BANKMED, S.A.L. (incorporated in the Lebanese Republic with limited liability) List of Banks No. 22, Commercial Registry: Beirut, 5261

Transcription

1 BANKMED, S.A.L. incorporated in the Lebanese Republic with limited liability) List of Banks No. 22, Commercial Registry: Beirut, 5261 U.S.$500,000, per cent. Deposit Certificates due 2017 The U.S.$500,000, per cent. Deposit Certificates due 2017 the Certificates ) will be issued by BankMed, s.a.l. the Issuer ) at an issue price of per cent. of their principal amount. It is expected that the Certificates will be issued on or about 14 December 2012 the Issue Date ) and, unless previously redeemed by the Issuer for tax reasons, repaid on 14 December 2017 at their principal amount. The Certificates are subject to redemption in whole at their principal amount at the option of the Issuer at any time in the event of certain changes affecting taxation in the Lebanese Republic Lebanon ). See Terms and Conditions of the Certificates Redemption. The Certificates will bear interest from and including the Issue Date at the rate of per cent. per annum payable semiannually in arrear on 14 June and 14 December in each year commencing on 14 June 2013 until their maturity. Payments on the Certificates will be made in U.S. Dollars without deduction for or on account of taxes imposed or levied by Lebanon to the extent described under Terms and Conditions of the Certificates Taxation. This prospectus the Prospectus ) constitutes a prospectus for the purposes of Article 5.3 of Directive 2003/71/EC, as amended by Directive 2010/73/EU the Prospectus Directive ). Application has been made to the Commission de Surveillance du Secteur Financier the CSSF ) in its capacity as competent authority, under the Law on Prospectuses for Securities, to approve this document as a prospectus. The CSSF gives no undertaking as to the economic and financial soundness of the transaction or the quality or solvency of the Issuer in accordance with Article 77) of the Law on Prospectuses for Securities. Application has also been made to the Luxembourg Stock Exchange for the Certificates to be admitted to trading on the Luxembourg Stock Exchange s Regulated Market the Market ) and to be listed on the Official List of the Luxembourg Stock Exchange the Official List ). References in this Prospectus to the Certificates being listed and all related references) shall mean that the Certificates have been admitted to the Official List and have been admitted to trading on the Market. The Market is a regulated market for the purposes of the Markets in Financial Instruments Directive 2004/39/EC. There is no assurance that a trading market in the Certificates will develop or be maintained. The Certificates have not been, and will not be, registered under the United States Securities Act of 1933, as amended the Securities Act ), for bearer. The Certificates are being offered outside the United States by the Manager as defined in Subscription and Sale ) in accordance with Regulation S under the Securities Act Regulation S ), and may not be offered, sold or delivered within the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. The Certificates will be in registered form and issued, offered and sold in denominations of, and may be held and transferred in principal amounts of, U.S.$200,000 and integral multiples of U.S.$1,000 in excess thereof. The Certificates will be represented by a global certificate the Global Certificate ) registered in the name of BT Globenet Nominees Limited, as nominee for, and deposited with, the common depositary for Euroclear Bank S.A./N.V. Euroclear ) and Clearstream Banking, société anonyme, Luxembourg Clearstream, Luxembourg ). Interests in the Certificates may also be held through Midclear, s.a.l., Lebanon s central clearing and settlement agency Midclear ). Certificates held through Midclear will be settled through Midclear s participant accounts with Euroclear and Clearstream. Individual Certificates Individual Certificates ) evidencing holdings of Certificates will only be available in certain limited circumstances. See Overview of Provisions relating to the Certificates in Global Form. The Certificates are expected to be rated B by Standard and Poor s Credit Market Services Europe Limited S&P ). A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation. Any change in the rating of the Certificates could adversely affect the price that a purchaser would be willing to pay for the Certificates. As at the date of this Prospectus, S&P is established in the European Union and registered under Regulation EU) No 1060/2009 on credit rating agencies, as amended the CRA Regulation ). As such, S&P is included in the latest update of the list of registered credit rating agencies published by the European Securities and Markets Authority on its website in accordance with the CRA Regulation as of the date of this Prospectus. Banque du Liban, the Central Bank of Lebanon the Central Bank ), has not passed upon and takes no responsibility for the information contained in this Prospectus and the merits of any offering of Certificates in connection with this Prospectus. Bookrunner and Manager DEUTSCHE BANK Selling Agent MEDINVESTMENT BANK 13 December 2012

2 IMPORTANT NOTICE The Issuer accepts responsibility for the information contained in this Prospectus and declares that, having taken all reasonable care to ensure that such is the case, the information contained in this Prospectus to the best of its knowledge is in accordance with the facts and contains no omission likely to affect its import. The Issuer has not authorised the making or provision of any representation or information regarding the Issuer or the Certificates other than as contained in this Prospectus. Any such representation or information should not be relied upon as having been authorised by the Issuer, the Selling Agent as defined in Subscription and Sale ) or the Manager. Neither the Manager nor any of its affiliates have authorised the whole or any part of this Prospectus and none of them makes any representation or warranty or accepts any responsibility as to the accuracy or completeness of the information contained in this Prospectus. This Prospectus does not constitute an offer of, or an invitation to subscribe for or purchase, any Certificates. The distribution of this Prospectus and the offering, sale and delivery of Certificates in certain jurisdictions may be restricted by law. Persons into whose possession this Prospectus comes are required by the Issuer and the Manager to inform themselves about and to observe any such restrictions. For a description of certain restrictions on offers, sales and deliveries of Certificates and on distribution of this Prospectus relating to the Certificates, see Subscription and Sale. In particular, the Certificates have not been and will not be registered under the Securities Act and are subject to United States tax law requirements. Certificates may not be offered, sold or delivered within the United States, except pursuant to an exemption from, or a transaction not subject to, the registration requirements of the Securities Act. The contents of this document are not to be construed as legal, business or tax advice. In making an investment decision, an investor must rely solely on its own independent appraisal of the economic, political and social conditions prevailing in Lebanon and in the Middle East and North Africa MENA ) region, the financial condition and results of operation of the Issuer and the terms and conditions of the Certificates, as well as all such other information and matters as the investor deems appropriate in determining whether to purchase Certificates, and each investor is urged to consult its own counsel, accountant or business advisor regarding legal, tax and related matters in connection with its purchase, holding and sale of Certificates. In particular, an investor should be aware that it may be required to bear the risk of no liquidity, as well as the financial and other risks of its investment for an indefinite period of time. In particular, the investment activities of certain investors are subject to legal investment laws and regulation, or review or regulation by certain authorities. Each potential investor should consult its legal advisers to determine whether and to what extent: i) the Certificates are legal investments for it; ii) the Certificates can be used as collateral for various types of borrowing; and iii) other restrictions apply to its purchase or pledge of the Certificates. Financial institutions should consult their legal advisers or the appropriate regulators to determine the appropriate treatment of the Certificates under any applicable riskbased capital or similar rules. The delivery of this Prospectus does not at any time imply that the information contained herein is correct at any time subsequent to the date hereof or such other date as at which it is stated to be given or that any other information supplied in connection with the Certificates is correct as at any time subsequent to the date indicated in the document containing the same. Neither the delivery of this Prospectus nor the offering, sale or delivery of any Certificate shall in any circumstances create any implication that there has been no change, or any event reasonably likely to involve any change, in the condition financial or otherwise) of the Issuer since the date of this Prospectus or earlier date as of which information is stated to be given. Each potential investor in the Certificates must determine the suitability of the investment in light of its own circumstances. In particular, each potential investor should: have sufficient knowledge and experience to make a meaningful evaluation of the Certificates, the merits and risks of investing in the Certificates and the information contained or incorporated by reference in this Prospectus; i

3 have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the Certificates and the impact the Certificates will have on its overall investment portfolio; have sufficient financial resources and liquidity to bear all of the risks of an investment in the Certificates, including where the currency for principal or interest payments is different from the potential investor s currency; understand thoroughly the terms of the Certificates and be familiar with the behaviour of any relevant indices and financial markets; and be able to evaluate either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks. A potential investor should not invest in the Certificates unless it has the expertise either alone or with a financial adviser) to evaluate how the Certificates will perform under changing conditions, the resulting effects on the value of the Certificates and the impact this investment will have on the potential investor s overall investment portfolio. In connection with the issue of the Certificates, Deutsche Bank AG, London Branch the Stabilising Manager ) or persons acting on behalf of the Stabilising Manager) may overallot Certificates or effect transactions with a view to supporting the price of the Certificates at a level higher than that which might otherwise prevail. However, there is no assurance that the Stabilising Manager or persons acting on behalf of the Stabilising Manager) will undertake stabilisation action. Any stabilisation action may begin on or after the date on which adequate public disclosure of the terms of the Certificates is made and, if begun, may be ended at any time, but it must end no later than the earlier of 30 days after the issue date of the Certificates and 60 days after the date of the allotment of the Certificates. Such stabilisation shall be conducted in accordance with all applicable laws and rules. ii

4 FORWARDLOOKING STATEMENTS This Prospectus contains forwardlooking statements. These statements appear in a number of places in this Prospectus and include statements regarding the Bank s intent, belief or current expectations or those of the Bank s Management as defined below) with respect to, among other things: statements regarding the Bank s results of operations, financial condition and economic performance; statements regarding the Bank s competitive position and the effect of such competition on its results of operations, financial condition and economic performance; statements regarding trends affecting the Bank s financial condition, results of operations or economic performance; statements of the Bank s plans, including those related to new products or services, future capital expenditure plans and anticipated customer demand for those products or services and potential acquisitions; statements regarding the impact of the ongoing global financial and market crisis and the ongoing political and military developments in the MENA region; and statements regarding the potential impact of regulatory actions on the Bank s business, competitive position, financial condition, results of operations and economic performance. These forwardlooking statements can be identified by the use of forwardlooking terminology such as believes, expects, may, is expected to, will, will continue, should, approximately, would be, seeks, or anticipates or similar expressions or comparable terminology, or the negatives thereof. Such forwardlooking statements are not guarantees of future performance and involve risks and uncertainties, and actual results, performance, expenditure or achievements of the Bank may differ materially from those expressed or implied in the forwardlooking statements as a result of various factors. The information contained in this Prospectus, including, without limitation, the information under Risk Factors, Management Discussion and Analysis of Financial Condition and Results of Operations, Overview of the Bank and The Banking Sector and Banking Regulation in Lebanon, identifies important factors that could cause such differences. In addition, many other factors, including those which may be beyond the control of the Bank, could affect the Bank s actual condition, results of operations or economic performance and could cause actual results to differ materially from those in the forwardlooking statements. The Bank does not undertake to update any forwardlooking statements made herein. iii

5 PRESENTATION OF FINANCIAL INFORMATION Information in this Prospectus relates to the Issuer, a bank incorporated in Lebanon with limited liability, and its consolidated subsidiaries collectively, the Subsidiaries ). References to the Issuer shall mean BankMed, s.a.l. References to the Bank shall mean, unless otherwise specified or unless the context otherwise requires, the Issuer and its Subsidiaries, taken as a whole. References to Management are to the Issuer s senior management team. References to the Government are to the government of Lebanon. Financial information included in this Prospectus has, unless otherwise indicated, been derived from the Bank s audited annual consolidated financial statements as at and for the years ended 31 December 2011 and 2010, including the notes thereto the 2011 Annual Financial Statements and 2010 Annual Financial Statements, respectively and, together, the Annual Financial Statements ) and the Bank s unaudited, reviewed interim condensed consolidated financial information as at and for the sixmonth period ended 30 June 2012, including the notes thereto the 2012 Interim Financial Statements and, together with the Annual Financial Statements, the Consolidated Financial Statements ). The Bank s Consolidated Financial Statements were prepared in accordance with IFRS as issued by the International Accounting Standards Board and include the results of the Bank and its Subsidiaries. Deloitte & Touche and Ernst & Young p.c.c., members of the Lebanese Association of Certified Public Accountants, have audited the Annual Financial Statements and have reviewed the 2012 Interim Financial Statements. As used in this Prospectus, references to IFRS are to International Financial Reporting Standards. The Bank maintains its accounts in Lebanese Pounds. Accordingly, U.S. Dollar amounts stated in this Prospectus have been translated from Lebanese Pounds at the rate of exchange prevailing at the date of the relevant statement of financial position, in the case of balance sheet data, and at the average rate of exchange for the relevant period, in the case of income statement data, and are provided for convenience only. In each case, the relevant rate for both the statement of financial position and income statement data was LBP 1, per U.S.$1.00, as, throughout the periods covered by this Prospectus, the Central Bank has maintained its policy of pegging the value of the Lebanese Pound to the U.S. Dollar at a fixed rate of LBP 1, per U.S.$1.00. In this Prospectus: references to U.S.$ or U.S. Dollars are to the United States Dollar, the lawful currency of the United States; references to EUR or Euros refer to the currency established for participating member states of the European Union as of the beginning of stage three of the European Monetary Union on 1 January 1999; references to LBP or Lebanese Pounds are to the Lebanese Pound, the lawful currency of Lebanon; and references to TL or Turkish Lira are to the Turkish Lira, the lawful currency of the Republic of Turkey. Certain figures included in this Prospectus have been subject to rounding adjustments; accordingly, figures shown as totals in certain tables may not represent an exact arithmetic aggregation of the figures that precede them. iv

6 INFORMATION FROM PUBLIC SOURCES Certain information included in the sections Risk Factors Risk Factors Relating to Lebanon, Overview of the Bank and The Banking Sector and Banking Regulation in Lebanon has been extracted from information and data publicly released by official sources and other sources that are believed to be reliable, including the Central Bank and Bankdata Financial Services WLL Bankdata ). Throughout this Prospectus, the Bank has also set forth certain statistics, including market shares, from official sources and other sources it believes to be reliable, including its own sources and estimates. Such information, data and statistics may be approximations or estimates or use rounded numbers. The Bank has not independently verified such information, data or statistics, does not guarantee their accuracy and completeness and accepts no responsibility in respect of such information, data and statistics, other than that this information has been accurately reproduced and that, accordingly, as far as the Bank is aware and is able to ascertain from published information, no facts have been omitted that would render the reproduced information inaccurate or misleading. Certain statistical and other information relating to the Lebanese banking sector generally and to the Bank s competitive position in its market and the relative positions of its primary competitors in the sector in particular are generally based on information made available from Bankdata, Central Bank statistics and the Bank s internal sources. Bankdata numbers may differ in certain respects from the Bank s own financial statements and from Central Bank statistics. v

7 CONTENTS IMPORTANT NOTICES...i FORWARDLOOKING STATEMENTS...iii PRESENTATION OF FINANCIAL INFORMATION...iv INFORMATION FROM PUBLIC SOURCES...v CONTENTS...vi RISK FACTORS...1 OVERVIEW...11 TERMS AND CONDITIONS OF THE CERTIFICATES...14 USE OF PROCEEDS...28 CAPITALISATION...29 OVERVIEW OF FINANCIAL INFORMATION...30 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...34 OVERVIEW OF THE BANK...57 MANAGEMENT AND EMPLOYEES...85 THE BANKING SECTOR AND BANKING REGULATIONS IN LEBANON...91 LEBANESE LAWS AND REGULATIONS GOVERNING ISSUANCE OF CERTIFICATES BY COMMERCIAL BANKS OVERVIEW OF PROVISIONS RELATING TO THE CERTIFICATES IN GLOBAL FORM TAXATION SUBSCRIPTION AND SALE GENERAL INFORMATION INDEX TO FINANCIAL STATEMENTS... F1 Page vi

8 RISK FACTORS An investment in the Certificates involves a high degree of risk. Potential investors should review this entire Prospectus carefully and, in particular, should consider, among other things, all risks inherent in making such an investment, including the risk factors set forth below, before making a decision to invest in the Certificates. These risk factors, individually or together, could have a material adverse effect on the Issuer s ability to repay principal of, and make payments of interest and other amounts due on, the Certificates. In addition, factors which the Issuer believes are material for the purpose of assessing the market risks associated with the Certificates are also described below. The value of the Certificates could decline due to any of these risks and prospective investors may lose some or all of their investment. Words and expressions defined in the Terms and Conditions of the Certificates below or elsewhere in this Prospectus have the same meanings in this section. Risk Factors Relating to Lebanon Political and Economic Considerations Lebanon s financial environment is related to the overall political, social, economic and security situation in Lebanon, which, in turn, is tied to the absence of military conflict in Lebanon and among its neighbours and continued internal stability. A combination of internal and external factors led to a heavily militarised conflict, which lasted from April 1975 until October Successive rounds of fighting took place, aggravated by two Israeli military invasions in 1978 and The conflict resulted in significant human losses, a substantial decline in GDP and reduction of economic activity, a significant reduction of Government authority, substantial physical and infrastructure damage, and a large public sector deficit and capital outflows. The postconflict era has been characterised by large reconstruction and institutionbuilding efforts, which resulted in large public sector deficits and setbacks in the implementation of political and economical reforms due, among other matters, to differences in views between political leaders and disagreements within the executive branch of the Government. Lebanon has witnessed a series of significant adverse events in recent years, which have affected and may continue to affect the Lebanese economy and the finances of the Government, including the assassination of the former Prime Minister, Rafic Hariri, a campaign of assassinations and attempted assassinations of other political leaders and public figures, the adoption of a series of United Nations Security Council Resolutions, including Resolution 1757, which established the Special Tribunal for Lebanon the STL ) to prosecute persons responsible for the bombing that killed former Prime Minister Hariri, the withdrawal of Syrian army troops from Lebanon, the July 2006 War and its effects on Lebanon s population, economy and infrastructure, the resignation of six ministers; representing the opposition; from the Government, followed by the opposition s sitin in downtown Beirut, as well as the failure of Parliament to convene during an 18month period, the Lebanese Security Forces taking over control of Nahr ElBared camp after clashes with a terrorist organisation from May to September 2007, the armed clashes that took place in Beirut, Northern Lebanon, the Bekaa Valley and the Chouf Mountains in May 2008, the sixmonth vacancy in the office of the President of Lebanon, which ended with the election of General Michel Sleiman as President on 25 May 2008, rising tensions surrounding the filing of an indictment by the then Prosecutor of the STL, in the case of the assassination of former Prime Minister Rafic Hariri and his companions, including speculation surrounding the identity of parties who could be charged, the resignation of the Government headed by Prime Minister Saad Hariri pursuant to Article 69 of the Constitution following the resignations of ten ministers representing the 8 March Coalition, as well as one of the five ministers representing the President of Lebanon, and the delay in the formation of the Government. On 25 January 2011, following mandatory Parliamentary consultations, 68 Members of Parliament nominated Mr. Najib Mikati as President of the Council of Ministers, while 60 Members of Parliament nominated Mr. Saad Hariri. Accordingly, President Suleiman appointed Mr. Mikati to this position. On 13 June 2011, a new Government, headed by Prime Minister Najib Mikati and comprised of 30 other ministers, was formed, and on 7 July 2011, this Government obtained the vote of confidence from Parliament with a vote of 68 members in favour, out of a total number of 128 members of Parliament) on the basis of the policy declaration submitted by the Government. The new Government does not include representatives of the 14 March Coalition, who participated in the debate preceding the vote of confidence, but withdrew from the parliamentary session prior to the vote. The opposition of the 14 March Coalition to the Government was centred primarily on the 1

9 Government s prospective approach to, and dealings with, the STL, as well as the fate of Hizbollah s weapons. On 28 June 2011, the PreTrial Judge of the STL confirmed an indictment filed by the then Prosecutor of the STL in the case of the assassination of, among others, former Prime Minister Rafic Hariri. The indictment and accompanying arrest warrants for four individuals, who are reportedly members of Hizbollah, were transmitted to the Lebanese authorities on 30 June According to STL procedures, the Lebanese authorities were required to inform the President of the STL within 30 days after the confirmation of the indictment of the measures Lebanon had taken to arrest the persons named in the indictment. The Lebanese authorities informed the STL that they were unable to locate or arrest these individuals. On 30 November 2011, the Government transferred U.S.$32 million to cover Lebanon s share of the STL s expenses for The Association of Lebanese Banks subsequently announced that it transferred funds in the same amount to the Government as an act of support to the Government. The political effects of the current internal conflict in Syria are escalating the tension among the different Lebanese political parties, which may lead to more clashes between supporters of the Syrian government and supporters of the Syrian opposition. This is becoming more visible as a result of the adverse events that have occurred in Tripoli and other regions of Lebanon. There were also armed clashes over several days in the spring of 2012 in Tripoli between residents of the Jabal Mohsen neighbourhood, who are thought to be supportive of the Syrian government, and residents of the Bab Al Tabbaneh neighbourhood, who are thought to be opposed to the Syrian government. The clashes resulted in 18 deaths and more than 70 injuries. There were further armed clashes in August 2012 in Tripoli between residents of the neighbourhoods. The clashes resulted in 12 further deaths and more than 100 injuries. The Lebanese army and internal security forces have largely restored order in the city. All political parties in Tripoli have undertaken to support order and stability in the city. On 9 August 2012, former minister Michel Samaha was arrested and subsequently indicted for preparing to incite sectarian trouble through terrorist attacks in Lebanon. An arrest warrant was also issued by Lebanese authorities for a highranking Syrian official. The investigation is ongoing. There were further sectarian armed clashes in August 2012 in Tripoli between armed groups in the Jabel Mohsen and the Bab AlTabbaneh neighbourhoods. The clashes resulted in 12 deaths and more than 100 injuries. The Lebanese army and internal security forces had largely restored order in the city, but clashes resumed after the death of Brigadier General Wissam alhassan. These clashes have since eased. On 19 October 2012, a car bomb exploded in the Ashrafiyeh district of Beirut, killing Brigadier General Wissam alhassan, the head of the Intelligence Bureau of the Internal Security Forces, his assistant and another person and wounding over 100 people. There were protests, sometimes violent, following this assassination by supporters of the 14 March Coalition, which is in opposition. The 14 March Coalition has called for the resignation of the Prime Minister and the Cabinet, and certain parties, including the Future Party and the Lebanese Forces, have also called for a boycott of Parliamentary sessions and other dealings with the Cabinet until the Cabinet resigns. The President is conducting consultations with the major political parties to discuss the possible formation of a cabinet of national unity. In a meeting with the President on 22 October 2012, a senior United Nations official and representatives of the five permanent members of the Security Council condemned the attempts to destabilise Lebanon through political assassination and expressed their determination to support the Government of Lebanon to put an end to impunity. Any deterioration of the political, social, economic and security environments in Lebanon could materially affect the political, economic and financial climate in Lebanon and, accordingly, would have a material adverse effect on the Bank s business, liquidity, results of operations, financial condition and prospects. Regional and International Considerations; Events in Syria Lebanon is located in a region that is and has been subject to ongoing political and security concerns. Political instability in the MENA region has increased since the terrorist attacks of 11 September 2001, the U.S. intervention in Iraq, Iran s reported nuclear programme and the ongoing violence in Syria. Some Middle Eastern and North African countries have experienced in the recent past or are currently experiencing political, social and economic instability, extremism, terrorism, armed conflicts and war, some of which have negatively affected Lebanon and are likely to continue to do so. 2

10 Since January 2011, a number of Arab countries have experienced significant political and military upheaval, conflict and revolutions leading to the departure of longterm rulers in Tunisia, Egypt, Yemen and Libya. The continuation of such events or the outbreak of new problems in such regions could negatively affect Lebanon s economy. Syria has recently been experiencing significant civil unrest and internal conflict. Although the stated policy of the Government has been to maintain neutrality with respect to the events in Syria in an attempt to shield Lebanon from any repercussions, these events have had, and are likely to continue to have, an adverse impact on the political and economic situation in Lebanon. These adverse economic consequences include, among others, a disruption to the transit of Lebanese and international goods through Syria, resulting in higher transit fees for Lebanese exporters, a decline in tourism from Syria and other Arab countries, the incursion of violence from Syria into Lebanon and losses incurred by Lebanese companies, including financial institutions, with subsidiaries or affiliates in Syria. There are divisions in Lebanon between supporters of the Syrian government and supporters of the Syrian opposition. In addition, Lebanon has experienced an inflow of Syrian refugees fleeing the conflict. If this increases, it may have an adverse impact on Lebanon, particularly on Lebanon s natural resources, housing and food. As a result of the political turmoil and social instability in Lebanon and the surrounding region, especially Syria, Lebanon has experienced frequent social and civil unrest, which has, on occasion, escalated into violence, sometimes of a general nature and more often with particular political or civil targets. In addition, there is a significant risk of events in the countries bordering Lebanon spilling over into Lebanon. For example, in retaliation for the detention of a member of the Lebanese AlMeqdad clan in Syria, reportedly by the Free Syrian Army, in August 2012, members of the clan abducted individuals, including two Turkish and a number of Syrian nationals. A number of other kidnappings for ransom took place in Lebanese territory. As a result, Turkey, Saudi Arabia, Qatar and other Gulf countries have issued travel warnings for their citizens about travel to Lebanon. The Lebanese Army and internal security forces rescued a number of detainees and other kidnap victims and arrested some of the perpetrators. On 17 September 2012, Syrian aircraft fired missiles into Lebanese territory near the border town of Arsal. President Sleiman has ordered an investigation into this event and other border violations. The social, political and economic conditions behind the unrest in the region are not likely to be resolved in the near future and, accordingly, could continue to materially adversely affect Lebanon s economy. If future disturbances were to occur, they could lead to further political and economic instability, as well as a loss of confidence in business investment in Lebanon, which would have a material adverse effect on the Bank s business, liquidity, results of operations, financial condition and prospects. Global Financial Crisis The recent global financial crisis contributed to the failures of a number of financial institutions in the United States and Europe and unprecedented action by governmental authorities, regulators and central banks around the world. Its effects continue to be felt, with some countries, in particular in the European Union EU ), experiencing difficulties with refinancing their debt obligations. As a result of market turmoil, there is significant price volatility in the secondary market for instruments similar to the Certificates. Moreover, systemic risk within the financial system and the related general deterioration in global economic conditions could result in a decline in the recoverability and value of the market price of the Certificates. It is difficult to predict how long the volatility in the financial sector and capital markets will persist or whether related concerns about further failures of financial and other institutions will exacerbate the prevailing difficulties in the global economy and, accordingly, it is not possible to foresee the specific impacts these conditions may have on the Bank. Although the Bank intends to continue to focus on controlled growth and asset quality, any contraction of its key markets will impact the Bank. If current global market conditions and circumstances deteriorate further, or continue for protracted periods of time, this could lead to a decline in available funding and credit quality and increases in defaults and nonperforming debt, which may impact the rating, investments and finances of the Bank. In particular, the global financial crisis and general slowdown in economic activity in Lebanon may have adverse effects on the Bank s assets and profitability. 3

11 As a result of all of the foregoing, there is significant price volatility in the secondary market for instruments similar to the Certificates and the systemic risks within the financial system and any related general deterioration in global economic conditions could result in a decline in the market price of the Certificates. Lebanese Banking Sector On 10 February 2011, the U.S. Department of the Treasury designated Lebanese Canadian Bank, s.a.l. LCB ) as a financial institution of primary money laundering concern under Section 311 of the U.S. PATRIOT Act. In its finding, the U.S. Department of the Treasury noted that the Lebanese banking sector generally faces certain vulnerabilities. The Central Bank is taking measures to address the concerns raised by the U.S. Department of the Treasury and has arranged for the sale of assets of LCB. In April 2011, the U.S. Ambassador to Lebanon stated that the U.S. government is not targeting the Lebanese banking sector in general and views LCB as an isolated case. The U.S. government has since filed a claim in New York against LCB and other parties seeking to attach certain assets. On 20 August 2012, the U.S. Attorney for the Southern District of New York and the U.S. Drug Enforcement Administration announced the seizure of U.S.$150 million from an account at a U.S. bank maintained by a Lebanese bank other than the Bank or LCB. The U.S. Attorney stated that the seized funds are substitutes for funds held in an escrow account for LCB shareholders maintained at the Lebanese bank and further stated that there were no allegations of wrongdoing against the affected Lebanese bank or the correspondent U.S. bank. Although the Bank is not a party to these proceedings, further claims or actions filed against other participants in the Lebanese banking sector could further damage the sector, including, inter alia, to the sector s international reputation, which could, in turn, have a material adverse effect to the Bank s business, liquidity, results of operations, financial condition and prospects, as well as on other Lebanese banks. United Against Nuclear Iran UANI ), a New Yorkbased advocacy group that seeks to prevent Iran from obtaining nuclear weapons, has launched a campaign against the Lebanese banking sector, the Central Bank and Lebanon, alleging, inter alia, that the Lebanese banking sector and the Central Bank have been engaged in money laundering activities and facilitating the evasion of international sanctions imposed upon Iran. UANI has called on international holders of Lebanese sovereign debt to divest their ownership of such securities. Although Lebanon has stated that it views UANI s allegations as being without merit, if UANI is successful in leading a divestiture of Lebanese sovereign or other securities, it could have a material adverse effect on the banking sector and the Bank s business, liquidity, results of operations, financial condition and prospects, as well as other Lebanese banks. Budget Deficit and Public Debt In recent years, the Government has incurred significant internal and external debt, principally for the purpose of financing the budget deficits. Expenditures during this period, mainly consisting of payments for wages and salaries, reconstruction and expansion projects, other current expenditures and debt service, have exceeded revenues. Total expenditures increased by approximately 3.2 per cent. in 2011, as compared to Net outstanding public debt as a percentage of estimated GDP increased from approximately 46 per cent. in 1992 to approximately 169 per cent. as of 31 December 2006 before decreasing to 156 per cent. as of 31 December 2007, 140 per cent. as of 31 December 2008, 127 per cent. as of 31 December 2009, 121 per cent. as of 31 December 2010 and 119 per cent. as of 31 December Despite this trend, Lebanon is suffering from a large budget deficit and the debt burden of the Lebanese Government is significant, accounting for the largest part of expenditures in recent years. In 2011, debt service represented approximately 42.9 per cent. of total expenditures and 34.3 per cent. of total revenues. The Government has been authorised to incur significant additional expenditures, including under Law No. 181, providing for an increase in electricity production capacity and the expenditure of an aggregate of approximately U.S.$1.2 billion over a four year period commencing in The Ministry of Finance accounted for the 2011 expenditures under Law No. 181 in its current spending plan for the year and for the 2012 expenditures in the draft 2012 budget originally submitted by the Minister of Finance to the Council of Ministers, but which has since been withdrawn. This and other expenditures, such as an expected increase in public sector wages, pursuant to a proposal to be submitted to Parliament by the Government, following an increase in private sector wages from LBP 500,000 to LBP 675,000), could have a negative effect on budgetary performance if not offset by revenue compensatory measures or a reduction in expenditure. On 19 September 2012, the Council of Ministers approved a draft law authorising the Government to spend up to LBP 2.4 trillion equivalent to U.S.$1,592 million) over the next five years for the purposes of equipping the Lebanese army. The draft law has not yet been transmitted to Parliament. If the law is passed, disbursements in 4

12 2013 should not exceed U.S.$100 million, although the Council of Ministers resolution notes that the Government will endeavour to finance most of these expenditures through grants. The further growth of the Government s debt and the inability of the Government to reduce Government debt could adversely affect the Lebanese economy, which could, in turn, have a material adverse effect on the financial condition, results of operation and profitability of the Bank. Foreign Exchange Risk; Monetary Policy Lebanon s economy is highly dollarised. The Central Bank s data indicate that the proportion of foreign currency deposits as a share of total deposits stood at approximately 64 per cent. as at 31 December 2009, 63 per cent. as at 31 December 2010 and 66 per cent. as at 31 December The Central Bank s exchange rate policy since October 1992 has been to anchor the Lebanese Pound s nominal exchange rate to the U.S. Dollar. The Central Bank has been successful during the past several years in maintaining a stable rate of exchange, through the use of its foreign exchange reserves and its interest rate policy, although it has come under pressure during periods of political instability. Although the Lebanese authorities have indicated that they expect to continue to gear monetary policy towards maintaining stability in the exchange rate, there can be no assurance that the Central Bank will continue to be willing, or able, to maintain a stable currency through intervention in the exchange markets or otherwise. Any depreciation of the Lebanese Pound against the U.S. Dollar, or the decline of the level of foreign reserves as a result of the Central Bank s intervention in the currency markets, could materially impair Lebanon s ability to service its debt, which could have a material adverse effect on the Bank s business, liquidity, results of operations, financial condition and prospects. Furthermore, any such depreciation could adversely affect the financial condition or results of operations of Lebanese companies generally, including the Bank and its customers located or doing business in Lebanon. As a substantial portion of the loans of banks operating in Lebanon, including the Bank, are denominated in U.S. Dollars, a devaluation of the Lebanese Pound would increase the debt service burden of borrowers whose income is in Lebanese Pounds and, therefore, would likely increase the level of the Bank s nonperforming loans. Prices and Inflation Depreciation of the Lebanese Pound has created pressure on the domestic price system that generated high rates of inflation, reaching 120 per cent. in 1992 prior to the first Hariri Government. Since 2001, estimated inflation has moderated, but has fluctuated considerably. Inflation increased in 2010, with the Central Administration of Statistics CAS ) estimating inflation at 4.6 per cent. on an endofperiod basis and 4.0 per cent. on a periodaverage basis, and the International Monetary Fund IMF ) estimating inflation at 4.5 per cent. on a periodaverage basis. Inflation in 2011 was estimated by CAS at 3.1 per cent. on an endofperiod basis, and compared to 5.5 per cent. according to the IMF s estimate. On a periodaverage basis, inflation in 2011 increased, with CAS estimating inflation at 5.1 per cent., compared to an IMF estimate of 5.4 per cent. The increases in both 2010 and 2011 were principally due to the worldwide increase in energy, food and other commodity prices. The inflation figure published by CAS for September 2012 as compared to September 2011) was 10.3 per cent., due mainly to increases in the prices of housing and alcoholic beverages and tobacco. The IMF s preliminary inflation projection is 4.0 per cent. for 2012 and 3.3 per cent. for 2013 on a periodaverage basis. There is no assurance that inflation will not rise in the future. An increase in inflation would have a material adverse effect on Lebanon s economy and, in turn, could have a material adverse effect on the Bank s business, liquidity, results of operations, financial condition and prospects. Risk Factors relating to the Bank and the Lebanese Banking Industry Exposure to Lebanese Sovereign Risks In common with other Lebanese banks, a significant portion of the Bank s liquidity in both Lebanese Pounds and foreign currency is invested in Government obligations or maintained as reserves with the Central Bank. The composition of the Bank s investment and trading portfolio and placements with the Central Bank remained 5

