BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 1 ANNUAL REPORT 06

Transcription

1 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 1 > ANNUAL REPORT 06

2 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 2 INTRODUCTION > The BLOM BANK Beirut Marathon has, over the past few years, quickly become a symbol of unity, peace and life in Lebanon. BLOM BANK has associated its name with the Beirut Marathon in order to further highlight BLOM BANK s patriotic mission and its social corporate responsibility. At BLOM BANK we are joining our efforts in the continuous run for a better future for Lebanon.

3 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 4 Summary Chairman s Letter 07 BLOM BANK Customer Deposits Evolution 09 Major Highlights 10 Financial Ratios 11 Strong and continuous Growth 12 BLOM BANK s Board of Directors 13 Group Chart 15 BLOM BANK s Major Shareholders and General Management 17 BLOM BANK s Organization Chart 19 Management Discussion and Analysis 21 Operating Environment 21 Overview 24 Evolution of Assets 25 Sources of Funds 26 Uses of Funds 29 Liquidity 38 Profitability 39 Dividend Distribution and Preferred Shares Revenues 48 Capital Adequacy Ratio 48 Interest Rate Risk 49 Universal Banking Services 50 Information Systems and Technology 51 People Development 54 Bank s Operational Efficiency 54 Regional Expansion 55 Auditor s Report to The Shareholders 57 Consolidated Statement of Income 61 Consolidated Balance Sheet 62 Consolidated Statement of Cash Flows 64 Consolidated Statement of Changes in Equity 66 Notes to the Consolidated Financial Statements 68 BLOM BANK s Worldwide Correspondents 130 Group Directory 131

4 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 6 Chairman s Letter The Lebanese domestic scene has been characterized by uncertainty and turmoil during, and the Israeli 34day war and blockade on Lebanon in JulyAugust. Gross Domestic Product (GDP) did not register any growth in, and the political tension after November significantly down from an expected 6% and down from an overall 1% growth recorded in. Inflation was at around 4%, while the country s public debt stood at $40.5bn, or at 175% of GDP, slightly up from 173% in. Despite the difficult environment, Lebanon showed evidence of solid economic resilience and benefited from strong international support. The country was also fortunate to rely on the strength of its financial system and the high level of foreign reserves at the Central Bank to wither away the consequences of the latest war. As such, commercial banks consolidated balance sheet showed a yearly increase of 3.7% in assets to $70.3bn, thus reinforcing its upward trend. Customer deposits and loans rose by 3.9% and 3.3% to $57bn and $19bn respectively. In parallel, capital funds of Lebanese banks improved by 36% in after registering a 10.4% growth in as banks are anticipating the implementation of Basel II starting The Central Bank sustained its policy of pegging the value of the Lebanese currency to the dollar at a fixed rate of LP/$ in light of persisting confidence in BDL s efficiency in withering dangers on the national currency. Activity on the Beirut Stock Exchange (BSE) improved in in terms of value traded, although prices of most stocks dropped after the hike witnessed in January, mainly due to the political uncertainty looming over the country after the JulyAugust war. Nevertheless, the total market turnover reached $2.03b, up 119% from. was an exceptional year for BLOM Bank, despite the summer war in Lebanon. Our Bank has successfully proven itself as a solid financial institution with the adequate strategies that enable it to effectively absorb severe economic shocks. This strong stand has won unanimous accreditations from international specialized rating and ranking institutions as BLOM BANK received in all awards granted to a Lebanese bank: Best Bank in Lebanon from The Banker, Best Bank in Lebanon and Best Investment Bank in Lebanon from Euromoney and Best Bank in Lebanon from Global Finance. Dr. Naaman AZHARI Chairman & General Manager In addition, BLOM BANK won Best Bank in Lebanon from Global Finance for 2007 and received the Best Use of Technology in the Middle East award from The Banker Middle East. It is worth noting that such an award was given for the first time to a Lebanese Bank. BLOM BANK also maintained the highest financial strength rating among Lebanese banks from Capital Intelligence, a regional rating agency. Despite the slowly recovering economic conditions in Lebanon, BLOM BANK total assets rose to a total of USD 14.2 billion in, up 19% yearonyear, while customer deposits grew 15.5% 06 07

5 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 8 Chairman s Letter Customer Deposits Evolution reaching a total of USD 11.7 billion. In line with the implementation of Basel II s standardized approach in 2008, all Lebanese banks, including BLOM BANK have been increasing their capital funds to better reflect adjusted risk weightings. As such, our Bank s capital funds rose 33% to USD1, million. In addition, the Bank pursued its regional expansion strategy in an aim to enhance market accessibility. Within that context, we opened two new branches in Amman, Jordan, as well as four new branches in Syria for our subsidiary, BANK OF SYRIA AND OVERSEAS (BSO), and expanded BLOM BANK EGYPT s network in its domestic market by opening two new branches in Cairo. BLOM BANK EGYPT plans to open 10 new branches in Egypt during the course of As for new licensing, BLOM BANK applied for a licence to establish a corporate bank in Qatar and received the approval to open a representative office in AbuDhabi, while BLOM BANK FRANCE applied for a bank licence in Algeria and BLOMINVEST BANK, our rlebanese investment banking subsidiary, applied for a Private and Investment Banking license in Saudi Arabia. In Lebanon, three new branches of BLOM BANK sal in Mansourieh, Zouk Mosbeh, and a retail branch in Verdun were open and there are plans to open four new branches in the coming year in Achrafieh, Jbeil, Hamra (Retail Branch), and Mina El Hosn. Deposits (in millions of USD) Customer Deposits Evolution in millions of USD ,992 10,161 11,735 BLOM BANK s continuous emphasis on maintaining high levels of liquidity and strong asset quality was reflected in the rise of immediate liquidity in foreign currencies to 78.26% of foreign currency deposits from 71.52% in. The Bank pursued its conservative lending strategy to preserve its high asset quality loan portfolio, a criterion considered essential in the current economic situation. Therefore, and as a direct application of this strategy, we maintained a low net loans and advances to total deposits ratio of 16.44%, which has been constant for two consecutive years. Despite the difficult economic situation looming over Lebanon in, and BLOM BANK s ongoing conservative strategy, net profits increased by 32% yearonyear to USD million. The return on average assets increased to 1.38% in, up from 1.20% in. Earnings per share increased to USD 7.29 in from USD 6.09 in. As such, the yield on the market value of BLOM BANK s GDR based on its closing price at the end of was at 12.65%. The increase in profits is mainly attributed to the 48.89% increase in net interest income and the successful cost containment policy of the bank. For instance, we registered one of the lowest costtoincome ratio in the industry, which stood at 35.10% at the end of. The Bank s General Assembly of shareholders held on April 12th, 2007 approved the distribution on profits of USD 15 for each series 2002 preferred share, USD 8.5 for each series 2004 preferred share, and USD 9.5 for each series preferred share. In addition, the Assembly approved the distribution of a LBP 5,000 dividend per common share and GDS. BLOM BANK s strategic goals continue to focus on the maximization of shareholders value, the consolidation of the Bank s financial strength, the pursuing of our regional expansion strategy and the development of our universal banking services that cater to all customers needs ,805 1, ,333 2, ,330 3,861 5,525 5, ,215 7, Years 08 09

6 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 10 Major Highlights (in millions) Financial Ratios EVOLUTION OF MAIN INDICATORS ( in % or USD) O6 FINANCIAL RATIOS Change 05/06 TOTAL ASSETS LBP USD CUSTOMER DEPOSITS LBP USD TOTAL NET LIQUIDITY LBP USD SHAREHOLDERS EQUITY LBP USD 21,436,325 14, ,690,381 11, ,946,895 10, ,892,813 1, ,966,731 11, ,317,489 10, ,783,905 9, ,348, % % % % % % % % LIQUIDITY RATIOS Net liquidity in LBP Net immediate liquidity in foreign currency Liquid assets over total assets LOANS TO DEPOSITS RATIOS LBP F/C ASSET QUALITY NOT INCLUDING GENERAL PROVISION Net doubtful loans over total loans Provision over doubtful loans Provision over total loans Gross doubtful loans / Gross total loans % % % 7.96 % % % 2.02 % % 8.85 % % % % % 6.62 % % % 1.40 % % % % CAPITAL FUNDS LBP USD 1,928,970 1, ,443, % 33.6 % CAPITAL ADEQUACY RATIOS Before dividend distribution After dividend distribution % % % % TOTAL LOANS & ADVANCES LBP USD NET INCOME AFTER TAX LBP USD 2,996,698 1, , ,517,982 1, , % % % % PROFITABILITY RATIOS Return on average equity Return on average assets Earnings per share USD Dividend per common share USD Dividend payout ratio Retention Ratio Net asset value per common share USD % 1.38 % 7.29 % 3.32 % % % % 1.20 % 6.09 % 2.65 % % %

