,275 Related parties deposits 7,808-7,808 Engagements by acceptances 65,929-65,929 Current tax liabilities 12,310-12,310 Deferred tax liabilities 5,489-5,489 Other liabilities 70,376 57, ,940 Provision for risks and charges 1,916 9,967 11,883 Employees end of service benefits 2,116 13,278 15,394 TOTAL LIABILITIES 6,282, ,980 6,551,481 NET (2,786,295) 3,369, ,824 SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

80 NOTES TO THE [In LL million] At 31 December 2008 Less than More than Total one year one year ASSETS Cash and balances with the Central Banks 444, , ,776 Deposits with banks and financial institutions 180, ,363 Amounts due from Head Office, branches and affiliates 458, ,971 Derivative financial instruments Financial assets held-for-trading Financial assets designated at fair value through profit or loss 4,401-4,401 Loans and advances to customers, net 743, ,216 1,401,753 Loans and advances to related parties, net 55, ,941 Debtors by acceptances 74,642-74,642 Financial investments available-for-sale 85, , ,347 Financial assets classified as loans and receivables 138,780 1,039,572 1,178,352 Financial investments held-to-maturity 11, , ,824 Investments in non-consolidated subsidiaries - 1,606 1,606 Property and equipment 2,508 50,692 53,200 Intangible assets 613 1,493 2,106 Non-current assets held for sale 142, ,567 Deferred tax assets 150 2,058 2,208 Other assets 30,920 42,040 72,960 Goodwill - 2,706 2,706 TOTAL ASSETS 2,375,148 2,673,802 5,048,950 LIABILITIES Due to Central Banks 1, , ,101 Due to banks and financial institutions 105,078 22, ,684 Due to Head Office, branches and affiliates Derivative financial instruments Customers deposits 3,785, ,056 3,903,315 Related parties deposits 11,568-11,568 Engagements by acceptances 74,642-74,642 Current tax liabilities 5,852 3,927 9,779 Deferred tax liabilities 1,060-1,060 Other liabilities 65,391 53, ,726 Provision for risks and charges 2,219 10,224 12,443 Employees end of service benefits 1,668 11,076 12,744 TOTAL LIABILITIES 4,054, ,222 4,578,167 NET (1,679,797) 2,150, , RISK MANAGEMENT The Group devotes significant resources to the ongoing adaptation of its risk management framework, in order to keep pace with the increasing diversification of its activities. The risk management is implemented in compliance with the two following fundamental principles: risk assessment departments are completely independent from the operating divisions a consistent approach to risk assessment and monitoring is applied at the Group level a) Risk management structure The Board of Directors is ultimately responsible for identifying and controlling risks; however, there are separate independent bodies responsible for managing and monitoring risks. Board of Directors The Board of Directors is responsible for the overall risk management approach and for approving the risk strategies and principles. Risk Management The Risk Management Unit is responsible for implementing and maintaining risk related procedures to ensure an independent control process. 80