13 relatively stable as at 30 June 2012, 31 December 2011 and 31 December 2010, with Lebanese treasury bills and bonds and placements with the Central Bank in both Lebanese Pounds and foreign currency) comprising 39.6 per cent. of the Bank s interestearning assets as at 30 June 2012, as compared to 42.9 per cent. as at 31 December 2011 and 45.6 per cent. as at 31 December In addition, Government securities and the Bank s Central Bank placements accrual book generated 27.1 per cent. of the Bank s revenues interest income, fee and commission income, net results on financial instruments, gain from derecognition of financial assets and other operating income) in the sixmonth period ended 30 June 2012, as compared to 33.3 per cent. for the year ended 31 December 2011 and 34.1 per cent. for the year ended 31 December Government securities and Central Bank placements transactions capital gains revenues generated 14.0 per cent. of the Bank s revenues interest income, fee and commission income, net results on financial instruments, gain from derecognition of financial assets and other operating income) for the six months ended 30 June 2012, as compared to 5.7 per cent. for the year ended 31 December 2011 and 6.0 per cent. for the year ended 31 December Such investments are generally considered to be relatively illiquid such that, in the event that the Bank were to attempt to sell a significant portion of its holdings, it would likely experience a discount on the price, which could be substantial. See Liquidity and Maturity Mismatching. As a result, any default by the Government or the Central Bank on any of its obligations, or any significant reduction in value or liquidity of Government securities the Bank holds, or in the regulatory or accounting treatment thereof, would have a material adverse effect to the Bank s business, liquidity, results of operations, financial condition and prospects, as well as on other Lebanese banks. Regional and International Expansion Some of the countries in which the Bank has existing operations, or is considering developing operations, have in the past experienced or are currently experiencing periods of political instability and, in some cases, civil unrest and clashes, or are located in regions characterised by instability. Such political and social unrest that may characterise the regions where the Bank has or may commence operations has, at times, adversely affected the banking sectors in these jurisdictions and there can be no assurance that social and civil disturbances will not occur in the future. In fact, in many cases, these conditions are not likely to be resolved quickly and, accordingly, could lead to further political and economic instability, as well as loss of confidence in business investment in the regions where the Bank currently operates or may operate in the future. As a result, particularly as the Bank expands its operations geographically, regional political and social instability both generally and in local banking sectors in particular could materially adversely affect the Bank s business, liquidity, results of operations, financial condition and prospects. In addition, there can be no assurance that the Bank will be able to achieve and effectively manage the growth of its operations in foreign countries. A failure to expand and manage growth as planned or to achieve effective marketing strategies may have a material adverse effect on the Bank s business, liquidity, results of operations, financial condition and prospects, as well as on other Lebanese banks. Acquisitions and Divestitures The Bank has historically pursued and intends to continue to implement a strategic plan that envisages selective acquisitions to further its growth. Risks relating to recent and future acquisitions include: difficulties in the integration of operations, technologies, products and personnel of acquired entities; diversion of Management s attention away from other business concerns; expenses relating to undisclosed or unknown potential liabilities of acquired entities; limitations on foreign ownership of banking or corporate institutions; and the incurrence of debt and the assumption of liabilities, including contingent liabilities. Moreover, the Bank s ability to implement its acquisition strategy in certain countries may be hindered due to a scarcity of acquisition targets or competition from other potential acquirers in the acquisition process. Any of the foregoing could have a material adverse effect on the Bank s business, liquidity, results of operations, financial condition and prospects. 6

14 Liquidity and Maturity Mismatching Although the Bank s balance sheet appears to indicate a high level of liquidity, the Bank, along with other Lebanese financial institutions, has utilised a portion of these liquidity levels to invest in longerterm higheryielding assets, namely Lebanese treasury bills and other financial papers traded in regulated markets. While much of the Bank s investment portfolio is funded by comparatively shorterterm customer deposits, the investments are comprised nominally of Lebanese governmental securities, including, in particular, Lebanese treasury bills, which are often, in practice, characterised by limited liquidity. See Exposure to Lebanese Sovereign Risk. As a result, although historically the Bank has been able to roll over the significant majority of its deposits, and these securities typically may be liquidated in times of crisis according to discount arrangements or repurchase agreements with the Central Bank, there can be no assurance that the Bank will be able to liquidate all or a portion of its portfolio of Lebanese treasury bills if it became necessary or advisable to do so. As a result, investors should not assume that the Bank s liquidity, as measured by its balance sheet, will continue to be available, but instead should be aware that the Bank, in common with other banks in Lebanon, may be required to rely on other, more expensive, funding sources. Any failure to source funding through less expensive deposits, if at all, would have a material adverse effect on the Bank s business, liquidity, results of operations, financial condition and prospects. Interest Rate Sensitivity As a result of the maturity mismatch between its deposits and assets, the Bank, in common with most Lebanese banks, is exposed to the risk of any sharp increase in shortterm interest rates. Like most commercial banks in Lebanon and the MENA region, the Bank realises income from the margin between interest earned on its assets and interest paid on its liabilities. Because many of the Bank s assets and liabilities reprice at different times, the Bank is vulnerable to fluctuations in market interest rates. Typically, the Bank s liabilities reprice substantially more frequently than its assets and, as a result, if interest rates rise, the Bank s interest expense will increase more rapidly than its interest income, which could negatively affect interest margins and result in liquidity problems. The Bank is limited in its ability to reprice assets more frequently and to mitigate this risk, since many of the securities held in the Bank s investment portfolio either have fixed interest rates or longerterm variable interest rates. As a result, volatility in interest rates could have a material adverse effect on the Bank s business, liquidity, results of operations, financial condition and prospects. Ordinary Course Banking Risks In the ordinary course of its business activities, the Bank is exposed, in common with other commercial banks, to a variety of financial, market and operational risks, including credit risk, market risk, currency risk, interest rate risk, prepayment risk, equity price risk, liquidity risk and operational risk. Whilst Management believes that these risk management policies and procedures are appropriate and sufficient to control and mitigate such risks, any failure to adequately control these risks could be greater than anticipated and could, in turn, have a material adverse effect on the Lebanese economy, the Bank s business, liquidity, results of operations, financial condition and prospects. International Capital Adequacy Reform In 2001, the Basel Committee issued a proposal for a new capital adequacy framework to replace the previous Basel Accord issued in In this proposal, the Basel Committee proposes replacing the existing approach with a system that would use both external and internal credit assessments for determining risk weightings to be applied to exposures to sovereign states. It is intended that such an approach will also apply, either directly or indirectly and to varying degrees, to the risk weighting of exposures to banks, securities firms and corporations. Pursuant to Central Bank Decision No dated 1 April 2006, as amended Decision 9302 ), adopted with respect to the application of the Basel II International Convention regarding Capital Adequacy the Basel II Accord ), all banks operating in Lebanon must apply the Basel II Accord for the calculation of capital adequacy on a consolidated and nonconsolidated basis, where applicable, from 1 January 2008 in accordance with the standards set forth in Decision 9302 and any subsequent decisions adopted in that regard. Since 31 December 2006, Lebanese banks have included reserves for unspecified banking risk in their calculation of their capital adequacy ratio. Pursuant to Article 7 of Decision 9302, banks operating in Lebanon were required to appoint an expert in risk management to be in charge of applying the Basel II Accord and notify the Banking Control Commission of the name of such person and contact details prior to 30 April The Bank has fulfilled these requirements. 7

15 In addition, in order to increase the capital resources of the Lebanese banking sector and to respond to potential and unexpected losses, in December 2011, the Central Bank issued Intermediary Circular No. 282 requiring banks to gradually raise their capital adequacy ratios by the end of Pursuant to that Circular, banks are required to have raised their Common Equity Tier 1 ratio to eight per cent. defined as the ratio of common equity Tier 1 capital to total weighted assets), their Tier 1 ratio to ten per cent. defined as the ratio of Tier 1 capital to total weighted assets) and their total capital ratio to 12 per cent. defined as the ratio of the sum of the Tier 1 ratio and the Tier 2 ratio to total weighted assets) by the end of The circular also imposes intermediate annual thresholds for such ratios from the end of The requirements are in line with the Basel III accord. These requirements could cause financial institutions that lend to Lebanese banks, including the Bank, to be subject to higher capital requirements as a result of the credit risk rating assigned to Lebanon and, accordingly, to Lebanese entities constrained by the sovereign ceiling. The framework could also require Lebanese banks to be subject to higher capital requirements based on loans made to, and investments in securities issued by, Lebanese entities including the Government) of up to 150 per cent. of the respective asset class. As a result, along with other Lebanese banks, the Bank may become subject to higher borrowing costs, which may adversely affect the Bank s results of operations and financial condition, and the Bank may be required to raise new equity, which may or may not be available to it, in order to meet new, more stringent capital requirements. Competition The market for financial and banking services in Lebanon is competitive. As at the date of this Prospectus, there were 42 active commercial banks with 902 operational branches in Lebanon), two specialised mediumand longterm credit banks, 48 financial institutions, 11 brokerage institutions, two leasing companies in the financial sector and ten representative offices of foreign banks in Lebanon, which has a population of approximately 4.0 million people. These banks include large international financial institutions with access to larger and cheaper sources of funding. Competition to attract depositors and quality borrowers and to provide feebased services to customers has been particularly intense since the end of the civil war in Due to the intensity of such competition and the increasing number of institutions offering financial and banking services in Lebanon, in common with other Lebanese banks, the Bank s average cost of deposits and lending margins, have decreased. Depending on the continuing extent and intensity of the competition, in common with other Lebanese banks, the Bank s interest expenses may increase and its revenues may decrease. Deposits from, and Loans and Advances to, Related Parties Certain of the heirs of the late Mr. Rafic Hariri are the ultimate beneficial owners of substantially all of the Bank s shares. Mr. Rafic Hariri was the former Prime Minister of Lebanon. One of Mr. Rafic Hariri s heirs, Mr. Saad Hariri, is also one of the former Prime Ministers of Lebanon and is currently the leader of the largest block in Parliament. In addition, as disclosed elsewhere in this Prospectus, a) deposits from, and loans and advances to, related parties represent a significant, although declining, portion of the Bank s business and b) the Bank and entities controlled by certain of Mr. Rafic Hariri s heirs have entered into certain related party transactions. Substantially all of the Bank s loans and advances to related parties are secured by cash collateral. See Notes 11, 22 and 23 to the 2011 Annual Financial Statements and Note 17 to the 2012 Interim Financial Statements. These factors, taken individually and collectively, render the Bank sensitive to political developments in Lebanon in general. Concentration in the Bank s Loan Portfolio The Bank s loan portfolio reflects some sector concentrations. As at 31 December 2011, loans and advances to customers net of provisions for nonperforming loans, allowance for collectively assessed loans and unrealised interest) in the real estate development and construction sectors accounted for 34.3 per cent. of the Bank s total loans and advances to customers 30.0 per cent. as at 31 December 2010). See Overview of the Bank Loan Portfolio. Downturns in the residential and commercial real estate sector in Lebanon and in the regions where its customers operate may result in a decline in the value of the collateral securing the Bank s loans, which, in turn, could have a material adverse effect on the Bank s business, liquidity, results of operations, financial condition and prospects. 8

16 Service of Process; Enforcement of Liabilities and Foreign Judgments Legal recourse against the Bank may be limited. The Bank is a jointstock company organised under the laws of Lebanon. Moreover, most of the members of the Board of Directors the Board of Directors or the Board ), executive officers of the Bank named herein are residents of Lebanon and the substantial majority of the assets of the Bank and of such persons are located in Lebanon. As a result, it may not be possible to effect service upon the Bank or such persons outside Lebanon or to enforce judgments obtained against such parties outside Lebanon. Enforcement of such foreign judgments in Lebanon is subject to the satisfaction of various conditions including that such judgments not be contrary to public policy in Lebanon) and also involves the payment of significant court and related fees, which may be as high as 3.0 per cent. of the amount claimed. Court costs and fees in connection with a direct action brought in Lebanese courts may at each level of prosecution or appeal also be as high as 3.0 per cent. of the amount claimed. Risks Relating to the Certificates Price Volatility and Illiquidity The Certificates may experience significant volatility in their market price and may decline in value. Prior to their listing and admission to trading, there has been no prior public market for the Certificates. In addition, an active market may not develop for the Certificates on the Luxembourg Stock Exchange or otherwise. Prices in Lebanese securities have, from time to time, experienced significant price fluctuations, which may be heightened by lower overall trading volumes than the volumes that may be typical for securities in larger, more established markets. The Certificates may be redeemed prior to maturity In the event that the Issuer would be obliged to increase the amounts payable in respect of any Certificates due to any change or amendment to the laws of regulations of Lebanon or any political subdivision of or any authority thereof or therein having power to tax, or any change in the application or official interpretation of such laws or regulations, the Issuer may redeem all outstanding Certificates in accordance with the Conditions. See Terms and Conditions of the Certificates Redemption. Because the Global Certificates are held by or on behalf of Euroclear and Clearstream, Luxembourg, investors will have to rely on their procedures for transfer, payment and communication with the Issuer The Certificates will be represented by the Global Certificate except in the certain limited circumstances described in the Global Certificate. The Global Certificate will be registered in the name of BT Globenet Nominees Limited, as nominee for, and deposited with, the common depositary for Euroclear and Clearstream, Luxembourg. Individual Certificates evidencing holdings of Certificates will only be available in certain limited circumstances. Euroclear and Clearstream, Luxembourg will maintain records of the beneficial interests in the Global Certificate. While the Certificates are represented by the Global Certificate, investors will be able to trade their beneficial interests only through Euroclear and Clearstream, Luxembourg. The Issuer will discharge its payment obligations under the Certificates by making payments to, or to the order of, the common depositary for Euroclear and Clearstream, Luxembourg for distribution to their account holders. A holder of a beneficial interest in the Global Certificate must rely on the procedures of Euroclear and Clearstream, Luxembourg to receive payments under the Certificates. The Issuer has no responsibility or liability for the records relating to, or payments made in respect of, beneficial interests in the Global Certificate. Holders of beneficial interests in the Global Certificate will not have a direct right to vote in respect of the Certificates. Instead, such holders will be permitted to act only to the extent that they are enabled by Euroclear and Clearstream, Luxembourg to appoint appropriate proxies. Similarly, holders of beneficial interests in the Global Certificate will not have a direct right under the Global Certificate to take enforcement action against the Issuer in the event of a default under the Certificates, but will have to rely upon their rights under the Deed of Covenant. 9

17 Legal Investment Considerations The investment activities of certain investors are subject to legal investment laws and regulations, or review or regulation by certain authorities. Each potential investor should consult its legal advisers to determine whether and to what extent: i) Certificates are legal investments for it; ii) Certificates can be used as collateral for various types of borrowing; and iii) other restrictions apply to its purchase or pledge of any Certificates. Financial institutions should consult their legal advisors or the appropriate regulators to determine the appropriate treatment of Certificates under any applicable riskbased capital or similar rules. No Deposit Insurance The Certificates: i) are not guaranteed, insured or otherwise backed by the credit of any government or any agency or political subdivision thereof; and ii) are not guaranteed or insured by any private deposit insurance corporation or agency. Market Conventions relating to Interest In accordance with current Central Bank requirements, interest on any certificates of deposit issued by Lebanese banks, such as Certificates, is required to be, and interest on the Certificates would be, calculated on the basis of a 365day year, irrespective of any otherwise applicable market conventions such as the U.S. 360day interest basis). EU Savings Directive Under EC Council Directive 2003/48/EC on the taxation of savings income, each Member State of the European Economic Area Member States ) is required to provide to the tax authorities of another Member State details of payments of interest or other similar income paid by a person within its jurisdiction to, or collected by such a person for, an individual resident or certain limited types of entity established in that other Member State; however, for a transitional period, Austria and Luxembourg may instead apply a withholding system in relation to such payments, deducting tax at a rate of 35 per cent. The transitional period is to terminate at the end of the first full fiscal year following agreement by certain noneu countries to the exchange of information relating to such payments. A number of noneu countries, and certain dependent or associated territories of certain Member States, have adopted similar measures either provision of information or transitional withholding) in relation to payments made by a person within its jurisdiction to, or collected by such a person for, an individual resident or certain limited types of entity established in a Member State. In addition, the Member States have entered into provision of information or transitional withholding arrangements with certain of those dependent or associated territories in relation to payments made by a person in a Member State to, or collected by such a person for, an individual resident or certain limited types of entity established in one of those territories. The European Commission has proposed certain amendments to the Directive, which may, if implemented, amend or broaden the scope of the requirements described above. Investors who are in any doubt as to their position should consult their professional advisers. Holders who are individuals should note that no additional amounts would be payable by the Issuer, pursuant to Condition 7 of the Terms and Conditions of the Certificates, in respect of any withholding tax imposed as a result thereof. 10

18 OVERVIEW Words and expressions defined in the Terms and Conditions of the Certificates below or elsewhere in this Prospectus have the same meanings in this Overview. As this Overview sets forth only summary information, it does not contain all the information that may be important to investors and the information is qualified by, and should be read in conjunction with, all of the information set forth in this Prospectus in its entirety. The Issuer: Manager: Selling Agent: BankMed, s.a.l., a bank incorporated in Lebanon with limited liability and commercial registry number Beirut Deutsche Bank AG, London Branch MedInvestment Bank, s.a.l. The Certificates: U.S.$500,000, per cent. Deposit Certificates due Issue Price: per cent. of the nominal principal amount of the Certificates. Issue Date: Expected to be on or about 14 December Maturity Date: Use of Proceeds: Interest: Status: Form and Denomination: Tax Redemption: Negative Pledge: Cross Default: Events of Default: 14 December 2017, unless previously redeemed for tax reasons. General corporate purposes, which may include the refinancing of existing indebtedness of the Issuer. See Use of Proceeds. The Certificates will bear interest from and including the Issue Date at a rate of per cent. per annum payable semiannually in arrear on 14 June and 14 December in each year commencing 14 June 2013 until their maturity whether at their stated maturity or upon earlier redemption or acceleration). The Certificates constitute direct, general, unconditional, unsubordinated and, subject to the provisions of Condition 3 Negative Pledge), unsecured obligations of the Issuer and will rank pari passu in priority of payment, without any preference among themselves, with all other present and future unsecured and unsubordinated indebtedness of the Issuer, except for any obligations that may be preferred by provisions of law that are both mandatory and of general application. The Certificates will be in registered form and issued, offered and sold in denominations of, and may be held and transferred in the principal amounts of, U.S.$200,000 and integral multiples of U.S.$1,000 in excess thereof. The redemption of Certificates prior to maturity is permitted only upon certain changes in the taxation laws of Lebanon. Upon the redemption of any Certificate pursuant to the terms thereof, such Certificate shall no longer be deemed to be outstanding. See Terms and Conditions of the Certificates Redemption for Tax Reasons. The Terms and Conditions of the Certificates contain a negative pledge of the Bank and certain of its subsidiaries. See Terms and Conditions of the Certificates Negative Pledge. The Terms and Conditions of the Certificates the Conditions ) contain a cross default in respect of Indebtedness as defined in the Conditions) of the Bank and certain of its subsidiaries. See Terms and Conditions of the Certificates CrossDefault of the Issuer or Material Subsidiary. For a description of certain other events of default that will permit the Certificates to become, by written notice to the Issuer, immediately due and 11

19 payable at their principal amount, together with accrued interest, see Terms and Conditions of the Certificates Events of Default. Rating: The Certificates are expected to be rated B by S&P. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation. Any change in the rating of the Certificates could adversely affect the price that a purchaser would be willing to pay for the Certificates. As at the date of this Prospectus, S&P is established in the EU and registered under the CRA Regulation. As such, S&P is included in the latest update of the list of registered credit rating agencies published by the European Securities and Markets Authority on its website in accordance with the CRA Regulation as of the date of this Prospectus. Withholding Tax: All payments by the Issuer in respect of the Certificates will be made, subject to certain exceptions, after deduction or withholding for, or on account of, any present or future taxes, duties, assessments or other governmental charges of whatever nature imposed or levied by or on behalf of, or by or within any political subdivision of or any authority having power to tax in, Lebanon Lebanese Taxes ). If the Issuer shall be so required to make any deduction or withholding, it shall make payment of the amount so deducted or withheld to the appropriate governmental authority and shall, subject to certain exceptions, forthwith pay the Holders of Certificates such additional amounts in respect of Lebanese Taxes as will result in the payment to the Holders of Certificates of the amounts that would otherwise have been received by them in respect of payments on the Certificates in the absence of such withholding or deduction. A Holder who is a bank, financial institution or other trading entity, which is subject to income tax in Lebanon and entitled to benefit from a tax credit under applicable Lebanese law, is not entitled to the payment of Additional Amounts. See Terms and Conditions of the Certificates Taxation and Redemption Redemption for Tax Reasons. Under applicable Lebanese laws and regulations, interest paid in respect of deposit certificates issued by banks, such as the Certificates, is subject to withholding tax currently at the rate of five per cent. In order to benefit from the obligations of the Bank to pay Additional Amounts pursuant to Condition 7a) Taxation), a Holder is required to submit a certification, substantially in the form attached as Annex A and, if applicable, Annex B to the Global Certificate, to the clearing system through which it holds its Certificates. Each Holder submitting such a certification will be required, in connection therewith, to undertake to advise the relevant clearing system, and the Bank the registrar promptly if any applicable statement contained in such certification is not correct on such date or if such Holder transfers all or a portion of the Certificates covered by such certification. See Terms and Conditions of the Certificates Additional Amounts. Governing Law: Listing and Trading: The Certificates, the Deed of Covenant, the Agency Agreement, the Subscription Agreement, the Selling Agency Agreement and any noncontractual obligations arising out of these documents will be governed by English law. Applications have been made for the Certificates to be admitted to listing on the official list and trading on the Luxembourg Stock Exchange s regulated market. 12

20 Clearing Systems: Selling Restrictions: Risk Factors: Euroclear and Clearstream, Luxembourg. Interests in the Certificates may also be held through Midclear. Certificates held through Midclear will be settled through Midclear s participant accounts with Euroclear and Clearstream, Luxembourg. Individual Certificates evidencing holdings of Certificates will only be available in certain limited circumstances. United States of America, United Kingdom and Lebanon. See Subscription and Sale. Investing in the Certificates involves risks. See Risk Factors. 13

21 TERMS AND CONDITIONS OF THE CERTIFICATES The following is the text of the Terms and Conditions of the Certificates which will be endorsed on each Note in definitive form: There will appear at the foot of the Conditions endorsed on each Note in definitive form the names and Specified Offices of the Registrar, Transfer Agents and the Paying Agents as set out at the end of this Prospectus. The U.S.$500,000, per cent. Deposit Certificates due 2017 the Certificates, which expression includes any further Certificates issued pursuant to Condition 13 Further Issues) and forming a single series therewith) of BankMed, s.a.l. the Issuer ) are constituted by a deed of covenant to be dated 14 December 2012 as amended or supplemented from time to time, the Deed of Covenant ) entered into by the Issuer and issued pursuant to the Lebanese Deposit Certificate Regulations as defined below) and are the subject of a fiscal agency agreement to be dated 14 December 2012 as amended or supplemented from time to time, the Agency Agreement ) between the Issuer, Deutsche Bank Luxembourg S.A. as registrar the Registrar, which expression includes any successor registrar appointed from time to time in connection with the Certificates), Deutsche Bank AG, London Branch as fiscal agent the Fiscal Agent, which expression includes any successor fiscal agent appointed from time to time in connection with the Certificates), the transfer agents named therein the Transfer Agents, which expression includes any successor or additional transfer agents appointed from time to time in connection with the Certificates) and the paying agents named therein together with the Fiscal Agent, the Paying Agents, which expression includes any successor or additional paying agents appointed from time to time in connection with the Certificates). References herein to the Agents are to the Registrar, the Fiscal Agent, the Transfer Agents and the Paying Agents and any reference to an Agent is to any one of them. Certain provisions of these Conditions are summaries of the Agency Agreement and the Deed of Covenant and subject to their detailed provisions. The Holders as defined below) are bound by, and are deemed to have notice of, all the provisions of the Agency Agreement and the Deed of Covenant applicable to them. Copies of the Agency Agreement and the Deed of Covenant are available for inspection by Holders during normal business hours at the Specified Offices as defined in the Agency Agreement) of each of the Agents, the initial Specified Offices of which are set out below. For the purposes hereof, references to Lebanese Deposit Certificate Regulations means: i) the Lebanese Code of Money and Credit, in particular Articles 70,174 and 175 thereof; ii) the Law implemented by Decree No. 5439, dated 20 September 1982; iii) Central Bank Circular No. 61, dated 11 February 1999, as amended; and iv) any other relevant laws, regulations and directive applicable to Lebanese banks which issue, or propose to issue, deposit certificates. 1. Form, Denomination and Status a) Form and denomination: The Certificates are in registered form and in denominations of U.S.$200,000 and integral multiples of U.S.$1,000 in excess thereof each, an Authorised Denomination ). b) Status: The Certificates constitute direct, general, unconditional, unsubordinated, and subject to the provisions of Condition 3 Negative Pledge) relating to the negative pledge, unsecured obligations of the Issuer and rank and will rank pari passu in priority of payment, without any preference among themselves, with all other present and future unsecured and unsubordinated indebtedness of the Issuer, except for any obligations that may be preferred by provisions of law that are both mandatory and of general application. 2. Register, Title and Transfers a) Register: The Registrar will maintain a register the Register ) in respect of the Certificates in accordance with the provisions of the Agency Agreement. In these Conditions, the Holder of a Certificate means the person in whose name such Certificate is for the time being registered in the Register or, in the case of a joint holding, the first named thereof) and Holder shall be construed accordingly. A certificate each, a Certificate ) will be issued to each Holder in respect of its registered holding. Each Certificate will be numbered serially with an identifying number which will be recorded in the Register. b) Title: The Holder of each Certificate shall except as otherwise required by law) be treated as the absolute owner of such Certificate for all purposes whether or not it is overdue and regardless of any 14

22 notice of ownership, trust or any other interest therein, any writing on the Certificate relating thereto other than the endorsed form of transfer) or any notice of any previous loss or theft of such Certificate) and no person shall be liable for so treating such Holder. No person shall have any right to enforce any term or condition of the Certificates under the Contracts Rights of Third Parties) Act c) d) e) f) Transfers: Subject to paragraphs f) Closed periods) and g) Regulations concerning transfers and registration) below, a Certificate may be transferred upon surrender of the relevant Certificate, with the endorsed form of transfer duly completed, at the Specified Office of the Registrar or any Transfer Agent, together with such evidence as the Registrar or as the case may be) such Transfer Agent may reasonably require to prove the title of the transferor and the authority of the individuals who have executed the form of transfer; provided, however, that a Certificate may not be transferred unless the principal amount of Certificates transferred and where not all of the Certificates held by a Holder are being transferred) the principal amount of the balance of Certificates not transferred are Authorised Denominations. Where not all the Certificates represented by the surrendered Certificate are the subject of the transfer, a new Certificate in respect of the balance of the Certificates will be issued to the transferor. Registration and delivery of Certificates: Within five business days of the surrender of a Certificate in accordance with paragraph c) Transfers) above, the Registrar will register the transfer in question and deliver a new Certificate of a like principal amount to the Certificates transferred to each relevant Holder at its Specified Office or as the case may be) the Specified Office of any Transfer Agent or at the request and risk of any such relevant Holder) by uninsured first class mail airmail if overseas) to the address specified for the purpose by such relevant Holder. In this paragraph, business day means a day on which commercial banks are open for general business including dealings in foreign currencies) in the city where the Registrar or as the case may be) the relevant Transfer Agent has its Specified Office. No charge: The transfer of a Certificate will be effected without charge by or on behalf of the Issuer, the Registrar or any Transfer Agent but against such indemnity as the Registrar or as the case may be) such Transfer Agent may require in respect of any tax or other duty of whatsoever nature which may be levied or imposed in connection with such transfer. Closed periods: Holders may not require transfers to be registered during the period of 15 days ending on the due date for any payment of principal or interest in respect of the Certificates. g) Regulations concerning transfers and registration: All transfers of Certificates and entries on the Register are subject to the Regulations concerning the transfer of Certificates scheduled to the Agency Agreement. The Regulations may be changed by the Issuer with the prior written approval of the Registrar. A copy of the current regulations will be mailed free of charge) by the Registrar to any Holder who requests in writing a copy of such regulations. 3. Negative Pledge a) b) So long as any obligation with respect to any Certificate remains outstanding, the Issuer will not create or permit to exist nor will the Issuer permit any Material Subsidiary to create or permit to exist any lien, pledge, security interest or other encumbrance other than customary permitted liens) upon or with respect to the whole or part of its or their undertakings, assets or revenues to secure any Relevant Indebtedness as defined below), without, at the same time or prior thereto, securing the Certificates equally and ratably therewith or providing such other security for the Certificates as shall be approved by the Holders by an Extraordinary Resolution. For the purposes of these Conditions: i) Guarantee means any obligation of a person to pay the Indebtedness of another person, including without limitation: A) an obligation to pay or purchase such Indebtedness; 15

23 B) C) an obligation to lend money or to purchase or subscribe shares or other securities or to purchase assets or services in order to provide funds for the payment of such Indebtedness; or any other agreement to be responsible for such Indebtedness; ii) iii) Indebtedness means any obligation whether present or future, actual or contingent) of any person for the payment or repayment of money which has been borrowed, directly or indirectly, including, without limitation, obligations evidenced by certificates, notes, bonds, debentures or other securities, reimbursement obligations with respect to Guarantees, letters of credit, bankers acceptances or similar facilities issued for the account of such person, obligations in respect of conditional sales or transfers without recourse or with an obligation to purchase or obligations pursuant to a lease with substantially the same economic effect as any such agreement or instrument; Material Subsidiary shall mean any Subsidiary of the Issuer that, at any relevant time, meets any of the following conditions: A) B) C) the aggregate of the Issuer s and its other Subsidiaries investments in and advances to the relevant Subsidiary exceeds 15 per cent. of the total assets of the Issuer and its consolidated Subsidiaries as of the end of the most recently completed fiscal year; the aggregate of the Issuer s and its other Subsidiaries proportionate shares of the total assets after intercompany eliminations) of the relevant Subsidiary exceeds 15 per cent. of the total assets of the Issuer and its consolidated Subsidiaries as of the end of the most recently completed fiscal year; or the aggregate of the Issuer s and its other Subsidiaries equity in the earnings before income tax of the relevant Subsidiary exceeds 15 per cent. of such earnings of the Issuer and its consolidated Subsidiaries as of the end of the most recent fiscal year, all as calculated by reference to the then latest audited financial statements or consolidated financial statements, as the case may be) of the relevant Subsidiary and the then latest audited consolidated financial statements of the Bank and its Subsidiaries; provided that neither Turkland Bank A.S. nor any Subsidiary of Turkland Bank A.S. shall at any time or for any purpose be treated as a Material Subsidiary. iv) v) Relevant Indebtedness means any Indebtedness which is represented by notes, bonds, certificates of deposit or other securities, which are, or are capable of being, quoted, listed or ordinarily dealt with on any stock exchange, overthecounter or other organised securities market; Subsidiary means any corporation or other entity of which at least a majority of the outstanding capital stock or other ownership interests having, by the terms thereof, ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation or other entity irrespective of whether or not at the time any capital stock or other ownership interests of any other class or classes of such corporation or entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by the Issuer and / or one or more of its other Subsidiaries. 4. Interest The Certificates bear interest from, and including, 14 December 2012 the Issue Date ) at the rate of per cent. per annum, the Rate of Interest ) payable semiannually in arrear on 14 June and 14 December in each year each, an Interest Payment Date ) commencing on 14 June 2013, subject as provided in Condition 6 Payments). Each Certificate will cease to bear interest from the due date for redemption unless, upon due presentation, payment of principal is improperly withheld or refused, in which case it will continue to 16

24 bear interest at such rate both before and after judgment) until whichever is the earlier of a) the day on which all sums due in respect of such Certificate up to that day are received by or on behalf of the relevant Holder and b) the day which is seven days after the Fiscal Agent has notified the Holders that it has received all sums due in respect of the Certificates up to such seventh day except to the extent that there is any subsequent default in payment). The amount of interest payable on each Interest Payment Date shall be U.S.$ per Calculation Amount in respect of each Certificate. If interest is required to be paid in respect of a Certificate on any other date, it shall be calculated by applying the Rate of Interest to the Calculation Amount, multiplying the product by the relevant Day Count Fraction and rounding the resulting figure to the nearest cent half a cent being rounded upwards) and multiplying such rounded figure by a fraction equal to the Authorised Denomination of such Certificate divided by the Calculation Amount, where Calculation Amount means U.S.$1,000 and Day Count Fraction means, in respect of any period, the number of days in the relevant period divided by 365 the number of days to be calculated on the basis of a year of 365 days). 5. Redemption a) Scheduled redemption: Unless previously redeemed, the Certificates will be redeemed at their principal amount on 14 December 2017, subject as provided in Condition 6 Payments). b) Redemption for tax reasons: The Certificates may be redeemed at the option of the Issuer in whole, but not in part, at any time, on giving not less than 30 nor more than 60 days notice to the Holders which notice shall be irrevocable), at their principal amount, together with interest accrued to the date fixed for redemption, if as a result of any change in, or amendment to, the laws or regulations of Lebanon or any political subdivision or any authority thereof or therein having power to tax, or any change in the application or official interpretation of such laws or regulations including a holding by a court of competent jurisdiction), which change or amendment becomes effective on or after 14 December 2012, the Issuer has or will become obliged to pay Additional Amounts, as provided or referred to in Condition 7 Taxation), to a greater extent than would have been required had such a payment been subject to a withholding tax at the rate in effect on the Issue Date; provided, however, that no such notice of redemption shall be given earlier than 60 days prior to the earliest date on which the Issuer would be obliged to pay such Additional Amounts if a payment in respect of the Certificates were then due. Prior to the publication of any notice of redemption pursuant to this paragraph, the Issuer shall deliver to the Fiscal Agent: A) B) a certificate signed by the Issuer stating that the Issuer is entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to the right of the Issuer so to redeem have occurred; and an opinion of independent legal advisers of recognised standing to the effect that the Issuer has or will become obliged to pay such Additional Amounts based on such statement of facts. Upon the expiry of any such notice as is referred to in this Condition 5b), the Issuer shall be bound to redeem the Certificates in accordance with this Condition 5b). c) No other redemption: The Issuer shall not be entitled to redeem the Certificates otherwise than as provided in paragraphs a) Scheduled Redemption) to b) Redemption for tax reasons) above. d) Cancellation: All Certificates redeemed by the Issuer shall be cancelled and may not be reissued or resold. 6. Payments a) Principal: Payments of principal shall be made by U.S. Dollar cheque drawn on, or, upon application by a Holder to the Specified Office of the Fiscal Agent not later than the fifteenth day before the due date for any such payment, by transfer to a U.S. Dollar account maintained by the payee with, a bank 17