7 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 12 Strong and Continuous Growth during the last 5 years (in millions of USD) Board of Directors and General Management assets in millions of USD Chairman & General Manager> 16,000 14,000 12,000 10,000 8,000 6,000 7,146 8,786 10,835 11,918 14,220 ViceChairman & General Manager> Dr. Naaman AZHARI Group Secratary General> 4,000 2, Mr. Saad AZHARI Mr. Samer AZHARI Net profits in millions of USD Directors> H.E. Sheikh Ghassan SHAKER, Grand Officier de la Légion d Honneur H.E. Mohamed JAROUDI Tier I & Tier II capital in millions of USD H.E. Fouad EL BIZRI Mr. Joseph Emile KHARRAT ,279.6 Mr. Nicolas Nicolas SAADE Sheikh Salim Boutros EL KHOURY Me. Youssef Selim TAKLA Banorabe Holding s.a

8 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 14 Group Chart 99.99% BLOM BANK FRANCE S.A. 100% BLOM BANK (SWITZERLAND) S.A. Head Office: Paris Branches: London Dubai Sharjah Head Office: Geneva 99.37% BLOM BANK EGYPT S.A.E. 100% BLOM EGYPT SECURITIES S.A.E BLOM BANK s General management Dr. Naaman AZHARI, surrounded by (to his right) Mr. Saad AZHARI, Mr. Amr AZHARI, Mr. Fawaz KAYAL, Mr. Fahim MOADAD and (to his left) Mr. Samer AZHARI, Mr. Georges SAYEGH, Dr. fadi OSSEIRAN and Mr. Habib RAHAL BLOM BANK S.A.L. Head Office: Beirut Branches: Lebanon (50 Branches) Cyprus Damascus Free Zone Jordan (3 branches in Amman) Head Office: Cairo Branches: Egypt (12) Romania (5) 99.88% BLOMINVEST BANK S.A.L % BLOM DEVELOPMENT BANK S.A.L % 10% Head Office: Beirut AROPE INSURANCE S.A.L. Head Office: Beirut Branches: Lebanon (4) 34% Head Office: Cairo Head Office: Beirut AROPE SYRIA Syria International Insurance Head Office: Damascus Branches: Aleppo 39.00% BANK OF SYRIA & OVERSEAS S.A.A. Head Office: Damascus Branches: Damasc us (4) Hama Aleppo (2) Latakia Tartous Homs 5%

9 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 16 BLOM BANK s Major Shareholders and General Management Major Common Shareholders Bank of New York** Banorabe Holding*** AZA Holding (Azhari Family over 50%) Azhari Family Actionnaires Unis (Azhari Family over 50%) Shaker Holdings S.A.L. (Shaker Family) Mrs. Nada Aoueini Jaroudy Family Saade Family Khoury Family Others % of Common Shares* % 11.4 % 9.33 % 2.86 % 1.68 % 5.39 % 5 % 4.91 % 1.92 % 2.29 % % * common shares: 21,500,000 ** Starting 1998, and after the issuance of Global Depositary Receipts (GDR) by BLOM Bank Shareholders, the Bank of New York as Depositary, became shareholder on the Bank s register. *** The major shareholders of Banorabe Holding are the same as in BLOM Bank (except Bank of New York and AZA Holding). General Management BLOM BANK s and BLOMINVEST BANK General management ViceChaiman and General Manager Mr. Saad AZHARI Chairman and General Manager Dr. Naaman AZHARI Group Secretary General Mr. Samer AZHARI General Manager Mr. Habib RAHAL Assistant General Manager Mr. Amr AZHARI Chairman s Advisors Mr. Fawaz KAYAL Sheikh Fahim MOADAD** Mr. Elias ARACTINGI Planning & Organization Department, Retail Banking Department (** Fomerly Vice Governor of the Central Bank of Lebanon) General Management Consultants Mr. Georges SAYEGH Mr. Adnan SALLAKH 16 17

10 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 18 BLOM BANK s Board of Directors and General Management BLOM BANK s Organization Chart Board of Directors Chairman and General Manager Dr. Naaman AZHARI SHAREHOLDERS BOARD OF DIRECTORS Consulting Committee Internal & IT Auditors ViceChairman and General Manager Mr. Saad AZHARI Directors Senior Managers* Managers* Dr. Pierre ABOU EZZE Mr. Grégoire AZAR Mr. Talal BABA Mrs. Jocelyne CHEHWAN Mr. Moustapha GHALAYINI Mr. Samir KASSIS Mr. Mekhael KAZZI Mr. Antoine LAWANDOS Mr. Elias MOKHACHEN Mr. Naoum RAPHAEL Mr. Jacques SABOUNGI Mr. Fouad SAID Me Aimée SAYEGH Mr. Mohamed SOUBRA Mr. Riad TABBARAH Mr. Ramzi TARABICHI Mr. Samih ZEINEDDINE Group Secretary General Mr. Samer AZHARI H.E. Sheikh Ghassan SHAKER, Grand Officier de la Légion d Honneur H.E. Mohamed JAROUDI H.E. Fouad EL BIZRI Sheikh Salim Boutros EL KHOURY Mr. Joseph Emile KHARRAT Mr. Nicolas Nicolas SAADE Me Youssef Selim TAKLA Banorabe Holding s.a. Human Resources International Relations/Treasury Accounting Retail Marketing Credit Corporate Unit Back Office Operations Chief Information Officer Regional Marketing Internal Audit / Group Inspection Trade Finance Overseas Marketing Legal IT Operations Credit Follow Up Internal Audit Administration Accounting Administration AntiMoney Laundering Unit Back Office Operations Communication & Investor Relations Corporate Unit Credit Engineering Group Inspection / Internal Audit Human Resources Information Systems International Affairs & Treasury IT Security Unit Legal Affairs Marketing DEPARTMENTS / UNITS Planning & Organization Recovery & General Managemenet Secretariat Unit Retail Banking Risk Management Trade Finance CHAIRMAN & GENERAL MANAGERS Chairman s Advisors Group Inspection Inspection & Control Strategy Committee COMMITTEES AntiMoney Laundering AssetLiability Management Board Audit Exceptional Credits Credit Files Rating Credit No.1 Credit No.2 Executive Followup Credit Risk Human Resources Information Technology Internal Audit Investment & Treasury Islamic Bank IT Security Legal Marketing Purchasing & Maintenance Operations & Internal Procedures Risk Management Mr. Mohamed BIZRI Mr. Michel GHANEM Mr. Imad KADI Mr. Wassim KHODOR Mr. Gerard RIZK Dr. Gladys YOUNES Engineering Marketing Retail & Credit Foreign Exchange Risk Management Communication & Investor Relations EXTERNAL AUDITORS Ernst & Young Semaan, Gholam & Co. SOLICITORS H.E. ME. Mohamad JAROUDI Me. Georges ABOUZAMEL Me. Antoine MERHEB BRANCH MANAGERS 50 in Lebanon 1 in Cyprus 1 in Damascus Free Zone 3 in Jordan 18 * By alphabetical order 07 19