81 NOTES TO THE Group Treasury Group Treasury is responsible for managing the Group s assets and liabilities and the overall financial structure. It is also primarily responsible for the funding and liquidity risks of the Group. Internal Audit Risk management processes throughout the Group are audited annually by the internal audit function, that examines both the adequacy of the procedures and the Group s compliance with the procedures. Internal Audit discusses the results of all assessments with management, and reports its findings and recommendations to Board of Directors. b)risk measurement and reporting systems In 2003, the Group launched a major project to quantify its credit risks using a RAROC (Risk-Adjusted Return on Capital) approach. One of the main objectives is to establish, using quantitative methods, the level of loss expected on credit transactions over the course of the business cycle. Taking advantage of the experience gained on this project, the Group has also begun work to upgrade its risk management procedures in line with Basel II standards. Monitoring and controlling risks is primarily performed based on limits established by the Group. These limits reflect the business strategy and market environment of the Group as well as the level of risk that the Group is willing to accept, with additional emphasis on selected industries. In addition, the Group monitors and measures the overall risk bearing capacity in relation to the aggregate risk exposure across all risk types and activities. c) Risk mitigation As part of its overall risk management, the Group uses derivatives and other instruments to manage exposures resulting from changes in interest rates, foreign currencies, credit risks, and exposures arising from forecast transactions. The Group actively uses collateral to reduce its credit risks. d)excessive concentration The Group also attempts to control credit risk by regular monitoring of its credit exposures and continuous assessment of the creditworthiness of counterparties by the credit risk committee [ CREDIT RISK ] In line with the Group s conservative lending policy, the Group seeks to diversify its lending activities to avoid undue concentrations of credit risks with individuals and groups of customers in specific geographical locations or business sectors. Collateral is also taken where appropriate. 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 counterparties, and continuously assessing the creditworthiness of counterparties. The Group seeks to manage its credit risk exposure through diversification of lending activities to avoid undue concentrations of risks with individuals or groups of customers in specific locations or businesses. The Group has established a credit quality review process to provide early identification of possible changes in the creditworthiness of counterparties, including regular collateral revisions. Counterparty limits are established by the use of a credit risk classification system, which assigns each counterparty a risk rating. Risk ratings are subject to regular revision. The credit quality review process aims to allow the Group to assess the potential loss as a result of the risks to which it is exposed and take corrective action. The risk rating system, which is managed by an independent unit, provides a rating based on client and transaction level. The classification system includes eight grades, of which five grades relate to the performing portfolio (regular credit facilities: risk rating 1, 2, 3, 4 and 5 and special mention watch list: risk rating 6a and 6c ), one grade relates to substandard loans (risk rating 6b ) and two grades relate to non-performing loans (risk rating 7 and 8 ). The Group uses the above internal rating system for the classifications of all of its financial assets portfolio. SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

82 NOTES TO THE Derivative financial instruments Credit risk arising from derivative financial instruments is, at any time, limited to those with positive fair values, as recorded on the statement of financial position. In the case of credit derivatives, the Group is also exposed to or protected from the risk of default of the underlying entity referenced by the derivative. With gross-settled derivatives, the Group is also exposed to a settlement risk, as being the risk that the Group honors its obligation but the counterparty fails to deliver the counter-value. Credit-related commitment risks The Group makes available to its customers guarantees which may require that the Group makes payments on their behalf and enters into commitments to extend credit lines to secure their liquidity needs. 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. Such commitments expose the Group to similar risks as loans and are mitigated by the same control processes and policies. Risk concentrations: maximum exposure to credit risk without taking account of any collateral and other credit enhancements The Bank s concentrations of risk are managed by client/counterparty and by geographical location. The maximum credit exposure as at 31 December 2009 was LL 734,952 million (2008: LL 519,638 million) before taking account of collateral or other credit enhancements and LL 429,842 million (2008: LL 214,537 million) net of such protection. The following table shows the maximum exposure to credit risk for the components of the statement of financial position, including derivatives, by geography and by industry 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. [In LL million] Lebanon Outside Total Lebanon Outside Total Lebanon Lebanon Cash and balances with the Central Banks 754, , , , , ,776 Deposits with banks and financial institutions 57, , ,718 52, , ,363 Derivative financial instruments 369 6,568 6, Amounts due from Head Office, branches and affiliates , , , ,971 Financial assets held-for-trading Financial assets designated at fair value through profit or loss 6,967-6,967 4,401-4,401 Loans and advances to customers, net 1,143, ,009 2,029,016 1,029, ,133 1,401,753 Loans and advances related parties, net 60,367 2,844 63,211 50,733 5,208 55,941 Financial investments available-for-sale 1,028,506 1,379 1,029, ,374 3, ,347 Financial assets classified as loans and receivables 1,279,410-1,279,410 1,171,822 6,530 1,178,352 Financial investments held-to-maturity 359, , , ,903 44, ,824 Total credit exposure 4,690,962 2,114,277 6,805,239 3,575,419 1,120,536 4,695,955 The maximum credit risk for the financial assets is based on their net carrying amounts as recorded in the consolidated statement of financial position. 82