25 outside the U.S. and in the case of redemption) upon surrender or, in the case of part payment only, endorsement) of the relevant Certificates at the Specified Office of any Paying Agent. b) c) Interest and Additional Amounts: Payments of interest and Additional Amounts shall be made by U.S. dollar cheque drawn on, or upon application by a Holder to the Specified Office of the Fiscal Agent not later than the fifteenth day before the due date for any such payment, by transfer to a U.S. Dollar account maintained by the payee with, a bank outside the U.S. and in the case of interest payable on redemption) upon surrender or, in the case of part payment only, endorsement) of the relevant Certificates at the Specified Office of any Paying Agent. Payments subject to fiscal laws: All payments in respect of the Certificates are subject in all cases to any applicable fiscal or other laws and regulations in the place of payment, but without prejudice to the provisions of Condition 7 Taxation). No commissions or expenses shall be charged to the Holders in respect of such payments. d) Payments on business days: Where payment is to be made by transfer to a U.S. Dollar account, payment instructions for value the due date, or, if the due date is not a business day, for value the next succeeding business day) will be initiated and, where payment is to be made by U.S. Dollar cheque, the cheque will be posted i) in the case of payments of principal and interest payable on redemption) on the later of the due date for payment and the day on which the relevant Certificate is surrendered or, in the case of part payment only, endorsed) at the Specified Office of a Paying Agent and ii) in the case of payments of interest payable other than on redemption) on the due date for payment. A Holder of a Certificate shall not be entitled to any interest or other payment in respect of any delay in payment resulting from A) the due date for a payment not being a business day or B) a cheque posted in accordance with this Condition 6 arriving after the due date for payment or being lost in the mail. In this paragraph, business day means any day on which banks are open for general business including dealings in foreign currencies) in the place of payment and, in the case of surrender or, in the case of part payment only, endorsement) of a Certificate, in the place in which the Certificate is surrendered or, as the case may be, endorsed). e) f) Partial payments: If a Paying Agent makes a partial payment in respect of any Certificate, the Issuer shall procure that the amount and date of such payment are noted on the Register and, in the case of partial payment upon presentation of a Certificate, that a statement indicating the amount and the date of such payment is endorsed on the relevant Certificate. Record date: Each payment in respect of a Certificate will be made to the person shown as the Holder in the Register at the opening of business in the place of the Registrar s Specified Office on the fifteenth day before the due date for such payment the Record Date ). Where payment in respect of a Certificate is to be made by cheque, the cheque will be posted to the address shown as the address of the Holder in the Register at the opening of business on the relevant Record Date. 7. Taxation a) All payments of principal and interest in respect of the Certificates by or on behalf of the Issuer shall be made free and clear of, and without withholding or deduction for or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by or on behalf of or within any political subdivision or any authority therein or thereof having power to tax in Lebanon Lebanese Taxes ), unless the withholding or deduction of such Lebanese Taxes is required by law. In that event the Issuer shall pay such additional amounts Additional Amounts ) as will result in receipt by the Holders of such amounts after such withholding or deduction as would have been received by them had no such withholding or deduction been required, except that no such Additional Amounts shall be payable in respect of any Certificate: i) ii) held by a Holder which is liable to Lebanese Taxes in respect of such Certificate by reason of its having some connection with Lebanon other than the mere holding of the Certificate; or where such withholding or deduction is imposed on a payment to an individual and is required to be made pursuant to European Council Directive 2003/48/EC on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to, this Directive; or 18

26 iii) iv) v) to or on behalf of a Holder that is a bank, financial institution or other trading entity, which is subject to income tax in Lebanon pursuant to Chapter 1 of the Income Tax Law and entitled to benefit from a tax credit pursuant to Article 51 of No. 497 dated 30 January 2003 published in Official Gazette No. 8 on 31 January 2003); or held by a Holder who would have been able to avoid such withholding or deduction by arranging to receive the relevant payment through another Paying Agent in a member state of the European Union; or where in the case of a payment of principal or interest on redemption) the relevant Certificate is surrendered or presented for payment more than 30 days after the Relevant Date except to the extent that the relevant Holder would have been entitled to such additional amounts if it had surrendered or presented the relevant Certificate on the last day of such period of 30 days. b) In order to benefit from the obligations of the Issuer to pay Additional Amounts pursuant to Condition 7a), a Holder is required to submit a certification, substantially in the form attached as Annex A and, if applicable, Annex B to the Global Certificate, to the clearing system through which it holds its Certificates. Each Holder submitting such a certification will be required, in connection therewith, to undertake to advise the relevant clearing system, the Issuer and the Registrar promptly if any applicable statement contained in such certification is not correct on such date or if such Holder transfers all or a portion of the Certificates covered by such certification. Absent any such advice, the matters certified by a Holder in any such certification shall apply to all payments made or to be made in respect of the Certificates held by it and the Issuer and the Fiscal Agent shall be entitled to rely thereon. Forms of the required certifications will be available without charge to any Holder of Certificates, on the written or oral request of such holder made to the Fiscal Agent or any Paying Agent, at the specified offices of the Fiscal Agent or such other Paying Agent. In these Conditions, Relevant Date means whichever is the later of 1) the date on which the payment in question first becomes due and 2) if the full amount payable has not been received in London by the Fiscal Agent on or prior to such due date, the date on which the full amount having been so received) notice to that effect has been given to the Holders. Any reference in these Conditions to principal or interest shall be deemed to include any Additional Amounts in respect of principal or interest as the case may be) which may be payable under this Condition 7. If the Issuer becomes subject at any time to any taxing jurisdiction other than Lebanon, references in these Conditions to Lebanon shall be construed as references to Lebanon and / or such other jurisdiction. 8. Events of Default With respect to the Certificates, the occurrence of one or more of the following events shall constitute an Event of Default : a) b) c) Nonpayment: the Issuer fails to pay any amount of principal in respect of the Certificates on the due date for payment thereof or fails to pay any amount of interest or Additional Amounts in respect of the Certificates within five days of the due date for payment thereof; or Breach of other obligations: default by the Issuer if applicable) in the performance or observance of any other term, covenant or obligation in the Certificates if applicable) or in the Agency Agreement and, if such default is capable of being remedied, continuance of such default for a period of more than 30 days after notice of such default has been given to the Fiscal Agent at its specified office by any Holder; or CrossDefault of the Issuer or Material Subsidiary: the Issuer or any Material Subsidiary shall A) default in the payment when due subject to any applicable grace period), whether by acceleration or otherwise, of any Indebtedness other than the Certificates) having a principal amount, individually or in the aggregate, in excess of U.S.$10,000,000 or the equivalent in any other currency, or B) default in the performance or observance of any other terms and conditions relating to any such Indebtedness if 19

27 the effect of such default is to cause such Indebtedness to become due prior to its stated maturity, or to permit the holders of such Indebtedness, or any trustee or agent for such holders, to cause such Indebtedness to become due and payable prior to its stated maturity; or d) e) f) g) h) i) j) Government Intervention: the government or any agency or instrumentality of Lebanon nationalises, seizes or expropriates all or a substantial portion of the assets or of the capital stock of, or assumes daytoday management of all or a substantial portion of the business and operations of, the Issuer or any Material Subsidiary, or Government Authorisations: any government authorisation necessary for the performance by the Issuer of any material obligation under the Certificates, the Agency Agreement or any other document delivered by the Issuer in connection therewith is not obtained or fails to enter into force or to remain valid and existing or, for any other reason, it is or becomes unlawful for the Issuer to perform or comply with any one or more of its material obligations under the Certificates if applicable) or the Agency Agreement and, if such default is capable of being remedied other than a default which has resulted in a payment default), continuance of such default for a period of more than 30 days after notice of such default has been given to the Fiscal Agent at its specified office by any Holder; or Agency Agreement: the Agency Agreement for any reason ceases to be in full force and effect in accordance with its terms or the binding effect or enforceability thereof shall be contested by the Issuer, or the Issuer shall deny that it has any further liability or obligation thereunder or in respect thereof; or Insolvency, etc.: a decree or order by a court having jurisdiction shall have been entered adjudging the Issuer or any Material Subsidiary thereof as bankrupt or insolvent, or approving as properly filed a petition seeking reorganisation or suspension of payments of the Issuer or any Material Subsidiary thereof, and such decree or order of a court having jurisdiction for the appointment of a receiver, liquidator, trustee or assignee in bankruptcy or insolvency of the Issuer or any Material Subsidiary thereof, or of the property of the Issuer or any Material Subsidiary thereof, or for the winding up or liquidation of the affairs of the Issuer or any Material Subsidiary thereof shall have been entered and such decree or order shall have continued undischarged and unstayed for a period of 60 days; or Winding up, etc.: the Issuer or any Material Subsidiary thereof shall institute proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganisation, suspension of payments or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver, liquidator, trustee or assignee in bankruptcy or insolvency of it or its property, or shall propose or make any agreement for the deferral, rescheduling or other readjustment of all of or a particular type of its debts or of any substantial part which it will or might otherwise be unable to pay when due), shall propose or make a general assignment or an arrangement or composition with or for the benefit of the relevant creditors in respect of any such debts or a moratorium shall be agreed or declared in respect of or affecting all or any substantial part of or a particular type of) the debts of the Issuer or any Material Subsidiary thereof; or Unsatisfied judgment: a final judgment or final judgments for the payment of money shall have been entered by a court or courts of competent jurisdiction against the Issuer or any Material Subsidiary thereof and shall remain undischarged for a period during which execution shall not be effectively stayed) of 60 days; provided that the aggregate amount of all such judgments at any time outstanding to the extent not paid or to be paid by insurance) exceeds U.S.$10,000,000; or Analogous Event: any event occurs that, under the laws of any relevant jurisdiction, has an analogous effect to any of the events referred to in any of the foregoing clauses. If an Event of Default in respect of the Certificates occurs and is continuing, then X) in the case of paragraphs a) and f) above, the Holder of each Certificate represented hereby may, at such Holder s option, by written notice to the Issuer, declare the principal amount of such Holder s Certificate to be due and payable and Y) in the case of any paragraph other than a) and f) above, the Holders of not less than 25 per cent. in aggregate principal amount of the Certificates may, by written notice to the Issuer, identify the applicable Events) of Default and declare all of the outstanding Certificates to be immediately due and payable. Upon any such declaration of acceleration, the principal amount of the Certificates so accelerated and the interest accrued thereon and all Additional Amounts and other 20

28 amounts payable with respect to the relevant Certificates shall become and be immediately due and payable. If the Event of Default, or Events of Default, giving rise to any such declaration or acceleration is cured following such declaration, such declaration may be rescinded by the Holders in the manner described in the Agency Agreement. 9. Prescription Claims for principal and interest on redemption shall become void unless the relevant Certificates are surrendered for payment within ten years in the case of principal) or five years in the case of interest) of the appropriate Relevant Date. 10. Replacement of Certificates If any Certificate is lost, stolen, mutilated, defaced or destroyed, it may be replaced at the Specified Office of the Registrar and the Transfer Agent having its Specified Office in Luxembourg, subject to all applicable laws and stock exchange requirements, upon payment by the claimant of the expenses incurred in connection with such replacement and on such terms as to evidence, security, indemnity and otherwise as the Issuer may reasonably require. Mutilated or defaced Certificates must be surrendered before replacements will be issued. 11. Agents In acting under the Agency Agreement and in connection with the Certificates, the Agents act solely as agents of the Issuer and do not assume any obligations towards or relationship of agency or trust for or with any of the Holders. The initial Agents and their initial Specified Offices are listed below. The Issuer reserves the right at any time to vary or terminate the appointment of any Agent and to appoint a successor registrar, fiscal agent and additional or successor paying agents and transfer agents; provided, however, that the Issuer shall at all times maintain a) a fiscal agent and a registrar, and b) a paying agent in an EU member state that will not be obliged to withhold or deduct tax pursuant to any law implementing European Council Directive 2003/48/EC. Notice of any change in any of the Agents or in their Specified Offices shall promptly be given to the Holders. 12. Meetings of Holders; Modification a) Meetings of Holders: The Agency Agreement contains provisions for convening meetings of Holders to consider matters relating to the Certificates, including the modification of any provision of these Conditions or the Agency Agreement. Any such modification may be made if sanctioned by an Extraordinary Resolution as defined in the Agency Agreement). Such a meeting may be convened by the Issuer and shall be convened by the Issuer upon the request in writing of Holders holding not less than onethird of the aggregate principal amount of the outstanding Certificates. The quorum at any meeting convened to vote on an Extraordinary Resolution will be two or more persons holding or representing one more than half of the aggregate principal amount of the outstanding Certificates or, at any adjourned meeting, two or more persons being or representing Holders whatever the principal amount of the Certificates held or represented; provided, however, that Reserved Matters as defined below) may only be sanctioned by an Extraordinary Resolution passed at a meeting of Holders at which two or more persons holding or representing not less than twothirds or, at any adjourned meeting, one quarter of the aggregate principal amount of the outstanding Certificates form a quorum. The majority required to pass any Extraordinary Resolution shall be not less than twothirds of the votes cast. Any Extraordinary Resolution duly passed at any such meeting shall be binding on all the Holders, whether present or not. In addition, a resolution in writing signed by or on behalf of all Holders of not less than twothirds of the aggregate principal amount of the outstanding Certificates will take effect as if it were an Extraordinary Resolution; provided that the Issuer shall have given its prior written consent thereto. 21

29 Such a resolution in writing may be contained in one document or several documents in the same form, each signed by or on behalf of one or more Holders. b) Reserved Matters: For the purposes of these Conditions, Reserved Matter means any proposal: i) ii) iii) iv) v) to change any date fixed for payment of principal or interest in respect of the Certificates, to reduce the amount of principal or interest payable on any date in respect of the Certificates or to alter the method of calculating the amount of any payment in respect of the Certificates on redemption or maturity or the date for any such payment; to effect the exchange or substitution of the Certificates for, or the conversion of the Certificates into, shares, bonds or other obligations or securities of the Issuer or any other person or body corporate formed or to be formed; to change the currency in which amounts due in respect of the Certificates are payable; to change the quorum required at any Meeting or the majority required to pass an Extraordinary Resolution; or to amend this definition. c) Modification: The Certificates, these Conditions, the Agency Agreement and the Deed of Covenant may be amended without the consent of the Holders to correct a manifest error or to make any other modification of a minor or technical nature. In addition, the parties to the Agency Agreement may agree to modify any provision thereof if such modification is, in the opinion of the Issuer, not materially prejudicial to the interests of the Holders. Notwithstanding any provision contained in these Conditions or the Agency Agreement, no modification or amendment of these Conditions or the Agency Agreement may be made without the prior written consent of the Issuer. 13. Further Issues To the extent permitted by applicable Lebanese laws and regulations, the Issuer may from time to time, without the consent of the Holders, create and issue further notes having the same terms and conditions as the Certificates in all respects or in all respects except for the first payment of interest) so as to form a single series with the Certificates. 14. Notices Notices to the Holders will be sent to them by first class post or its equivalent) or if posted to an overseas address) by airmail at their respective addresses on the Register. Any such notice shall be deemed to have been given on the fourth day after the date of mailing. In addition, so long as Certificates are listed on the Luxembourg Stock Exchange and the rules of such Exchange so require, notices to Holders will be published on the date of such mailing in a daily newspaper of general circulation in Luxembourg which is expected to be the Luxemburger Wort) or, if such publication is not practicable, in a leading English language daily newspaper having general circulation in Europe. In addition, notices to be given by the Issuer to Holders will be published in the manner and at the times required pursuant to the applicable provisions of Lebanese law. 15. Currency Indemnity If any sum due from the Issuer in respect of the Certificates or any order or judgment given or made in relation thereto has to be converted from the currency the first currency ) in which the same is payable under these Conditions or such order or judgment into another currency the second currency ) for the purpose of a) making or filing a claim or proof against the Issuer, b) obtaining an order or judgment in any court or other tribunal or c) enforcing any order or judgment given or made in relation to the Certificates, the Issuer shall indemnify each Holder, on the written demand of such Holder addressed to the Issuer and delivered to the Issuer or to the Specified Office of the Fiscal Agent, 22

30 against any loss suffered as a result of any discrepancy between i) the rate of exchange used for such purpose to convert the sum in question from the first currency into the second currency and ii) the rate or rates of exchange at which such Holder may in the ordinary course of business purchase the first currency with the second currency upon receipt of a sum paid to it in satisfaction, in whole or in part, of any such order, judgment, claim or proof. This indemnity constitutes a separate and independent obligation of the Issuer and shall give rise to a separate and independent cause of action. 16. Governing Law and Jurisdiction a) b) Governing law: The Certificates and any noncontractual obligations arising out of or in connection with the Certificates are governed by English law. English courts: The courts of England have exclusive jurisdiction to settle any dispute a Dispute ) arising out of or in connection with the Certificates including any noncontractual obligation arising out of or in connection with the Certificates). c) Appropriate forum: The Issuer agrees that the courts of England are the most appropriate and convenient courts to settle any Dispute and, accordingly, that it will not argue to the contrary. d) Rights of the Holders to take proceedings outside England: Condition 16b) English courts) is for the benefit of the Holders only. As a result, nothing in this Condition 16 prevents the Holders from taking proceedings relating to a Dispute Proceedings ) in any other courts of competent jurisdiction. To the extent allowed by law, the Holders may take concurrent Proceedings in any number of jurisdictions. e) Process agent: The Issuer agrees that the documents which start any Proceedings and any other documents required to be served in relation to those Proceedings may be served on it by being delivered to Law Debenture Corporate Services Limited, Fifth Floor, 100 Wood Street, London EC2V 7EX, United Kingdom or, if different, its registered office for the time being or at any address of the Issuer in Great Britain at which process may be served on it in accordance with the Companies Act If such person is not or ceases to be effectively appointed to accept service of process on behalf of the Issuer, the Issuer shall, on the written demand of any Holder addressed to the Issuer and delivered to the Issuer or to the Specified Office of the Fiscal Agent appoint a further person in England to accept service of process on its behalf and, failing such appointment within 15 days, any Holder shall be entitled to appoint such a person by written notice addressed to the Issuer and delivered to the Issuer or to the Specified Office of the Fiscal Agent. Nothing in this paragraph shall affect the right of any Holder to serve process in any other manner permitted by law. This Condition applies to Proceedings in England and to Proceedings elsewhere. f) g) Consent to enforcement etc.: The Issuer consents generally in respect of any Proceedings to the giving of any relief or the issue of any process in connection with such Proceedings including without limitation) the making, enforcement or execution against any property whatsoever irrespective of its use or intended use) of any order or judgment which is made or given in such Proceedings. Waiver of immunity: To the extent that the Issuer may in any jurisdiction claim for itself or its assets or revenues immunity from suit, execution, attachment whether in aid of execution, before judgment or otherwise) or other legal process and to the extent that such immunity whether or not claimed) may be attributed in any such jurisdiction to the Issuer or its assets or revenues, the Issuer agrees not to claim and irrevocably waives such immunity to the full extent permitted by the laws of such jurisdiction. 23

31 Annex A OneTime Certification with respect to payment of additional amounts on securities subject to this type of certification and to Lebanese withholding tax pursuant to Article 51 of Law No. 497 of the Lebanese Republic dated 30 January 2003 the 2003 Budget Law ) and related implementing regulations, which are held in Euroclear Bank S.A./N.V. and/or Clearstream Banking, société anonyme to be provided by participants in Euroclear Bank S.A./N.V. and/or Clearstream Banking, société anonyme, by authenticated means of communication before the first relevant interest payment date. Re: OneTime Certification with respect to payment of additional amounts on securities subject to this type of certification and subject to Lebanese withholding tax pursuant to the 2003 Budget Law and related implementing regulations, which are held in Euroclear Bank S.A./N.V. and/or Clearstream Banking, société anonyme the securities ) Dear Sir/Madam: We, the undersigned Customer/Participant, understand that, in order to obtain payment of additional amounts from the Issuer of the above mentioned securities in respect of taxes required to be withheld by the Issuer on payments of interest on such securities, as more fully provided in the terms and conditions applicable to the securities, Euroclear Bank S.A./N.V. or Clearstream Banking, société anonyme, as the case may be, is required to provide the Issuer through the Common Depositary with certain information. In this connection, we certify that, as of the date hereof, except to the extent set forth in any separate certification relating to this OneTime Certification, any above mentioned securities, which are or may be held in our accounts) specified below, are beneficially owned by persons or entities other than a bank, financial institution or other trading entity subject to income tax in Lebanon pursuant to Chapter 1 of the Income Tax Code and therefore eligible to claim a tax credit in Lebanon in respect of taxes required to be withheld by the Issuer on payments of interest on such securities pursuant to the 2003 Budget Law and related implementing regulations. Account in which the above mentioned securities are held: Euroclear Bank S.A./N.V. Account No. Clearstream Banking, société anonyme, Account No. We undertake to advise Euroclear Bank S.A./N.V. and/or Clearstream Banking, société anonyme, as the case may be, promptly, in the form of an advice of excluded securities by authenticated means of communication, if any statement contained in this certification is not correct as of any date. Absent any such advice, the matters certified in this certification shall apply to all payments made or to be made in respect of securities, which are or may be held in the aboveidentified accounts). We understand that this certification is required in connection with certain tax laws of Lebanon. We hereby irrevocably authorise Euroclear Bank S.A./N.V. [and authorise and appoint Clearstream Banking, société anonyme,] the Common Depositary and the Issuer as attorneysinfact, each acting singly, to provide this certification or a copy hereof, and any other document submitted in connection herewith by or on behalf of the undersigned to Euroclear Bank S.A./N.V. or Clearstream Banking, société anonyme, as the case may be, the Common Depositary or the Issuer, to the appropriate authorities in Lebanon, including Lebanese tax authorities, in connection with any administrative, legal or other official proceedings or inquiries in respect of which the statements made in this certification are or could be relevant. 24

32 [Insert name of Euroclear Participant or Clearstream Banking, société anonyme, Customer] Date: Authorised signatory) Name and title of authorised signatory) Authorised signatory) Name and title of authorised signatory) 25

33 Annex B Advice of nominal amount to be excluded from the OneTime Certification with respect to payment of additional amounts on securities subject to this type of certification and to Lebanese withholding tax pursuant to Article 51 of Law No. 497 of the Lebanese Republic dated 30 January 2003 the 2003 Budget Law ) and related implementing regulations which are held in Euroclear Bank S.A./N.V. and/or Clearstream Banking, société anonyme to be provided by Participants in Euroclear Bank S.A./N.V. and/or Clearstream Banking, société anonyme, by authenticated means of communication from time to time as necessary to qualify any statements made in such OneTime Certification prior to any interest payment date Re: OneTime Certification with respect to payment of additional amounts on securities subject to this type of certification and to Lebanese withholding tax pursuant to the 2003 Budget Law and related implementing regulations, which are held in Euroclear Bank S.A./N.V. and/or Clearstream Banking, société anonyme: For: Interest due: ISIN code: Issuer: Total Holding: Nominal Amount to be Excluded: [insert next Interest Payment Date] XS BankMed, s.a.l. [insert total nominal amount held in the account specified below] [insert nominal amount to be excluded] Security Description: U.S.$500,000, per cent. Certificates due 2017 the securities ) Issued by: BankMed, s.a.l. Securities Clearance Account number: [insert account number] Dear Sir/Madam: We certify that the aboveindicated Nominal Amount to be Excluded is held on behalf of persons that are banks, financial institutions or other trading entities subject to income tax in Lebanon pursuant to Chapter 1 of the Income Tax Code and therefore eligible to claim a tax credit in Lebanon in respect of taxes required to be withheld by the Issuer on payments of interest on such securities pursuant to the 2003 Budget Law and related implementing regulations. We understand that such persons are not entitled to the payment of additional amounts in respect of taxes withheld by the Issuer on payments of interest on such securities pursuant to Article 51 of the 2003 Budget Law, and related implementing regulations. We hereby confirm that the statements in the OneTime Certification delivered by us with respect to payment of additional amounts on securities subject to Lebanese withholding tax pursuant to the 2003 Budget Law and related implementing regulations, which are held in Euroclear Bank S.A./N.V. and/or Clearstream Banking, société anonyme, are true and complete and continue in full force and effect, subject only to the foregoing. Without limiting the generality of the foregoing, we hereby confirm our authorisation of each of Euroclear Bank S.A./N.V. and Clearstream Banking, société anonyme, as the case may be, the Common Depositary and the Issuer [and appoint Clearstream Banking, société anonyme, the Common Depositary] and the Issuer as our attorneysinfact, each acting singly, to provide this Certification or a copy hereof to the appropriate authorities in Lebanon in connection with any official proceedings where any statements made in this Certification are or could be relevant. 26

34 [Insert name of Euroclear Participant or Clearstream Banking, société anonyme, Customer] Date: Authorised signatory) Name and title of authorised signatory) Authorised signatory) Name and title of authorised signatory) 27

35 USE OF PROCEEDS The net proceeds of the issue of the Certificates, expected to amount to U.S.$496,485,590 after deduction of the combined management and underwriting commission and selling agency fees, and the other expenses incurred in connection with the issue of the Certificates, will be used by the Issuer for general corporate purposes, which may include the refinancing of existing indebtedness of the Issuer. 28

36 CAPITALISATION The following table sets forth the consolidated shareholders equity and longterm liabilities of the Bank as at 30 June 2012: As at 30 June 2012 unaudited) in U.S.$ millions) in LBP millions) Longterm liabilities Deposits from banks and financial institutions 1) ,947 Borrowings from banks and financial institutions 2) ,449 Provision ,625 Total longterm liabilities ,021 Share capital ,000 Preferred Shares ,750 Legal reserves ,799 Property revaluation reserve ,213 Reserve for general banking risks and other reserves ,246 Reserves for assets acquired in satisfaction of loans ,076 Retained earnings ,696 Cumulative change in fair value of financial assets through other comprehensive income/availableforsale securities... 49) 74,485) Currency translation adjustment... 26) 38,861) Profit for the period ,392 Equity attributable to the Group ,353,827 Noncontrolling interest ,277 Total shareholders equity ,506,104 Total longterm liabilities and shareholders equity... 1,522 2,295,125 Notes: 1) Represents the noncurrent portion above 1 year) of the outstanding deposits with banks and financial institutions. 2) Represents the noncurrent portion above 1 year) of the outstanding borrowings from banks and financial institutions. Except as otherwise noted below, as of the date of this Prospectus there has been no material change in the consolidated longterm liabilities and shareholders equity of the Bank since 30 June On 23 October 2012, the Bank issued 2,250,000 series 2 preferred shares, fully paid and at an issue price of U.S.$100, with a par value of LBP 10,000 per share and an issue size of U.S.$225,000,000 the Series 2 Preferred Shares ). Subject to certain conditions, the Series 2 Preferred Shares are redeemable at par at the option of the Bank five years after their Issue Date and annually thereafter. Market practice in Lebanon has been for issuers to exercise their option to redeem preferred shares five years after their issue. 29

37 OVERVIEW OF FINANCIAL INFORMATION The following information other than the financial ratios and statistical data) as at and for the six months ended 30 June 2012 and 30 June 2011, and as at and for the years ended 31 December 2011 and 31 December 2010, has been derived from, should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements. The Consolidated Financial Statements have been prepared in accordance with IFRS as issued by the International Accounting Standards Board. The Consolidated Financial Statements include the financial statements of the Bank and companies in which the Bank has a controlling financial interest subsidiaries) see Note 3 to the 2011 Annual Financial Statements). The Bank and its Subsidiaries have the same financial reporting year and use consistent accounting policies. 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 effective date of acquisition or up to the effective date of disposal, as appropriate. The Bank maintains its accounts in Lebanese Pounds. Accordingly, U.S. Dollar amounts stated in this Prospectus have been translated from Lebanese Pounds at the rate of exchange prevailing at the relevant balance sheet date, in the case of balance sheet data, and at the average rate of exchange for the relevant period, in the case of income statement data, and are provided for convenience only. In each case, the relevant rate for both balance sheet data and income statement data was LBP 1,507.5 per U.S.$1.00, as, throughout the periods covered by this Prospectus the Central Bank has maintained its policy of pegging the value of the Lebanese Pound to the U.S. Dollar at a fixed rate of LBP 1,507.5 per U.S.$1.00. Banking sector information has been derived from Central Bank statistics, Bankdata and the Bank s internal sources. Deloitte & Touche and Ernst & Young p.c.c. have audited the 2011 Annual Financial Statements and the 2010 Annual Financial Statements and have reviewed the 2012 Interim Financial Statements. 30

38 Consolidated Statement of Financial Position As at 30 June 2012 As at 31 December unaudited) in U.S.$ millions) in LBP millions) in U.S.$ millions) in LBP millions) in U.S.$ millions) in LBP millions) Cash and central banks... 2,619 3,947,503 1,884 2,840,698 1,433 2,159,955 Deposits with banks and financial institutions... 1,609 2,425,055 1,032 1,555,208 1,117 1,683,274 Financial assets at fair value through profit or loss , , ,956 Loans to banks , , ,594 Loans and advances to customers... 3,828 5,770,292 3,490 5,260,185 2,884 4,347,093 Loans and advances to related parties ,161, ,011, ,685 Investment securities... 3,152 4,752,209 3,594 5,418,525 4,326 6,521,649 Customers acceptance liability , , ,474 Investments in associates and other investments , , ,598 Assets acquired in satisfaction of loans , , ,077 Goodwill , , ,982 Property and equipment , , ,411 Other assets , , ,891 Total assets... 13,188 19,880,284 11,791 17,775,391 11,188 16,863,639 Deposits from banks and financial institutions , , ,621 Customers deposits at fair value through profit or loss , , ,660 Customers deposits at amortised cost... 9,319 14,048,267 8,013 12,079,766 7,796 11,751,719 Related parties deposits at fair value through profit or loss ,950 Related parties deposits at amortised cost... 1,255 1,891,574 1,461 2,201, ,472,913 Acceptances payable , , ,474 Borrowings from banks and financial institutions , , ,276 Certificates of deposit , , ,021 Other liabilities , , ,908 Provisions , , ,837 Total liabilities... 12,189 18,374,180 10,803 16,285,993 10,084 15,199,379 Total equity ,506, ,489,398 1,104 1,664,260 Total liabilities and equity.. 13,188 19,880,284 11,791 17,775,391 11,188 16,863,639 31

39 Consolidated Income Statement For the Six Months Ended 30 June For the Years Ended 31 December 2012 unaudited) 2011 unaudited) in U.S.$ millions) in LBP millions) in U.S.$ millions) in LBP millions) in U.S.$ millions) in LBP millions) in U.S.$ millions) in LBP millions) Interest income , , ,004, ,851 Interest expense ) 382,115) 218) 328,207) 450) 678,107) 453) 682,399) Net interest income , , , ,452 Net fee and commission income , , , ,024 Net results on financial instruments at fair value through profit or loss , , , ) Gain from derecognition of financial assets measured at amortised cost , , , ,806 Other operating income , , , ,455 Net operating revenues , , , ,467 Provision for credit losses net of writeback)... 47) 71,514) 28) 42,685) 21) 31,169) 31) 45,961) Loss from writeoff of loans net)... 0) 139) 0) 234) 0) 287) 0) 504) Net operating revenues after impairment charge for credit losses , , , ,002 Total operating expenses ) 192,324) 103) 155,307) 208) 314,272) 206) 311,096) Writeback of impairment of assets acquired in satisfaction of loans , , ,838 Provisions for)/ writeback of provision for Contingencies ,070 1) 1,614) 2) 2,191) Profit before taxes , , , ,947 Income tax expense... 15) 23,133) 14) 21,636) 22) 32,675) 14) 21,754) Profit for the period , , , ,193 32

40 Selected Financial Ratios and Statistics As at 30 June 2012 As at 31 December unaudited) Per cent.) Profitability 1) ROAA return on average assets) 2) ROAE return on average equity) 3) Total interest paid to total interest received 4) Net interest income over interest earning assets 5) Net interest spread 6) Operating expenses to operating revenues costtoincome ratio) 7) Noninterest income to operating revenues before allocation to provisions) 8) Liquidity Average net loans to average net deposits 9)16) Average customers creditor accounts to average total deposits 10)16) Foreign currency customers loans to foreign currency customers creditor accounts 11)16) Capital adequacy Capital adequacy ratio 12) Basel II Asset Quality Ratios Net nonperforming loans to total net loans 13) Net nonperforming loans to total equity 14) Loan loss provision to nonperforming loans 15) Notes: 1) Profitability ratios for 30 June 2012 are annualised for comparative purposes. 2) Calculated by dividing profit for the financial year by average total assets. Average total assets are computed as the average of periodbeginning and periodending balances. 3) Calculated by dividing profit for the financial year by average equity. Average equity is computed as the average of periodbeginning and periodending balances. 4) Calculated by dividing total interest paid by total interest received. 5) Calculated by dividing net interest income by interest earning assets. 6) Calculated by deducting average interest expense rate from average interest income rate. 7) Calculated by dividing total operating expenses by net operating revenues. 8) Calculated by dividing noninterest income by net operating revenues before allocation to provisions). 9) Calculated by dividing average net loans to customers and related parties by average net customers and related parties deposits. Average net loans to customers and related parties and average net customers and related parties deposits are each computed as the average of periodbeginning and periodending balances. 10) Calculated by dividing average deposits from customers and related parties by average total deposits the sum of customers creditor accounts, deposits and borrowings from banks and financial institutions and certificates of deposits). Average deposits from customers and related parties and average total deposits are each computed as the average of periodbeginning and periodending balances. 11) Calculated by dividing net loans and advances to customers and related parties in foreign currency by customers and related parties creditor accounts and certificates of deposits in foreign currency. 12) Calculated according to Central Bank Circular No based on the guidelines of the Banking Control Commissions. 13) Calculated by dividing net nonperforming loans net of collective provision and deferred penalties) by total net loans for customers and related parties). 14) Calculated by dividing net nonperforming loans net of collective provision and deferred penalties) by total equity. 15) Calculated by dividing provisions for nonperforming loans by nonperforming loans net of unearned interest and deferred penalties). 16) Customers and related parties creditor accounts consist of accounts at amortised cost and accounts designated at fair value through profit or loss. 33