11 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 20 MANAGEMENT DISCUSSION & ANALYSIS 1. OPERATING ENVIRONMENT The Lebanese economy was severely hit during, as the repercussions of the assassination of former Prime Minister Rafik Hariri in February were aggravated by the Israeli 34day war and blockade on Lebanon in JulyAugust and the subsequent political turmoil that has characterized the domestic scene ever since. Consequently, the huge negative impact of the war on the country s political, economic and social aspects wiped out the significant growth registered in the first half of. However, Lebanon s solid economic resilience and the strong international support, which materialized with the success of the Paris III Donors Conference, had the overwhelming effect of offsetting the huge losses incurred during the summer war. Lebanon was also able to rely on the strength of its financial system (reflected by the banks significant liquidity) and the high level of foreign reserves at the Central Bank to wither away the consequences of the latest war. The latter were boosted by deposits totaling USD 1.5bn from the Kingdom of Saudi Arabia and the State of Kuwait, which through their acts, demonstrated the strong implicit support enjoyed by Lebanon, particularly in times of need. Real Gross Domestic Product (GDP) growth estimates for were revised from an expected 6% to an estimated contraction of 5%, later revised upwards to 0%, down from an overall 1% growth recorded in. Inflation was at around 4% and private consumption and investment weakened as Israel inflicted an embargo that persisted for several weeks even after the cessation of its military attacks on Lebanon. The total number of tourists has declined by 6.7% yearonyear to 1.06 million, when Lebanon was expecting no less than 1.5 million tourists in. The trade deficit decreased by 5% to $7.1bn, mainly due to a rise in exports in early and a drop in imports as the Israeli blockade took effect. The country s balance of payments registered an overall surplus of $2.8bn, up from $748m in mainly driven by the surpluses registered before July, as during this month alone, the balance of payments recorded a deficit of $1.2bn which was offset by Saudi and Kuwaiti deposits at the Central Bank worth $1.5bn to replenish the latter s foreign currency reserves. Accordingly, the net foreign assets of the Central Bank rose by $1.3bn during the year, accompanied by a rise of $2.3bn in commercial banks net foreign assets. The ratio of current account deficit to GDP showed a slight deterioration, increasing from 11.8% in to 13.0% in. The country s budget deficit rose by 64% to $3.04bn in, or some 13% of GDP up from 8% in. The fiscal stance deterioration is mainly attributed to the Israeli JulyAugust war, which caused a $1.2bn increase in the government s budget deficit. Lebanon s public debt stood at $40.5bn by the end of, or at 175% of GDP, slightly up from 173% in. The debt denominated in foreign currency (external debt) stood at 50% of total debt in, and was practically unchanged compared to. Similarly, the nonmarket debt (held by the Central Bank, public institutions, foreign governments and international agencies) as a ratio of total debt only slightly decreased from 33% in to 30% in. 21

12 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 22 MANAGEMENT DISCUSSION & ANALYSIS MANAGEMENT DISCUSSION & ANALYSIS The Central Bank sustained its policy of pegging the value of the Lebanese currency to the dollar at a fixed rate of LP/$ in light of persisting confidence in BDL s efficiency in withering dangers on the national currency. The average interbank rate, which is a sound indicator for the pressure on the local currency, increased by 169 b.p. to reach an average of 5.45% in, mainly affected by a temporary rise to 8.34% and 6.79% in July and August respectively, levels which remain way below the rise to 10.14% and 8.60% witnessed in March and April following former PM Hariri s assassination. Although the BDL had to intervene in the foreign exchange market during the period of the Israeli attacks, the pressure diminished in the subsequent months, supported by external deposits of foreign currency at BDL and by the rise in foreign exchange reserves to reach $13bn at the end of, from $11.7bn in. Commercial banks consolidated balance sheet showed a yearly increase of 8.3% in assets to $76bn, thus reinforcing its upward trend. Customer deposits and loans rose by 6.5% and 12.5% to $61bn and $21bn respectively. In parallel, capital funds of Lebanese banks improved by 36% in after registering a 10.4% in, mainly due to banks increases in capital with the approaching application of the Basel II Accord in Lebanon by Domestic interest rates moved in opposite directions as the average deposit rate on the LBP went down by 15 basis points from 7.64% in to 7.49% in, whereas the average US dollar deposit rate rose by 112 basis points to 4.71%. The average LBPUS differential or exchange rate risk decreased from 4.05% to 2.78% and the average LBPLibor differential or sovereign risk dropped from 4.08% to 2.29%. The value of cleared cheques decreased by 3.5% in, and the dollarisation rate increased to 76% of deposits by the end of compared to 73% in. Activity on the Beirut Stock Exchange (BSE) improved in in terms of value traded, although prices of most stocks dropped after the hike witnessed in January, mainly due to the political uncertainty looming over the country after the JulyAugust war. As such, the total market turnover reached $2.03b, up 119% from. The market capitalization increased by 69% to $8.3bn; although the BLOM Stock Index, the Lebanese benchmark index, dropped by 9.6% to 1, after it rose by 106% to 1, in. The political atmosphere in the country similarly affected the Lebanese Eurobond market, which witnessed a drop in most paper prices mainly after the assassination of former Minister of Industry Pierre Gemayel late November. As such, sovereign and corporate paper ended the year on low demand across the maturity spectrum, with the average yield on all traded bonds increasing yearonyear by 183 b.p. to reach 7.96% at end. effective way for the country to resolve its fundamental economic problems needs political consensus and stability in order to be thoroughly implemented. KEY INDICATORS GDP Growth Rate Estimated Inflation Balance of Payments Trade Deficit Budget Deficit LP/USD Gross Public Debt Gross FX Reserves Banks Assets USD Millions or % % Change 0.0 % 1.0 % 100 b.p. 4.0 % 2.4 % 160 b.p. $ 2,749.5 $ % $ 7,117 $ 7,459 (4.6 %) $ 3,040 $ 1, % $ 1,507.5 $ 1, % $ 40,466 $ 38, % $ 12,975 $ 11, % $ 76,179 $ 70, % Notes: Data included in BLOM s Environment are based on several sources. Public finance, public debt, interest payments, cost of debt and trade balance are based on the Ministry of Finance s publications. Tourists, FX reserves, cleared checks, banking sector s performance and balance of payments are based on Banque du Liban s publications. GDP figures are based on Moody s estimations. Stock market data, interbank rate, domestic interest spread and average eurobonds yield are based on calculations performed by the Economic Research Department at BLOMINVEST Bank s.a.l. The Lebanese government presented a 5year ( ) Recovery, Reconstruction, And Reform program to the Paris III Donor Conference that was held in support for Lebanon on January 25, 2007 and in which regional and international donors pledged $7.6bn to the country. The program consists of five pillars of growth enhancing structural reform, social sector reforms, fiscal adjustment, privatization, and monetary and exchange rate policies, which are inevitable if Lebanon is to be back on track in terms of sustainable economic and social development. However, this program described by some observers as by far the best and most 22 23

13 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 24 MANAGEMENT DISCUSSION & ANALYSIS MANAGEMENT DISCUSSION & ANALYSIS 2. OVERVIEW was an exceptional year for the bank, despite the summer war in Lebanon. BLOM BANK sal has successfully proven itself as a solid financial institution with the adequate strategies that enable it to successfully absorb severe economic shocks. This strong stand has won unanimous accreditations from international specialized institutions. As such, BLOM BANK sal received in all awards granted to a Lebanese bank: Best Bank in Lebanon from The Banker Best Bank in Lebanon from Euromoney Best Investment Bank in Lebanon from Euromoney Best Bank in Lebanon from Global Finance Highest Financial Strength Rating among Lebanese banks according to Capital Intelligence BLOM BANK sal also remained the largest bank in Lebanon in terms of assets and the most profitable bank. As at year end, the bank s total assets increased by 19.31% to reach USD billion, with customer deposits increasing by 15.5% to reach USD billion and net profits increasing by 32.04% to reach USD million. On the other hand, the bank continued its strategy of strengthening its capital funds with the issue of USD 276 million worth of GDRs in, the consequence of which was a 33.6% rise in capital funds. This strong stance is the direct result of the bank s conservative and lending policy, its professional approach, and most of all the trust of its customers. As in, BLOM BANK s strategy remained focused on consolidating financial strength, through a strong profitability and excellent asset quality. High liquidity levels and comfortable capital adequacy ratios were easily maintained while we remained ranked number one in terms of profitability and total assets among all Lebanese banks. was another year of strong regional expansion. Through its subsidiaries the bank opened new branches in various countries in the region. BLOM BANK EGYPT opened two new branches in Cairo while BANK OF SYRIA AND OVERSEAS opened four new branches in Hamah, Tartous, Mezza, and Homs. In Lebanon, BLOM BANK sal also opened three new branches in Mansourieh, Zouk Mosbeh and Verdun (retail Branch), as well as in Jordan in Wahadat and Souwaifieh. The regional expansion enhanced our global presence, which encompasses Lebanon, France, UK, UAE, Romania, Egypt, Jordan and Syria, while diluting any country specific risk. BLOM BANK has been the fastest growing Lebanese bank in its regional expansion as it has 40% market share of the Lebanese banks consolidated customer deposits outside Lebanon. saw a significant expansion in Insurance as AROPE Lebanon, 88.56% owned by BLOM BANK, expanded its services and opened AROPE Syria. Arope Syria, which is now 49 % owned by BLOM BANK sal. The company is among the first private insurance companies to get a license for conducting operations in the Syrian market. Arope Syria offers a wide range of Insurance and Bank insurance products ranging from medical insurance, term life insurance on personal accidents, motor, workmen s compensation, travel, marine, property, and general third party liability. 3. EVOLUTION OF TOTAL ASSETS Despite the slow recovering economic conditions in Lebanon, has witnessed an interesting increase in the Bank s assets. As such, total assets rose by 19.31% by USD 2,301.6 million to reach a total of USD 14,219.8 billion in. Moreover, BLOM BANK sal was successful in gradually increasing its market share in terms of total assets from 16% at the end of 2004, to 16.96% at the end of, and to % at the end of. Evolution of total assets in millions of USD , ,146 8,786 10,835 11,918 14,