83 NOTES TO THE Collateral and other credit enhancements The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters. The main types of collateral obtained are as follows: For commercial lending, charges over real estate properties, inventory, trade receivables, cash and securities For retail lending, mortgages over residential properties 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. 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 based on the Group s credit rating system. The amounts presented are gross of impairment allowances. [In LL million] Neither past due Past due Individually impaired Total nor impaired but not impaired Substandard Doubtful 2009 Balances with the Central Banks 827, ,072 Deposits with Banks and financial institutions 203, ,718 Amounts due from Head Office, branches and affiliates 806, ,604 Derivative financial instruments 6, ,937 Financial assets held-for-trading Financial assets designated at fair value through profit or loss 6, ,967 Loans and advances to customers, net - Corporate 1,007,957 44,022 23, ,765 1,501,834 -Retail 923,914 33,309 5, ,706 1,075,492 Loans and advances to related parties, net - Corporate 58, ,161 59,763 - Retail 3, ,151 Financial investments available-for-sale 1,029, ,030,331 Financial assets classified as loans and receivables 1,279, ,279,440 Financial investments held-to-maturity 500, ,372 6,655,185 77,768 28, ,108 7,302,714 Moody s equivalent Aaa-B3* Not rated Not rated Not rated Not rated SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

84 NOTES TO THE [In LL million] Neither past due Past due Individually impaired Total nor impaired but not impaired Substandard Doubtful 2008 Balances with the Central Banks 594, ,676 Deposits with Banks and financial institutions 180, ,363 Amounts due from Head Office, branches and affiliates 458, ,971 Derivative financial instruments Financial assets held-for-trading Financial assets designated at fair value through profit or loss 4, ,401 Loans and advances to customers, net - Corporate 719,892 43,622 38, ,358 1,192,927 - Retail 587,449 25,176 11,968 78, ,379 Loans and advances to related parties, net - Corporate 11,420 2, ,980 - Retail 42, ,207 Financial investments available-for-sale 390, ,793 Financial assets classified as loans and receivables 1,178, ,178,382 Financial investments held-to-maturity 383, ,824 4,553,129 71,112 50, ,866 5,145,130 Moody s equivalent Aaa-B3* Not rated Not rated Not rated Not rated (*) The normal grade (neither past due nor impaired category) includes due from head office, branches and affiliates, derivative financial instruments, loans and advances to customers, loans and advances to related parties, financial assets held-for-trading which are not rated by Moody s. Past due but not impaired loans and advances include those that are past due by a few days. It is the Group s policy to maintain accurate and consistent risk rating across the credit portfolio. This facilitates focused management of the applicable risks and the comparison of credit exposures across all lines of business, geographic regions and products. The rating system is supported by a variety of financial analytics, combined with processed market information to provide the main inputs for the measurement of counterparty risk. All internal risk ratings are tailored to the various categories and are derived in accordance with the Group s rating policy. The attributable risks are assessed and updated regularly. See note 18 and 19 for more information with respect to the allowance for impairment losses on loans and advances. Carrying amount by class of financial assets whose terms have been renegotiated The carrying value of renegotiated financial assets included in the consolidated statement of financial position is as follows: [In LL million] Loans and advances 49,454 40,927 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. 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. 84

85 NOTES TO THE Individually assessed allowances The Group determines the allowance appropriate for each individually significant loan or advance on an individual basis. 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 unforseen circumstances require more careful attention. Collectively assessed allowances Allowances are assessed collectively for losses on loans and advances that are not individually significant (including credit cards, residential mortages and unsecured consumer lending) and for individually significant loans that have been assessed individually and found not to be impaired. 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. 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. [In LL million] Financial guarantees 218, ,992 Letters of credit 134, ,144 Undrawn commitments to lend 367, ,616 Bank acceptances 65,929 74, , , [ MARKET RISK ] 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 risk arises from fluctuations in interest rates, foreign exchange rates and equity prices. The Board has set limits on the value of risk that may be accepted. This is monitored on a weekly basis by the Asset and Liability Committee [ INTEREST RATE RISK ] Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows 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 financial instruments not recognized in the consolidated statement of financial position which SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