41 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Basis of Presentation General The following presentation has been prepared by the Management using the Consolidated Financial Statements, which are included elsewhere in this Prospectus. Such presentation should be read in conjunction with such Consolidated Financial Statements and the overview of financial information appearing elsewhere herein. See Overview of Financial Information. Early adoption by the Bank of IFRS 9 Financial Instruments) With effect from 1 January 2011, the Bank has applied IFRS 9 Financial Instruments) and changes in accounting policies resulting from the adoption of IFRS 9. These were applied in the 2011 Annual Financial Statements on a retroactive basis without restatement of prior periods, as permitted under IFRS 9. IFRS 9 introduces new classification and measurement requirements for financial assets. Specifically, IFRS requires all financial assets to be classified and subsequently measured at either amortised cost or fair value on the basis of the entity s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. All equity investments under IFRS 9 are measured at fair value in the statement of consolidated statement of financial position with value changes recognised in profit or loss, except for those equity investments for which the Bank has elected to report value changes in other comprehensive income. If an equity investment is not held for trading, the Bank can make an irrevocable election at initial recognition to measure at fair value through other comprehensive income, with only dividend income recognised in profit or loss. IFRS 9 also contains requirements for the classification and measurement of financial liabilities. One major change in the classification and measurement of financial liabilities relates to the accounting for changes in the fair value of a financial liability designated as at fair value through profit or loss) attributable to changes in the credit risk of that liability. For the impact of the early adoption of IFRS 9 on the opening retained earnings, cumulative change in fair value of financial assets and noncontrolling interest of the Bank as at 1 January 2011, see Use Capital Adequacy. For further information in relation to the new classification and measurements under IFRS 9, see Note 2.1 and Note 4A to the 2011 Annual Financial Statements. For a summary of the transitional classification and measurement adjustments to the Bank s investment securities on the date of initial application of IFRS 9, see Note 5 to the 2011 Annual Financial Statements. Lebanese Economy and the Banking Sector The Bank operates principally in Lebanon, as well as in Europe and MENA, and, accordingly, its financial condition, results of operations and business prospects are closely related to the overall political, social and economic situation in Lebanon, which, in turn, is tied to the geopolitical situation in the region. 34

42 The following table sets forth certain key economic indicators for Lebanon as at and for the years ended 31 December 2011 and 2010, respectively: As at and for the Years Ended 31 December Percentage Change ) U.S.$ millions) except where indicated) Per cent. Real GDP... 39,075 37,124 Growth of Real GDP per cent.) ) ) Inflation per cent.) ) ) Balance of payments U.S.$ millions)... 1,996) 3, ) Trade deficit... 6,253 2) 12, ) Total deficit 3)... 3,530) 4,362) 19.1 LBP/U.S.$... 1, ,507.5 Gross public debt as a percentage of GDP ) ) Gross foreign currency reserves excluding gold reserves) 4)... 30,815 28, Banking sector assets LBP billions) , , Sources: Ministry of Finance, Central Bank Notes: 1) Estimates. 2) The 2011 figures are for the sixmonth period ended 30 June ) Excluding foreign financed Council for Development and Reconstruction expenditure and the Higher Relief Committee spending, not funded by budgetary allocations and treasury advances. 4) As at 31 January 2012, gross foreign currency reserves excluding gold reserves) were U.S.$30,745 million and gold reserves were U.S.$16,029 million. Real GDP growth in 2011 is estimated at 1.5 per cent., as compared to 7.0 per cent. in Inflation increased in 2010, with CAS estimating inflation at 4.6 per cent. on an endofperiod basis and 4.0 per cent. on a periodaverage basis, and the IMF estimating inflation at 4.5 per cent. on a periodaverage basis. Inflation in 2011 was estimated by CAS at 3.1 per cent. on an endofperiod basis, and compared to 5.5 per cent. according to the IMF s estimate. On a periodaverage basis, inflation in 2011 increased, with CAS estimating inflation at 5.1 per cent., compared to an IMF estimate of 5.4 per cent. The increases in both 2010 and 2011 were principally due to the worldwide increase in energy, food and other commodity prices. The inflation figure published by CAS for September 2012 as compared to September 2011) was 10.3 per cent., mainly due to increases in the prices of housing and alcoholic beverages and tobacco. The IMF s preliminary inflation projection is 4.0 per cent. for 2012 and 3.3 per cent. for 2013 on a periodaverage basis. On 25 January 2012, Decree No was adopted, providing for: i) an increase in the monthly minimum wage for private sector employees from LBP 500,000 to LBP 675,000; and ii) an increase in costofliving payments up to a maximum of LBP 299,000 per month, both effective 1 February Although Decree No applies to private sector employees, similar increases are likely to be implemented in favour of public sector employees. Such increases in the minimum wage and other salaries could have an inflationary impact on prices. In the context of regional instability in 2011, tourism decreased, with 1,655,051 tourists arriving in Lebanon in 2011, as compared to 2,167,989 in 2010, representing a 24 per cent. decrease. This decrease was mainly due to the political instability in the surrounding region. The largest decrease in tourist numbers was in tourists from Arab countries, which decreased by 35 per cent. in It is anticipated that tourism activities will decrease further in 2012 due to the continuing political instability in Lebanon and the surrounding region. The balance of payments surplus registered a deficit of U.S.$1,996 million as at 31 December 2011, as compared to a surplus of U.S.$3,324 million as at 31 December The decrease in surplus in 2010 was the result of a slower rate of increase in both foreign assets and liabilities. In 2011, the deficit was mainly the result of an increase in the current deficit, principally due to higher energy costs and a reduction in remittances. 35

43 The trade deficit was U.S.$8,709 million for the six months ended 30 June The trade deficit for the year ended 31 December 2011 was U.S.$15,893 million, as compared to U.S.$12,258 million for the year ended 31 December Gross foreign currency reserves excluding gold reserves) at the Central Bank were U.S.$30,815 million as at 31 December 2011, as compared to U.S.$28,598 million as at 31 December As at 30 June 2012, gross foreign currency reserves excluding gold reserves) were U.S.$29,643.7 million and gold reserves were U.S.$14,979.9 million. Foreign currency reserves are generally placed by the Central Bank outside Lebanon with other central banks or with highlyrated international banks and include a limited amount of highlyrated foreign debt securities. The performance of the banking sector continued to improve in 2011, as compared to Total banking sector assets in Lebanon increased by 9.0 per cent. in 2011, as compared to 2010, after having increased by 11.9 per cent. in Total private sectors loans increased by 12.9 per cent. in 2011, as compared to Similarly, private sector customers deposits increased by 6.5 per cent. in 2011, as compared to 2010, after having increased by 12.0 per cent. in As at 31 December 2011, 61.1 per cent. of total customers deposits were held in U.S. Dollars, as compared to 58.8 per cent. as at 31 December According to data published by the Central Bank, the proportion of foreign currency deposits as a share of total deposits was approximately 66 per cent. and 63 per cent. as at 31 December 2011 and 2010, respectively. Because a substantial portion of the Bank s loans are denominated in U.S. Dollars, a devaluation of the Lebanese Pound would increase the debt service burden of borrowers whose income is in Lebanese Pounds and, therefore, would likely increase the level of the Bank s nonperforming loans. Market capitalisation of shares listed on the Beirut Stock Exchange decreased to U.S.$10,285 million as at 31 December 2011, from U.S.$12,676 million in Throughout 2010 and 2011, the Central Bank continued its policy of pegging the value of the Lebanese Pound to the U.S. Dollar at a fixed rate of LBP 1,507.5 per U.S.$1.00. MENA Political and security turmoil in several countries in the MENA region affected national and regional economies, resulting in decreases in, among other things, national GDPs, foreign direct investment in a number of countries and tourism. In addition, market concerns over the European sovereign debt crisis and its impact on the European banking industry further dampened the economic outlook in MENA. These effects were partially offset by rising energy prices, especially oil prices, over the course of 2011, as well as a number of domestic stimulus packages, which benefited, in particular, Gulf economies. As a result, the Gulf banking sector reported considerably higher asset and lending growth than in countries in the Levant region, where the Bank s operations are heavily concentrated. 36

44 Results of Operations of the Bank for the Six Months Ended 30 June 2012 and 30 June 2011 Net Income The following table sets forth a breakdown of the Bank s consolidated net income for the six months ended 30 June 2012 and 30 June 2011, respectively: For the Six Months Ended 30 June 2012 unaudited) 2011 unaudited) in U.S.$ millions) in LBP millions) in U.S.$ millions) in LBP millions) Interest income , ,288 Interest expense ) 382,115) 218) 328,207) Net interest income , ,081 Net fee and commission income , ,780 Net results on financial instruments at fair value through profit or loss , ,801 Gain from derecognition of financial assets measured at amortised cost , ,189 Other operating income , ,936 Net operating revenues , ,787 Provision for credit losses net of writeback). 47) 71,514) 28) 42,685) Loss from writeoff of loans net) ) 0 234) Net operating revenues after impairment charge for credit losses , ,868 Total operating expenses ) 192,324) 103) 155,307) Writeback of impairment of assets acquired in satisfaction of loans ,164 Provisions for)/ writeback of provision for Contingencies ,070 1) 1,614) Profit before taxes , ,111 Income tax expense... 15) 23,133) 14) 21,636) Profit for the period , ,475 The Bank s net income for the six months ended 30 June 2012 increased by LBP 7.2 billion U.S.$4.8 million), or 8.1 per cent., to LBP 96.7 billion U.S.$64.2 million), from LBP 89.5 billion U.S.$59.4 million) for the six months ended 30 June The increase in net income for the six months ended 30 June 2012, as compared to the six months ended 30 June 2011, was primarily due to an increase in interest income, from LBP billion U.S.$319.3 million) for the six months ended 30 June 2011 to LBP billion U.S.$370.2 million) for the six months ended 30 June 2012, and an increase in gain from derecognition of financial assets measured at amortised cost from LBP 71.2 billion U.S.$47.2 million) for the six months ended 30 June 2011 to LBP billion U.S.$71.5 million) for the six months ended 30 June These increases were partially offset by an increase in interest expense from LBP billion U.S.$217.7 million) for the six months ended 30 June 2011, to LBP billion U.S.$253.5 million) for the six months ended 30 June 2012 and an increase in staff costs from LBP 72.7 billion U.S.$48.2 million) for the six months ended 30 June 2011 to LBP billion U.S.$68.9 million) for the six months ended 30 June

45 Interest Income The following table sets forth a breakdown of the Bank s interest income for the six months ended 30 June 2012 and 30 June 2011, respectively: For the Six Months Ended 30 June 2012 unaudited) 2011 unaudited) in U.S.$ millions) in LBP millions) in U.S.$ millions) in LBP millions) Deposits with central banks , ,164 Deposits with banks and financial institutions , ,143 Deposits with related party banks and financial institutions Financial assets at amortised cost , ,950 Loans to banks , ,185 Loans to related party banks Loans and advances to customers , ,283 Loans and advances to related parties , ,262 Receivable from properties sold with deferred payment Interest recognised on impaired loans and advances to customers 2 2, ,407 Total , ,288 The Bank s interest income for the six months ended 30 June 2012 increased by LBP 76.9 billion U.S.$50.9 million), or 16.0 per cent., to LBP billion U.S.$370.2 million) from LBP billion U.S.$319.3 million) for the six months ended 30 June The most significant components of the Bank s interestearning assets are its loan and securities portfolios. The Bank intends to continue to focus on expanding its core business lending operations and maintaining its investment strategy in low risk securities. See Overview of the Bank Strategy. The increase in interest income for the six months ended 30 June 2012, as compared to the six months ended 30 June 2011, was primarily due to an increase in interest income from deposits with central banks from LBP 8.2 billion U.S.$5.4 million) for the six months ended 30 June 2011 to LBP 60.7 billion U.S.$40.3 million) for the six months ended 30 June This was primarily due to an increase in the average balance of time deposits held with the Central Bank to LBP 3,111 billion U.S.$2,064 million) for the first six months in 2012, as compared to LBP 1,536 billion U.S.$1,019 million) for the first six months of 2011, as well as an increase in average rates on such balances. In addition, interest income from loans and advances to customers increased from LBP billion U.S.$122.2 million) for the six months ended 30 June 2011 to LBP billion U.S.$163.8 million) for the six months ended 30 June This increase primarily reflected an increase in the size of the Bank s overall loan portfolio. The increase in interest income from loans and advances to customers for the six months ended 30 June 2012, as compared to the first six months ended 30 June 2011, was partially offset by a decrease in interest income from financial assets at amortised cost from LBP billion U.S.$139.9 million) for the six months ended 30 June 2011, to LBP billion U.S.$110.2 million) for the six months ended 30 June This decrease was mainly due to a decrease of LBP billion U.S.$525.3 million) in the Bank s average balance classified at amortised cost of certificates of deposit issued by the Central Bank, for the first six months in 2012, as compared to the first six months of

46 Interest Expense The following table sets forth a breakdown of the Bank s interest expense for the six months ended 30 June 2012 and 30 June 2011, respectively: For the Six Months Ended 30 June 2012 unaudited) 2011 unaudited) in U.S.$ millions) in LBP millions) in U.S.$ millions) in LBP millions) Deposits from banks and financial institutions , ,291 Deposits from related party banks and financial institutions , ,006 Securities lent and repurchase agreements , ,694 Customers deposits at amortised cost , ,910 Related parties deposits at amortised cost , ,239 Borrowings from banks and financial institutions , ,584 Borrowings from related party banks and financial institutions... Certificates of deposit , ,417 Others Total , ,207 The Bank s interest expense for the six months ended 30 June 2012 increased by LBP 53.9 billion U.S.$35.8 million), or 16.4 per cent., to LBP billion U.S.$253.5 million) from LBP billion U.S.$217.7 million) for the six months ended 30 June This increase in interest expense was primarily due to an increase in interest expense on customers deposits at amortised cost of LBP 19.2 billion U.S.$12.7 million), or 7.0 per cent., to LBP billion U.S.$196.4 million) for the six months ended 30 June 2012 from LBP billion U.S.$183.7 million) for the six months ended 30 June 2011, and an increase in interest expense on related parties deposits at amortised cost of LBP 32.4 billion U.S.$21.5 million) to LBP 45.6 billion U.S.$30.3 million) for the six months ended 30 June 2012 from LBP 13.2 billion U.S.$8.8 million) for the six months ended 30 June The increase in interest expense on customers deposits at amortised cost and on interest expense on related parties deposits at amortised cost for the six months ended 30 June 2012, as compared to the six months ended 30 June 2011, was primarily due to an increase in the average balance of deposits held by the Bank. Net Interest Income As a result of the foregoing, net interest income for the six months ended 30 June 2012 increased by LBP 22.9 billion U.S.$15.2 million), or 15.0 per cent., to LBP billion U.S.$116.7 million) from LBP billion U.S.$101.5 million) for the six months ended 30 June Net Fee and Commission Income Net fee and commission income for the six months ended 30 June 2012 decreased by LBP 2.2 billion U.S.$1.5 million), or 5.7 per cent., to LBP 36.6 billion U.S.$24.3 million) from LBP 38.8 billion U.S.$25.7 million) for the six months ended 30 June This decrease was mainly due to an increase in fee and commission expense from LBP 3.7 billion U.S.$2.4 million) for the six months ended 30 June 2011 to LBP 6.7 billion U.S.$4.5 million) for the six months ended 30 June 2012, which was only partially offset by an increase in fee and commission income from LBP 42.5 billion U.S.$28.2 million) for the six months ended 30 June 2011 to LBP 43.3 billion U.S.$28.7 million) for the six months ended 30 June

47 The increase in fee and commission expense for the six months ended 30 June 2012, as compared to the six months ended 30 June 2011, was primarily due to the payment of an upfront fee by the Bank to the Central Bank in the amount of LBP 3.38 billion U.S.$2.2 million) in respect of a deposit made by the Bank with the Central Bank on what Management believes to be favourable terms, following the receipt by the Bank of funds in respect of the early redemption of LBP 750 billion U.S.$497.5 million) of certificates of deposit issued by the Central Bank which had been held by the Bank. The increase in fee and commission income for the six months ended 30 June 2012, as compared to the six months ended 30 June 2011, was primarily due to growth in the Bank s normal operating activities. Net Results on Financial Instruments at Fair Value through Profit or Loss Net results on financial instruments at fair value through profit of loss for the six months ended 30 June 2012 increased by LBP 6.8 billion U.S.$4.5 million), or 77.3 per cent., to LBP 15.6 billion U.S.$10.3 million) for the six months ended 30 June 2012 from LBP 8.8 billion U.S.$5.8 million) for the six months ended 30 June 2011, primarily reflecting an increase in the amount of investment securities classified at fair value through profit or loss as a result of the reclassification of availableforsale investment securities and heldtomaturity investment securities as financial assets at fair value through profit or loss following the Bank s adoption of IFRS 9. See Financial Note 5 to the 2012 Interim Financial Statements. Gain from Derecognition of Financial Assets Measured at Amortised Cost Gain from derecognition of financial assets measured at amortised cost for the six months ended 30 June 2012 increased by LBP 36.6 billion U.S.$24.3 million), or 51.4 per cent., to LBP billion U.S.$71.5 million) from LBP 71.2 billion U.S.$47.2 million) for the six months ended 30 June 2011, primarily reflecting the derecognition of LBP 750 billion U.S.$497.5 million) of certificates of deposit issued by the Central Bank as a result of their early redemption. Other Operating Income The following table sets forth a breakdown of the Bank s other operating income for the six months ended 30 June 2012 and 30 June 2011, respectively: For the Six Months Ended 30 June 2012 unaudited) 2011 unaudited) in U.S.$ millions) in LBP millions) in U.S.$ millions) in LBP millions) Dividends from equity investment securities , ,983 Income from associates at equity method , ,766 Gain on disposal of property and equipment Foreign exchange gain , ,978 Gain on sale of assets acquired in satisfaction of loans , ,283 Other , ,892 Total other operating income , ,936 Other operating income for the six months ended 30 June 2012 increased by LBP 8.9 billion U.S.$5.9 million), or 24.0 per cent., to LBP 45.8 billion U.S.$30.4 million) from LBP 36.9 billion U.S.$24.5 million) for the six months ended 30 June This increase was primarily due to the increase in foreign exchange gains, as well as the increase from other operational income as a result of transaction arrangement fees paid to the Bank s subsidiary, MedFinance Holding Limited. Provision for Credit Losses Net of WriteBack) The Bank recorded an increase in its provision for credit losses net of writeback) of LBP 28.8 billion U.S.$19.1 million), or 67.4 per cent., to LBP 71.5 billion U.S.$47.4 million) for the six months ended 30 June 40

48 2012 from LBP 42.7 billion U.S.$28.3 million) for the six months ended 30 June 2011, primarily reflecting the Bank s conservative policy of maintaining a high ratio of loan loss provision to nonperforming loans. Total Operating Expenses The following table sets forth a breakdown of the Bank s total operating expenses for the six months ended 30 June 2012 and 30 June 2011, respectively: 2012 unaudited) For the Six Months Ended 30 June 2011 unaudited) in U.S.$ millions) in LBP millions) in U.S.$ millions) in LBP millions) Staff costs , ,653 Administrative expenses , ,609 Depreciation and amortisation , ,045 Total operating expenses , ,307 Operating expenses for the six months ended 30 June 2012 increased by LBP 37 billion U.S.$24.6 million), or 23.8 per cent., to LBP 192 billion U.S.$127.4 million), from LBP 155 billion U.S.$103.0 million) for the six months ended 30 June This increase primarily reflected an increase in staff costs from LBP 72.7 billion U.S.$48.2 million) for the six months ended 30 June 2011 to LBP 104 billion U.S.$68.9 million) for the six months ended 30 June The increase in staff costs over this period primarily reflected the implementation by the Bank of Decree No. 7426, which increased the monthly minimum wage and related cost of living payments of private sector employees, as well an increase in the average number of Bank employees. See Lebanese Economy and the Banking Sector Income Tax Income tax expense for the six months ended 30 June 2012 was LBP 23.1 billion U.S.$15.3 million), as compared to LBP 21.6 billion U.S.$14.3 million) for the six months ended 30 June 2011, principally reflecting the growth in the Bank s net income. The Bank s tax returns for the years 2008 to 2011 remain subject to examination and final tax assessment by the tax authorities, although Management does not expect any material additional tax liability as a result of the expected tax reviews. In 2012, the Bank was subject to tax examination for the fiscal years 2006 and 2007 which resulted in additional liability in the amount of LBP 1.5 billion paid during

49 Results of Operations of the Bank for the Years Ended 31 December 2011 and 31 December 2010 Net Income The following table sets forth a breakdown of the Bank s consolidated net income statement for the years ended 31 December 2011 and 31 December 2010, respectively: For the Years Ended 31 December in U.S.$ millions) in LBP millions) in U.S.$ millions) in LBP millions) Interest income ,004, ,851 Interest expense ) 678,107) 453) 682,399) Net interest income , ,452 Net fee and commission income , ,024 Net results on financial instruments at fair value through profit or loss , ) Gain from derecognition of financial assets measured at amortised cost , ,806 Other operating income , ,455 Net operating revenues , ,467 Provision for credit losses net of writeback)... 21) 31,169) 31) 45,961) Loss from writeoff of loans net) ) 0 504) Net operating revenues after impairment charge for credit losses , ,002 Total operating expenses ) 314,272) 206) 311,096) Writeback of impairment of assets acquired in satisfaction of loans , ,838 Provisions for)/ writeback of provision for Contingencies... 2) 2,191) Profit before taxes , ,947 Income tax expense... 22) 32,675) 14) 21,754) Profit for the year , ,193 The Bank s net income for the year ended 31 December 2011 increased by LBP 17.9 billion, or 11.2 per cent., to LBP billion U.S.$117.5 million) from LBP billion U.S.$105.6 million) for the year ended 31 December The Bank s net income has grown each year since For the year ended 31 December 2011, the Bank achieved a return on average assets of 1.02 per cent. and a return on average equity of per cent., as compared to a return on average assets of 0.97 per cent., and a return on equity of 9.40 per cent., for the year ended 31 December The increase in net income for the year ended 31 December 2011, as compared to the year ended 31 December 2010, was primarily due to an increase in interest income from LBP billion U.S.$648 million) for the year ended 31 December 2010 to LBP 1,004.8 billion U.S.$667 million) for the year ended 31 December 2011 and an increase in gain from derecognition of financial assets measured at amortised cost from LBP 46.8 billion U.S.$31.0 million) for the year ended 31 December 2010 to LBP 71.0 billion U.S.$47.1 million) for the year ended 31 December 2011, as well as a decrease in provision for credit losses net of writeback) from LBP 46.0 billion U.S.$30.5 million) for the year ended 31 December 2010 to LBP 31.2 billion U.S.$20.7 million) for the year ended 31 December 2011, and a decrease in administrative expenses from LBP billion U.S.$106.6 million) for the year ended 31 December 2010 to LBP billion U.S.$95.4 million) for the year ended 31 December 2011, partially offset by an increase in staff costs from LBP billion U.S.$89.1 million) for the year ended 31 December 2010 to LBP billion U.S.$102.3 million) for the year ended 31 December

50 Interest Income The following table sets forth a breakdown of the Bank s interest income for the years ended 31 December 2011 and 31 December 2010, respectively: For the Years Ended 31 December in U.S.$ millions) in LBP millions) in U.S.$ millions) in LBP millions) Deposits with the central banks , ,451 Deposits with banks and financial institutions , ,596 Deposits with related party banks and financial institutions , ,060 Notes receivable on total return swap, net ,917 Financial assets at amortised cost ,980 Availableforsale investment securities ,493 Held to maturity investment securities ,032 Loans to banks , ,152 Loans to related party banks Loans and advances to customers , ,398 Loans and advances to related parties , ,461 Receivable from properties sold with deferred payment Interest recognised on impaired loans and advances to customers , ,437 Total ,004, ,851 The Bank s interest income for the year ended 31 December 2011 increased by LBP 27.9 billion U.S.$18.6 million), or 2.9 per cent., to LBP 1,004.8 billion U.S.$666.5 million) from LBP billion U.S.$648.0 million) for the year ended 31 December The increase in interest income for the year ended 31 December 2011, as compared to the year ended 31 December 2010, was mainly due to the increase in interest income from loans and advances to customers from LBP billion U.S.$223.8 million) for the year ended 31 December 2010 to LBP billion U.S.$265.1 million) for the year ended 31 December 2011, which was, in turn, primarily due to an increase in the size of the Bank s portfolio of loans and advances to customers from LBP 4,347 billion U.S.$2,883.6 million) as at 31 December 2010 to LBP 5,260 billion U.S.$3,489.4 million) as at 31 December Due to the Bank s adoption of IFRS 9, certain investment securities which were classified as available for sale, held to maturity or financial assets designated at fair value through profit or loss in 2010 were reclassified in See Note 5 to the 2011 Annual Financial Statements. 43

51 Interest Expense The following table sets forth a breakdown of the Bank s interest expense for the years ended 31 December 2011 and 31 December 2010, respectively: For the Years Ended 31 December in U.S.$ millions) in LBP millions) in U.S.$ millions) in LBP millions) Deposits from banks and financial institutions , ,683 Deposits from related party banks and financial Institutions , ,716 Securities lent and repurchase agreements , ,475 Customers deposits at amortised cost , ,520 Related parties deposits at amortised cost , ,365 Borrowings from banks and financial institutions , ,905 Borrowings from related party banks and financial institutions Certificates of deposit , ,464 Others Total , ,399 The Bank s interest expense for the year ended 31 December 2011 decreased by LBP 4.3 billion U.S.$2.9 million), or 0.6 per cent., from LBP billion U.S.$452.7 million) for the year ended 31 December 2010 to LBP billion U.S.$449.8 million) for the year ended 31 December 2011, primarily reflecting the decrease in interest expense on customers deposits at amortised cost from LBP billion U.S.$342.3 million) for the year ended 31 December 2010 to LBP billion U.S.$338.9 million) for the year ended 31 December 2011 and the decrease in interest expense on certificates of deposit from LBP 46.5 billion U.S.$30.9 million) for the year ended 31 December 2010 to LBP 35.1 billion U.S.$23.3 million) for the year ended 31 December 2011 The decrease in interest expense on customers deposits at amortised cost for the year ended 31 December 2011, as compared to the year ended 31 December 2010, primarily reflected a decrease in the cost of funds of the Bank by 0.9 per cent. The decrease in interest expense on certificates of deposit for the year ended 31 December 2011, as compared to the year ended 31 December 2010, primarily reflecting the repayment by the Bank in full at maturity on 19 July 2010 of interestbearing certificates of deposit in an aggregate principal amount of U.S.$170 million. Net interest income As a result of the foregoing, net interest income for the year ended 31 December 2011 increased by LBP 32.3 billion, or 11.0 per cent., to LBP billion U.S.$216.7 million), from LBP billion U.S.$195.4 million) for the year ended 31 December

52 Net Fee and Commission Income The following table sets forth a breakdown of the Bank s net fee and commission income for the years ended 31 December 2011 and 31 December 2010, respectively: For the Years Ended 31 December in U.S.$ millions) in LBP millions) in U.S.$ millions) in LBP millions) Fee and commission income Commission on documentary credits , ,837 Commission on acceptances , ,698 Commission on letters of guarantee , ,513 Service fees on customers transactions , ,037 Brokerage fees , ,421 Commission on transactions with banks , ,913 Asset management, placement and underwriting fees , ,340 Commissions on fiduciary activities , ,119 Other , , , ,618 Fee and commission expense Commission on transactions with financial Institutions , ,494 Safe custody charges Other , , , ,594 Net fee and commission income , ,024 Net fee and commission income for the year ended 31 December 2011 increased by LBP 4.3 billion U.S.$2.9 million), or 7.0 per cent., to LBP 65.3 billion U.S.$43.3 million) from LBP 61.0 billion U.S.$40.5 million) for the year ended 31 December 2010, reflecting a decrease in fee and commission expense from LBP 12.6 billion U.S.$8.4 million) for the year ended 31 December 2010 to LBP 7.4 billion U.S.$4.9 million) for the year ended 31 December 2011, which was only partially offset by a decrease in fee and commission income from LBP 73.6 billion U.S.$48.8 million) for the year ended 31 December 2010 to LBP 72.7 billion U.S.$48.2 million) for the year ended 31 December Net Results on Financial Instruments at Fair Value through Profit or Loss The Bank recorded a profit of LBP 7.8 billion U.S.$5.2 million) on net results on financial instruments at fair value through profit or loss for the year ended 31 December 2011, as compared to a loss of LBP 0.3 billion U.S.$0.2 million) for the year ended 31 December 2010, due to the realisation of a gain in 2011 of LBP 37 billion U.S.$24.5 million) on the Bank s financial assets classified at fair value through profit or loss. Gain from Derecognition of Financial Assets Measured at Amortised Cost Gain from derecognition of financial assets measured at amortised cost was LBP 71.0 billion U.S.$47.1 million) for the year ended 31 December 2011, as compared to LBP 46.8 billion U.S.$31.0 million) for the year ended 31 December

53 The following table sets forth comparable figures for the total capital gains generated on investment securities for the years ended 31 December 2011 and 2010, respectively: Investment security Income statement line item For the Years Ended 31 December U.S.$ millions) LBP millions) U.S.$ millions) LBP millions) Financial Assets Measured at Amortised Cost... Availableforsale securities... Gain from derecognition of financial assets measured at amortised cost , ,806 Other operating income Gain on sale of availableforsale securities ,668 Total , ,474 Most of the Bank s availableforsale securities were classified as financial assets measured at amortised cost upon the early adoption of IFRS 9, effective 1 January In 2010, total gains generated on investment securities was comprised of both gain from derecognition of financial assets measured at amortised cost and gain on sale of availableforsale securities, which was recorded as other operating income. Accordingly, the gain on investment securities was LBP 71.0 billion U.S.$47 million) for the year ended 31 December 2011, as compared to LBP 95.5 billion U.S.$63 million) for the year ended 31 December 2010, of which LBP 46.8 billion U.S.$31 million) resulted from gain from derecognition of financial assets in respect of the Bank s investment securities as a consequence of the adoption of IFRS 9 measured at amortised cost and LBP 48.7 billion U.S.$32 million) resulted from gain on sale of availableforsale securities. Other Operating Income The following table sets forth a breakdown of the Bank s other operating income for the years ended 31 December 2011 and 31 December 2010, respectively: For the Years Ended 31 December in U.S.$ millions) in LBP millions) in U.S.$ millions) in LBP millions) Gain on sale of availableforsale securities Equities Lebanese and Turkish Government bonds ,668 Corporate bonds Dividends from equity investment securities , ,456 Income from associates at equity method.. 3 4, ,157 Gain on disposal of property and equipment Foreign exchange gain , ,758 Gain on sale of assets acquired in satisfaction of loans , ,513 Other , ,334 Total other operating income , ,455 46

54 Other operating income for the year ended 31 December 2011 decreased by LBP 50.2 billion U.S.$33.3 million), or 37.3 per cent., to LBP 84.2 billion U.S.$55.9 million), from LBP billion U.S.$89.2 million) for the year ended 31 December 2010, primarily reflecting a decrease in the gain on availableforsale securities, as a consequence of their reclassification under IFRS 9, partially offset by an increase in gain from derecognition of financial assets measured at amortised cost. The net effect of both items was a decrease of LBP 24.4 billion U.S.$16.2 million), reflected in the reclassification of availableforsale securities under IFRS 9 in the year ended 31 December Provision for Credit Losses Net of WriteBack) The Bank recorded provision for credit losses net of writeback) of LBP 31.2 billion U.S.$20.7 million) for the year ended 31 December 2011, as compared to LBP 46.0 billion U.S.$30.5 million) for the year ended 31 December 2010, in line with the Bank s continued conservative policy of maintaining a high ratio of loan loss provision to nonperforming loans. The Bank s loan loss provision to nonperforming loans increased from per cent. as at 31 December 2010 to per cent. as at 31 December Operating Expenses The following table sets forth a breakdown of the Bank s operating expenses for the years ended 31 December 2011 and 31 December 2010, respectively: For the Years Ended 31 December in U.S.$ millions) in LBP millions) in U.S.$ millions) in LBP millions) Staff costs , ,346 Administrative expenses , ,704 Depreciation and amortisation , ,046 Total operating expenses , ,096 The Bank s total operating expenses for the year ended 31 December 2011 increased by LBP 3.2 billion U.S.$2.1 million), or 1.0 per cent, to LBP billion U.S.$208.5 million) from LBP billion U.S.$206.4 million) for the year ended 31 December This increase reflected an increase in staff costs from LBP billion U.S.$89.1 million) for the year ended 31 December 2010 to LBP billion U.S.$102.2 million) for the year ended 31 December 2011, which was only partially offset by a decrease in administrative expenses from LBP billion U.S.$106.6 million) for the year ended 31 December 2010 to LBP billion U.S.$95.4 million) for the year ended 31 December The increase in the Bank s total operating expenses during 2011 was in line with the Bank s increase in business volume, and its overall expansion plan to add branches and, accordingly increase staff, as compared to Income Tax Income tax expense for the year ended 31 December 2011 was LBP 32.7 billion U.S.$21.7 million), as compared to LBP 21.8 billion U.S.$14.5 million) for the year ended 31 December 2010, principally reflecting the growth in the Bank s net income. Analysis of Financial Condition The Bank s total assets increased by LBP 2.1 trillion U.S.$1.4 billion), or 11.8 per cent., to LBP 19.9 trillion U.S.$13.2 billion) as at 30 June 2012, from LBP 17.8 trillion U.S.$11.8 billion) as at 31 December 2011, having increased by LBP 0.9 trillion, or 5.4 per cent. from LBP 16.9 trillion U.S.$11.2 billion) as at 31 December These increases were primarily attributable to: an increase in cash and central banks to LBP 3.9 trillion U.S.$2.6 billion) as at 30 June 2012, from LBP 2.8 trillion U.S.$1.9 billion) as at 31 December 2011 and LBP 2.2 trillion U.S.$1.4 billion) as at 31 December 2010; 47