14 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 26 MANAGEMENT DISCUSSION & ANALYSIS MANAGEMENT DISCUSSION & ANALYSIS 4. SOURCES OF FUNDS Sources of funding are grouped into four main categories: customer deposits, capital funds (Tier I & Tier II), banks and financial institutions and other liabilities. It is apparent from the graph below that customer deposits accounted for 82.53% of total funds as compared to 85.25% in, while capital funds represented 9% compared to 8.04% in, and Banks and financial institutions accounted for 6.11% of total funding at year end as compared to 3.92% in. Other liabilities accounted for the smallest part of total funds at 2.37% in (: 2.79%). Sources of Funds 4.1 Customer Deposits In, customer deposits grew by USD 1, million, or by 15.49% in percentage terms reaching a total of USD 11, million by year end, as compared to a growth of 13% and a total of USD 10, million in. Deposits in foreign currency represented 82.38% of total deposits for the year as compared to 76.35% at the end of and to 73.19% in This was partly due to our group expansion outside Lebanon. The fact that BLOM BANK s customer deposits grew by 15.49%, which is much larger than the 6.50% growth for market, is evidence of BLOM BANK s sal continuous outgrowing of the market. The Bank s share of total consolidated sector deposits increased from 17.83% in to 19.33% in. Customers Deposits Tier I & Tier II Capital 9.00% 6.11% 2.37% 8.04% 3.92% 2.79% Evolution of customer deposits in millions of USD ,735 Banks & Financial Institutions Other Liabilities 82.53% 85.25% ,525 6,215 7,686 8,992 10, Fiduciary deposits increased by 86.46% in reaching USD 1, million as compared to a growth of % and a total amount of USD million in

15 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 28 MANAGEMENT DISCUSSION & ANALYSIS MANAGEMENT DISCUSSION & ANALYSIS 4.2 Capitalization (TIER I & TIER II CAPITAL) Tier I capital increased by 40.41% reaching USD 1, million in as compared to an increase of 28.39% for a total amount of USD million in. The rise in the Tier 1 capital was due to the: Issuance of GDRs for the total amount of USD 276 million in February A rise in the reinjected net profits for the year. It is worth noting that net profits rose to USD million before dividend distribution at yearend. Tier II Capital in decreased by 62.26% to reach USD million, as compared to a 32.47% decrease in. This drop in Tier II capital is due to the decrease in the cumulative change in fair values of the bank securities portfolio by 73.57%. 5. USES OF FUNDS With Basel II s standardized approach to be fully implemented by Lebanese banks in 2008, risk assessment becomes even more of a crucial factor when considering investments and asset allocation. Therefore, the group is keen to stresses on its strategy of maintaining high asset quality and strong sustainable investment portfolios. The bank s return on assets (ROA) in stood at 1.38%. As a result of the bank s strategy to reduce the Lebanese sovereign country risk in its books, the share of Lebanese pound Treasury bills and other Lebanese government debt securities in foreign currencies (Eurobonds) to total assets was decreased in to 16.21% from 19.70% in and 19.91% in Similarly, the percentage of cash and deposits at the Central Bank decreased to 29.14% from 31.18% for the same period, while the share of bonds and financial instruments with fixed income decreased to 1.80% in from 2.42% in. On the other hand, loans granted to customers remained almost the same amounting to 13.98% of total assets in compared to 14.01% in. Tier I & Tier II in millions of USD The abovementioned decreases were offset by an increase in our placements with banks and financial institutions, which amounted to % of total assets in as compared to 29.48% in. This asset allocation switch is in line with one of our main strategies to maintain high liquidity levels especially in periods of crisis Uses of Funds Lebanese Treasury Bills and other governmemtal bonds Cash and Central Banks Banks and Financial Institutions 1.80% 13.98% 2.70% 16.21% 2.42% 14.01% 3.21% 19.70% Tier I Tier II Bonds and Financial Instruments with Fixed Income Loans to Customers Others 36.17% 29.14% 29.48% 31.18% 28 29

16 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 30 MANAGEMENT DISCUSSION & ANALYSIS MANAGEMENT DISCUSSION & ANALYSIS 5.1 Cash and CEntral Bank DISTRIBUTION OF THE TREASURY PORTFOLIO (LEBANESE & GOV. BILLS AND BONDS) Cash and central bank reserves increased by % to USD million in from USD million in. The share of our subscription in Central Bank certificates of deposits to total cash and central banks is 57.91% in as compared to 54.61% in. The Cash and central bank category includes noninterest bearing balances held by the Bank at the Central Bank of Lebanon (Banque Du Liban) in compliance with the required reserves obligation on commitments in Lebanese Pounds of all banks operating in Lebanon (calculated on the basis of 25% of sight and 15% of term commitments). This requirement also applies to interest bearing placements at the rate of 15% on foreign currency deposits and certificates of deposits issued by the Lebanese Banque Du Liban. (in USD Millions) Investments Held for Trading: Treasury Bills and Bonds Accrued Interest Available for sale investments: Treasury Bills and Bonds Accrued Interest Unrealized Premiums Unrealized Discounts At December 31, At December 31, , , , , (17.436) (29.615) DISTRIBUTION OF CASH AND CENTRAL BANKS 2, , Cash Central Banks Certificate of Deposits End of Year Amount in USD Millions 62 1,682 2,400 2,400 % End of Year Amount in USD Millions 55 1,632 2,030 3,717 % Distribution of the Treasury Portfolio Lebanese Treasury Bills 42.50% 43.54% 5.2 Lebanese Treasury Bills and Other Governmental Bills and Bonds The bank s portfolio of Lebanese Treasury bills and other government debt securities decreased by 1.83% to USD million in from USD million in, in compliance with the Bank s more conservative strategy regarding its exposure to Lebanon s sovereign risk. The Lebanese pounds and foreign currency denominated government bills and bonds accounted for % and 42.50% of the total portfolio as compared to 56.46% and 43.54% in respectively. Other Governmemtal Bonds in Foreign Currencies 57.50% 56.46% The table below highlights the distribution of the Treasury portfolio in accordance with the new IFRS (International Financial Reporting Standards) classification: 30 31