86 NOTES TO THE will mature or reprice in a particular 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 reasonable possible change in interest rates, with all other variables held constant, of the Group s income statement and equity. The sensitivity of the income statement is the effect of the assumed changes in interest rates on the profit or loss for the year, based on the floating rate financial assets and financial liabilities held at 31 December, including the effect of hedging instruments. The sensitivity of equity is calculated by revaluing fixed rate available-for-sale financial assets, including the effect of any associated hedges and swaps designated as cash flow hedges, at 31 December for the effects of the assumed changes in interest rates. The total sensitivity of equity is based on the assumption that there are parallel shifts in the yield curve. [Currency] Sensitivity of Sensitivity of Increase/ net interest Sensitivity Increase/ net interest Sensitivity decrease income of equity decrease income of equity in basis points LL million LL million in basis points LL million LL million Lebanese Lira US Dollars (1,980) ,354 (2,895) Euro + 50 (36) (109) - Lebanese Lira - 50 (558) (319) - US Dollars - 50 (965) 1, (1,354) 2,895 Euro Interest rate sensitivity gap The table below analyses the Group s interest risk exposure on non-trading financial assets and liabilities. The Group s assets and liabilities are included at carrying amount and categorized by the earlier of contractual repricing or maturity date. [In LL million] 2009 Non Up to 1 month 1to3 months 3months to 1 year 1 to 2 years 2 to 5 years Over 5 years interest bearing Total ASSETS Cash and balances with the Central Banks 497, , , ,086 Deposits with banks and financial institutions 98,324 48, , ,718 Amounts due from Head Office, branches and affiliates 659,404 81,333 64, , ,604 Loans and advances to customers, net 413, , , , , ,757 6,645 2,029,016 Loans and advances to related parties, net 59, , ,211 Financial investments available-for-sale - 80, , , , ,879 29,245 1,029,885 Financial assets classified as loans and receivables 25,000 18,000 2,636 85,443 1,011, ,835 33,586 1,279,410 Financial investments held-to-maturity , ,149 58,749-2, ,372 TOTAL ASSETS 1,753, ,664 1,411, ,098 1,545, , ,220 6,791,302 LIABILITIES Due to Central Banks - 8,430 45, , ,110 Due to banks and financial institutions 90,552 33,419 15,938-23,493 4, ,658 Amounts due to Head Office, branches and affiliates 38, , ,386 Customers deposits 3,639,755 1,468, , ,261 5, ,949 5,515,275 Related parties deposits 3,749 4, ,808 TOTAL LIABILITIES 3,772,623 1,513, , ,754 9, ,381 6,312,237 Total interest sensitivity gap (2,018,693) (920,317) 844, ,890 1,521, ,898 (139,161) 479,065 86

87 NOTES TO THE [In LL million] 2008 Non Up to 1 1 to 3 3 months 1 to 2 2 to 5 Over 5 interest month months to 1 year years years years bearing items Total ASSETS Cash and balances with the Central Banks 185, , , , ,776 Deposits with banks and financial institutions 131,621 2,405 1, , ,363 Amounts due from Head Office, branches and affiliates 195, , , , ,971 Loans and advances to customers, net 121, , , , , ,741 1,985 1,401,753 Loans and advances to related parties, net 54, ,941 Financial investments available-for-sale 20,047 30,287 28,064 88, , , ,347 Financial assets classified as loans and receivables 6,530-98,853 91, ,717 21,494 33,398 1,178,352 Financial investments held-to-maturity - 4,252 4, , ,059 5,943 2, ,824 TOTAL ASSETS 715, , , ,821 1,510, , ,346 4,690,327 LIABILITIES Due to Central Banks - 8,430 45, , ,101 Due to banks and financial institutions 66,307 13,978 7,585 10,631 17,798 11, ,684 Amounts due to Head Office, branches and affiliates Customers deposits 1,973,869 1,692,794 70,594 41,626 17, ,878 3,903,315 Related parties deposits 6, ,640 11,568 TOTAL LIABILITIES 2,047,421 1,715, ,746 52,257 35,352 11, ,835 4,347,990 Total interest sensitivity gap (1,331,569) (1,282,403) 825, ,564 1,474, ,182 (130,489) 342, [ CURRENCY RISK ] Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Board has set limits on positions by currency. Positions are monitored on a daily basis and hedging strategies are used to ensure positions are maintained within established limits. The following table shows the effect of a reasonably probable change in currencies, with all other variables held constant, against the Lebanese Lira on the income statement and statement of changes in equity. The negative amounts represent probable losses in the income statement or equity while positive amounts represent probable gains. An equivalent decrease in each of the below currencies against the LL would have resulted in an equivalent opposite impact. [Currency] Effect on the Effect Effect on the Effect Change in income On Change in income On currency rate statement equity currency rate statement equity in % LL million LL million iin % LL million LL million US Dollars Euro (20) - SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