55 an increase in deposits with banks and financial institutions to LBP 2.4 trillion U.S.$1.6 billion) as at 30 June 2012 from LBP 1.6 trillion U.S.$1.0 billion) as at 31 December 2011 and LBP 1.7 trillion U.S.$1.1 billion) as at 31 December 2010; and an increase in loans and advances to customers to LBP 5.8 trillion U.S.$3.8 billion) as at 30 June 2012 from LBP 5.3 trillion U.S.$3.5 billion) as at 31 December 2011 and LBP 4.3 trillion U.S.$2.9 billion) as at 31 December Cash and Central Banks The following table sets forth the breakdown of the Bank s cash and placements with the Central Bank, and other central banks as at 30 June 2012, 31 December 2011 and 31 December 2010, respectively: As at 30 June 2012 As at 31 December unaudited) in U.S.$ millions) in LBP millions) in U.S.$ millions) in LBP millions) in U.S.$ millions) in LBP millions) Cash at hand , , ,263 Compulsory reserves with the Central Bank , , ,972 Current accounts with the Central Bank , , ,092 Current accounts with other central banks , , ,848 Term placements with the Central Bank... 2,063 3,110,714 1,399 2,108, ,400,769 Term placements with other central banks , , ,368 Accrued interest receivable , , ,643 Total... 2,619 3,947,503 1,884 2,840,698 1,433 2,159,955 Compulsory deposits with the central banks are not available for use in the Bank s daytoday operations and are reflected at amortised cost. Compulsory reserves with the Central Bank represent noninterest earning deposits in Lebanese Pounds computed on the basis of 25 per cent. and 15 per cent. of the average weekly sight and term customers deposits in Lebanese Pounds, respectively. The Central Bank, pursuant to regulations amending Decision No. 7835, has established exemptions from compulsory reserves requirements to incentivise banks to extend different types of subsidised loans denominated in Lebanese Pounds, such as housing and Kafalat guaranteed) loans, as well as loans extended to finance environmentallyfriendly projects or for educational purposes. The periodonperiod reduction in the Bank s compulsory reserves reflected the growth of the Bank s portfolio of these subsidised loans. Term placements with the Central Bank include the equivalent in foreign currencies of LBP 1,583 billion as at 31 December 2011 LBP 1,352 billion as at 31 December 2010) deposited in accordance with local banking regulations which require banks to maintain interest earning placements in foreign currency to the extent of 15 per cent. of customers deposits in foreign currencies, certificates of deposits and loans obtained from nonresident financial institutions. In accordance with these requirements, the periodonperiod increases in term placements with the Central Bank primarily reflected the corresponding underlying increases in the Bank s customers deposits in foreign currencies during such periods. Furthermore, the increase during the first half of 2012 also reflected the placement by the Bank of a longterm deposit on favourable terms with the Central Bank of LBP 900 billion, maturing in See Results of Operations of the Bank for the Six Months Ended 30 June 2012 and 30 June 2011 Interest Income. Term placements with other central banks include the equivalent in Turkish Lira and other foreign currencies of LBP billion as at 31 December 2011 LBP 93.7 billion as at 31 December 2010) deposited in accordance with banking laws and regulations in Turkey which require banks to maintain at the Central Bank of Turkey 48

56 mandatory interest earning deposits to the extent of 6 per cent. to 11 per cent. of their liabilities in Turkish Lira and 5 per cent. to 11 per cent. of their liabilities in foreign currencies, depending on the nature of their liabilities. Term placements with other central banks also include the equivalent in Euro of LBP 36.5 billion as at 31 December 2011 LBP 26.9 billion as at 31 December 2010) deposited in accordance with banking laws and regulations in Cyprus, which require banks to maintain at the Central Bank of Cyprus mandatory interest earning deposits in Euro to the extent of 2 per cent. of banks and customers deposits maturing in less than two years, after deducting a fixed amount of Euro 100,000. Financial Assets at Fair Value Through Profit and Loss The following table sets out financial assets at fair value through profit or loss FVTPL ) as at 30 June 2012, 31 December 2011 and 31 December 2010, respectively: As at 30 June 2012 As at 31 December unaudited) in U.S.$ millions) in LBP millions) in U.S.$ millions) in LBP millions) in U.S.$ millions) in LBP millions) Financial assets at fair value through profit or loss , ,643 Financial assets designated at fair value through profit or loss upon initial recognition ,652 Trading assets ,304 Total , , ,956 See Note 2 Adoption of New and Revised International Financial Reporting Standards IFRSs)) to the 2011 Annual Financial Statements. The following table sets out a breakdown of the Bank s securities portfolio classified as FVTPL as at 30 June 2012, 31 December 2011 and 31 December 2010, respectively: As at 30 June 2012 As at 31 December unaudited) in U.S.$ millions) in LBP millions) in U.S.$ millions) in LBP millions) in U.S.$ millions) in LBP millions) Credit linked notes issued by banks , ,472 0 Lebanese government bonds , ,349 Other foreign government bonds , Debt securities issued by banks and companies , ,905 0 Quoted equity securities Unquoted equity securities , ,257 0 Accrued interest receivable , , Total , , ,956 The Bank s FVTPL securities portfolio increased by LBP 6.5 billion U.S.$4.3 million), or 1.8 per cent., to LBP 371 billion U.S.$246.2 million) as at 30 June 2012 from LBP 365 billion U.S.$241.9 million) as at 31 December 2011, having increased by LBP 328 billion U.S.$217.4 million), or per cent., from LBP 37 billion U.S.$24.5 million) as at 31 December The increase, as at the years ended 31 December 2011 and 2010, reflected the Bank s early adoption of IFRS 9, pursuant to which a portion of the investment securities 49

57 held by the Bank at the end of 2010 were reclassified as FVTPL securities. See Note 8 Financial Assets at Fair Value through Profit or Loss) to the 2011 Annual Financial Statements. Loan Portfolio The Bank s loans and advances to customers and loans and advances to related parties, net of provisions for nonperforming loans, allowance for collectively assessed loans, deferred penalties charged on excess over limit and unrealised interest, amounted to LBP 6.9 trillion U.S.$4.6 billion), representing 34.9 per cent. of the Bank s total assets, as at 30 June 2012, having increased from LBP 6.3 trillion U.S.$4.2 billion), representing 35.3 per cent. of the Bank s total assets, as at 31 December 2011 and LBP 5.3 trillion U.S.$3.5 billion), representing 31.5 per cent. of the Bank s total assets, as at 31 December For a description of the Bank s loan portfolio, see Overview of the Bank Loan Portfolio. Investment Securities The following table sets out a breakdown of the Bank s financial assets as at 30 June 2012, 31 December 2011 and 31 December 2010, respectively: As at 30 June 2012 As at 31 December unaudited) Total in LBP millions) Foreign Currency) Total in LBP millions) Foreign Currency) Total in LBP millions) Foreign Currency) Financial assets at fair value through other comprehensive income ,478 12, , ,787 12, ,482 Financial assets measured at amortised cost... 4,171,972 2,017,623 2,154,349 4,789,693 2,625,165 2,164,528 Accrued interest receivable... 68,759 29,939 38,820 78,045 42,568 35,477 4,240,731 2,047,562 2,193,169 4,867,738 2,667,733 2,200,005 Available for sale investment securities... 5,707,185 3,367,127 2,340,058 Accrued interest receivable... 79,194 55,499 23,695 5,786,379 3,422,626 2,363,753 Heldtomaturity investment securities , , ,938 Accrued interest receivable... 13,069 1,501 11, , , ,506 Total... 4,752,209 2,059,968 2,692,241 5,418,525 2,680,038 2,738,487 6,521,648 3,538,389 2,983,259 The decrease in the size of the Bank s investment securities portfolio as at 30 June 2012, as compared to 31 December 2011, was mainly due to the sale of Central Bank certificates of deposit denominated in LBP with an aggregate nominal value of LBP 750 billion U.S.$498 million). The decrease in the size of the Bank s investment securities portfolio as at 31 December 2011, as compared to 31 December 2010, was mainly due to the early adoption of IFRS 9 and the resulting reclassification of available for sale and heldtomaturity investment securities to financial assets at fair value through other comprehensive income and financial assets measured at amortised cost. See also Notes 12B and 12C to the 2011 Annual Financial Statements. Customers Acceptance Liability Acceptances represent documentary credits which the Bank has committed to settle on behalf of its customers against commitments by those customers acceptances). The commitments resulting from these acceptances are stated as a liability in the statement of financial position for the same amount. The Bank s customers acceptance liability increased by LBP 71.4 billion U.S.$47.4 million), or 96 per cent., to LBP 146 billion U.S.$96.8 million) as at 30 June 2012, having increased by, from LBP 74.4 billion U.S.$49.4 million) as at 31 December 2011, after having decreased by LBP 63 billion U.S.$41.8 million), or 46 per cent., from LBP 139 billion U.S.$91.2 million) as at 31 December The increase in customers acceptance liability as at 30 50

58 June 2012, as compared to 31 December 2011, was primarily due to the increase in documentary credits. The decrease in customers acceptance liability as at 31 December 2011, as compared to 31 December 2010, was primarily due to the maturity of certain documentary credits issued. See Note 13 to the 2011 Annual Financial Statements. Investments in Associated Companies and Other Investments The following table sets out the Bank s investments as at 31 December 2011 and 31 December 2010, respectively: As at 31 December in LBP millions) Associated Companies CSC Bank, s.a.l... 39,723 34,802 GroupMed Services, s.a.l... 2,139 3,166 Pin Pay, s.a.l... 2,412 44,274 37,968 Other Investments Ciment de Sibline, s.a.l ,096 27,096 Light Metal Products, s.a.l.... 7,173 7,173 Longterm loan to Light Metal Products, s.a.l.... 3,410 3,418 Fanadeq, s.a.l.... 1,140 1,096 Beverely Hotel, s.a.l... 4,135 3,876 Real Estate Central Development Company, s.a.l... 1,490 Sidem, s.a.l... 16,908 15,971 61,352 58,630 Total ,626 96,598 Assets Acquired in Satisfaction of Loans Assets acquired in satisfaction of loans have been acquired through the enforcement of security over loans and advances. The Bank s assets acquired in satisfaction of loans increased by LBP 0.12 billion U.S.$0.08 million) to LBP 403 billion U.S.$267.5 million) as at 30 June 2012, from LBP 403 billion U.S.$267.4 million) as at 31 December 2011, after having increased by LBP 259 billion U.S.$171.9 million), or 180 per cent., from LBP 144 billion U.S.$95.6 million) as at 31 December See Note 15 to the 2011 Annual Financial Statements. The acquisition of assets in settlement of loans in Lebanon is regulated by the Central Bank. The assets are required to be liquidated within two years, failing which a regulatory reserve is required to be deducted from yearly net profits over a period of five years. This reserve is reduced to five per cent. annually if certain conditions related to the restructuring of the Bank s nonperforming loan portfolio are met. This regulatory reserve is reflected under equity. In this regard, LBP 3.0 billion was deducted in 2011 from 2010 income LBP 2.7 billion in 2010). Sources of Funds In common with other Lebanese commercial banks, the Bank relies on customers deposits as its principal source of funding. In addition, the Bank is an opportunitydriven borrower on the Beirut overnight Lebanese Pound interbank market. In 1996, the Bank established a U.S.$1,000,000,000 Euro Deposit Program and has historically sought to lengthen maturities by issuing twelve series of certificates with terms ranging from two to seven years. Other than the Bank s U.S.$300,000, per cent. certificates due 2012, which are due to mature in December 2012, all the series issued under such programme have matured and have been fully repaid. 51

59 The following tables set forth the principal sources of the Bank s funds as at 31 December 2011 and 30 December 2010, respectively: As at 31 December 2011 LBP Funds Foreign Currency Funds Total in LBP millions) Per cent. in LBP millions) Per cent. in LBP millions) Deposits from banks and financial institutions... 25, , ,826 Customers deposits at fair value through profit or loss... 6, ,454 Customers deposits at amortised cost. 2,996, ,083, ,079,766 Related parties deposits at fair value through profit or loss... Related parties deposits at amortised cost , ,051, ,201,999 Borrowings from banks and financial institutions... 91, , ,224 Certificates of deposit , ,449 Equity , , ,489,398 Total... 4,178, ,279, ,457,116 As at 31 December 2010 LBP Funds Foreign Currency Funds Total in LBP millions) Per cent. in LBP millions) Per cent. in LBP millions) Deposits from banks and financial institutions... 73, , ,621 Customers deposits at fair value through profit or loss... 47, ,660 Customers deposits at amortised cost... 3,037, ,714, ,751,719 Related parties deposits at fair value through profit or loss... 2, ,950 Related parties deposits at amortised cost , , ,472,913 Borrowings from banks and financial institutions... 91, , ,276 Certificates of deposit , ,021 Equity , , ,664,260 Total... 4,627, ,827, ,455,420 52

60 Customer Accounts by Currency and Maturity Customer accounts represent the Bank s principal source of funding. The following tables set forth the breakdown of the Bank s customer accounts at amortised cost, by currency and maturity, as at 31 December 2011 and 31 December 2010, respectively: As at 31 December 2011 LBP Funds Foreign Currency Funds Total in LBP millions) Per cent. in LBP millions) Per cent. in LBP millions) No maturity... 11, , ,468 Up to 3 months... 2,782, ,228, ,011, months , ,038, ,240, years , , years... 96, , years Over 10 years... Total... 2,996, ,083, ,079,766 As at 31 December 2010 LBP Funds Foreign Currency Funds Total in LBP millions) Per cent. in LBP millions) Per cent. in LBP millions) No maturity... 12, , ,688 Up to 3 Months... 2,919, ,132, ,051, Months , , , Years , , years... 5, , years... 4, ,225 Over 10 years... Total... 3,037, ,714, ,751,719 Customer Accounts by Geography As at 31 December 2011, LBP 8.6 trillion U.S.$5.7 billion), or 71.2 per cent., of customer accounts at amortised cost were held by customers in Lebanon; LBP 1.5 trillion U.S.$974 million), or 12.2 per cent., of total customer accounts at amortised cost, by customers elsewhere in the Middle East, Gulf and Africa; LBP billion U.S.$123.5 million), or 1.5 per cent., by customers in North America, LBP 1.6 trillion U.S.$1.1 billion); or 13.0 per cent., by customers in Europe; and LBP billion U.S.$165.1 million), or 2.1 per cent., by customers elsewhere. 53

61 Total Equity The Bank s total equity amounted to LBP 1,506.1 billion U.S.$999 million) as at 30 June 2012, as compared to LBP 1,489.4 billion U.S.$988 million) as at 31 December 2011 and LBP 1,664.3 billion U.S.$1,104 million) as at 31 December The increase in the Bank s total equity from 31 December 2011 to 30 June 2012, by LBP 16.7 billion U.S.$11.1 million), or 1.1 per cent, was primarily as a result of the generation of net income. The decrease in the Bank s total equity from 31 December 2010 to 31 December 2011 by LBP billion U.S.$116.1 million), or 10.5 per cent., was primarily due to the implementation of IFRS 9. As at 30 June 2012 As at 31 December unaudited) in U.S.$ millions) in LBP millions) in U.S.$ millions) in LBP millions) in U.S.$ millions) in LBP millions) Equity Share capital , , ,000 Preferred shares 1) , , ,750 Legal reserves , , ,177 Property revaluation reserve 2 3, , ,213 Reserve for general banking risks and other reserves , , ,967 Reserves for assets acquired in satisfaction of loans , , ,525 Retained earnings , , ,530 Cumulative change in fair value of financial assets through other comprehensive income/availableforsale securities... 49) 74,485) 24) 36,368) ,569 Currency translation adjustment... 26) 38,861) 31) 46,620) 14) 20,963) Profit for the year , , ,271 Equity attributable to the group ,353, ,351,196 1,031 1,555,039 Noncontrolling interest , , ,221 Total equity ,506, ,489,398 1,104 1,664,260 1) On 23 October 2012, the Bank issued the Series 2 Preferred Shares. See Capitalisation. Capital Adequacy The Bank s objectives when managing its capital are to comply with the capital requirements set by the Central Bank, the Bank s main regulator, to safeguard the Bank s ability to continue as a going concern and to maintain a strong capital base. The Bank s capital adequacy ratio is calculated according to Central Bank guidelines, which are in line with the recommendations of the Committee on Banking Regulations and Supervisory Practices of the Bank for International Settlements the Basel Accords ). In December 2011, the Central Bank issued Intermediary Decision No , requiring banks to gradually raise their capital adequacy ratios by the end of Pursuant to Decision No , Lebanese banks are required to have raised their common equity Tier 1 ratio to eight per cent. defined as the ratio of common equity Tier 1 capital to total weighted assets), their Tier 1 ratio to ten per cent. defined as the ratio of Tier 1 capital to total weighted assets) and their total capital ratio to 12 per cent. defined as the ratio of the sum of the Tier 1 ratio and the Tier 2 ratio to total weighted assets) by the end of Decision No also imposes intermediate annual thresholds for such ratios from the end of The requirements are in line with Basel III. For the year ending 31 December 2012, the minimum ratios of Common Equity Tier 1, Tier 1 and total capital are five, eight and ten per cent., respectively. 54

62 The following table sets forth a breakdown of the Bank s capital, by type, together with the Bank s capital adequacy ratio, as at 30 June 2012, 31 December 2011 and 31 December 2010, respectively: As at 30 June 2012 As at 31 December unaudited) in U.S.$ millions) in LBP millions) in U.S.$ millions) in LBP millions) in U.S.$ millions) in LBP millions) Total risk weighted assets credit, market and operational... 8,403 12,666,875 8,086 12,190,324 7,189 10,836,869 Tier I and Tier II capital ,136, ,218, ,198,317 Capital Adequacy Ratio Tier I and Tier II per cent 9.0 per cent 10.0 per cent 10.0 per cent 11.0 per cent 11.0 per cent The Bank s consolidated capital adequacy ratio as at 31 December 2011 decreased to 10.0 per cent. from 11.0 per cent. as at 31 December 2010, primarily as a result of the adoption of IFRS 9 effective 1 January The impact of this early adoption on the Bank s retained earnings, cumulative change in fair value of financial assets and noncontrolling interest as at 1 January 2011 was as follows: Carrying Amount as at 31 December 2010 Carrying Amount as at 1 January 2011 upon Adoption of IFRS 9 in LBP millions) Impact of Early Adoption change) Retained earnings , ,789 5,258 Cumulative change in fair value of financial assets ,569 83, ,172) Noncontrolling interest , ,467 3,753) 55

63 Liquidity The following table sets forth certain liquidity ratios for the Bank as at 30 June 2012, 31 December 2011 and 31 December 2010, respectively: As at 30 June 2012 As at 31 December unaudited) Per cent. Liquidity Average net loans to average net deposits 1)4) Average customers creditor accounts to average total deposits 2)4) Foreign currency customers loans to foreign currency customers creditor accounts 3)4) Notes: 1) Calculated by dividing average net loans to customers and related parties by average net customers and related parties deposits. 2) Calculated by dividing average deposits from customers and related parties by average total deposits the sum of customers creditor accounts, deposits and borrowings from banks and financial institutions and certificates of deposits). 3) Calculated by dividing net loans and advances to customers and related parties in foreign currency by customers and related parties creditor accounts and certificates of deposits in foreign currency. 4) Customers and related parties creditor accounts consist of accounts at amortised cost and accounts designated at fair value through profit or loss. The Asset Liability Committee monitors and regulates the liquidity position of the Bank and ascertains that the Bank maintains a high level of liquid assets and a stable funding base. Capital Expenditure As at the date of this Prospectus, the most significant budgeted capital expenditure projects for the Bank are: i) the anticipated replacement of the Bank s information technology in respect of its core banking system operations, at a total estimated cost of approximately U.S.$30 million; and ii) the building of an extension to the head office in Beirut, at a total estimated cost of approximately U.S.$55 million. See Overview of the Bank Information Technology and Overview of the Bank Properties. 56

64 OVERVIEW OF THE BANK The Bank The Bank is one of the leading banks in Lebanon 1, providing a wide range of corporate and retail banking and related financial services to individuals and private sector companies. The Bank is a Lebanese joint stock company société anonyme libanaise) with its head office located at BankMed Centre, 482 Clemenceau Street, Kantari , Beirut, Lebanon. The Bank s common shares are per cent.owned by GroupMed Holding, s.a.l. GroupMed ), a Lebanese holding company, which is, in turn, majorityowned by Mrs. Nazek Hariri and Messrs. Saad and Ayman Hariri. The Bank s financial services subsidiaries include: i) Saudi Lebanese Bank, s.a.l. SLB ), a Lebanese banking institution, providing banking services primarily to mediumsized corporate clients in Lebanon, which is wholly owned by the Bank; ii) MedInvestment Bank, s.a.l. MIB ), a specialised bank providing investment banking services in Lebanon, which is wholly owned by the Bank; iii) BankMed Suisse S.A. BankMed Suisse ), a Swiss bank engaged in private banking activities, which is wholly owned by the Bank; iv) Turkland Bank A.S. TBank ), a Turkish bank providing banking services to the commercial business sector as well as to small and mediumsized enterprises SMEs ) in Turkey, which is 50 per cent. owned by the Bank; v) SaudiMed Investment Company SaudiMed ), the Bank s investment banking arm in the Kingdom of Saudi Arabia, which is wholly owned by the Bank; and vi) MedSecurities Investment, s.a.l. MedSecurities ), a wholly owned subsidiary of the Bank, which commenced operations in April 2008 and provides brokerage services and offers structured finance products. See Note 3 to the 2012 Interim Financial Statements for a full list of the Bank s consolidated subsidiaries as at 30 June As at 30 June 2012, the Bank and its financial services subsidiaries had 2,046 employees and a total of 56 active local branches, as well as a branch of SLB in Lebanon, a branch in Cyprus, two branches in Iraq, 27 branches in Turkey of TBank, and a branch in Geneva of BankMed Suisse. History The Bank traces its roots to 1944 when Messrs. George Naaman and Elias Sousou established a credit institution under the name of Banque Naaman et Sousou. The Bank was incorporated on 13 August 1955 as a société anonyme libanaise under the name Eastern Commercial Bank, s.a.l., with a capital of LBP 1.5 million, pursuant to Presidential Decree No dated 21 March The duration of this decree is ninetynine years, commencing in The name of the Bank was changed to Banque de la Méditerranée, s.a.l. on 29 January 1970, pursuant to Presidential Decree No and, upon the approval of the Central Bank on 23 November 2005, to BankMed, s.a.l. In November 1994, Méditerranée Investors Group Liban) Holding, s.a.l. MIG Liban ) was incorporated in Lebanon by the late prime minister H.E. Mr. Rafic Hariri and, in December 1994, MIG Liban acquired the entire share capital of the Bank from its previous owners. In December 1995, the Bank acquired 75 per cent. of the shares of SLB and, in doing so, became the largest bank by total assets in Lebanon at that date. On 24 January 1996, the Bank established a specialised bank, Méditerranée Investment Bank, with a capital of LBP 10 billion. Méditerranée Investment Bank s capital was increased to LBP 85 billion in December In March 2011, Méditerranée Investment Bank changed its name to MedInvestment Bank, s.a.l. In 1996, the Bank acquired the shares of Centre Méditerranée, s.a.l., whose assets consist of a commercial building, which houses the Bank s headquarters. Later in 1996, the Bank acquired 35 per cent. of the share capital of Banque Française de l Orient BFO ) from a related company, La Holding de la Méditerranée Hollande B.V. In February 2001, the Bank sold its investment in BFO to Crédit Agricole Indosuez and agreed to acquire all of the shares of Banque Française de L Orient Suisse) S.A. BFO Switzerland ), a wholly owned subsidiary of BFO, subject to approval of the 1 Based on information published by Bankdata and the Central Bank and from the Bank s own internal sources. See The Banking Sector and Banking Regulations in Lebanon. 57

65 Swiss banking authorities and of the Central Bank. Following receipt of the requisite approvals, the Bank completed the acquisition of the shares in BFO Switzerland on 31 August On 4 September 2001, BFO Switzerland changed its name to Banque de la Méditerranée Suisse) S.A. and again on 29 March 2006 to BankMed Suisse. BankMed Suisse is a Swiss bank principally engaged in private banking activities aimed primarily at high net worth clients. On 5 November 2001, the Bank, together with MIG Liban, acquired 2,700,000 shares, representing 90 per cent. of the issued share capital, of Allied Business Bank, s.a.l., Allied Bank ), a bank incorporated in Lebanon with limited liability List of Banks No. 71; Commercial Registry: Beirut 12900) and engaged principally in commercial banking activities. The Bank has subsequently acquired all of the remaining shares in Allied Bank. Allied Bank has one subsidiary, Allied Business Investment Corporation ABICORP ), which is 66 per cent. owned by Allied Bank. ABICORP is a financial institution incorporated in Lebanon with limited liability and engaged in asset management. During 2011, Allied Bank increased its ownership in ABICORP to 70.9 per cent. through acquiring additional shares. Effective 29 November 2001, the Bank acquired 35 per cent. of the issued share capital of Credit Card Services s.a.l., a financial institution incorporated in Lebanon with limited liability CSC ). CSC is engaged in various credit card operations in Lebanon and other Arab and Middle Eastern Countries. On 16 June 2004, Allied Bank acquired five per cent. of the share capital of CSC. The acquisition was approved by the Central Bank on 15 September On 31 May 2006, and as a result of merging Allied Bank with the Bank, the Bank s shareholding in CSC increased to 40 per cent. In April 2010, CSC became a specialised bank under the name of CSC Bank, s.a.l. CSC Bank ). In July 2010 and September 2011, CSC Bank increased its capital from LBP 40 billion to LBP 55 billion and then further to LBP 75 billion. In May 2003, MedBancassurance, s.a.l. was established by the Bank to conduct insurance brokerage operations. In October 2010, MedBancassurance, s.a.l. changed its name to GroupMed Insurance Brokers Lebanon, s.a.l. GMIB ). On 18 February 2006, MIG Liban was renamed GroupMed Holding), s.a.l. GroupMed Holding ). In 2006, the Bank adopted major restructuring and reorganisation initiatives, with the aim of consolidating businesses and increasing operating efficiency. As part of these initiatives, on 19 May 2006, Allied Bank was merged into BankMed, as a result of which ABICORP became a subsidiary of the Bank. In June 2006, the Bank acquired the remaining 25 per cent. of SLB s shares. In January 2007, the Bank, in partnership with Arab Bank plc, acquired a majority equity stake in MNG Bank, a Turkish bank. As a result of this acquisition, the Bank held 41 per cent. of the shares of MNG Bank. In April 2007, MNG Bank s name was changed to Turkland Bank A.S. In June 2010, the Bank increased its shareholding in TBank from 41 per cent. to 50 per cent. by acquiring an additional nine per cent. of TBank s share capital. In November 2011, TBank increased its capital from TL 170 million to TL 300 million. At the date of the Prospectus, the Bank holds 50 per cent. of TBank s share capital, Arab Bank plc holds 28 per cent. and Arab Bank Switzerland) Ltd. holds 22 per cent. On 21 May 2007, the Bank established SaudiMed to serve as its investment banking arm in the Kingdom of Saudi Arabia. SaudiMed officially commenced activities in July On 17 December 2007, the Bank spunoff its brokerage business into a separate entity by establishing MedSecurities, which is a financial institution that is regulated by the Central Bank. MedSecurities, which is a wholly owned subsidiary of the Bank, commenced operations in April 2008 and provides brokerage services and offers structured finance products. In October 2009, the Bank issued 1,000,000 Series 1 Preferred Shares, fully paid and at an issue price per share of U.S.$100, with a par value of LBP 10,000 per share and an issue size of U.S.$100,000,000 the Series 1 Preferred Shares ). Subject to certain conditions, the Series 1 Preferred Shares may be redeemed at the option of the Bank five years after their issue date and annually thereafter. On 19 May 2011, the Bank established a wholly owned financial services subsidiary, Emkan Finance, s.a.l. Emkan ), which is regulated by the Central Bank. Emkan provides microfinance services in different regions of Lebanon to economically active, but lowincome customers. 58

66 In October 2012, the Bank issued 2,250,000 Series 2 Preferred Shares, fully paid and at an issue price of U.S.$100, with a par value of LBP 10,000 per share and an issue size of U.S.$225,000,000. Subject to certain conditions, the Series 2 Preferred Shares may be redeemed at the option of the Bank five years after their issue date and annually thereafter. See Capitalisation. As at the date of this Prospectus, the Bank s capital is LBP 652,500,000,000, divided into 62,000,000 common shares, 1,000,000 Series 1 Preferred Shares and 2,250,000 Series 2 Preferred Shares. The Bank s central telephone number is Credit Ratings As at the date of this Prospectus, the Issuer has been assigned a B rating by S&P. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation. S&P is established in the EU and registered under the CRA Regulation. As such, S&P is included in the latest update of the list of registered credit rating agencies published by the European Securities and Markets Authority on its website in accordance with the CRA Regulation as of the date of this Prospectus. 59

67 Organisational Chart The organisational chart of the Bank as at the date of this Prospectus is set forth below: 1 1 For a description of the principal subsidiaries of the Bank, see Subsidiaries. In addition to full service banking operations conducted through certain of its subsidiaries, the Bank also conducts its investment banking, private banking and brokerage service activities through its subsidiaries. 60

68 Strategy Taking into account the significant challenges that local, regional and international economies have continued to encounter in recent years, the Bank s objectives are to prioritise cautious and controlled growth, while remaining committed to acting in partnership with its customers. In order to realise these objectives, the Bank s strategy in the short to mediumterm is to allocate resources prudently, in order to respond flexibly to changes in the business environment. The main pillars of the Bank s strategy are: evaluating its business model on a regular basis, taking into account regulatory constraints, economic challenges and market changes, as well as competitive challenges, with a view to creating increased value for shareholders and customers; focusing on businesses where the Bank has leading market shares and competitive advantages, while diversifying revenues geographically and across business lines; expanding its presence in the Lebanese market by increasing the number of local branches prudently; growing its retail customer base by attracting, retaining and strengthening ties with its new clients; the Bank s strategy is to grow and diversify its deposit base and to increase its client base by expanding its branch network, introducing new products and deploying innovative technology to better serve its customers; broadening the range and scope of its retail and institutional banking financial products and services; maintaining a leading position in technologybased banking; conservatively growing its commercial banking activities in Turkey; leveraging its local and international customer base to expand and develop the financial services that the Bank is offering through its investment arm in Saudi Arabia SaudiMed) and its private banking business in Switzerland BankMed Suisse); selectively monitoring regional and international markets to prudently pursue growth opportunities through organic growth or acquisitions; and continuing to enhance its overall risk management processes. Principal Business Activities The Bank s principal business activities consist of institutional banking, financial institutions and trade finance, financial markets treasury operations), retail banking, investment banking, private banking and brokerage. As at 31 October 2012, the Bank had over 100,000 retail customers and 2,300 corporate customers. Institutional Banking The Bank s Institutional Banking Division comprises the Corporate Banking Division, the SME Division and the International Commercial Banking Division, which together are responsible for offering a broad range of services and products to Lebanese entities operating in major sectors of numerous economies. The primary goal of the Institutional Banking Division is to focus on those sectors of Lebanon s economy that retain good prospects for growth and on companies that maintain dominant market shares. The sectors involved are diversified and include, among others, retail and wholesale trade, real estate development, transportation, telecommunications and financial intermediaries. The Institutional Banking Division s principal products include, among others, loans, overdrafts, inventory financing and international trade financing. With the growing needs of Lebanese corporate clients to expand their businesses locally and overseas, the Bank has been a reliable provider of financing solutions. An important aspect of the Bank s philosophy to maintain a significant position in the Lebanese corporate banking market is to focus on providing a high level of customer 61

69 service, innovative lending products and a wide range of products and services that facilitate daytoday banking transactions. Corporate Banking The Corporate Banking Division, which caters to the financial needs of corporate clients with an annual turnover greater than U.S.$10 million, offers innovative real estate lending products and financing for project contractors and companies in manufacturing industries, as well as wholesale and retail vendor financing. In addition, the Corporate Banking Division offers tailored financing programmes that are specific to industry segments, including aviation, healthcare and telecommunications. These services are provided through client relationship teams, which include team leaders backed by relationship managers and which are supported by the Bank s domestic and international branch network. Small and Medium Enterprises The SME Division, which caters for the financial needs of clients with annual turnovers of less than U.S.$10 million, provides term loans, credit lines, working capital facilities, trade finance facilities and subsidised Kafalat guaranteed) loans. The SME Division serves customers across diversified sectors, including food and beverages, agriculture, retail and wholesale trade and real estate development, as well as individuals. These products are provided through client relationship teams, which consist of unit heads backed by a team of relationship managers. The client relationship teams are spread over several regions, including Beirut, North Lebanon, South Lebanon and the Bekaa Valley, and are also supported by the Bank s domestic and international branch network. International Commercial Banking The International Commercial Banking Division, which was established in 2011, serves new and existing Lebanese corporate clients established outside of Lebanon. The Division seeks to provide clients with improved financing solutions to facilitate their international banking needs. The International Commercial Banking Division s client base is spread throughout the MENA region, with the majority of its clients operating in the trade and manufacturing sectors. Financial Institutions and Trade Finance The Bank s Financial Institutions and Trade Finance Division is responsible for handling the Bank s relationships with other financial institutions locally, regionally and internationally. The Division services the overseas trade finance requirements of the Bank s institutional customers. The Division is also responsible for promoting the Bank s foreign trade activities throughout the world and in assisting other Bank divisions with their international activities. Over the past three years, the Bank has been strengthening and expanding its network of regional and international correspondent banks with established and strategic banking relationships; the Bank now has more than 100 correspondents globally. In line with the Bank s regional expansion, the Financial Institutions and Trade Finance Division has been improving its trade finance capabilities regionally in Turkey, Iraq and Cyprus), as well as in Europe Switzerland), which Management believes creates a competitive advantage for the Bank by allowing it to provide doortodoor trade finance services. The Bank s principal trade finance products are bank guarantees, standby letters of credit, documentary credits sight or acceptance), performance bonds, forward exchange contracts and foreign currency options. The Bank has also been strengthening its lending capabilities by growing its international syndication desk through its participation in regional and international syndicated and club deal transactions. Management believes the Bank s knowhow and increased activity have made the Bank one of the key active Lebanese participants in this sector. In recent years, the Bank has also partnered with multilateral international and regional financial institutions through various funding programmes and trade finance transactions in order to support the longterm financing needs of the Bank s customers. The Bank s principal partners in this respect are: i) the Overseas Private 62