17 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 32 MANAGEMENT DISCUSSION & ANALYSIS MANAGEMENT DISCUSSION & ANALYSIS 5.3 Bonds and Financial Instruments with Fixed Income Bonds and financial instruments with fixed income decreased by % yearonyear to reach to USD in million, down from USD million in. This category includes bonds and certificates of deposit that are classified as follows: Held for trading Available for sale Held to Maturity Loans and receivables DISTRIBUTION OF BONDS AND FINANCIAL INSTRUMENTS WITH FIXED INCOME 5.4 Banks and Financial Institutions The Bank s deposits with banks and financial institutions increased by 46.39% in to reach USD billion as compared to USD billion in. These deposits represented % of total assets in as compared to 29.48% in. This significant increase is mainly attributed to the Bank s strategy of maintaining high liquidity levels especially in periods of crises. Time deposits accounted for 96.12% of total deposits with banks and financial institutions as compared to 95.82% in. It is worth noting that 99.19% of the current and time deposits are in foreign currencies. 5.5 Loans and Advances to Customers (in USD Millions) Held for Trading: Bonds Accrued Interest Available for sale: Bonds Less: provision for Impairment Accrued Interest At December 31, At December 31, (0.251) The Bank follows a conservative lending strategy that preserves its high asset quality loan portfolio. This strategy allows BLOM BANK to preserve high liquidity ratios, which are considered essential in the current economic situation. Therefore, and as a direct application of this strategy, the Bank maintained a low net loans and advances to total deposits ratio of 16.44% in, which has been constant for two consecutive years. Our outstanding loans increased by 19.01% yearonyear to reach USD billion in, up from USD billion in, an increase mainly attributed to the growth of the Bank s loans and advances portfolio outside Lebanon. Consequently, the Bank has outgrown the market, which witnessed a 12.46% yearonyear growth in loans and advances to customers. The Bank s market share of loans and advances in the Lebanese banking sector reached 9.28% in, up from 8.77% in. Held to Maturity: Bonds Accrued Interest Evolution of total loans and advances in millions of USD ,988 Loans & Receivables: Certificates of Deposit Accrued InterestT ,198 1, ,352 1,

18 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 34 MANAGEMENT DISCUSSION & ANALYSIS MANAGEMENT DISCUSSION & ANALYSIS The table below highlights the credit risk classification of the Bank s Net Loan portfolio: CREDIT RISK CLASSIFICATION OF TOTAL NET LOAN PORTFOLIO Nonperforming accounts: Cover loans which display most or all of the following: (in USD Millions) Regular Accounts Special Attention Accounts Net NonPerforming Accounts Net Doubtful Accounts Net Provisions for Commercial Loans not Classified Bad Debt Accounts End End 1, , (35.71) (27.65) , , A significant drop in the client s profitability A drop in the flow of cash into the account for a period exceeding 2 years, and thus resulting in repetitive delays in repayment exceeding a period of 3 months. A noticeable depreciation in the value of the collateral provided and repetitive delays in repayment for a period not exceeding three months. Credit facilities are not used partially or in whole for the purpose specified in the loan agreement. The credit risk committee will review the repayment schedule with the client and will keep the account under close observation. However, interest and commissions will be classified as unrealized until the account is regularized. The above loan classification is in accordance with that of the Central Bank of Lebanon (Banque Du Liban) under decree N dated November 10th, 1998 and the decree related to bad debt classification dated December Below is a definition of each of the net loan portfolio classification. Regular accounts: A Unconditional: Cover accounts which display regular movements sufficient to repay the loan in accordance with the repayment schedule. The latest financial statements should be available and adequate collateral should be taken to cover the loan. B Incomplete file: as in point (A), adequate collateral is provided and repayment is expected to be on schedule. However, the file is considered incomplete due to the lack of up to date financial statements. Special attention accounts: Display signs of irregular movements or exceed the credit limit on a continuous basis. Recent financial statements are unavailable and adverse economic conditions may affect the borrower s ability to repay the debt. Collateral has not been evaluated for the last 3 years. Such an account may be considered recoverable. However, such accounts should be closely monitored for a year, at the end of which any account that does not meet the previously mentioned conditions will be reclassified. Doubtful accounts: Represent loans which display all of the conditions of a nonperforming account in addition to having a complete lack of credit movement into the account for a period of 6 months and a delay in payments of the rescheduled loan which exceeds 3 months from the date of maturity. The Bank will make a partial provision for the loan and consider interest and will commission as unrealized. Bad debt accounts: Include all Doubtful Accounts considered unrecoverable due to the lack of collateral or loss of contact with the client. In this case, interest will cease to be accrued and a provision of 100% of the principal amount of the loan will be made. The account is under litigation until a ruling by the court is made, after which it is writtenoff. The Bank s ratio of gross doubtful debt to gross total loans decreased in to 10.25% from 11.22% in. The provision for doubtful accounts decreased to 98.04% in from % in. Provisions and unrealized interest on doubtful debts and nonperforming accounts decreased by USD 1,403 million to reach USD 232,288 million at the end of. The amount includes provisions for commercial loans not classified at the end of after deducting the amount of USD million of provisions for doubtful loans no more required, transferring USD million to an offbalance sheet item related to bad debts and provisions writtenoff amounting to million in

19 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 36 MANAGEMENT DISCUSSION & ANALYSIS MANAGEMENT DISCUSSION & ANALYSIS The ratio of foreign currency loans to total loans increased in to 91.72% up from 90.48% in. On the other hand, the ratio of foreign currency loans to foreign currency deposits decreased to 18.86% in, down from 19.48% in. Medium and Long term loans with maturities exceeding one year constituted 17.57% of the bank s outstanding net commercial loans in as compared to 19.19% in. The breakdown of our loan portfolio by economic sector reveals the following: an increase in loans to consumers and to the services sector and a slight decrease in loans to the trade and liberal profession sectors. Loans granted to the agriculture sector stayed almost the same in and constituted 0.60% of our loan portfolio as compared to 0.63% in. Loans granted to the manufacturing sector increased to 13.01% in from 11.71% in. Loans to Trade decreased from 33.64% in to 30.37% in with 4.82% of our portfolio granted to trade retail and 25.55% to trade wholesale. Loans granted to the services sector witnessed a big increase as they constituted 20.21% of our portfolio, up from 13.32% of our portfolio. Loans granted to freelance professions decreased to 12.65% in, down from 20.03% in. Loans to the construction sector decreased to 7.19% in from 8.57% in, while consumer loans increased to 15.99% in, up from 12.10% in. An examination of the breakdown of our loan portfolio by type of collateral clearly shows that Overdrafts underwent the largest decrease. This comes in line with our conservative lending policy that was tightened during periods of crises in an aim to preserve our asset and loan portfolio quality. In, Overdraft decreased to % of the total loans portfolio from 25.85% in. On the other hand, commercial loans secured by mortgages increased to 29.30%, up from 22.84% in while retail loans increased to 15.99% from 12.10%. Similarly, advances against personal guarantees increased to 16.78%, up from 15.47% for the same period while LC Financing dropped to 1.62%, down from 2.79%. Advances against cash collateral decreased to 19.78% from 20.53%. The share of syndicated loans dropped to nill, down from 0.13% in. Loans to members and staff decreased to 0.13% from 0.20%, while loans to directors and related parties decreased to 0.04% from 0.08% in. Distribution of loans by type of collateral: Commercial Loans Secured by Mortgages Distribution of Loans by Economic Sector Trade Services Construction Freelance Professions 0.60% Consumer Loans 13.01% 30.37% 11.71% 33.64% 0.63% 12.10% Advanced Against Personal Guaranties LC Financing Advances Against Cash Collateral Syndicated Loans Retail Loans Loans to Members of Staff 16.36% 0.04% 0.13% 15.99% 0.00% 19.78% 1.62% 29.30% 16.60% 25.85% 0.08% 0.20% 12.11% 0.13% 20.53% 22.84% 2.79% 15.47% Agriculture and Forestry Manufacturing 15.99% Loans to Directors and Related Parties 12.65% 7.19% 20.21% 20.03% 8.57% 13.32% Overdraft 36 37