88 NOTES TO THE The following consolidated statement of financial position as at 31 December 2009 and 2008 are detailed in Lebanese Lira (LL million) and foreign currencies, primarily US$, translated into LL million: [In LL million] 31 December December 2008 Foreign Total Foreign Total currencies LL million currencies LL million LL million LL million LL million LL million ASSETS Cash and balances with the Central Banks 264, , , , , ,776 Deposits with banks and financial institutions 12, , ,718 12, , ,363 Amounts due from Head Office, branches and affiliates - 806, , , ,971 Derivative financial instruments 6, , Financial assets held-for-trading Financial assets designated at fair value through profit or loss - 6,967 6,967-4,401 4,401 Loans and advances to customers, net 247,915 1,781,101 2,029, ,642 1,202,111 1,401,753 Loans and advances to related parties, net ,381 63, ,691 55,941 Debtors by acceptances - 65,929 65,929-74,642 74,642 Financial instruments available-for-sale 431, ,863 1,029, ,193 31, ,347 Financial assets classified as loans and receivables 584, ,160 1,279, , ,295 1,178,352 Financial investments held-to-maturity 330, , , ,798 74, ,824 Investments in non-consolidated subsidiaries 2,510-2,510 1,606-1,606 Property and equipment 56,045 6,186 62,231 49,060 4,140 53,200 Intangible assets 1, ,561 1, ,106 Non-current assets held for sale (1,388) 123, ,328 (972) 144, ,567 Deferred tax assets 150 4,896 5, ,058 2,208 Other assets 35,585 17,022 52,607 60,519 12,441 72,960 Goodwill 1,012 14,842 15,854 2,706-2,706 TOTAL ASSETS 1,973,645 5,160,660 7,134,305 1,451,743 3,597,207 5,048,950 LIABILITIES Due to Central Banks 305, , , ,101 Due to banks and financial institutions 11, , ,658 10, , ,684 Amounts due to Head Office, branches and affiliates , , Derivative financial instruments Customers deposits 1,404,578 4,110,697 5,515, ,334 2,944,981 3,903,315 Related parties deposits 1,483 6,325 7,808 3,694 7,874 11,568 Engagements by acceptances - 65,929 65,929-74,642 74,642 Current tax liabilities 8,354 3,956 12,310 5,636 4,143 9,779 Deferred tax liabilities 2,417 3,072 5, ,060 Other liabilities 13, , ,940 12, , ,726 Provision for risks and charges 7,257 4,626 11,883 10,436 2,007 12,443 Employees end of services benefits 5,898 9,496 15,394 5,930 6,814 12,744 TOTAL LIABILITIES 1,761,147 4,790,334 6,551,481 1,313,437 3,264,730 4,578,167 NET EXPOSURE 212, , , , , , [ EQUITY PRICE RISK ] Equity price risk is the risk that the fair value of equities decreases as the result of changes in the level of equity indices and individual stocks. The non-trading equity price risk from equity securities classified as available-for-sale. A 10 percent increase in the value of the Group s available-for-sale equities at 31 December 2009 would have increased equity by LL 1,399 million (2008: LL 1,599 million). An equivalent decrease would have resulted in an equivalent but opposite impact. 88