70 Investment Corporation, the U.S. Government s development financial institution; and ii) the Arab Trade Finance Program, a multilateral agency that promotes trade finance in the Arab world. The Financial Institutions and Trade Finance Division coordinates closely with various other divisions of the Bank, principally in respect of the following areas: Corporate Banking: i) supporting corporate customers overseas businesses, in general, and trade finance and correspondent banking needs, in particular; ii) providing recommendations and assessments of financial institutions risks in transactions involving its corporate customers; and iii) establishing financial institution credit limits in respect of the export requirements of corporate customers. Treasury & Brokerage: setting up financial institution credit limits for brokerage and treasury trading activities with approved counterparties. Overseas branches / subsidiaries: i) contributing to the origination of trade finance transactions; ii) providing recommendations and assessments of transactions with underlying financial institution credit risk; and iii) promoting crossselling efforts. Backoffice: i) liaising between the international correspondents and the Bank s back office in relation to correspondents requests to issue letters of credit or letters of guarantee, as well as cash transfers and payments; and ii) giving recommendations in respect of different international correspondents to whom letters of credit or letters of guarantee should be issued. Treasury The Bank s Treasury Division manages the balance sheet and related interest rate and foreign exchange exposures. The Bank s Treasury Division is currently divided into two separate desks, each focusing on specific activities: the Money and Capital Markets desk and the Foreign Exchange and Treasury Marketing Unit desk. The Treasury Division undertakes foreign exchange spot, forward and interest rate hedging transactions, repo transactions and trading in commodities, local and foreign currency debt and equity securities and access to local and foreign interbank markets. It is also responsible for managing the Bank s investment products and dual currency and indexlinked deposits. Additionally, the Bank s Treasury Division prepares daily reports on local and international developments and trends and presents seminars on foreign exchange and derivative products. Retail Banking The Bank offers a full range of banking products and services to its individual customers, including, among others, foreign exchange services, money transfers, credit cards, guarantees, Bancassurance products, personal loans, car loans, housing loans, deposit accounts and treasury products. Delivery Channels The Retail Operations Division offers banking solutions through multiple delivery channels, including through its branches, its 24hour call centre, its wide range of online services and telephone and mobile banking. The Bank s branch network focuses on providing a full range of financial products to service the Bank s retail and corporate clients. As at 30 June 2012, the Bank operated 56 branches across Lebanon, one in Cyprus and two in Iraq. The Bank s local branches included: 25 operational branches located in the Greater Beirut region 24 branches and the head office), seven branches in the north of Lebanon, six branches in the south of Lebanon, 15 branches in Mount Lebanon and three branches in Bekaa. Since 2005, the Bank has expanded its branch network by opening 13 new branches. The Bank is planning to open three new branches by December 2012 and a minimum of two new branches annually from 2013 through The Bank operates a network of 102 Automated Teller Machines ATMs ) spread across Lebanon. The Bank s ATMs offer multiple services, including cash withdrawals, balance inquiries, personal identification number changes, mini statements, cheque book orders, transfers between accounts, recharging prepaid mobile phones and settling bill payments. The Bank owns the largest nonbranch ATM network in Lebanon. 63

71 Through MedOnline, the Bank offers its customers access to a wide range of products and services and allows customers to manage their deposit and credit card accounts online. Consumer Loans The Bank offers a variety of consumer credit solutions to finance the needs of its customers. These products have flexible terms, fixed or variable rates, and are intended to meet the needs of the Bank s customers of all income levels. The Bank s consumer loan products include: Personal loans: these loans represent credit extended to the Bank s clients to meet their personal needs. Such loans may be unsecured or secured by collateral. Unsecured loans are advanced on the basis of the borrower s credit history and ability to repay the loan from their personal income. Repayment of the loan is usually achieved through monthly payments over the term of the loan. Car, truck, taxi and boat loans: these loans are extended to finance the purchase of new and used vehicles. Car loans are offered for terms of up to 60 months and include asset insurance and require a minimum down payment of 15 per cent. of the total purchase price. Housing loans regular and subsidised): these loans are offered to the employed, the selfemployed and professionals for the acquisition of residential properties for personal use. Typically, a deposit of 25 per cent. is required and loans are secured on the property. Subsidised housing loans are targeted towards lowtomedium income families, whereas regular housing loans are offered to higherincome clientele. Housing loans may have terms of up to 20 years. Revolving facilities and overdrafts: these facilities provide for the extension of credit up to a maximum amount; the customer may write cheques or make withdrawals. Interest is charged only on the outstanding balance and the Bank may revoke the facility at any time. These facilities are offered against either a salary domiciliation or a security, such as cash collateral or a mortgage, and are generally renewed on an annual basis. Professional loans: these loans are offered to professionals such as medical doctors, lawyers and engineers to finance their business undertakings. Clients may finance the purchase of clinics, offices or machinery and equipment. Loans are extended for terms of up to 10 years and are secured by the purchased assets. Deposits At regular intervals during the year, the Bank launches deposit campaigns to attract new depositors and to service the needs of existing clients. These campaigns are designed to introduce a variety of products, ranging from interestbearing instruments to structured products whose return is linked to an underlying asset. Most of the Bank s deposit products are interestbearing. The Bank s deposit account products include the following: Call account: an account that accrues interest on the balance, does not have a maturity date, allows withdrawals and does not usually require a minimum amount. Current account: a noninterestbearing account. Time deposit account: an account that pays higher interest than the call account, but imposes conditions on the amount and frequency of withdrawals. Clients have the option of holding a passbook for call and time deposit accounts and the ability to write cheques with current accounts. Structured Products The Bank offers structured products that are mainly capital guaranteed or creditlinked to sovereigns. These products also include Deposit Plus, which is a deposit account linked to a customer s life insurance policy. 64

72 The term of this product is three years and the subscription amount ranges between U.S.$5,000 and U.S.$25,000. FeeBased Products The Bank offers a broad range of insurance products, including home and automobile coverage, life and health insurance and retirement and education savings plans under its Bancassurance business. Debit, Prepaid and Credit Cards The Bank offers a wide array of standard and customised cards, including debit, prepaid and credit cards. Debit cards are electronic cards issued by the Bank that allow clients to access their accounts to withdraw cash at ATMs or to pay for goods and services. Their major benefits are convenience and security. Prepaid cards target particular groups of customers, are preloaded with funds and are used in a similar manner to a normal debit card. The Bank generates fees when a prepaid card is issued and reloaded with funds. Credit cards give the holder access to funds up to a preapproved limit. The Bank s range of credit cards includes Classic, Gold, Platinum and Infinite. All cards carry an annual fee, charge interest on any outstanding balance and earn interchange fees and cash advance fees. Customers accumulate reward points that may be redeemed for cash or merchandise. Credit cards carry their own distinctive benefits. In particular: Classic cardholders have the option to choose a minimum monthly payment of the higher of five per cent. of the outstanding balance or U.S.$25. Gold, Platinum and Infinite cards have a monthly payment of the higher of five per cent. of the outstanding balance or U.S.$50. The Platinum card carries a higher credit limit, provides a purchase protection feature and is targeted at upscale customers. The Infinite credit card, which the Bank launched in July 2011, provides additional services and benefits to the customer, including a concierge service, travel insurance, collision damage waiver insurance, purchase protection insurance, extended warranty insurances and a payment grace period up to 37 days. This card is targeted at the Bank s highnetworth clients. MedMiles, which is the Bank s first cobranded credit card, was launched in June 2012 with Middle East Airlines, the national carrier of Lebanon. The card is available in Classic, Gold, Platinum and Infinite, and allows customers to accumulate MedMiles on their purchases and redeem those miles for travel. This card is targeted at high net worth clients, particularly frequent travellers. The Bank has adopted chip and PIN technology on all its cards to enhance protection against fraudulent transactions. Moreover, Internet transactions using Visa and MasterCard have a secured service with a simple passwordprotected identitychecking service to reduce the risk of fraudulent online purchasing. Merchant Acquiring and ECommerce The Bank is a member of VISA and MasterCard for pointofsale merchant acquiring services. The Bank uses these services for processing credit card payments with merchants at the pointofsale. Pilot testing finished in October 2011 and the services became active in November This project has allowed the Bank to enter the merchant acquiring market. In January 2011, the Bank became a member of VISA and MasterCard s Ecommerce activities. Certification was finalised in July 2011 and the Bank launched this service in early Pearl Centres Pearl Centres Pearl ) is a programme designed to serve customers within certain predefined criteria, related to their deposit size and annual income. As at the date of this Prospectus, the Bank has opened three priority centres in Lebanon, where dedicated relationship officers are assigned to assist customers and offer a set of services and products tailored for Pearl s target clientele. Between its launch in late 2011 and July 2012, Pearl 65

73 officers had enrolled more than 500 clients. Pearl clients are entitled to personalised services, including a private lounge in the centres, immediate service delivery, discounts on all transactions and periodic gifts. Loyalty and Gift Cards Programme The Bank operates loyalty and gift cards programmes in Lebanon. It has also extended these programmes successfully in Egypt, Jordan, Qatar, Kuwait, the UAE and Bahrain. Investment Banking Through its investment banking subsidiary, SaudiMed, the Bank offers a wide range of financial advisory and asset management services and solutions covering equity and debt transactions, mergers and acquisitions advice, corporate restructuring and private placements. The Bank established SaudiMed as an investment banking company in Saudi Arabia to diversify the services it offers and to cater to the growing investment banking needs of its Saudi and Gulf Cooperation Council GCC ) client base. The Bank also offers investment banking activities through its subsidiary MIB, including financial advisory work and the structuring and placement of debt and equity securities by way of private placements and public offerings. See Subsidiaries SaudiMed Investment Company and Subsidiaries MedInvestment Bank, s.a.l. Private Banking BankMed Suisse, a wholly owned Swiss bank based in Geneva, provides a complete range of private banking and asset management services primarily to high networth individuals and private businesses. BankMed Suisse has more than 20 years of international private banking experience and offers a range of products and services to its clients in Lebanon, MENA and internationally, including: wealth management; financial planning; fiduciary services; foreign exchange, precious metals, stocks and fixed income brokerage; investment funds and structured products; discretionary and nondiscretionary portfolio management; and other products and services that may be geared to specific client requirements. See Subsidiaries BankMed Suisse) S.A. Brokerage The Bank trades securities for its retail and institutional clients in local, regional and international markets and also offers a wide range of investment structured products, through its subsidiary, MedSecurities see Subsidiaries MedSecurities Investment, s.a.l. ). Subsidiaries For a full list of the Bank s consolidated subsidiaries as at 30 June 2012, see Note 3 to the 2012 Interim Financial Statements. 66

74 Saudi Lebanese Bank, s.a.l. SLB was established in May 1981 as a commercial bank under the name Lebanese Saudi Credit, s.a.l. by the late H.E. Mr. Rafic Hariri, Abdallah Bahamdan and Mohammad Al Halabi. In December 1981, the bank changed its name to Saudi Lebanese Bank, s.a.l.. In 1995, the Bank acquired 75 per cent. of the shares of SLB after obtaining the Central Bank s approval; the remaining 25 per cent. of SLB s shares were acquired by the Bank in June As at 30 June 2012, the sharecapital of SLB was LBP 40 billion U.S.$26.5 million), consisting of 4,000,000 shares, with a par value of LBP 10,000 per share. As at 31 December 2011, SLB s total assets were LBP billion U.S.$158.8 million). MedInvestment Bank, s.a.l. MIB was established in Lebanon in January 1996 as a specialised bank under DecreeLaw No. 50 dated 15 July 1983, as amended, with an initial paidup capital of LBP 10 billion U.S.$6.6 million). MIB is wholly owned by the Bank. MIB engages in investment banking activities, including financial advisory work and the structuring and placement of debt and equity securities by way of private placements and public offerings. It also acts as the booking entity for the Bank s medium and longterm lending operations. MIB is registered as an intermediary i.e., a broker) on the Beirut Stock Exchange. As at 30 June 2012, the sharecapital of MIB was LBP 85 billion U.S.$56.4 million), divided into 8,500,000 shares, with a par value of LBP 10,000 per share. As at 31 December 2011, MIB s total assets were LBP billion U.S.$231.0 million). MedSecurities Investment, s.a.l. In November 2007, the Bank established MedSecurities as a wholly owned subsidiary to operate its brokerage business unit. MedSecurities commenced operations in April 2008 to serve as the Bank s brokerage and product development arm covering local, regional and international markets. MedSecurities primarily offers brokerage services to its regional, institutional and high networth clients in respect of local, regional and international debt, equity and derivative securities, equitylinked notes, futures and investment funds. It also conducts placements in debt and equity transactions. The services provided by MedSecurities include: Brokerage services: providing access to a wide range of financial instruments, including equities, fixed income, funds and derivatives in addition to overthecounter securities in local, regional and international markets; Product development: providing a wide range of structured investment products and solutions that diversify asset classes and reduce risk. The product development team also offers access to dedicated funds for investment opportunities; and Private placement activity: acting as a private placement agent, arranger or distributor. Since its incorporation, MedSecurities has participated in a number of successful local and regional private placement initiatives, covering several sectors and involving different asset classes. MedSecurities benefits from the synergy and support of the Bank s branch network, with an international presence that extends to Cyprus, Switzerland, Turkey, Iraq and Saudi Arabia. MedSecurities accessibility allows it to trade in developed, as well as emerging, markets, including the U.S., Europe and the GCC. As at 30 June 2012, the share capital of MedSecurities was LBP 5 billion U.S.$3.3 million), consisting of 500,000 shares, with a par value of LBP 10,000 per share. As at 31 December 2011, MedSecurities total assets were LBP 47.0 billion U.S.$31.2 million). 67

75 BankMed Suisse) S.A. In August 2001, the Bank acquired 100 per cent. of the share capital of BankMed Suisse, a Swiss bank involved in private banking activities aimed primarily at high networth clients. BankMed Suisse has more than 20 years of international private banking experience and has a customer base of Lebanese and Arab investors. BankMed Suisse provides a complete range of private banking and asset management services primarily to high networth individuals and private businesses. As at the date of this Prospectus, BankMed Suisse has approximately U.S.$1.3 billion of assets under management and 32 employees. As at 30 June 2012, the share capital of BankMed Suisse was CHF 30.0 million U.S.$31.4 million), consisting of 30,000 shares, with a par value of CHF 1,000 per share. As at 31 December 2011, BankMed Suisse s total assets were LBP billion U.S.$319.9 million). Turkland Bank A.S. In 2006, the Bank and Arab Bank plc acquired MNG Bank. Following the completion of the share transfer, in January 2007, the Bank and Arab Bank held 41 per cent. and 50 per cent. of MNG Bank s shares, respectively. As part of the acquisition, the Bank signed a management agreement with MNG Bank pursuant to which the management of MNG Bank is entrusted to the Bank. In April 2007, MNG Bank s name was changed to Turkland Bank A.S. In June 2010, the Bank increased its shareholding in TBank from 41 per cent. to 50 per cent. In November 2011, the Bank procured the increase in TBank s share capital from TL 170 million to TL 300 million. TBank mainly offers banking services to the commercial business sector, as well as SMEs. TBank offers a broad range of banking services, including treasury and cash management, investment services and trade finance, as well as personal banking services. As at 30 June 2012, total shareholders equity of TBank was TL million U.S.$200.7 million), consisting of TL 300 million in share capital divided into 3 billion shares with a par value of TL 0.1 per share. As at the date of this Prospectus, TBank has 496 employees and 27 branches located across the major industrial and financial centres in Turkey. As at 31 December 2011, TBank s total assets were LBP 1,738.9 billion U.S.$1,153.5 million). SaudiMed Investment Company On 21 May 2007, the Bank established SaudiMed as the Bank s investment banking arm, based in Riyadh, Saudi Arabia. In July 2008, SaudiMed, which is a wholly owned subsidiary of the Bank, was granted regulatory approval by the Saudi Arabian Capital Market Authority to commence operations as a financial services company in Saudi Arabia. SaudiMed is licensed to perform the following services: arranging and advising on financial securities transactions, introducing parties in relation to securities business and advising on corporate finance; undertaking investment funds management; dealing as principal or agent in the sale, purchase or underwriting of securities; and providing custody and safekeeping of securities belonging to third parties and arranging to safekeep securities with third parties. SaudiMed offers corporate finance advisory services in respect of mergers and acquisitions, as well as private placement transactions. In addition to corporate finance, SaudiMed establishes and manages investment funds in Saudi Arabia, mainly in the real estate sector, responding to the increasing needs of the Saudi market. 68

76 In 2011, SaudiMed established a structured finance practice. With the introduction of this new business line, SaudiMed aims to become a onestopshop that provides its clients with a full range of financial services and products covering both debt and equity. As at 30 June 2012, the share capital of SaudiMed was SAR 100 million U.S.$26.7 million), consisting of 10 million shares, with a par value of SAR 10 per share. As at 31 December 2011, SaudiMed s total assets were LBP billion U.S.$168.6 million). Emkan Finance, s.a.l. On 19 May 2011, the Bank established Emkan as a wholly owned financial services subsidiary regulated by the Central Bank. Emkan provides microfinance services in different regions of Lebanon to economically active, but lowincome customers. As at 30 June 2012, the share capital of Emkan was LBP 2 billion U.S.$1.3 million), consisting of 200,000 shares with a par value of LBP 10,000 per share. As at 31 December 2011, Emkan s total assets were LBP 14.7 billion U.S.$9.7 million). Loan Portfolio Loans and Advances to Customers The Bank s loans and overdrafts increased by LBP 1.0 billion, or 23.3 per cent., to LBP 5.3 billion, as at 31 December 2011 from LBP 4.3 billion as at 31 December 2010, reflecting an increase in the overall size in the Bank s retail and corporate loan portfolio during such period. Distribution of Loans and Advances to Customers by Type The following table shows the distribution of the Bank s loans and advances to customers net of provisions for nonperforming loans, allowance for collectively assessed loans and unrealised interest), by type of customer, as at 31 December 2011 and 31 December 2010, respectively: As at 31 December in LBP millions) Per cent. in LBP millions) Per cent. Loans and overdrafts Retail customers , , Corporate customers... 4,437, ,657, Deferred penalties charged on excess over limit... 13,950) ,585) 0.3 Accrued interest receivable... 16, , Total... 5,260, ,347,

77 Distribution of Loans and Advances to Customers by Currency The following table shows the distribution of the Bank s loans and advances to customers net of provisions for nonperforming loans, allowance for collectively assessed loans and unrealised interest), by currency, as at 31 December 2011 and 31 December 2010, respectively: As at 31 December in LBP millions) Per cent. in LBP millions) Per cent. Loans and advances to customers in LBP , , Loans and advances to customers in foreign currency... 5,018, ,188, Total... 5,260, ,347, As at 31 December 2011, LBP 5,018.6 billion, or 95.4 per cent., of loans and advances to customers net of provisions for nonperforming loans, allowance for collectively assessed loans and unrealised interest) were denominated in foreign currencies principally U.S. Dollars), with the remaining 4.6 per cent. denominated in Lebanese Pounds. Distribution of Loans and Advances to Customers by Economic Sector The following table shows the distribution of the Bank s loans and advances to customers net of provisions for nonperforming loans, allowance for collectively assessed loans and unrealised interest), by economic sector, as at 31 December 2011 and 31 December 2010, respectively: As at 31 December in LBP millions) Per cent. in LBP millions) Per cent. Financial Services... 35, , Real Estate... 1,803, ,303, Manufacturing , , Consumer Goods Trading , , Services , , Private Individuals , , Others , , Total... 5,260, ,347, The Bank s loans and advances to customers net of provisions for nonperforming loans, allowance for collectively assessed loans and unrealised interest) in the financial services sector increased by LBP 5.9 billion, or 20.2 per cent. from LBP 29 billion as at 31 December 2010 to LBP 35 billion as at 31 December 2011 primarily due to an increase in TBank s activities. The Bank s loans and advances to customers net of provisions for nonperforming loans, allowance for collectively assessed loans and unrealised interest) in the real estate development sector increased by LBP 500 billion, or 38.4 per cent. from LBP 1,303 billion as at 31 December 2010 to LBP 1,803 billion as at 31 December 2011 primarily due to Lebanese clients activity outside Lebanon. The Bank s loans and advances to customers net of provisions for nonperforming loans, allowance for collectively assessed loans and unrealised interest) in the manufacturing sector increased by LBP 126 billion, or 18.7 per cent., from LBP 674 billion as at 31 December 2010 to LBP 801 billion as at 31 December 2011 in line with the growth of the Bank s total portfolio. The proportionate contribution of this sector to total portfolio remained relatively stable. 70

78 The Bank s loans and advances to customers net of provisions for nonperforming loans, allowance for collectively assessed loans and unrealised interest) in the consumer goods trading sector increased by LBP 209 billion, or 54.8 per cent. from LBP 381 billion as at 31 December 2010 to LBP 590 billion as at 31 December 2011, which reflected a diversification of the Bank s portfolio, in order to meet increased customer demand in that sector. The Bank s loans and advances to customers net of provisions for nonperforming loans, allowance for collectively assessed loans and unrealised interest) in the private individuals sector increased by LBP 76 billion, or 9.2 per cent., from LBP 824 billion as at 31 December 2010, to LBP 900 billion as at 31 December However, the proportionate contribution of this sector to the Bank s total portfolio was reduced to 17 per cent., from 19 per cent., between 31 December 2010 and 31 December The Bank s loans and advances to customers net of provisions for nonperforming loans, allowance for collectively assessed loans and unrealised interest) in the other sector increased by LBP 43 billion, or 17.3 per cent., from LBP 248 billion as at 31 December 2010 to LBP 291 billion as at 31 December 2011 in line with the growth of the Bank s total portfolio. The proportionate contribution of this sector to the Bank s total portfolio remained relatively stable. Distribution of Loans and Advances to Customers by Maturity The following table shows the distribution of the Bank s loans and advances to customers excluding acceptances and net of provisions for nonperforming loans, allowance for collectively assessed loans and unrealised interest), by maturity, as at 31 December 2010 and 31 December 2011, respectively: As at 31 December Total Per cent. LBP Countervalue of foreign currency in LBP Total Per cent. LBP Countervalue of foreign currency in LBP in LBP millions) Up to 3 months 1)... 2,984, ,430) 3,048,281 2,456, ,310) 2,469, months , , , , , , years , , , , , , years 647, , , , , ,941 5 to 10 years , , , , , ,372 Over 10 years , ,042 60, , ,420 59,417 Total... 5,260, ,568 5,018,617 4,347, ,756 4,188,337 Note: 1) Up to 3 months includes accounts with no maturity. As at 31 December 2011, LBP 3,775.2 billion, or 71.8 per cent., of the Bank s loans and advances to customers, excluding loans of no maturity excluding acceptances and net of provisions for nonperforming loans, allowance for collectively assessed loans and unrealised interest), had maturities of up to one year. 71

79 Distribution of Loans and Advances to Customers by Geography The following table shows the distribution of the Bank s loans and advances to customers excluding acceptances and net of provisions for nonperforming loans, allowance for collectively assessed loans and unrealised interest), by geography, as at 31 December 2010 and 31 December 2011, respectively: As at 31 December in LBP millions) Per cent. in LBP millions) Per cent. Lebanon... 2,912, ,534, Middle East, Gulf and Africa... 1,029, , North America... 9, , Europe... 1,262, ,072, Others... 45, , Total... 5,260, ,347, Loans to Banks The Bank s loans to banks increased by LBP 17.9 billion, or 10.6 per cent., to LBP billion as at 30 June 2012, from LBP billion as at 31 December 2011, having decreased by LBP 35.0 billion, or 17.2 per cent., from LBP billion as at 31 December Risk Management General The Bank is exposed to a broad range of risks in the normal course of its business. Its risk management policies are designed to identify and quantify these risks, set appropriate limits in line with defined risk appetite, ensure control and monitor adherence to the limits. The Bank s strategy is to maintain a strong risk management culture and manage the risk/reward relationship within and across each of the Bank s major riskbased lines of business. The Bank continuously reviews its risk management policies and practices to reflect changes in markets, products and emerging best practice. The Bank has exposure to the following risks from its use of financial instruments: credit risk; liquidity risk; market risk; and operational risk. The Bank s Risk Committee oversees the proper implementation of the risk management framework set by the Bank and compliance with the regulations issued by the relevant banking authorities. The Bank has also established an independent Risk Management Division, which is responsible for identifying and assessing the implications of relevant risks on the Bank s operations and recommending appropriate ways to mitigate these risks. The Head of the Risk Management Division is responsible for the management of credit, market, operational, compliance and other material risks at the level of the Bank and its affiliates. The risk management process is supported by a set of independent control functions reporting to the Head of the Risk Management Division. These include: Credit Committees, which approve individual credit transactions. See Lending Policies. 72

80 The Credit Administration Department, which reviews approval levels and documentation prior to the extension of facilities. The Market Risk Department, which reviews limits and provides independent reports about the Bank s market risk exposures and liquidity positions, including measurement against stressed events. The Portfolio Risk Management Department, which manages the process of risk appetite definition, portfolio targets and overall limit settings, examines components of the capital plan and calculates the Bank s capital adequacy. The Operations Risk Department, which oversees and monitors operational risks using a riskbased approach. The Compliance Department, which oversees compliance with antimoney laundering and counter financing of terrorism laws and regulations. Stress Testing The Bank s stress testing methodology is integrated with the Bank s risk appetite, planning and capital management processes. The Bank undertakes stress scenario analyses to identify vulnerabilities in the Bank s business and capital plans to the adverse effects of extreme, but plausible, events and the results of the stress tests are incorporated into the determination of risk appetite. Stress tests are used to assess the capability of the Bank to continue its operations under stressed conditions. The Bank s Risk Management Division and Management review the impact of the stress tests on the Bank s capital and the results of stress tests are communicated to the Board of Directors. Credit Risk The Bank attempts to minimise credit risk by monitoring credit exposures, limiting transactions with specific counterparties, and continually assessing the creditworthiness of counterparties. The Bank s risk management policies are designed to identify and to set appropriate risk limits and to monitor the risks and adherence to limits. Actual exposures against limits are monitored daily. In certain cases the Bank may also close out transactions or assign them to other counterparties to mitigate credit risk. The Bank s credit risk for derivatives represents the potential cost to replace the derivative contracts if counterparties fail to fulfil their obligation, and to control the level of credit risk taken, the Bank assesses counterparties using the same techniques as for its lending activities. The Bank seeks to manage its credit risk exposure through the diversification of its lending activities, to ensure that there is no undue concentration of risks with individuals or groups of customers in specific locations or business. It also takes security, when appropriate, and seeks additional collateral from the counterparty as soon as impairment indicators are noticed for the relevant individual loans and advances. Lending Policies General In July 1995, the Bank developed and adopted a written manual, which sets forth the Bank s detailed credit policies and procedures. The manual is updated on an ongoing basis in order to comply with Basel Committee and Central Bank recommendations. The authority to approve and extend credit is officially vested in the ChairmanGeneral Manager of the Bank by the Board of Directors, in accordance with the bylaws of the Bank. This authority is delegated to a number of Credit Committees, including the Special Credit Committee, the Executive Credit Committee, the Management Credit Committee, the Senior Credit Committee and the Retail Credit Committee, established by the Board of Directors, with the level of authority including lending limits) and powers of each such committee, as well as the membership thereof, determined by the ChairmanGeneral Manager, all as described below. 73

81 Credit Committees Credit committees have the exclusive authority to approve the extension of credit, with each such approval being given only pursuant to written decision of the relevant committee having the appropriate level of credit authority. The Special Credit Committee The Special Credit Committee SCC ) is composed of five members and is chaired by the Bank s Chairman General Manager. It is authorised to decide on every new credit facility or the increase of an approved credit facility, leading to a total exposure with a client, whether an individual, a company or a group, of U.S.$100 million and above excluding amounts which are secured by cash collateral). Before being considered by the SCC, the relevant credit facility must first have been approved by the ECC as defined below). The Executive Credit Committee The Executive Credit Committee ECC ) meets weekly or more frequently, if needed, and consists of the ChairmanGeneral Manager and eight voting members: the Executive General Manager EGM ), the Head of Risk Management Division, the Head of Institutional Banking Division, the Head of Remedial Division, the Head of Retail Banking, the Head of SLB and two Senior General Manager Advisors. It is authorised to grant credit for amounts in excess of the maximum authorised limits of the Management Credit Committee, the Senior Credit Committee and the Retail Credit Committee and is responsible for the approval of the Bank s credit policies. The ECC is also responsible for, among other things, the approval of correspondent banking lines and the allocation and placement of the Bank s assets, the rating and settlement of credits, the classification of loans and the transfer of problem loans to the Remedial Management Division and of litigious accounts to the Bank s Legal Department, as well as the evaluation and monitoring of the performance of the credit functions of the Bank. The Retail Credit Committee The Retail Credit Committee RCC ) reports to the ECC. The RCC is authorised to approve extensions of credit by product type, such as personal loans, car loans and housing loans, each up to a preapproved maximum amount for each product as approved and delegated by the ECC. The RCC has three subcommittees: The first subcommittee is authorised to approve up to U.S.$200,000 in credit and consists of the Head of the Risk Management Division, the Head of Retail Banking, the Head of the Consumer Credit Products Division, the Head of the Consumer Credit Products Department, the Head of Retail Risk Management and a Credit Officer. The second subcommittee is authorised to approve up to U.S.$120,000 in credit and consists of the Head of Retail Banking, the Head of the Consumer Credit Products Division, the Head of the Consumer Credit Products Department, the Head of Retail Risk and a Credit Officer. The third subcommittee is authorised to approve up to U.S.$40,000 in credit and consists of the Head of the Consumer Credit Products Division, the Head of the Consumer Credit Products Department and a Credit Officer. The Management Credit Committee The Management Credit Committee MCC ) is comprised of five members and is headed by the Executive General Manager. The MCC is authorised to approve credits for secured and unsecured commercial, project finance and nonconsumer related credit facilities for amounts in excess of the maximum authorised limit of the Senior Credit Committee. The MCC s approval authority is subject to a limit of U.S.$1 million for unsecured facilities and U.S.$5 million for secured facilities. The Senior Credit Committee The Senior Credit Committee SeCC ) reports to the MCC. The SeCC is authorised to approve secured and unsecured commercial credit facilities up to a preapproved maximum amount as approved and delegated by the ECC. The SeCC s approval authority is subject to a limit of U.S.$200,000 for unsecured facilities and U.S.$1 74

82 million for secured facilities. The ECC agreed to delegate approval authority from the SeCC to the Head of Institutional Banking Division and the Head of Credit Risk Administration. Lending Limits The Bank limits the amount of credit it extends to any one borrower or group of related borrowers, in compliance with both legal lending limits set by reference to the Bank s shareholders equity and the Bank s internal lending limits. Central Bank Decision No dated 13 August 1998, as amended by Intermediary Decisions No dated 9 November 2006, No dated 6 December 2010 and No dated 16 May 2011, sets the maximum allowable weighted credit limit for loans to a single borrower or a group of related borrowers) at: i) 20 per cent. of the Bank s shareholders equity with respect to loans extended to borrowers or a group of related borrowers) resident in Lebanon, the proceeds of which are to be used in Lebanon; ii) 20 per cent. of the Bank s shareholders equity with respect to loans extended to resident borrowers or nonresident borrowers or a group of related borrowers), the proceeds of which are to be used in countries with sovereign ratings of A+ and above; and iii) ten per cent. of the Bank s shareholders equity with respect to loans extended to resident borrowers or nonresident borrowers or a group of related borrowers), the proceeds of which are to be used in countries with sovereign ratings below A+, provided that: A) the aggregate exposure for countries rated from A to BBB is not to exceed 200 per cent. of the Bank s shareholders equity and the aggregate exposure to each of these countries is not to exceed 50 per cent. of the Bank s shareholders equity; and B) the aggregate exposure for countries rated below BBB is not to exceed 100 per cent. of the Bank s shareholders equity and the aggregate exposure to each of these countries is not to exceed 25 per cent. of the Bank s shareholders equity. Article 152 of the Code of Money and Credit provides that advances and credit facilities to directors or managers of banks or to companies having common directors with a bank must be authorised by the shareholders of the bank, must not exceed in aggregate two per cent. of the bank s shareholders equity and must be secured. According to the Bank s independent auditors, as at 31 December 2011, the Bank was in compliance with Article 152 of the Code of Money and Credit and with the Central Bank Decision No The Bank s internal lending limits are established periodically for specific borrowers or groups of borrowers by the ECC according to a review of the borrower s financial statements, management of the company, the adequacy of the collateral and risk analysis. Credit Procedures Credit applications to the Bank must be prepared in writing by the relevant branch manager or account officer for credit initiated at the branch level or by the account officer for credit initiated at the Corporate Banking Division level. Credit applications must include, among other things: information relating to the type and amount of credit sought; information relating to the background and history of the client, an evaluation of its management and market reputation and the status of its relationship with the Bank and other outside creditors; details of the client s historic and projected balance sheets, income statements, cash flows and related ratios bearing on the client s ability to fulfil its commitments; in this regard, reference is also made to other borrowings, contingent obligations and potential cash shortfalls of the client; an analysis of other actual and potential risks related to the credit; the latest available Centrale des Risques the Central Risk Office of the Central Bank or C.D.R. ) figures and the last yearend C.D.R. figures to verify a borrower s overall credit exposure to Lebanese banks the C.D.R. maintains files on all borrowers with exposure in excess of LBP 7 million, in each case, reflecting the borrower s line availability, the utilisation thereof, the nature of collateral posted and any delinquency); and a recommendation by the submitting officer or division. 75

83 The completed credit application is submitted to the Credit Risk Administration Department, which reviews the application and adds its recommendations before submitting the file for consideration and decision at the next scheduled meeting of the appropriate credit committee. All documents intended as security or support for credit facilities must be reviewed by the Credit Administration Department before disbursement of funds. Collateral The principal collateral types that the Bank requires for loans and advances to customers are: pledged deposits; mortgages over real estate properties land, commercial and residential properties); bank guarantees; financial instruments equities and debt securities); and business other assets such as inventories and accounts receivable). Collateral generally is not held over loans and advances to banks, except when securities are held as part of reverse repurchase and securities borrowing activity. Collateral usually is not held against investment securities. 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. 76