20 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 38 MANAGEMENT DISCUSSION & ANALYSIS MANAGEMENT DISCUSSION & ANALYSIS 6. LIQUIDITY BLOM BANK continuously aims at maintaining high levels of liquidity, minimizing risks and ensuring high asset quality. The Lebanese pound liquidity ratio, including Lebanese government treasury bills in stood at %, compared to % in. The immediate liquidity (cash & banks) in foreign currencies increased to 78.26% of foreign currency deposits from 71.52% in. BLOM BANK sal, along with all Lebanese banks, witnesses mismatches in maturities. The gap is negative for maturities of up to one month and from 1 to 3 months, USD 3,555 million and USD 1,141 million respectively. It turns back positive for maturities of 3 to 6 months, at USD 49 million. The positive gap reaches a maximum of USD 3,191 million before becoming negative again, standing at USD 233 million for maturities over 5 years. 7. PROFITABILITY Net profits in increased by 32.04% yearonyear to USD million, compared to million in, up 50.13% from the year before. Return on average equity slightly decreased in to 14.12%, down from 14.58% in, due to the larger increase registered in the shareholders equity of 40.41%, compared to a 32.04% rise in net profits. On the other hand, return on average assets increased to 1.38% in, up from 1.20% in, as total assets increased by 19.31%. Earnings per share increased to USD 7.29 in from USD 6.09 in. As such, the yield on the market value of BLOM BANK s GDR based on its closing price at the end of was at 12.65%. ASSETLIABILITIES MATURITY GAP (in USD Millions) Up to 1 month 1 to 3 months 3 to 6 months 6 months to 1 year 1 to 2 years 2 to 5 years Over 5 years Evolution of net income in millions of USD Assets Liabilities & Shareholder s Equity Liquidity Gap Cumulative Maturity Gap 6,250 9,805 (3,555) (3,555) 1,201 2,342 (1,141) (4,696) (4,647) (4,252) 1, ,294 (2,958) 3, , ,099 1,333 (233) 0 14,220 14,

21 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 40 MANAGEMENT DISCUSSION & ANALYSIS MANAGEMENT DISCUSSION & ANALYSIS 7.1 Net Interest Income Interest and similar income increased by 35.67% yearonyear to reach USD million in, while interest charges rose by 30.18% to reach USD million. Therefore net interest received increased by 48.89% yearonyear to USD million. On the other hand, net interest revenue after provisions for doubtful loans, increased by 47.51% yearonyear to reach USD million in. Below is an elaboration of each contributing factor and an independent discussion of its trend. When we compare the proportions of average interest earning assets in to those in, we do not notice any significant change. Lebanese and other government bills constituted 21.13% of total average interest earning assets in as compared to 20.43% in. Deposits with banks and central banks only slightly decreased in to 42.25%, down from 43.30% in. Bonds and other financial instruments with fixed income, including certificates of deposit, represented 20.57% of the total in, practically unchanged from 20.23% of the total a year before. Loans and advances maintained a ratio of 16.04% of the total average interest earning assets for the second year in a row. The above detailed average interest earning assets affected the Bank s interest and similar income breakdown as follows: Interest and Similar Income Interest and similar income increased by 35.67% in after registering a slight increase of 13.19% in. Average interest earning assets rose by 17.35% to reach USD 11,507 million in up from an increase of 15.35% in, equivalent to USD 9,806 million. The table below illustrates the breakdown of average earning assets by currency at the end of : BREAKDOWN OF AVERAGE INTEREST EARNING ASSETS AT THE END OF (in USD Millions) LBP Foreign Currencies BREAKDOWN OF INTEREST AND SIMILAR INCOME (in USD Millions) Lebanese Treasury Bills and Other Governmental Bills Deposits with Banks and Central Banks Bonds and Other Financial Instruments with Fixed Income Including Certificates of Deposit Loans and Advances Including Related Parties End of Year End of Year Amount % of Amount % of 214, , ,55 157, , , , , , , Lebanese Treasury Bills and Other Governmental Bills Deposits with Banks and Central Banks Bonds and Other Financial Instruments with Fixed Income Including Certificates of Deposit Loans and Advances 1, ,019 4,783 2,432 4, ,665 2, ,716 1,846 2,324 9,183 11,507 Upon considering each component of interest income we can see that in the portion generated from Lebanese treasury bills and other government bills decreased to 25.52% in down from 26.45% in. An increase of 32.46% in deposits with banks and central banks in addition to an increase in LIBOR rates resulted in a 29.69% increase in income generated from these deposits, up from a 25.46% in the previous year. Interest income from bonds and other financial instruments fixed income, including certificates of deposit, decreased to 25.67% in down from 31.12% in. Income generated from loans and advances to customers increased to 19.11%, up from 16.95% in, due to the 19.01% yearly increase in loans and advances to customers. It is to note that the consolidated profit and loss account does not include the results of BLOM BANK EGYPT

22 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 42 MANAGEMENT DISCUSSION & ANALYSIS MANAGEMENT DISCUSSION & ANALYSIS Breakdown of interest and similar income: Lebanese Treasury Bills and Other Governmental Bonds Deposits and similar accounts from banks and financial institutions decreased to 1.56%, from 2.60% in, while deposits from customers and other credit balances including related parties increased to 98.44%, up from 96.30% last year. Finally charges from bonds and other fixed income financial instruments dropped to zero as subordinated loans matured on December 12,. Deposits with Banks and Central Banks 19.12% 25.52% 16.97% 26.45% BREAKDOWN OF INTEREST AND SIMILAR CHARGES Bonds and Other Financial Financial Instruments with Fixed Income Including Certificates of Deposits Loans and Advances Interest and Similar Charges 25.67% 29.69% 31.12% 25.46% (in USD Millions) Deposits & Similar Accounts from Banks & Financial Institutions Notes & Financial Instruments with Fixed Income Deposits from Customers Including Related Parties End of Year End of Year Amount % of Amount % of 8, ,353 4, , , , , Interest and similar charges increased by 30.18% to USD million up from USD million in. Average interest earning liabilities rose 17.49% in to USD 11,011 million, compared to USD 9,37 in. Deposits from customers including related parties constituted most of the average interest bearing liabilities and amounted to %, up slightly from 97.45% in. Breakdown of interest and similar charges: AVERAGE INTEREST BEARING LIABILITIES AT THE END OF (in USD Millions) Deposits and Similar Accounts from Banks and Financial Institutions Deposits from Customers Including Related Parties LBP Foreign Currencies ,254 8,512 10,766 2,257 8,754 11,011 Deposits and Similar Accounts from Banks and Financial Institutions Notes and Financial Instruments with Fixed Income Deposits from Customers Including Related Parties 1.56% 0.00% 98.44% 2.60% 1.11% 96.30% 42 43

23 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 44 MANAGEMENT DISCUSSION & ANALYSIS MANAGEMENT DISCUSSION & ANALYSIS Interest Margin (Before Provisions for Doubtful Loans) Interest cost / Interest Income Ratio in percent Net Interest Income before provisions for doubtful loans increased by 48.89% yearonyear to reach USD in. Similarly, net interest margin before provisions for doubtful loans (i.e. net interest income divided by average interest earning assets) increased to 2.13% in, up from 1.85% in, mainly due to the consolidation of BLOM BANK EGYPT profit & loss account in. The ratio of interest charges to interest income decreased to 67.80% from 70.66% in. This was mainly due to a larger increase in interest income as compared to that of interest charges % 72.00% 71.00% 70.00% 69.00% 72.50% 70.40% 70.91% 71.25% 70.66% Net interest income (before provisions) in millions of USD 68.00% 67.80% % 66.00% % Net Provisions for Doubtful Loans The net provisions for doubtful loans decreased by % to reach a positive balance of USD million. Net interest margin in percent 3.00% 2.00% 2.49% 2.16% 1.85% 1.85% 2.13% 1.00% 0.00%

24 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 46 MANAGEMENT DISCUSSION & ANALYSIS MANAGEMENT DISCUSSION & ANALYSIS 7.2 NonInterest Income Noninterest income increased by 4.23% yearonyear to reach USD million in, up from USD million in. 7.3 Staff and Operating Expenses Staff and operating expenses ( general and administrative expenses) increased by 39.24% in to reach USD million. BREAKDOWN OF NONINTEREST INCOME DISTRIBUTION OF STAFF AND OPERATING EXPENSES (in USD Millions) % Change Amount % of Amount % of (in USD Millions) % Change Amount % of Amount % of Net Commission Net Income from Financial Operations Other Income Net Commissions rose 44.04% yearonyear. As such, their share out of the total noninterest income was 72.22% in. Net income from financial operations decreased by 47% in to reach USD million. Other net income constituted only 4.37% of the total noninterest income. Constituents of noninterest income: (47.00) Staff Expenses Operating Expenses Staff (salaries and related benefits) and operating expenses increased by 38.92% and a 39.76% respectively after the consolidation in of BLOM BANK EGYPT profit & loss account. In terms of breakdown, staff and operating expenses constituted 61.34% and 38.66% of total staff and operating expenses respectively, compared to 61.48% and 38.52% respectively in. BLOM BANK sal maintains a lowerthanindustry average cost to income ratio, due to the Bank s costcontainment policy and efficiencydriven benefits to employees. The cost to income ratio in was 35.10%, slightly higher than that 34.11% in. Cost to Income Ratio 55% Net Commissions Net Income from Financial Operations Other Income 23.40% 4.37% 46.03% 1.70% 50% 45% 40% 35% 47.34% 42.56% 38.37% 40.93% 39.77% 38.09% 38.58% 36.80% 34.11% 35.10% 30% 72.23% 52.27% 25%