89 NOTES TO THE [ PREPAYMENT RISK ] Prepayment risk is the risk that the Group will incur a financial loss because its customers and counterparties repay or request repayment earlier than expected. The fixed rate asset of the Group is not significant compared to the total assets. Moreover, other market conditions causing prepayment is not significant in the markets in which the Group operates. Therefore the Group considers the effect of prepayment on net interest income is not material after taking into account the effect of any prepayment penalties LIQUIDITY RISK AND FUNDING MANAGEMENT Liquidity risk is the risk that the Group will be unable to meet its liabilities when they fall due. To limit this risk, management has arranged diversified funding sources, manages assets with liquidity in mind, and monitors liquidity on a daily basis. In addition, the Group maintains a statutory deposit with the Central Banks (refer to note 13 for detail). The Group maintains a portfolio of highly marketable and diverse assets that are assumed to be easily liquidated in the event of an unforeseen interruption of cash flow. The Group also has committed lines of credit that it can access to meet liquidity needs. In addition, the Group maintains a statutory deposit with its Central Banks on customer deposits. In accordance with the Group s policy, 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. The most important of these is to maintain limits on the ratio of net liquid assets to customer liabilities, set to reflect market conditions. Net liquid assets consist of cash, short-term bank deposits and liquid debt securities available for immediate sale, less deposit from banks and other issued securities and borrowings due to mature within the next month. The ratio during the year was as follows: [In LL million] At 31 December Average during the year Highest Lowest Analysis of financial liabilities by remaining contractual maturities The table below summarizes the Group s financial assets and liabilities at 31 December 2009 and 2008 based on contractual undiscounted repayment obligations. As the special commission payments up to contractual maturity are included in the table, totals do not match with the statement of financial position. The contractual maturities of assets and liabilities have been determined on the basis of the remaining period at the statement of financial position date to the contractual maturity date and do not take into account the effective expected maturities as shown in maturity analysis of assets and liabilities. 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. SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

90 NOTES TO THE [In LL million] 31 December 2009 Up to 1 1 to 3 3 months 1 to 2 2 to 5 Over 5 month months to 1 year years years years Total Cash and balances with the Central Banks 442, , , ,945 Deposits with banks and financial institutions 201,463 2, ,726 Amount due from Head Office, branches and affiliates 669,934 73,649 65, ,758 Financial assets held-for-trading Financial assets designated at fair value through profit or loss - - 6, ,967 Loans and advances to customers, net 232, , , , , ,558 2,183,821 Loans and advances to related parties, net 58,517 1,325 2, ,250 Financial investments available-for-sale 18,412 84, , , , ,085 1,375,609 Financial assets classified as loans and receivables 60,324 27,561 45, ,664 1,157, ,718 1,563,866 Financial investments held-to-maturity 128,890 4, ,959 62,302 30, ,056 Total undiscounted financial assets 1,812, ,734 1,075, ,974 2,312,854 1,458,979 7,624,031 Due to Central Banks 1, ,333 60, ,449 Due to banks and financial institutions 88,685 17,473 21,255 12,762 23,493 4, ,740 Amounts due to Head Office, branches and affiliates 38, , ,517 Customers deposits 3,673,089 1,497, , ,485 1,764 6,923 5,545,188 Related parties deposits 6, ,885 Total undiscounted financial liabilities 3,808,581 1,515, , ,250 25,257 10,995 6,352,779 Net undiscounted assets (liabilities) (1,996,109) (1,177,774) 258, ,724 2,287,597 1,447,984 1,271,252 [In LL million] 31 December 2008 Up to 1 1 to 3 3 months 1 to 2 2 to 5 Over 5 month months to 1 year years years years Total Due to Central Banks 1, ,789 63, ,459 Due to banks and financial institutions 95,433 6,556 3,333-17,798 4, ,928 Amounts due to Head Office, branches and affiliates Customers deposits 2,446,655 1,306, ,256 9,732 16,344-3,919,925 Related parties deposits 11, ,568 Total undiscounted financial liabilities 2,555,089 1,313, , ,521 97,709 4,808 4,375,210 90