84 The following table shows the details of the Bank s exposure to credit risk with respect to loans and advances to customers, excluding deferred penalties, as at 31 December 2011 and 31 December 2010, respectively. As at 31 December in LBP millions) Regular loans and advances Net exposure... 5,233,558 4,309,552 Fair value of collateral received Pledged Funds... 1,112, ,244 Property... 1,945,081 1,518,768 Equity Securities... 1,133, ,638 Debt Securities... 78,201 84,120 Other , ,833 4,406,643 3,521,604 Substandard loans Net Exposure... 17,211 19,815 Fair value of collateral received Pledged Funds Property... 17,874 23,698 Equity Securities... Debt Securities... Other ,757 23,850 Bad and doubtful loans Net Exposure... 23,367 31,311 Fair value of collateral received Pledged Funds... 2,690 3,184 Property... 90, ,169 Equity Securities Debt Securities... Other , ,535 The Bank s net exposure to credit risk with respect to loans and advances to customers, excluding deferred penalties, increased by LBP 924 billion, or 21.4 per cent., from LBP 4,309.5 billion as at 31 December 2010 to LBP 5,233.5 billion as at 31 December The Bank s net exposure to substandard loans decreased by LBP 2.6 billion, or 13.1 per cent., from LBP 19.8 billion as at December 2010 to LBP 17.2 billion as at 31 December 2011, primarily reflecting collections in cash, in kind and write backs. The Bank s net exposure to bad and doubtful loans decreased by LBP 7.9 billion, or 25.4 per cent., from LBP 31.3 billion as at December 2010, to LBP 23.4 billion as at December 2011, primarily reflecting to collections in cash, in kind and write backs. Monitoring of Credit Facilities Followup and monitoring of credit facilities are undertaken by the account officer, the Retail Banking Division or the Institutional Banking Division, as applicable, the Risk Management Division and by reports specifically prepared by the Internal Audit Division. 77

85 The Risk Management Division undertakes a daily review of any excesses over authorised limits and unauthorised overdrafts. Breaches of authorised limits or unauthorised overdrafts are reported daily to the Heads of the Retail Banking Division and the Institutional Banking Division and, if not regularised, to the ECC. All credit facilities are reviewed at least annually. The Retail Banking Division and the Institutional Banking Division present the results of this review, which includes a review of the financial statements, management of the company, risks analysis and the adequacy of the collateral, to the relevant credit committees, according to the amount of facility and security as dictated in the Bank s credit policy manual. The Bank s entire loan portfolio is also subject to review quarterly by the Risk Management Division and the EGM and at least quarterly by the Board Risk Committee. See Management and Employees Committees Risk Committee. The portfolio is also reviewed periodically by the Banking Control Commission. Loan Classification Policy The Bank classifies its portfolio of loans and advances to customers into categories in accordance with Central Bank Decision No dated 10 November 1998, as amended on 27 April 2011 Decision No ), as set out below: Regular accounts: borrowers that respect systematically all engagements and conditions for the granted credit. Watch list: loans and advances that are not impaired but which are deemed by the Bank to require special monitoring. Past due but not impaired: loans and advances where contractual interest or principal are overdue but Management believes that impairment is not appropriate on the basis of the level of collateral available and the stage of collection of amounts owed to the Bank. Followup: loans and advances that are not impaired, but require file renewal and the updating of the loan and other documentation in order to substantiate the borrower s capacity to settle their obligations on time. Substandard: loans and advances that are inadequately protected by the current worth and paying capacity of the borrower or by any collateral pledged in favour of the Bank. This category includes exposures where there is an indication of the possibility that the Bank will sustain a loss if certain irregularities and deficiencies are not addressed. The Bank does not provide against these accounts, but it does defer the recognition of interest income under unrealised interest. Doubtful: loans and advances that have, in addition to the weaknesses existing in substandard loans, characteristics indicating that current existing facts and figures make collection in full highly improbable. The probability of loss is high but certain reasonable and specific pending factors, which if addressed could strengthen the probability of collection, result in the deferral of the exposure as an estimated loss until a more exact status is determined. These loans are provided for and interest income recognition is deferred. Loss: loans and advances that are considered uncollectible or of such minimal ultimate value that their classification as assets is not warranted. This does not mean that the loan is absolutely unrecoverable or has no salvage value. However, the amount of loss is difficult to measure and the Bank does not wish to defer the writing off of the loan even though partial recovery might occur in the future. Loans are charged off in the period in which they are deemed uncollectible and therefore classified as loss. Interest continues to accrue on accounts classified as substandard, doubtful or bad, but is credited to an Interest Provision account instead of being credited to the Profit and Loss account. In accordance with Central Bank Intermediary Decision No dated 27 April 2011, all Lebanese banks are required to adopt, in addition to the Central Bank classification of loans, their own loan grading system for purposes of managing credit risk. 78

86 The account officer and the members of the Credit Committees are initially responsible for identifying weaknesses or other signs of deterioration in credit quality, which may call for the adverse classification of an account. Adverse classifications, when appropriate, may be recommended by the account manager or by the members of the Bank s credit committees or the Bank s internal or external auditors; however, final decisions are taken by the ECC. In addition, the Banking Control Commission has the power to request that specific loans be classified as substandard or bad or doubtful loans. Once an account has been adversely classified, an upward reclassification or a declassification must be approved by the appropriate level of authority within the Bank. Remedial Management Division In August 2000, the Bank established a Remedial Management Division to follow up on the collection and regularisation of doubtful debts. The principal objectives of this Division are: to followup on nonperforming loans and to report to the ECC on developments and recovery plans; to conduct settlement discussions with borrowers and obtain the approval of the ECC on proposed workouts; to coordinate with the Bank s legal advisors both internal counsel and external counsel) on collection and repayment agreements; to pursue liquidation of real estate properties acquired in settlement of debt in concordance with Article 154 of the GCC s Code of Money and Credit; and to pursue liquidation of shares in commercial entities acquired in settlement of debt in accordance with Article 154 of the Code of Money and Credit, and control a borrower s performance through financial management and board membership. Provisioning Policy The Bank has a stringent provisioning approach, which addresses provisioning at the individual exposure level and at the portfolio level. All specific provisions are recommended by Management, approved by the Board of Directors and accepted by the Banking Control Commission. While the Bank s approach to loan provisioning is conservative and Management believes the Bank adequately provides for its loans, provisioning may also be taken in response to a request by the Banking Control Commission or the Bank s external auditors. Reserves for Unspecified Risk Pursuant to Central Bank Basic Decision No dated 15 October 1998, as amended by Intermediary Decision No dated 9 May 2009, banks operating in Lebanon are required to allocate on a yearly basis a general reserve to be included in Tier I Capital) for unspecified banking risks out of net profits in an amount equal to a minimum of 0.2 per cent. and a maximum of 0.3 per cent. of riskweighted assets. The accumulated reserve for unspecified banking risks must be equivalent to 1.25 per cent. of riskweighted assets within ten years from the Decision s issuance and 2.0 per cent. of riskweighted assets within a period of 20 years from the Decision s issuance. The reserve for general banking risks shall be calculated in accordance with Basel II requirements as of the 2008 fiscal year. 79

87 NonPerforming and Doubtful Loans The following table shows the level of the Bank s substandard, bad and doubtful accounts net of provisions) as at 30 June 2012, 31 December 2011 and 31 December 2010, respectively: As at 30 June 2012 As at 31 December unaudited) in LBP millions) Net loans to customers and related parties *... 7,114,324 6,406,444 5,409,029 Substandard loans **... 24,116 17,211 19,815 Bad and doubtful loans **... 23,253 23,367 31,311 Allowances for collectively assessed loans ,525) 161,805) 137,792) Deferred penalties charged on excess over limit... 14,085) 13,950) 13,585) Per cent. Net nonperforming loans to total net loans Loan loss provision to nonperforming loans net of unrealised interest) *** Notes: * Including accrued interest receivable ** Net of unrealised interest and provisions *** Loan loss provision to nonperforming loans = Loan loss provision / Net bad & doubtful loans including accrued interest net of deferred penalties charged) The Bank has devoted substantial resources to pursuing and resolving nonperforming loans, resulting in a decrease in the ratio of net nonperforming loans to total net loans remaining at 0.0 per cent. as at 31 December 2010, 31 December 2011 and 30 June In parallel, the Bank followed through its conservative loan loss provisioning policy with the ratio of total loan loss provision to nonperforming loans rising from per cent. as at 31 December 2010 to per cent. as at 31 December 2011 and to per cent. as at 30 June Liquidity Risk Liquidity risk is the risk that the Bank will be unable to meet its commitments, both onbalance and offbalance sheet commitments, at a reasonable cost, on time. Liquidity risk can be caused by, among other matters, market disruptions or credit downgrades, which may cause certain sources of funding to dry up immediately. Liquidity risk also arises when in case of crisis refinancing may only be raised at higher market rates or assets may only be liquidated at a discount to market rates. Liquidity risk is also caused by mismatches in the maturities of assets and liabilities. To mitigate this risk, Management has diversified funding sources, manages assets with liquidity in mind, maintaining an adequate balance of cash, cash equivalents and readily marketable securities and monitors future cash flows and liquidity on a daily basis. The Bank also has committed lines of credit that it can access to meet liquidity needs. In accordance with banking regulations issued by the Central Bank, the Bank maintains compulsory reserves with the Central Bank of 25 per cent. and 15 per cent. of the weekly average demand and term customers deposits in Lebanese Pounds. The Bank has the ability to raise additional funds through repurchase facilities available with the Central Bank against Government debt securities. The Bank sets policies and procedures to ensure that its individual entities are in compliance with liquidity ratios imposed by the regulators in the countries in which each of these entities operates in addition to other internal limits and thresholds. 80

88 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 variables such as interest rates, foreign exchange rates and equity prices. Management of Market Risks The Bank classifies exposures to market risk into either trading or banking nontrading) book. The market risk for the trading book is managed and monitored using a combination of limits monitoring and Value at Risk methodology. Market risk for the nontrading book includes price and liquidity risks that are managed and monitored through internal limits, gap analysis, stress testing and sensitivity analysis. Exposure to Foreign Exchange Risk Foreign exchange risk is the risk that changes in foreign currency rates will affect the Bank s income or the value of its holdings of financial instruments. The objective of foreign currency risk management is to manage and control foreign currency risk exposure within acceptable parameters while optimising the return on risk. Foreign exchange exposure arises from normal banking activities, primarily from the receipt of deposits and the placement of funds. Future open positions in any currency are managed by means of forward foreign exchange contracts. It is the policy of the Bank that it will, at all times, adhere to the limits laid down by the Central Bank as referred to below. It is not the Bank s intention to take open positions on its own account proprietary trading) but rather to maintain square or near square positions in all currencies. Management sets limits on the level of exposure by currency and in the aggregate for both overnight and intraday positions and hedging strategies, which are monitored daily and are in compliance with Central Bank rules and regulations. Exposure to Interest Rate Risk Interest rate risk arises when there is a mismatch between positions, which are subject to interest rate adjustment within a specified period. The Bank s lending, funding and investment activities give rise to interest rate risk. The immediate impact of a variation in interest rate is on the Bank s net interest income, while a long term impact is on the Bank s net worth since the economic value of the Bank s assets, liabilities and offbalance sheet exposures are affected. The Bank manages this risk by matching or hedging the repricing profile of assets and liabilities through risk management strategies. The Board has established interest rate gap limits for stipulated periods. The effective interest rate effective yield) of a monetary financial instrument is the rate that, when used in a present value calculation, results in the carrying amount of the instrument. The rate is a historical rate for a fixed rate instrument carried at amortised cost and a current market rate for a floating rate instrument or an instrument carried at fair value. AntiMoney Laundering Policies The Bank and its subsidiaries are committed to complying with applicable antimoneylaundering laws and regulations and aim to prevent, deter and combat money laundering and terrorist financing, protect correspondent banking relationships and preserve the name and reputation of the Bank and its subsidiaries through the implementation of robust AntiMoney Laundering AML ) and Counter Financing of Terrorism CFT ) programmes. These programmes include the following four pillars: setting AML policies and procedures in accordance with applicable Lebanese AML laws and regulations and the directives of the Central Bank, which share the common aim of preventing, deterring and combating money laundering and terrorist financing, in accordance with the Financial Action Task Force 81

89 FATF ) recommendations 40+ Special ) and adopting international standards and best practices applicable to highrisk customers; assigning a compliance officer and dedicated team responsible for ensuring proper implementation of these policies and procedures and investigating suspicion of money laundering and terrorist financing; training all concerned staff in order to ensure proper implementation of AML and CFT policies and procedures; and ensuring independent testing of AML and CFT compliance functions. The AML policies and procedures provide for programme continuity regardless of staff changes, dual controls and segregation of duties, with the aim of providing sufficient controls and monitoring systems to detect suspicious activities on a timely basis. The policies and procedures also incorporate money laundering compliance into employee job specifications and performance evaluations. The Bank has invested in an AML software solution to automate the monitoring of customers deposits for unusual account behaviour and to screen customers, correspondent banks and business transactions against international sanctions lists. Internal and external auditors review and report periodically on the AML and CFT programmes. Corrective measures are taken against any identified deficiencies and copies of the auditors reports are sent to the Special Investigation Commission at the Central Bank. Related Party Transactions As part of its ordinary activities, the Bank deals with related parties shareholders, directors, companies having interlocking directors and sister financial institutions) under terms approved by the Bank s General Assembly. Transactions between the Bank and related parties are subject to the limitations set forth in Article 152 of the Code of Money and Credit of Lebanon and the Central Bank Basic Decision No dated 21 February 2001, as amended, and must be authorised by a General Assembly of Shareholders in accordance with Articles 158 and 159 of the Code of Commerce and Article 152 of the Code of Money and Credit. Central Bank Decision No dated 10 November 1998, provides that interbank deposits among banks and foreign affiliated companies whether or not financial institutions) may not exceed 25 per cent. of Tier 1 capital. Central Bank Intermediary Decision No dated 30 December 2010, amending Decision No. 7776, prohibits lending made by commercial banks to specialised banks and Islamic banks, as defined by laws and regulations, belonging to the same economic group. Deposits made by commercial banks with specialised banks and Islamic banks belonging to the same economic group are also prohibited. This restriction does not apply to deposits made by specialised banks and Islamic banks in commercial banks belonging to the same economic group. 82

90 The following table sets forth the breakdown of transactions with related parties, by type of transaction, as at 30 June 2012 and as at 31 December 2011 and 2010, respectively: As at 30 June 2012 As at 31 December unaudited) in LBP millions) Shareholders, directors and other key management personnel and close family members Secured loans and advances , , ,481 Unsecured loans and advances ,486 Deposits ,175 33,853 18,999 Related Party Companies Secured loans and advances , , ,659 Unsecured loans and advances... 7, ,755 Deposits... 1,090,252 2,165,866 1,453,102 Properties The Bank s real property portfolio includes its branch network and head office operations. Of the Bank s 56 branches in Lebanon as at 30 June 2012, 20 are owned by the Bank and 36 are leased from other companies. As at the date of this Prospectus, the Bank leases its head office from a wholly owned subsidiary of the Bank. The Bank s Board of Directors has approved the construction of an extension to the head office in Beirut, at a total estimated cost of approximately U.S.$55 million. Management expects the extension to the head office to be completed in five to seven years. Information Technology In line with its commitment to continuously leverage technology to enhance the functionality of its information systems, the Bank has made significant investments in its IT infrastructure to improve and expand the delivery of its banking services. Since 2010, enhancements have included: the introduction of mobile phone recharge and third party payment services at all of the Bank s ATMs; improved internet banking MedOnline) features in terms of daytoday banking operations, especially in credit and debit card operations, aimed at providing customers with remote banking services yearround; the implementation of an advanced customer relationship management CRM ) system. The CRM system is used by the Retail, Pearl, Brokerage and Treasury Divisions as an advanced marketing tool to better serve existing clients and target potential clients. the introduction of an automated document management system whereby any document can be retrieved from its digitised version ; initiating and adopting virtual server systems, whereby a batch of virtual servers can be implemented on top of a single physical server in order improve efficiency, redundancy and maintenance; implementing a new loan and collection system FinnOne from Nucleus Systems ) in the third quarter of 2012, which provides improved loan and collection management capabilities; and implementing an integrated IT service management system to facilitate resolving internal related incidents in a timely manner. Management believes that the Bank s current information technology provides a stable and functional infrastructure for the Bank s core banking system s operations. However, in addition to the projects referenced 83

91 above, Management has approved the implementation in the nearterm of a project to further upgrade the Bank s information technology in respect of its core banking system operations at a total estimated cost of approximately U.S.$30 million. 84

92 MANAGEMENT AND EMPLOYEES Board of Directors The Bank is managed by its Board of Directors, which is composed of nine members as at the date of this Prospectus. The members of the Board of Directors were elected at the Annual General Assembly of the shareholders of the Bank for a term ending on the date of the Annual Ordinary General Assembly of shareholders of the Bank at which the accounts of the Bank for the year ending 31 December 2012 will be approved i.e., in April 2013). Lebanese law stipulates that the Board of Directors must be composed of a majority of Lebanese nationals. At least two of the Board members of the Bank are required to be nonexecutive directors and at least two must be independent. Independent directors are independent parties with no vested interest in the Bank, to ensure objectivity. Board members are, subject to certain exceptions, jointly and severally liable to the Bank, shareholders and third parties for violations of the law, the Bank s bylaws or regulations and for any damage caused by fraud, abuse of authority or gross negligence. In addition, Board members are liable to the Bank and the shareholders for improper performance of their duties. The shareholders are empowered, by resolution adopted at an Ordinary General Assembly, to remove directors. Board members are not permitted to carry out similar functions in a competing company without the authorisation of the shareholders; such authorisation must be renewed at each annual meeting of shareholders. The Board of Directors appoints one of its members as Chairman. The Chairman of the Board of Directors currently also acts as the General Manager of the Bank and has extensive powers to execute resolutions adopted by the Board of Directors, to carry out operations necessary for the daily functioning of the Bank and generally to represent the Bank in its commercial activities. The Chairman may delegate some or all of his authority as General Manager to another person or persons, who act under the supervision of the Chairman; the Chairman remains responsible for the acts of all his delegates. The Bank s bylaws clearly define the Board of Directors powers, duties and responsibility in managing the Bank. The bylaws also define the powers of the Chairman of the Board, and require that any amendment to these powers must be subject to the shareholders Extraordinary General Assembly approval. As at the date of this Prospectus, the Bank s Board of Directors is composed of the following members: Mohammed Hariri, Mrs. Nazek Hariri, Basile Yared, Maroun Asmar, Stanislas de Hauss Boncza, Hani Fadayel, Raya Haffar ElHassan, Ghazi Youssef and GroupMed. Set forth below is a brief biography of each of the directors: Mohammed Hariri, Chairman General Manager Mr. Hariri is the Chairman of GroupMed Holding), s.a.l., SLB, MIB, Al Mal Investment, Holding), s.a.l., and SaudiMed. He is the Chairman of BankMed Suisse in Geneva, Oger Telecom Ltd, TürkTelekomünikasyon A.S. and AveaIletisimHizmeltleri A.S in Turkey. Mr. Hariri is Vice Chairman Finance & Investments) of Saudi Oger Limited. He is a board member of Arab Bank plcjordan and serves on the boards of directors of various companies of the Saudi Oger Group, including 3C Telecommunications PTY) Ltd in South Africa, OjerTelekomünikasyon A.S. in Turkey, Oger International S.A. and Entreprise de Travaux Internationaux ETI) in France. Mr. Hariri is a member of the Board of Directors of the Lebanese Bankers Association. He is a member of the Advisory Board of Deutsche Bank PWM Middle East and Africa. Nazek Hariri Mrs. Hariri, the wife of the late H.E. Mr. Rafic Hariri, is a board member of GroupMed and Arab Bank plc. She is also the President of the Rafic Hariri Foundation and several other humanitarian, cultural and educational institutions in Lebanon and in the Arab world, including the Nazik Hariri Welfare Centre for Special Education and the Beirut Festivals Association. She is the First Ambassador of the International Osteoporosis Foundation, as well as President of this Foundation s 206A Bone Fund. Mrs. Hariri is the VicePresident of the Chronic Care Centre in Lebanon and CoChairperson of the Rafic Hariri UNHabitat Memorial Award. She is also member of the Board of Trustees of the Children s Cancer Centre, the Welfare Association and the Jordan 85

93 Education Association. Mrs. Hariri is member of the Nahda Philanthropic Society for Women in Saudi Arabia. Basile Yared Mr. Yared is an attorney at law. He is the Chairman of the Bank s Audit Committee. Mr. Yared is a Board Member of GroupMed, BankMed Suisse, MIB, Saudi Oger Limited and serves on the boards of directors of various companies of the Saudi Oger Group. He is also a board member of Solidere, s.a.l., Solidere International, as well as InterAudi Bank New York). Mr. Yared is also Board Member of École Supérieure des Affaires, Beirut and is Commander of the Legion d Honneur France). Maroun Asmar Mr. Asmar is a member of the Bank s Audit and Risk Committees. He is also the ChairmanGeneral Manager of MIB. He is the former Dean of the Faculty of Engineering at Saint Joseph University. Mr. Asmar had previously served as the Chairman of the Board of Directors of Electricité du Liban. Stanislas de Hauss Boncza Mr. de Hauss Boncza has been the CEO General Manager of BankMed Suisse since March He has spent the last 25 years with Indosuez, Credit Agricole and Calyon assuming various senior management positions, most of them directly related to the MENA region. Hani Fadayel Mr. Fadayel is the Chairman of the Bank s Risk Committee. He is also a board member of the GroupMed International Management Holding Ltd. Mr. Fadayel is former Assistant CEO of Arab Bank plc in Jordan and, prior to that, he was the Gulf Regional Manager of Arab Bank plc. Before that he worked at Citibank/SAMBA in Jordan, Saudi Arabia and Turkey. During his banking experience in Arab Bank and Citibank, Mr. Fadayel has held senior responsibilities in the areas of Corporate and Project Finance, Credit Risk Management, Retail, Treasury, Operations and General Management. He has also served as board member in various business entities as well as nonprofit organizations. Raya Haffar ElHassan H.E. Mrs. Raya Haffar ElHassan holds a master s degree in business administration, from George Washington University and a bachelor s degree in business administration from the American University of Beirut. Earlier in her career, Mrs. ElHassan was advisor to the Minister of Economy and Trade and a programme specialist for the Economic Governance and ProPoor portfolio at UNDP Lebanon. In the mid 1990s, she was responsible for overseeing the implementation of expenditure management reforms and in setting up and operating a UN debt management system at the Ministry of Finance. As Project Director within the Office of the Prime Minister, she oversaw several public reform projects and worked on the elaboration of the government s economic and social reform agenda under the Paris II and III International Donor Conferences. Between November 2009 and June 2011, Mrs. ElHassan served as the Minister of Finance in Lebanon. Ghazi Youssef Dr. Ghazi Youssef holds a Ph.D. in economics from Wayne State University in Michigan. He taught economics at the American University of Beirut for eleven years. Mr. Youssef served as an economic advisor to the late H.E. Mr. Rafic Hariri and acted as the secretary general for the Higher Council for Privatisation. He is currently CEO of Middle East Airport Services, and Board Member and Chairman of the Audit Committee at Cedrus Invest Bank s.a.l. Mr. Youssef has been a member of the Lebanese Parliament since GroupMed Holding), s.a.l. GroupMed is the principal shareholder of the Bank and is one of the largest banking and financial groups in Lebanon, with a growing regional and international presence. 86

94 The business address of the directors of GroupMed is BankMed Centre, 482, Clemenceau Street, P.O. Box , Beirut, Lebanon. As at the date of this Prospectus, no options for the purchase of any of the Bank s securities were held by any of the Board members. Corporate Governance The Bank s Board of Directors has adopted corporate governance standards based on core principles of transparency and accountability at all levels of the organisation. The Bank s Board of Directors and its senior management are committed to complying with established best practices in corporate governance, including those set by the Central Bank and the recommendations under the Basel Accords. The Bank s key corporate governance standards are summarised as follows: members of the Board of Directors each in their area of speciality) are aware of their roles in corporate governance and exercise sound judgment with regard to the business affairs of the Bank; the Board of Directors includes independent members who are committed to adhering to best practices in corporate governance, including those set by the Central Bank and the recommendations under the Basel Accords recommendations. The Board of Directors also observes the regulatory requirements of other countries in which the Bank operates; the majority of the members of the Board of Directors are independent from Management, which helps to ensure the objectivity of the Board of Directors in monitoring and reviewing the Bank s activities and operations; the Board of Directors reviews and approves the Bank s overall business strategy, with particular focus on investment strategies, the buying or financing of subsidiaries and the Bank s sources of the related financing of its operations; the Board of Directors exercises its oversight over the senior management of the Bank through its vested authority to examine the decisions of management and timely receive information relating to the performance of the Bank; the Board of Directors reviews internal audit reports regularly in order to assess policies, establish communication lines and monitor progress toward achieving the Bank s corporate objectives; and the Board of Directors appoints, supervises and, when necessary, replaces key executives. The Bank s Code of Ethics and Professional Conduct the Code ), which was adopted in 2000 and is circulated to the Bank s entire staff as a basis for conducting the Bank s business, sets forth the following guidelines: all employees of the Bank are required to avoid activities that may result in conflicts of interest among customers, employees and the Bank; all employees of the Bank are required to exercise honesty, objectivity and due diligence in the performance of their duties and responsibilities; whistleblowing by employees is encouraged if employees become aware of any form of wrongdoing or unethical behaviour, even if such doing or behaviour involves a senior manager or colleague; and employees are required to remain alert and exercise due diligence in monitoring antimoney laundering activities. The Board of Directors has set clear lines of responsibility and accountability at all levels throughout the Bank. 87

95 Conflicts of Interest There are no potential conflicts of interest between any duties owed to the Bank by members of the Board of Directors and their private interests, or other duties. Committees As at the date of this Prospectus, the Bank has 15 committees. Each committee has its specific charter and function; some of these committees were established in the implementation of the regulations of the relevant banking authority, while other committees were formed pursuant to Management s resolutions. The ten principal committees, which meet on a regular basis, are: AntiMoney Laundering and Counter Financing of Terrorism Committee AML & CFT Committee ) The AML & CFT Committee is composed of six members and is chaired by the EGM. The AML & CFT Committee was established in accordance with the regulations of the control of banking operations for combating money laundering. The committee convenes periodically and when necessary. The primary duties of the AML & CFT Committee include preparing the procedures guide for implementing the applicable AML laws and regulations, reviewing and developing periodically the Bank s AML procedures and regulations, setting customer identification and due diligence requirements, controlling and monitoring banking operations, ensuring the proper implementation and effectiveness of the Bank s AML policies and procedures, preparing a staff training programme and advising the Board of Directors on suspicious operations and high risk accounts. Asset & Liability Management Committee ALCO ) The ALCO is composed of eight members and is chaired by the Chairman. The ALCO convenes on a frequent basis. The primary duties of the ALCO include setting and supervising the implementation of the Bank s asset/liability management policy, overseeing the management of the Bank s balance sheet, pricing risk and liquidity of the Bank, assessing market conditions according to economic and political developments and implementing strategies accordingly. Credit Committees The Bank has five levels of credit committees, namely, the SCC, ECC, RCC, MCC and SeCC. See Overview of the Bank Lending Policies. International Committee The International Committee is composed of four members and is chaired by the EGM. This committee convenes on a semiannual basis or more frequently if necessary. The primary duties of the International Committee are to oversee the operations of the Bank s foreign subsidiaries which involves assessing and analysing the financial condition of foreign subsidiaries, their operating performance, business strategies and market risk profiles, analysing related internal audit reports and following up on the effective implementation of internal audit recommendations. Participation and Investment Committee The Participation and Investment Committee is composed of three members and is chaired by the Bank s ChairmanGeneral Manager. The Investment Committee was established pursuant to the Central Bank s Decision No dated 21 February 2001, as amended. The committee convenes as and when required. The primary duties of the Participation and Investment Committee include developing and maintaining the Bank s investment strategy in relation to the Bank s proprietary investment portfolio and monitoring and supervising the implementation of such strategy in accordance with the Central Bank regulations. 88

96 IT Steering Committee The IT Steering Committee is composed of six members and is chaired by the EGM; other senior managers of the Bank may be invited by the IT Steering Committee Chairman to attend meetings if their expertise is required. This committee convenes on a quarterly basis, or more frequently, if necessary. The IT Steering Committee is an advisory body to the EGM, and acts to ensure that the Bank s IT strategy, plans and policies conform to the business objectives of the Bank, as a whole. All decisions and recommendations made by the IT Steering Committee are proposed to the EGM for formal approval. The primary duties of the IT Steering Committee include prioritising IT initiatives and projects across business units, reviewing progress, overseeing IT deliverables and securing needed resources, approving IT strategy and operating plans and reviewing IT service delivery. IT Security Committee The IT Security Committee is composed of five members and is chaired by the EGM. This committee convenes on a quarterly basis, or more frequently, if necessary. The primary duties of the IT Security Committee include developing the Bank s information security policy and security compliance procedures; ensuring implementation of the information security policy and general IT security guidelines; overseeing contracts related to IT security and making recommendations for guaranteeing security and the integrity of information, as well as recommendations in response to any security incident so as to prevent reoccurrence. Real Estate Committee The Real Estate Committee is composed of seven members and is chaired by the Bank s ChairmanGeneral Manager. This committee convenes when necessary. The Real Estate Committee is responsible for liquidating real estate interests and properties acquired by the Bank in settlement of debts as required by the Lebanese Code of Money and Credit, in addition to managing real estate interests or properties otherwise held by the Bank. The primary duties of the Real Estate Committee include appraisal and management of the Bank s real estate holdings, determining sale and investment terms, monitoring all related laws and regulations pertaining to the Bank s properties and ensuring conformity to such laws and regulations. Audit Committee The Audit Committee is composed of three nonexecutive Board members and is chaired by an independent Board member. This committee convenes on a quarterly basis, or more frequently, if necessary. The primary duties of the Audit Committee include assisting the Board in its oversight of the efficiency and effectiveness of internal control and procedures, supervising of the Internal Audit Division s activities, appointing the Bank s external auditors and following up on their activities, ensuring fairness of the financial statements and related disclosures and monitoring compliance with applicable laws and regulations. Risk Committee The Risk Committee is composed of three Board members, at least one of which must be an independent director, and is chaired by an independent Board member of the Bank. The primary duties of the Risk Committee involve overseeing the proper implementation of the risk management framework set by the Bank in compliance with the regulations issued by the relevant banking authorities. 89

97 Employees and Training As at the date of this Prospectus, the Bank and its subsidiaries had approximately 2,050 employees, as compared to 1,954 employees as at 31 December 2011 and 1,788 employees as at 31 December The Bank has been enhancing its top senior and middle management with more than 10 key executives recruited during the last three years from global and regional financial institutions. The Bank believes that it is adequately staffed to carry out its present activities and does not expect to make significant increases in, or reductions to, the size of its workforce in the near future. The Bank has devoted significant resources to provide its employees with support and guidance in line with market practice and Management intends to continue to do so. The collective labour agreement that governs working conditions of all Bank employees other than general managers) is a contract between the Federation of Bank Employee Syndicate and the Lebanese Banks Association. The terms of this agreement must conform to minimum requirements of the Labour Code, although greater benefits may be provided to employees than those available under the Labour Code. Some of the most significant provisions covered by the collective bargaining agreement include employee hierarchy and minimum salary scale, allowances and other benefits, base salary increases, vacation and leave entitlement, health care, maximum working week, general discipline and endofservice payment. To date, the Bank s experience with the Federation of Bank Employee Syndicate has been one of favourable cooperation. In 2009, the Bank implemented: i) a methodology for employee grading and the determination of salaries based on function; ii) a reward system, which bases reward on performance; and iii) a system for promotion and career development, as well as succession planning. In line with the Central Bank requirements imposed by Central Bank Decision No dated 3 September 2006, the Bank provides a programme of training to its staff on a broad range of topics, including Risk Management, Basel II & III, UCP 600 and AML regulations. 90

98 Role of the Central Bank THE BANKING SECTOR AND BANKING REGULATIONS IN LEBANON The Central Bank was created by the law implemented by Decree No dated 1 August The Central Bank is a legal person, not a governmental department, and is vested with financial autonomy. It is considered a commercial institution in its relations with third parties. It is headquartered in Beirut and has branches in Tripoli, Jounieh, Saida, Zahle, Bikfaya, Aley, Tyre, Nabatiye and Baalbek. The Central Bank is managed by a Governor, assisted by four ViceGovernors, collectively constituting the Governorship of the Central Bank. The Board of the Central Bank is chaired by the Governor and is composed of the ViceGovernors, the DirectorGeneral of the Ministry of Finance and the DirectorGeneral of the Ministry of Economy and Trade. The Governor is appointed, for a six calendar year tenure, by a decree from the Council of Ministers, acting on the proposal of the Minister of Finance. The ViceGovernors are appointed for five calendar years by decree from the Council of Ministers on the proposal of the Minister of Finance, following consultation with the Governor. The Central Bank s primary role is to safeguard the currency and promote monetary stability, thereby creating a sound environment for economic and social progress. The Central Bank also advises the Government of Lebanon on various economic and financial matters. In conducting its monetary management function, the Central Bank utilises a wide range of instruments, including reserve requirements on Lebanese Pound deposits with commercial banks, liquidity requirements on U.S. Dollar deposits with commercial banks and treasury bill repurchase and swap agreements with commercial banks, as well as Lebanese Pound and U.S. Dollardenominated certificates of deposit issued by the Central Bank. As a result of high inflation prior to 1992, the Lebanese economy became substantially dollarised. Despite the decline in the rate of inflation, the proportion of foreign currency deposits primarily in U.S. Dollars) remains high as a share of total deposits, at approximately 65.9 per cent as at 31 December Banking Sector As at 30 September 2012 and based on information from the Association des Banques du Liban, there were 54 active commercial banks, with 948 operational branches in Lebanon, 52 financial institutions, 17 specialised medium and longterm credit banks and 11 brokerage firms in Lebanon. Foreign banks are well represented in Lebanon and maintain branches in Lebanon or equity stakes in several Lebanese banks. Unlike the banking sector in some other emerging market countries, the banking sector in Lebanon is generally acknowledged to be stable and financially strong, and plays a critical role in the economy as a whole. The banking sector currently offers services related to shortterm and, increasingly, mediumterm financing. As mediumterm funds become available to Lebanese banks by way of loans from international organisations, such as the International Finance Corporation, the European Investment Bank and Proparco / Agence Française de Développement, or the issuance of debt securities on the international capital markets and incentives offered by the Central Bank by way of exemption of compulsory reserves requirements), commercial banks have begun to offer a variety of mediumterm loans, such as residential mortgage loans, other consumer loans and several types of loans to corporate investors. From March 1995, commercial banks were required to meet a minimum capital adequacy ratio of 8.0 per cent in line with the Basel I Accord. In September 1999, the Central Bank required banks to raise their capital adequacy ratios to 10.0 per cent by 31 December 2000 and 12.0 per cent by 31 December In December 2011, the Central Bank issued Intermediary Decision No the Decision ) requiring banks to gradually raise their capital adequacy ratios by the end of Pursuant to the Decision, banks are required to have raised their Common Equity Tier 1 ratio to 8 per cent defined as the ratio of common equity Tier 1 capital to total weighted assets), their Tier 1 ratio to 10 per cent defined as the ratio of Tier 1 capital to total weighted assets) and their total capital ratio to 12 per cent defined as the ratio of the sum of the Tier 1 ratio and the Tier 2 ratio to total weighted assets) by the end of The Decision also imposes intermediate annual thresholds for such ratios from the end of For the year ending 31 December 2012, the minimum ratios of Common Equity Tier 1, Tier 1 and total capital must be 5, 8 and 10 per cent, respectively. The requirements are in line with Basel III which is the third instalment of the Basel Accords. 91