25 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 48 MANAGEMENT DISCUSSION & ANALYSIS MANAGEMENT DISCUSSION & ANALYSIS 8. DIVIDEND DISTRIBUTION & PREFERRED SHARES REVENUES Based on the terms of the Issuance of Preferred Shares series 2002, Preferred Shares series 2004, and Preferred Shares series, the Bank s General Assembly of shareholders held on April 12th, 2007 approved the distribution of USD 15 for each series 2002 preferred share, USD 8.5 for each series 2004 preferred share, and USD 9.5 for each series preferred shares from profits of USD million. In addition, the assembly approved the distribution of a LBP 5,000 dividend per common share and GDS. 9. CAPITAL ADEQUACY RATIOS The capital adequacy ratio at the end of stood at 39.50% for tier I and Tier II (before dividend distribution). For Tier I capital alone, the capital adequacy ratio stood at 38.73% for the same period. This is more than four times the international ratio of 8% and more than 3 times the 12% ratio required by the Central Bank of Lebanon. After dividend distribution, the capital adequacy ratio was at 36.35% in compared to 33.25% in. Tier I Capital Tier I + Tier II Capital 10. INTEREST RATE RISK Interest rate risk arises from changes in interest rates, which affect interest earning assets and liabilities of the bank. The bank manages the underlying risk by the continuous repricing of assets and liabilities. The majority of the bank s assets and liabilities are repriced within one year given that variable interest rates are applied on most loans and deposits. Interest rate risk continued to be concentrated within the 3 months interval in, as the major part of our deposits are repriced within this period, while a major part of our treasury bills and government bonds portfolio are repriced after the 3 months period. The AssetLiability committee monitors regularly interest rate risks based on forecasted evolution of interest rates movements in national and international markets. The bank s interest rate sensitivity position based on contractual repricing arrangements as at December 31, is as follows: INTERESTRATE SENSITIVITY POSITION AT THE END OF (in USD Millions) Up to 1 month 1 to 3 months 3 to 6 months 1 to 2 years 2 to 5 years Over 5 years Non Sensitive to interest rate risk Capital Adequacy Ratios (after dividend distribution ) in percent 40.00% 35.00% 33.23% % 29.76% 30.00% 28.22% 30.71% 25.00% 28.02% 26.60% 27.34% 36.35% 35.58% Assets Liabilities and Shareholder s Equity Interest Rate Sensitivity Gap for Cumulative interest Rate Sensitivity Gap 5,186 8, ,213 1, , , ,678 3,021 (3,091) (1,278) 576 1,279 3, (1,343) (3,091) (4,368) (3,792) (2,513) 551 1, % 15.00% RISK MANAGEMENT AND BASEL II PREPARATIONS In accordance with the Lebanese Banking Control Commission Circular no. 242 relating to the principals for risk management at banks and financial institution operating in Lebanon, BLOM BANK s Risk Management Department aids Executive Management in controlling and actively managing the Group s overall risk. The department mainly ensures that : Risk policies and methodologies are consistent with the Group s risk appetite. Limits and risks across banking activities are monitored throughout the Group

26 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 50 MANAGEMENT DISCUSSION & ANALYSIS MANAGEMENT DISCUSSION & ANALYSIS With respect to Basel II capital adequacy ratio calculations, the Risk Management Department started, since December 2004 consolidated balances, to issue internal reports to Executive Management and the Board revealing multiple scenarios of capital charges calculations for credit and market risks under the Standardized approaches and for operational risk under the Basic Indicator approach. In relation to credit risk, the Risk Management Department is responsible for monitoring the risk profile of the Bank s loan portfolio, producing internal reports highlighting any exposure of concern in corporate, commercial and consumer lending, as well as examining collateral coverage, past due loans and provisioning needs. In January 2007, the Bank acquired, through a groupwide license, the Moody s KMV Risk Advisor, a stateoftheart credit analysis and rating system for corporate and commercial lending clients, in order to aid the Bank in moving to internal ratingbased measurements under Basel II. 12. UNIVERSAL BANKING SERVICES BLOM BANK provides universal banking services that cater to all customers needs: Commercial banking. Private and investment banking. BLOM BANK offers a savings program dedicated to child s education: WALADI. This program is coupled with a life insurance that guarantees continuity in case of death or total permanent disability. BLOM BANK offers DAMANATI which is an all purpose saving program (in US Dollar) coupled with life and total permanent disability insurance policy. BLOM BANK offers phone banking services, such as ALLO BLOM, in addition to internet banking services which are differentiated by their high security level. Moreover, customers can benefit from SMS ALERT services that enable them to receive mobile messages whenever the account drops or exceeds a predefined value and whenever a transaction is performed on BLOM cards. Also, the retail banking services include BLOM Call Center which is present to help customers around the clock (24 hours a day 7 days a week) by providing them with general information on BLOM BANK s products and services as well as cancelling a lost or stolen card. BLOM BANK Group provides all types of insurance policies through its subsidiary, AROPE Insurance s.a.l. which has recently established a private insurance company in Syria named AROPE SYRIA; among the first private insurance companies to operate in Syria. BLOM BANK follows a strategy based on continuous diversification of its banking services in order to maximize customers satisfaction. Corporate banking services. Retail banking that offers the following services and products: Insurancecovered personal and car loans. Housing loans either directly or in cooperation with the Institution for Public Housing. BLOM BANK provides a wide variety of payment cards that are designed to fit all purposes and budgets. Whether classic, Gold, Platinum, Black Platinum, Transparent, Corporate, Mini or Internet, BLOM cards enable the cardholder to select his mode of payment as direct debit, charge or credit in a convenient, simple, safe and flexible manner. BLOM cards are accompanied by a rich portfolio of spending rewards under the Golden Points and BLOM Gifts programs. At the beginning of 2007, BLOM was a pioneer in launching the Alpha BLOM MasterCard, a first of its kind in the Middle East. The card offers its user free talk time on its Alpha classic line. 13. INFORMATION SYSTEMS AND TECHNOLOGY BLOM BANK has been putting Information Technology, Finance and Relationship management in partnership using leadingedge technology deployments to address the challenges of rapidly adapting to the changing face of the Banking Business in the 21st century. In that context, BLOM BANK has kept capitalizing on their advanced multichannel, online, realtime systems and delivery infrastructure to enable the constant development of advanced electronic customer relationship management (ecrm) suite and services, under the name of eblom, and to continue in parallel launching more initiatives aimed at: Streamlining more processes by transforming them into STP (Straight Through Processing) mode, Enhancing customers experiences 50 51