91 NOTES TO THE The table below shows the contractual expiry by maturity of the Group s contingent liabilities and commitments: [In LL million] 31 December 2009 On demand Less than 3 to 12 1 to 5 Over 5 3 months months years years Total Commitments issued to customers 24,290 4, ,018 Guarantees issued to financial institutions 15,780 12,739 6, ,652 39,139 Guarantees issued to customers 73,599 17,318 62,433 12,155 13, ,923 Foreign currencies to deliver 71,518 64,037 2, ,006 Commitments on term financial instruments 50 1,382 2,814 5,603-9,849 Undrawn commitments to lend 367, ,683 Total 552, ,204 73,819 18,605 17, ,618 [In LL million] 31 December 2008 On demand Less than 3 to 12 1 to 5 Over 5 3 months months years years Total Commitments issued to customers Guarantees issued to financial institutions 1,484 7,536 6,148 2,778 3,620 21,566 Guarantees issued to customers 10,299 19,390 73,406 11,154 21, ,426 Foreign currencies to deliver 25,268 5,127 6, ,389 Commitments on term financial instruments 93 1,467 3,910 11,784-17,254 Undrawn commitments to lend 342, ,616 Total 380,632 33,520 90,458 25,716 24, ,123 The Group expects that not all of the contingent liabilities or commitments will be drawn before expiry of the commitments. 53. 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 training and assessment processes, including the use of internal audit. 54. CAPITAL MANAGEMENT The Group maintains an actively managed capital base to cover risks, inherent to the business. The adequacy of the Group 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 Group should maintain a required capital adequacy ratio (equal to or greater than 12%) based on the total tier one capital over the total risk weighted assets and off-balance sheet items. The Group manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. No changes were made in the objectives, policies and processes for the years ended 31 December 2009 and SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

92 NOTES TO THE Capital consists of the following as of 31 December 2009 and 2008: [In LL million] Tier 1 capital 535, ,829 Tier 2 capital 20,525 9, , , SUBSEQUENT EVENTS On 17 February 2010, the Central Council of the Central Bank of Lebanon approved the capital increase of the Bank in the amount of LL 12,531,600,000 by issuing 10,000 preferred shares with a nominal amount of LL 212,400 per share subscribed-for in cash in accordance with the Extraordinary General Assembly of the Bank dated 30 December

93 NOTES TO THE 56. COMPARATIVE INFORMATION - Derivative financial instruments have been reclassified from other assets and other liabilities. Comparative amounts totaling LL 300 million and LL 783 million respectively have been reclassified accordingly. - Taxes payable have been reclassified from provision for risk and charges into other liabilities. Comparative amounts totaling LL 951 million have been reclassified accordingly. - Net profit from sale of non-current assets held for sale has been reclassified to other operating income in the income statement. Comparative amounts totaling to LL 2,937 million have been reclassified accordingly. These changes have been made to improve the quality of the information presented. SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

94

95 SGBL NETWORK

96 SGBL NETWORK THE GROUP S CONTACT INFORMATION ELECTRONIC BANKING : for clients to check their accounts on the Net : our trilingual website CALL CENTER 1274 / GENERAL MANAGEMENT Sin el Fil - Saloumeh roundabout P.O.Box: Tel: Fax : Telex: LE - Swift: SGLILBBX sgbl@sgbl.com.lb HEADQUARTERS Riad el Solh Riad el Solh street Tél: /4 Fax: THE NATIONAL NETWORK GREATER BEIRUT BAABDA - Next to Sérail Tel : Fax : BADARO - Badaro street Tel : /7 Fax : BARBIR - Barbir street Tel : Fax : BLISS - Main road - Selman Bldg Tel : Fax : BURJ EL BRAJNEH - Ain Sekké street Tel : /8 Fax : BOURJ HAMMOUD - Municipality square Tel : /4 Fax : CHIAH - Mecharafieh Tel : /2 Fax : FURN EL CHEBBACK - Gharios center Tel : Fax : GHOBEIRY - Main street Tel : /7 Fax : HAMRA - Banque du Liban street Tel : /1 Fax : HORCH TABET - Horch Tabet Tel : /3 Fax : JDEIDEH - Monte Libano Bldg Tel : Fax : JEITAWI - Greek Orthodox Hospital street Tel : /1 Fax : KHALDE - Beginning Khaldeh highway Tel : Fax : MAR ELIAS - Moussaytbeh - Mar Elias street Tel : /4 Fax : MATHAF - Facing ISF Tel : /9 Fax : MAZRAA - El Mama street - Saeb Salam Corniche Tel : /6 Fax : RIAD EL SOLH - Riad el Solh street Tel : /4 Fax : SADAT - Hamra - Lagos center Tel : /7 Fax : SAINT NICOLAS - St Nicolas street - Ashrafieh Tel : /9 Fax : SASSINE - Sassine square - Ashrafieh Tel : Fax : SIN EL FIL - Saloumeh roundabout Tel : Fax : VERDUN - Verdun street Tel : /5 Fax : MOUNT LEBANON AJALTOUN - Main road Tel : /4 Fax : ANTELIAS - Armenian Patriarcat street Tel : /1 Fax : BIKFAYA - Bikfaya square Tel : /2 Fax : BROUMANA - Main road Tel : Fax : DHOUR EL CHOUEIR - Dhour El Choueir square Tel : Fax : ELYSSAR - Main Road Tel : /2 Fax : JBEIL - Main road Tel : Fax : JOUNIEH - Banque du Liban street Tel : Fax : KASLIK - Sarba highway Tel : Fax :

97 SGBL NETWORK MANSOURIEH - Mansourieh square Tel : Fax : SOUTH NABATIEH - Main road Tel : /5 Fax : SAIDA - Jezzine street Tel : Fax : SOUR - Sour Al Ramel Tel : Fax : NORTH ABDEH - Main road Tel : /2/3 Fax : AMIOUN - Main road Tel : Fax : KFARAAKA - Koura - Main road Tel : Fax : MINA - Al Mina street Tel : Fax : TRIPOLI - Fouad Chehab street Tel : Fax : BEKAA CHTAURA - Main road Tel : Fax : ZAHLEH - Main road Tel : /3 Fax : THE REGIONAL NETWORK SYRIA DAMASCUS - Aljamarek Free zone Tel : Fax : JORDAN AMMAN - SGBJ - Société Générale de Banque Jordanie Tel : Fax : Headquarters : Shmeisani - P.O.Box 560 Amman CYPRUS NICOSIA - Société Générale Bank Cyprus (SGBCy) Tel : Fax : Headquarters : 20 Agias Paraskevis, 2002 Strovolos, Nicosie - P.O.Box AFFILIATED COMPANIES SOGELEASE LIBAN Montelibano bldg, Jdeideh, Beirut, Lebanon Tel : Fax: SOGECAP LIBAN Sogecap bldg, 41 street, Dekwaneh, Beirut, Lebanon Tel : /7 Fax: /5 FIDUS S.A.L. Sehnaoui bldg, Riad el Solh, Beirut, Lebanon Tell : Fax : CENTRE DE TRAITEMENT MONETIQUE (CTM) Ashrafieh, Beirut, Lebanon Tel : /3/4 Fax : SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN ANNUAL REPORT

98

99 CORRESPONDENT BANKS

100 CORRESPONDENT BANKS (NOSTRO) COUNTRY Australia, Sydney BANK Commonwealth Bank of Australia Canada, Toronto Canadian Imperial Bank of Commerce Denmark, Copenhaguen Danske Bank A/S France, Paris, La Défense Société Générale Great Britain, London National Westminster Bank Plc HSBC - LONDON Japan, Tokyo Tokyo Mizuho Corporate Bank Ltd Jordan, Amman Société Générale de Banque - Jordanie Kuwait, Kuwait National Bank of Kuwait SAK New Zealand, Wellington ANZ National Bank Limited Norway, Oslo DnB NOR Bank ASA Saudi Arabia, Riyadh Riyad Bank Sweden, Stockholm Skandinaviska Enskilda Banken AB (PUBL) United Arab Emirates, Abu Dhabi United Arab Bank Switzerland, Zürich Crédit Suisse - Zürich United States, New York Société Générale, The Bank of New York Mellon JP Morgan New York 100