27 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 52 MANAGEMENT DISCUSSION & ANALYSIS MANAGEMENT DISCUSSION & ANALYSIS Enriching products and services portfolio and features set Addressing compliance and regulatory requirements (such as Basel 2 and other...) Improving systems availability and reliability The eblom architecture has been designed to take advantage of the BLOMNET infrastructure (the bank s enterprise wide Intranet linking all the branches together with the head office) in order to assure that customers and transactions data are shared online in realtime across the various customer touchpoints, and that the resulting information is gathered and aggregated in a central Knowledge base or Data Warehouse. As part of the eblom initiative, the Bank is providing a suite of integrated electronic banking delivery channels consisting of: eblom ALLO BLOM the Bank s Interactive Voice Response system. eblom Internet Banking Introduced since 1H2002. eblom SMS Alerts A realtime alert system which delivers messages to the customers mobile phones, informing them instantly about events pertaining to their accounts or cards Introduced in 2H2002. eblom Contact Center Started in 1Q2002, with continuous enhancements based on CTI (Computer Telephony Integration) and IP telephony to achieve seamless integration with the Bank s CRM application. eblom Self Service Using the bank Network of ATMs deployed all over Lebanon and where additional services are being constantly planned and added. eblom Live information Broadcasting System A system recently introduced (in ) that enables the bank to broadcast in realtime over large LCD screens deployed at the branches live and updated information covering stock quotes, foreign exchange quotes, news feeds etc... Through the eblom initiative, which fully integrates the traditional branch concept, BLOM BANK has been responding to the challenge of creating a customercentric business environment, while interacting with their customers, however, wherever and whenever they desire, providing them with the same consistent experience regardless of the Delivery Channel being used. In this environment, all customer related information including behavior, preferences and interactions, are made available in a Central Knowledge Base (or Data Warehouse) that is used for enabling efficient marketing campaigns management, as well as cross and upselling activities. Moreover, given the need for a high level of trust in ecommerce transactions, the Bank has been using a public key infrastructure (PKI), to enable the issuance of digital certificates to their Internet Banking customers. These certificates serve the purpose of securly authenticating the customers and protecting them from online identity theft. They are also used as enablers for customers electronic signatures to guarantee the nonrepudiation of their internet banking transactions. On the other hand, and based on the recently deployed EFT SWITCH the bank has completely insourced their ATM driving, management and monitoring activities, and is adding more connections between its SWITCH and other national SWITCHES and International Interchanges. This has allowed the bank to reduce and fix their costs and to transform them into a fixed cost model. This has also given the bank more flexibility in adding services to their ATMs such as mobile cards topup, as it has helped in achieving EMV and 3DES compliance. To be noted that the bank s fleet of ATMs has been completely renewed after installing the latest generation of ATMs which are ready for advanced services delivery such as notes acceptance and checks deposits. In that context, the bank is also finalizing the preparations needed for starting their Point of Sales acquiring activities. On the cards issuing side, the bank continued to develop its Information Systems infrastructure in order to keep adding more features to their existing cards products and loyalty programs, in addition to introducing new types of payment cards including Visa prepaid cards with online refill capability, Visa EURO Cards, Credit cards with grace period, BLOM MasterCard cards, Cobranded cards, etc. The bank also completed with Visa the EMV certification process for issuing EMV cards, and, have now reached a stage where they have started issuing EMV cards. At the same time, through its centralized IT services and infrastructure in Lebanon, the bank kept expanding its branches network locally and in Jordan, where a third branch was opened in Amman, and where the three branches started operating in online, realtime mode connected with the HO in Beirut. To that end, a connectivity gateway was established between their Jordan regional H.O. and their Lebanon H.O. This gateway also facilitated the deployment of ATMs in Amman connected to the CSC in Lebanon. A similar gateway has been also been set up with Cyprus. In addition to the above, the bank is finalizing the preparations needed for implementing systems for corporate and commercial credit risk rating, Assets and Liabilities management and Funds Transfer Pricing which are required for Basel 2 compliance. Also on the agenda, there are initiatives related to online fraud monitoring for credit and debit cards transactions, budgeting and forecasting, expenditures management, in addition to the implementation of systems related to the management of Islamic banking activities newly introduced through BLOM DEVELOPMENT BANK

28 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 54 MANAGEMENT DISCUSSION & ANALYSIS Finally, it is worth noting that, while deploying their IT infrastructure and systems the bank have constantly in mind their information security and availability, where they are looking very closely at: Insuring the highest possible availability of their systems by enhancing or putting the appropriate continuity plans in place. Raising employees awareness through the development of Information Security Policies and Procedures as well as through appropriate training and awareness programs. Addressing security threats and systems failure incidents proactively through implementing advanced preventive and detective controls and monitoring systems and procedures. 14. PEOPLE DEVELOPMENT The Bank continued its policy of organizing intensive inhouse and external training sessions for its personnel at all levels, in order to train and develop their capabilities. Following the Bank s expansion plans, the Bank s employees reached 2216 in compared to 1627 in. 15. BANK S OPERATIONAL EFFICIENCY In, the net profit per branch increased by 14% to reach USD 2,053,273 while the net profit per employee decreased to USD 81,538 as compared to USD 94,313 in. 16. REBRANDING THE GROUP S AFFILIATES In, BLOM Bank rebranded the names of its affiliate banks and that in an aim to put in the spotlight the importance of the group, to highlight its unity and to benefit from the excellent brand image that the parent bank enjoys locally, regionally and internationally. Consequently, Banque Banorabe, Banque Banorient and Misr Romania Bank were rebranded BLOM BANK FRANCE, BLOM BANK (SWITZERLAND) and BLOM BANK EGYPT. 17. REGIONAL EXPANSION In line with our regional expansion policy, BLOM BANK group continued opening new branches within its existing international network in an aim to enhance market accessibility. In Lebanon, the bank opened three new branches in in Mansourieh, Zouk Mosbeh, and a retail branch in Verdun. Four new branches are planned for the coming year in Achrafieh, Jbeil, Hamra (Retail Branch), and Mina El Hosn. BLOM BANK also applied for a licence to establish a corporate bank in Qatar and got the approval to open a representative office in AbuDhabi. In Jordan, BLOM BANK opened two new branches in Amman located in Wahadat and Swayfieh, and we expect to open in 2007 two additional branches in Amman too. As for our sister banks, BLOM BANK FRANCE applied for a bank licence in Algeria and BLOM BANK EGYPT expanded its network in Egypt and opened two new branches in Cairo and is going to open 10 additional branches in the Egypt in BSO is also expanding its network in major cities in Syria, four new branches located in Hamah, Tartous, Mezza and Homs were opened. A new branch will be opened in Aleppo during the second half of In 2007, BLOMINVEST BANK applied for a license to establish a Private and Investment Bank in Saudi Arabia. BLOM BANK sal will continue to expand its operation in other Arab countries. BANK S OPERATIONAL EFFICIENCY INDICATORS Number of Employees Number of Branches USD Net Profit per Employee USD Average Assets per Employee USD Average Assets per Branch USD Net Profit per Branch , ,538 94,313 6,416,773 7,713, ,586, ,272,995 2,053,273 1,800,

29 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 56 AUDITORS REPORT TO THE SHAREHOLDERS OF BLOM BANK SAL 57

30 BLOM LEBANON INSIDE#1 (C) 9/12/07 9:40 AM Page 58 L échec ne prévaudra jamais si votre détermination à réussir est plus forte Og Mandino Consolidated Income Statement Consolidated Balance sheet Consolidated Cash Flow Consolidated Statement of Changes in Equity 1. Activities 2. Significant accounting policies 3. Business Combination 4. Net Provisions Less Recoveries on Loans and Advances 5. Net Commissions 6. Other Operating Income 7. Salaries and Related Benefits 8. General Operating Expenses 9. Depreciation and Amortization of Tangible Assets 10. Earning Per Share 11. Cash and Balances with the Central Banks 12. Lebanese and Other Governmental Treasury bills and Bonds 13. Bonds and Financial Assets with Fixed Income 14. Shares, Securities and Financial Assets with Variable Income 15. Banks and Financial Institutions Debit 16. Loans and advances to customers 17. Bank/ Engagements by Acceptances 18. Investments and Loans to Related Parties 19. Tangible Fixed Assets 20. Intangible Fixed Assets 21. Other Assets 22. Regularization Accounts and Other Debit Accounts 23. Goodwill 24. Banks and Financial Institutions Credit 25. Customers Deposits 26. other Liabilities 27. Regularization Accounts and other Credit Accounts 28. Provisions For Risks and Charges 29. Share Capital 30. Reserves for General Banking Risks 31. Reserves and Premiums 32. Cumulative changes in Fair Values 33. Treasury Shares 34. Paid and Proposed Dividends 35. Cash and Cash Equivalents 36. Related Parties Transactions 37. Derivatives 38. Commitments and Contingent Liabilities 39. Segmental Information 40. Credit Risk 41. Concentration of Assets, Liabilities and Off Balance Sheet Items 42. Market Risk 43. Interest Rate Risk 44. Currency Risk 45. Liquidity Risk 46. Fair Value of the Financial Instruments 47. Fiduciary Deposits, Assets under Management and Custody Accounts 48. Commitments and contingencies 49. Comparative Amounts O6 Notes to the Consoliated Finanacial Statements