99 The average capital adequacy ratio of Lebanese banks was 11.6 per cent. as at 31 December Law No. 192 dated 4 January 1993 facilitated bank mergers by, inter alia, making banks eligible for soft loans from the Central Bank. Such law was renewed until the year Pursuant to Law No. 675 dated 14 February 2005 published in the Official Gazette No. 8 dated 24 February 2005, the law facilitating bank mergers was reinstated for an indefinite period. The mechanism and criteria for granting soft loans to banks in accordance with Article 6 of Law 192 was set out by Decree No dated 26 February During the past few years, the capital of commercial banks in Lebanon has increased substantially. In addition, Parliament passed legislation to revitalise specialised banks for housing, agriculture and industry). State participation in the shareholding of these banks has been reduced to a minority stake. In addition, Parliament passed laws relating to the listing of bank shares on stock exchanges and several banks currently list their eligible shares on the Beirut Stock Exchange. The Bank considers the banks in Lebanon with customers deposits in excess of U.S.$2 billion the Alpha Group ) to be its main competitors. As at 31 December 2011, based on unaudited financial statements of banks operating in Lebanon provided to Bankdata, the Bank ranked fifth among all banks operating in Lebanon with total customers deposits of LBP 14, billion U.S.$9, million), fifth among all banks operating in Lebanon with net profit of LBP billion U.S.$ million), fifth among all banks operating in Lebanon with total assets of LBP 17,775.4 billion U.S.$11, million), sixth among all banks operating in Lebanon with total shareholders equity of LBP 1,489.4 billion U.S.$987.9 million) and fourth among all banks operating in Lebanon with total loans of LBP 6,271.2 billion U.S.$4, million). The following tables set forth the rankings for selected criteria of the Alpha Group banks in Lebanon in 2010 and 2011, respectively: Ranking by Customer Deposits 1) As at 31 December U.S.$ millions) Bank Audi SalAudi Saradar Group... 24, , BLOM Bank, s.a.l... 20, , Byblos Bank, s.a.l... 12, , Fransabank, s.a.l , , BankMed, s.a.l... 9, , Banque LibanoFrancais, s.a.l.... 8, , Societe Generale de Banque au Liban SGBAL), s.a.l.... 8, , Bank of Beirut, s.a.l.... 7, , Credit Libanais, s.a.l.... 6, , BBAC, s.a.l... 3, , IBL Bank... 3, , First National Bank, s.a.l.... 2, , Total , , Source: Bankdata Notes: 1): Certain figures in this table may differ slightly from the Bank s audited financial information set forth elsewhere in this Prospectus because the figures used by Bankdata are unaudited. 92

100 Ranking by Net Profits 1) As at 31 December U.S.$ millions) Bank Audi SalAudi Saradar Group BLOM Bank, s.a.l Byblos Bank, s.a.l Fransabank, s.a.l BankMed, s.a.l Bank of Beirut, s.a.l Credit Libanais, s.a.l Banque LibanoFrancais, s.a.l IBL Bank BBAC, s.a.l First National Bank, s.a.l Societe Generale de Banque au Liban SGBAL), s.a.l.... N.A. N.A. Total... 1, , Source: Bankdata Notes: 1): Certain figures in this table may differ slightly from the Bank s audited financial information set forth elsewhere in this Prospectus because the figures used by Bankdata are unaudited. Ranking by Total Assets 1) As at 31 December U.S.$ millions) Bank Audi SalAudi Saradar Group... 28, , BLOM Bank, s.a.l... 23, , Byblos Bank, s.a.l... 16, , Fransabank, s.a.l , , BankMed, s.a.l... 11, , Societe Generale de Banque au Liban SGBAL), s.a.l , , Banque LibanoFrancais, s.a.l... 10, , Bank of Beirut, s.a.l.... 9, , Credit Libanais, s.a.l.... 7, , BBAC, s.a.l... 4, , IBL Bank... 3, , First National Bank, s.a.l.... 2, , Total , , Source: Bankdata Notes: 1): Certain figures in this table may differ slightly from the Bank s audited financial information set forth elsewhere in this Prospectus because the figures used by Bankdata are unaudited. 93

101 Ranking by Shareholders Equity 1) As at 31 December U.S.$ millions) Bank Audi SalAudi Saradar Group... 2, , BLOM Bank, s.a.l... 1, , Byblos Bank, s.a.l... 1, , Fransabank, s.a.l.... 1, , Bank of Beirut, s.a.l.... 1, BankMed, s.a.l , Banque LibanoFrancais, s.a.l Credit Libanais, s.a.l Societe Generale de Banque au Liban SGBAL), s.a.l BBAC, s.a.l IBL Bank First National Bank, s.a.l Total... 11, , Source: Bankdata Notes: 1): Certain figures in this table may differ slightly from the Bank s audited financial information set forth elsewhere in this Prospectus because the figures used by Bankdata are unaudited. Ranking by Loans and Advances 1) As at 31 December U.S.$ millions) Bank Audi SalAudi Saradar Group... 8, , BLOM Bank, s.a.l... 5, , Fransabank, s.a.l.... 4, , BankMed, s.a.l... 4, , Byblos Bank, s.a.l... 4, , Banque LibanoFrancais, s.a.l... 3, , Bank of Beirut, s.a.l.... 3, , Societe Generale de Banque au Liban SGBAL), s.a.l.... 2, , Credit Libanais, s.a.l.... 1, , BBAC, s.a.l... 1, First National Bank, s.a.l IBL Bank Total... 40, , Source: Bankdata Notes: 1): Certain figures in this table may differ slightly from the Bank s audited financial information set forth elsewhere in this Prospectus because the figures used by Bankdata are unaudited. Banking Regulations Banking activities in Lebanon are governed by the Lebanese Code of Commerce, the Code of Money and Credit and Central Bank Decisions. Regulations are set out by the Central Bank and the Banking Control Commission, which was established in 1967 and has the responsibility of supervising banking activities and ensuring compliance with regulations and legislation. 94

102 The Banking Control Commission undertakes both offsite reviews and onsite examinations of Lebanese banks to assess, inter alia, compliance with banking laws and regulations, reliability of bank reporting, levels of liquidity and capital adequacy and loantodeposit ratios. Banks regularly submit reports to the Central Bank, including daily lists of foreign exchange transactions undertaken, weekly reports on the portfolio of treasury bills held, periodic financial information on customers and interbank deposits and audited financial statements. Banks also submit regular reports to the Banking Control Commission mainly on their lending portfolio and on some details of their financial statements. Furthermore, banks, like all joint stock companies registered in Lebanon, must have their bylaws and minutes of certain shareholders meetings, as well as minutes of board of directors meetings whose objects relate to, or otherwise affect, third parties registered with the Register of Commerce. Related Party Transactions Transactions with related parties are governed by the Code of Commerce, the Code of Money and Credit and Central Bank Decision No dated 21 February 2001, as amended, which collectively provide that a transaction with a related party must be formally authorised by a general meeting of the bank s shareholders and approved by the bank s board of directors. Any facilities granted to a related party must be adequately collateralized. Decision No. 7776, as amended by Intermediary Decision No dated 9 November 2012 provides that advances and credit facilities to directors, managers and companies having common directors with a bank may not exceed 2 per cent of shareholders equity, one per cent of which may be granted without having to meet the conditions specified in the Code of Money and Credit, including, among other things, the formal prior approval of the general meeting of the Bank s shareholders. Banks exceeding such limit are granted a phasein compliance period, which may not extend beyond the date of the first meeting of shareholders which will be held for purposes of approving or renewing the authorisations for related party transactions. Intermediary Decision No further provides that the value of noninterest bearing cash collaterals guaranteeing advances and credit facilities to related parties bearing interest at prevailing market rates will be deducted from the aggregate value of advances and credit facilities to related parties that are subject to conditions and restrictions specified in the Code of Money and Credit and Decision Decision No further provides that Lebanese banks are prohibited from extending advances and credit facilities to related parties if they are not in compliance with the solvency and liquidity ratios as per applicable Central Bank regulations. The value of advances and credit facilities to a related party may not exceed: i) 50 per cent of the relevant related party s share in the aggregate value of the transaction or operation being financed; or ii) 40 per cent of the net financial assets of the related party and its guarantors, whichever is lower. Central Bank Decision No. 7156, dated 10 November 1998, provides that interbank deposits among banks and foreign affiliated companies whether or not financial institutions) may not exceed 25 per cent of Tier I Capital. Central Bank Intermediary Decision No , dated 30 December 2010, amending Decision No. 7776, prohibits lending made by commercial banks to specialised banks and Islamic banks belonging to the same economic group. Deposits made by commercial banks with specialised banks and Islamic banks belonging to the same economic group are also prohibited. This restriction does not apply to deposits made by specialised banks and Islamic banks in commercial banks belonging to the same economic group. Reserve Requirements Pursuant to Decision No. 7835, dated 2 June 2001, as amended, all banks operating in Lebanon, except investment banks and commercial banks making medium and longterm loans, must maintain a compulsory reserve in cash with the Central Bank equal to: i) 25 per cent of the weekly average of the sum of Lebanese Pounddenominated demand deposits; and ii) 15 per cent of the weekly average of Lebanese Pounddenominated term deposits. On 27 September 2001, the Central Bank issued Decision No. 7935, as amended, implementing Decision No. 7926, dated 20 September 2001, pursuant to which all banks operating in Lebanon must maintain in cash with the Central Bank an interestbearing deposit to the extent of 15 per cent. of all foreign currencydenominated deposits, notes, certificates of deposit, banks certificates and other debt instruments and loans granted by the financial sector with a remaining time to maturity of one year or less, against payment of interest at the rate applied by the Central Bank on foreign currencydenominated deposits. 95

103 Pursuant to Central Bank Decision No dated 8 February 1996, as amended, the Central Bank may grant, on a casebycase basis, to commercial banks making medium and longterm loans, the same reserve requirement concessions and exemptions as those granted to specialised banks governed by Decree Law No. 50 dated 15 July Pursuant to Intermediary Decision No dated 30 April 2012, amending Decision No. 6101, specialised banks were required to maintain a compulsory reserve in cash with the Central Bank equal to: i) 15 per cent. of the weekly average of the sum of Lebanese Pounddenominated deposits that are not invested; and ii) 15 per cent of the aggregate investment amounts that are not in compliance with the delays prescribed by Decree Law No. 50 dated 15 July Central Bank Decision No dated 18 October 2000, as amended, provides that all banks operating in Lebanon must maintain at all times a minimum of 10 per cent. of all foreign currencydenominated deposits, debt securities, certificates of deposits, banks certificates and other debt instruments and loans granted by the financial sector with a remaining time to maturity of one year or less, in liquid assets consisting of: i) cash in a bank s vaults; ii) cash deposited with the Central Bank; and iii) cash deposited with other banks with a remaining time to maturity equal to or less than one year. Central Bank Decision No. 7694, dated 18 October 2000, as amended, provides that all banks operating in Lebanon must also maintain a minimum of 40 per cent of their Tier I Capital denominated in Lebanese Pounds, after provisions and distribution of profits, in liquid assets, consisting of: i) cash in the Bank s vaults; ii) cash deposited with the Central Bank; iii) cash deposited with other banks with a remaining time to maturity equal to or less than one year; and iv) Lebanese treasury bills with a remaining time to maturity of one year or less. The Central Bank, pursuant to regulations amending Decision No. 7835, established exemptions from compulsory reserves requirements to incentivise banks to extend different types of Lebanese Pounddenominated loans, such as housing, Kafalat guaranteed), education and loans extended to finance environmentallyfriendly projects. Property Acquired in Settlement of Debts Pursuant to Central Bank Decision No. 7740, dated 21 December 2000, as amended, banks are required to establish a special reserve for properties acquired in satisfaction of debts and not liquidated within the required delays. The Banking Control Commission Circular No. 4/2008 provides that banks must establish such special reserve at the end of the fiscal year during which the acquired property should have been liquidated. This special reserve shall be withheld from the annual profits and shall not be accounted for as an expense in the profit and loss account in accordance with IFRS. Capital Adequacy In December 2011, the Central Bank issued the Decision, requiring banks to gradually raise their capital adequacy ratios by the end of Pursuant to the Decision, banks are required to have raised their Common Equity Tier 1 ratio to 8 per cent defined as the ratio of common equity Tier 1 capital to total weighted assets), their Tier 1 ratio to 10 per cent defined as the ratio of Tier 1 capital to total weighted assets) and their total capital ratio to 12 per cent defined as the ratio of the sum of the Tier 1 ratio and the Tier 2 ratio to total weighted assets) by the end of The Decision also imposes intermediate annual thresholds for such ratios from the end of For the year ending 31 December 2012, the minimum ratios of Common Equity Tier 1, Tier 1 and total capital must be 5, 8 and 10 per cent, respectively. The requirements are in line with Basel III which is the third instalment of the Basel Accords. In recent years, the capital of commercial banks in Lebanon has increased substantially. The average capital adequacy ratio of Lebanese banks was per cent. as at 31 December Central Bank Decision No. 9302, dated 1 April 2006, provides that Lebanese banks are required to phase in application of the Basel II International Convention starting from 1 January 2008 in accordance with the standards set forth in Decision No and any subsequent decisions or implementing regulations. The Central Bank is in the process of issuing regulations for the implementation of the Basel International Convention and the related provisions of Decision No Furthermore, the Central Bank and the Banking Control Commission are currently conducting a followup review of the full implementation of the Basel International Convention requirements by all banks operating in Lebanon. While the followup review progresses and further implementing regulations are issued, Lebanese banks are required to continue to calculate their capital adequacy ratios according to current applicable regulations under Basel I, as well as to start to calculate their capital adequacy ratios according to the Basel II International Convention. 96

104 Pursuant to the Central Bank Basic Decision No Decision 9957 ) dated 21 July 2008 relating to the assessment of the capital adequacy of Lebanese banks, the senior executive management of Lebanese banks is required, in addition to meeting the Pillar I i.e., minimum capital requirements under the Basel II International Convention), to establish a documented mechanism for the assessment of the Bank s capital adequacy. The assessment of such capital adequacy shall be carried out in accordance with certain guidelines, including, inter alia: i) the risks to which the Bank is exposed, such as credit risk, market risk, operational risk, interest rate risk, credit concentration risk, liquidity risk and strategic risk; ii) the future capital needs of the Bank; and iii) the periodic monitoring of the sufficiency of the Bank s capital to cover the minimum requirements to counter any risks or potential negative changes. The Banking Control Commission shall periodically ensure that the assessment of a bank s capital adequacy is carried out in accordance with Decision 9957 by reviewing and evaluating all the qualitative i.e., corporate governance, risk management and internal control regulations) and quantitative i.e., the calculation of the capital requirements in accordance with Pillar I and Pillar II) elements adopted by a bank in its capital adequacy assessment process. The Banking Control Commission shall have the right to instruct the Bank to increase its shareholders equity should it deem the foregoing qualitative and quantitative elements to be weak or inadequate, although any such increase of shareholders equity shall not exempt the Bank from rectifying such weaknesses or inadequacies. Central Bank Decision No dated 25 March 1998 was amended on 8 September 2005 to provide that the aggregate amount of preferred shares convertible and nonconvertible into ordinary shares) and financial instruments that are deemed part of a bank s Tier I Capital according to the applicable regulations cannot exceed 49 per cent. of the bank s Tier I Capital; that the aggregate amount of preferred shares nonconvertible into ordinary shares) and financial instruments that are deemed part of a bank s Tier I Capital according to the applicable regulations cannot exceed the limit of 35 per cent. of the bank s Tier I Capital; and that the aggregate amount of financial instruments that are deemed part of a bank s Tier I Capital according to the applicable regulations cannot exceed the limit of 15 per cent of the bank s Tier I Capital. The excess above these limits of preferred shares convertible and nonconvertible) and financial instruments, that would otherwise form part of the bank s Tier I Capital, will be included in the bank s Tier II Capital. On 24 September 2007, Central Bank Decision No dated 25 March 1998 was amended to introduce an additional category of capital, called Tier III capital that consists of subordinated debt that is issued initially for a minimum of two years. Tier III Capital can only be used to support market risk in the trading book of the bank; this means that any capital requirement arising in respect of credit, operational and counterparty risk, including the credit counterparty risk in both trading and banking books, needs to be met by the existing definition of capital base i.e., Tier I and Tier II). The use of Tier III Capital to support market risk is limited to 250 per cent. of the amount of residual Tier I Capital used to support market risk. This means a minimum of 28.5 per cent. of market risk must be covered by residual Tier I capital to maintain this ratio. Tier II Capital may be substituted for Tier III Capital up to the limit of 250 per cent. in so far as the overall limits for Tier II with regard to Tier I are not breached. This additional category of capital was cancelled pursuant to Central Bank Intermediary Decision No dated 15 April Corporate Governance Central Bank Decision No dated 26 July 2006, adopted in implementation of the Basel II International Convention regarding the banks corporate governance, has outlined the general guidelines for the banks corporate governance, regarding, inter alia: i) the directors competence to hold their positions; ii) the board of directors role in specifying the strategic goals and corporate values of the bank and to ensure implementation thereof; iii) the board of directors duty to clearly provide for responsibilities and accountability and to ensure that such responsibility and accountability are thoroughly applied; and iv) the transparent management of the bank. Pursuant to Central Bank Basic Decision No dated 21 July 2008, the board of directors of each Lebanese bank is required to establish an audit committee composed of at least three nonexecutive directors, one of whom shall have experience in accounting, financial management or auditing. This audit committee shall, inter alia, assist the board of directors in the performance of its duties, in particular with respect to: i) assessing the qualifications and independence of each of the auditors and the internal audit unit; ii) monitoring the accuracy of the bank s financial statements and reviewing the disclosure criteria adopted by the bank; iii) reviewing the sufficiency and effectiveness of the bank s internal control regulations and procedures; iv) following up on the implementation of the proposed corrections included in any reports issued by the internal audit unit and the auditors; and v) monitoring the bank s compliance with applicable Central Bank and Banking Control Commission regulations. 97

105 In addition, the audit committee shall, separate from its duty to assist the board of directors, independently supervise the internal audit activities, assess the performance, independence and objectivity of the auditors and review the internal control regulations and procedures, including AML procedures and the prevention of terrorism financing procedures, in order to ensure their sufficiency and effectiveness. Intermediary Decision No provides that the audit committee shall, inter alia, assist the board of directors in carrying out its supervisory duties over the internal audit and control in accordance with the requirements of the applicable Central Bank and Banking Control Commission regulations and recommendations. In addition, Intermediary Decision No provides that the audit committee shall, inter alia: i) oversee the internal audit unit to ensure its independency from the senior executive management and assess its performance; ii) review the internal audit report; iii) review the regulations, policies and procedures relating to the internal control, including the approval of the internal audit charter, the audit cycle and the annual audit plan; iv) review the internal control regulations, policies and procedures, including, those related to anti money laundering and terrorist financing in order to ensure their sufficiency and effectiveness; v) advise on the auditors prior to their appointment, after ensuring that they have the required expertise to be appointed as auditors in light of the size and complexity of the Bank s operations; vi) review the audit plan prepared by the auditors in order to ensure that it covers all risks that the bank encounters; vii) discuss with the senior executive management and the auditors the financial statements to be published; and viii) meet every six months with the auditors to discuss the result of their actions. According to Intermediary Decision No , boards of directors of Lebanese banks are required to establish a risk committee composed of at least three directors. The chairman of such committee must be an independent director with appropriate expertise in the assessment and management of risks in the banking and financial industry. This committee shall oversee the proper implementation of the risk management principals in banks in accordance with the applicable Central Bank and Banking Control Commission regulations and recommendations. Central Bank Decision No dated 13 August 2009 requires all Lebanese banks to appoint as of financial year 2010 two separate external auditors to jointly audit the banks accounts. The Bank is in compliance with the requirements provided under said decision. Pursuant to Central Bank Basic Decision No dated 21 August 2009, Lebanese banks are required to adopt a business continuity plan for the purposes of ensuring the continuity of the banks operations in the event of the occurrence of any disaster or other event that may affect the continuity of any bank s operation. Decision grants banks a oneyear phasein compliance period. The business continuity plan shall include: i) preventive and precautionary measures; ii) detection procedure; iii) rescue measures or operating pattern during and after the disaster; and iv) procedures for resuming the ordinary course of business. The Bank adopted its first business continuity plan in July Credit Limits Central Bank Decision No dated 13 August 1998, as amended by Intermediary Decision No dated 9 November 2006, sets the maximum allowable weighted credit limit for loans to a single borrower or a group of related borrowers) at: i) 20 per cent. of a bank s shareholders equity with respect to loans extended to borrowers or a group of related borrowers) resident in Lebanon, the proceeds of which are to be used in Lebanon; ii) 20 per cent. of a bank s shareholders equity with respect to loans extended to resident borrowers or nonresident borrowers or a group of related borrowers), the proceeds of which are to be used in countries with sovereign ratings of A+ and above; and iii) ten per cent. of a bank s shareholders equity with respect to loans extended to resident borrowers or nonresident borrowers or a group of related borrowers), the proceeds of which are to be used in countries with sovereign ratings below A+, provided that x) the aggregate exposure for countries rated from A to BBB is not to exceed 200. per cent of the bank s shareholders equity and the aggregate exposure to each of these countries is not to exceed 50 per cent of the bank s shareholders equity or y) the aggregate exposure for countries rated below BBB is not to exceed 100 per cent. of the bank s shareholders equity and the aggregate exposure to each of these countries is not to exceed 25 per cent. of the bank s shareholders equity. Intermediary Decision No gave noncompliant banks until 31 December 2007 to comply with its provisions. 98

106 Foreign Exchange Trading Central Bank Decision No. 6568, dated 24 April 1997, as amended, prohibits Lebanese banks from maintaining at any time i) net trading positions against Lebanese Pounds in an amount greater than one per cent. of Tier I Capital and ii) global positions greater than 40 per cent of Tier I Capital. Lebanese banks, however, are allowed, under Decision No. 6568, to hold a structural foreign exchange position up to 60 per cent. of Tier I Capital denominated in Lebanese Pounds. Loan Classification Central Bank Decision No. 7159, dated 10 November 1998, as amended, introduces specific rules relating to loan classification and provisioning in accordance with the Basel Committee regulations. Specifically, it divides loan facilities into five categories: regular loans, watch list, substandard loans, doubtful loans, and loss loans. In accordance with the Central Bank s Intermediary Decision No dated 27 April 2011 all Lebanese banks are required to adopt in addition to the supervisory classification its own loan grading system for purposes of managing its credit risk. All Lebanese banks must equate between the supervisory classification and loan grading system. Lebanese banks must put in place an action plan for the purposes of implementing the requirements of Intermediary Decision No including the adoption of their own loan grading system) before 31 December 2012 and to inform the Banking Control Commission of the work progress. Provision for Bad Debt and Doubtful Loans The Banking Control Commission requires specific provisions to be established for identified credit losses. Full or partial provisions must be made in respect of nonperforming loans in accordance with applicable Central Bank regulations. Furthermore, nonperforming loans must be put on a nonaccrual basis and any interest subsequently received booked on a cash basis, as and when received. Nonperforming loans are those as to which the relevant Central Credit Department has determined that the borrower may be unable to meet principal and/or interest repayment obligations, or performance is otherwise unsatisfactory, unless the loans are adequately secured and/or are in the process of liquidation. See Overview of the Bank Loan Portfolio. Reserves for General Banking Risk Pursuant to the Central Bank Basic Decision No. 7129, dated 15 October 1998, as recently amended by Intermediary Decision No dated 9 May 2009, banks operating in Lebanon are required to allocate on a yearly basis a general reserve to be included in Tier I Capital) for unspecified banking risks out of net profits in an amount equal to a minimum of 0.2 per cent. and a maximum of 0.3 per cent. of riskweighted assets. The accumulated reserve for unspecified banking risks must be equivalent to 1.25 per cent. of riskweighted assets within ten years from the Decision No s issuance and 2.0 per cent. of riskweighted assets within a period of 20 years from the Decision No s issuance. The reserve for general banking risks shall be calculated in accordance with Basel II requirements as of the 2008 fiscal year. Accounting Standards Effective from 1997, all Lebanese banks are required to prepare their financial statements in accordance with IFRS. The Banking Control Commission has issued instructions which correspond to IFRS, for instance, the recognition of interest on classified loans only on a cash basis, guidelines for the effects of hyperinflation, the recording of exchange gains and losses arising from revaluation of foreign exchange positions and a statement of nonmonetary assets acquired in settlement of debts at current price. There are also certain restrictions on lending to shareholders and directors and on investments in subsidiaries and affiliates. Central Bank Decision No. 6576, dated 24 April 1997, requires Lebanese banks to prepare consolidated financial statements effective 1 July Consolidated financial statements must include all companies financial and nonfinancial) under a bank s exclusive control evidenced by ownership of 50 per cent. and/or exclusive control over management). Companies in which the bank has significant influence evidenced by 99

107 direct or indirect ownership ranging from 20 per cent. up to 50 per cent.) should be presented using the equity method in the consolidated financial statements. 100

108 LEBANESE LAWS AND REGULATIONS GOVERNING ISSUANCE OF CERTIFICATES BY COMMERCIAL BANKS The issuance of certificates of deposit by Lebanese commercial banks is governed by: i) the Code of Money and Credit of Lebanon, in particular Articles 70, 174 and 175 thereof; ii) the Law implemented by Decree No dated 20 September 1982; iii) Central Bank Circular No. 61 dated 11 February 1999, as amended the Circular ); iv) Articles 453 to 458 of the Code of Commerce of the Lebanese Republic; and v) other relevant laws, regulations and directives applicable to Lebanese banks. The principal provisions of the Circulars are as follows: Prior Notice to Central Bank: Minimum Denominations: Permitted Tenors: Maximum Amounts: Form: Restrictions and Covenants: At least 15 days prior to the date of issue of certificates of deposit, each issuing bank must notify the Central Bank in writing of the aggregate nominal amount of certificates of deposit proposed to be issued, and of the principal terms and conditions thereof. Certificates of deposit must be issued in minimum denominations of U.S.$50,000 or the equivalent of such U.S. Dollar amount in any other foreign currency, calculated as at the date of issue). From three months to five years, except for specialised banks, which may issue certificates of deposit with a tenor of up to ten years. The aggregate nominal amount of certificates of deposit of the issuing bank and its majorityowned subsidiaries which may be outstanding at any one time may not exceed six times the issuing bank s Tier I capital. Registered. The Circular provides that the issuance of certificates of deposit in bearer form requires the prior approval of the Central Council of the Central Bank. The Circular includes a standard form for certificates of deposit, which does not include provisions relating to crossdefault, acceleration, negative pledge and other covenants. A bank issuer is prohibited from directly or indirectly discounting or purchasing certificates of deposit issued by it. A bank issuer must provide the Central Bank with a monthly report regarding outstanding certificates issued by it. A bank issuer s external auditors are obligated to verify on an ongoing basis the validity of the issuance of certificates of deposit and compliance with applicable regulations and to advise the Central Bank and the Banking Control Commission of any violation of applicable regulations. A bank issuer must explicitly mention in its offering document that the Central Bank has not passed upon the merits of such offering document. In addition, the bank issuer is prohibited from distributing an offering document prior to notifying the Central Bank. Exemptions: Lebanese banks are authorised to request the exemption from certain provisions relating to the maturity, the standard form, the interest rate and the subscription agreement to the extent the Certificates of Deposit are sold in foreign markets. The Bank requested waivers from the Central Bank in respect of the application of certain of these regulations to the Certificates and such waivers have been granted. 101

109 OVERVIEW OF PROVISIONS RELATING TO THE CERTIFICATES IN GLOBAL FORM The Certificates will be represented by a Global Certificate, which will be registered in the name of BT Globenet Nominees Limited as nominee for, and deposited with, the common depositary for Euroclear and Clearstream, Luxembourg. The Global Certificate will become exchangeable in whole, but not in part, for Individual Certificates if a) Euroclear or Clearstream, Luxembourg is closed for business for a continuous period of 14 days other than by reason of legal holidays) or announces an intention permanently to cease business or b) any of the other circumstances described in Condition 8 Events of Default) occurs. Whenever the Global Certificate is to be exchanged for Individual Certificates, such Individual Certificates will be issued in an aggregate principal amount equal to the principal amount of the Global Certificate within five business days of the delivery, by or on behalf of the registered Holder of the Global Certificate, Euroclear and/or Clearstream, Luxembourg, to the Registrar of such information as is required to complete and deliver such Individual Certificates including, without limitation, the names and addresses of the persons in whose names the Individual Certificates are to be registered and the principal amount of each such person s holding) against the surrender of the Global Certificate at the Specified Office of the Registrar. Such exchange will be effected in accordance with the provisions of the Agency Agreement and the regulations concerning the transfer and registration of Certificates scheduled thereto and, in particular, shall be effected without charge to any Holder, but against such indemnity as the Registrar may require in respect of any tax or other duty of whatsoever nature which may be levied or imposed in connection with such exchange. If: a) b) Individual Certificates have not been issued and delivered by 5.00 p.m. London time) on the thirtieth day after the date on which the same are due to be issued and delivered in accordance with the terms of the Global Certificate; or any of the Certificates evidenced by the Global Certificate has become due and payable in accordance with the Conditions or the date for final redemption of the Certificates has occurred and, in either case, payment in full of the amount of principal falling due with all accrued interest thereon has not been made to the Holder of the Global Certificate on the due date for payment in accordance with the terms of the Global Certificate, then, at 5.00 p.m. London time) on such thirtieth day in the case of a) above) or at 5.00 p.m. London time) on such due date in the case of b) above), each person shown in the records of Midclear, Euroclear or Clearstream, Luxembourg or any other relevant clearing system) as being entitled to an interest in the Certificates each, an Accountholder ) shall acquire under the deed of covenant to be dated 14 December 2012 the Deed of Covenant ) rights of enforcement against the Issuer Direct Rights ) to compel the Issuer to perform its obligations to the Holder of the Global Certificate in respect of the Certificates represented by the Global Certificate, including the obligation of the Issuer to make all payments when due at any time in respect of such Certificates in accordance with the Conditions as if such Certificates had where required by the Conditions) been duly presented and surrendered on the due date in accordance with the Conditions. The Direct Rights shall be without prejudice to the rights which the Holder of the Global Certificate may have under the Global Certificate or otherwise. Payment to the Holder of the Global Certificate in respect of any Certificates represented by the Global Certificate shall constitute a discharge of the Issuer s obligations under the Certificates and the Deed of Covenant to the extent of any such payment and nothing in the Deed of Covenant shall oblige the Issuer to make any payment under the Certificates to or to the order of any person other than the Holder of the Global Certificate. As a condition of any exercise of Direct Rights by an Accountholder, such Accountholder shall, as soon as practicable, give notice of such exercise to the Noteholders in the manner provided for in the Conditions or the Global Certificate for notices to be given by the Issuer to Noteholders. 102

110 In addition, the Global Certificate will contain provisions that modify the Terms and Conditions of the Certificates as they apply to the Certificates evidenced by the Global Certificate. The following is a summary of certain of those provisions: Payments on business days: In the case of all payments made in respect of the Global Certificate, business day means any day which is a day on which dealings in foreign currencies may be carried on in London. Payment Record Date: Each payment in respect of the Global Certificate will be made to the person shown as the Holder in the Register at the close of business in the relevant clearing system) on the third Clearing System Business Day before the due date for such payment the Record Date ), where Clearing System Business Day means a day on which each clearing system for which the Global Certificate is being held is open for business. Notices: Notwithstanding Condition 14 Notices), so long as the Global Certificate is held on behalf of Euroclear, Clearstream, Luxembourg or any other clearing system an Alternative Clearing System ), notices to Holders of Certificates represented by the Global Certificate may be given by delivery of the relevant notice to Euroclear, Clearstream, Luxembourg or as the case may be) such Alternative Clearing System, except that, for so long as such Certificates are admitted to trading on the Luxembourg Stock Exchange and it is a requirement of applicable law or regulations, such notices shall also be published in a leading newspaper having general circulation in Luxembourg which is expected to be Luxemburger Wort) or published on the website of the Luxembourg Stock Exchange 103

111 TAXATION The following is a general description of certain Lebanese tax considerations relating to the Certificates. It does not purport to be a complete analysis of all tax considerations relating to the Certificates whether in those countries or elsewhere. Prospective purchasers of Certificates should consult their own tax advisers as to the consequences under the tax laws of the country of which they are resident for tax purposes and the tax laws of Issuer s country of acquiring, holding and disposing of Certificates and receiving payments of interest, principal and/or other amounts under the Certificates. This summary is based upon the law as in effect on the date of this Prospectus and is subject to any change in law that may take effect after such date. Also investors should note that the appointment by an investor in Certificates, or any person through which an investor holds Certificates, of a custodian, collection agent or similar person in relation to such Certificates in any jurisdiction may have tax implications. Investors should consult their own tax advisers in relation to the tax consequences for them of any such appointment Lebanese Taxation The following is a summary of certain Lebanese tax consequences resulting from the purchase, ownership and disposition of the Certificates. This summary does not purport to consider all of the possible Lebanese consequences of the purchase, ownership and disposition of the Certificates and is not intended to reflect the individual tax position of any beneficial owner. This summary is based upon laws, regulations, rulings and decisions now in effect, all of which are subject to change perhaps with retroactive effect). The summary does not include any description of the tax laws of any state, local or foreign governments other than Lebanon) that may be applicable to the Certificates or the holders thereof. The legal authorities on which this summary is based are subject to various interpretations, and no rulings have or will be sought from any tax agency with respect to the matters described herein. Withholding Tax on Interest under the 2003 Budget Law, published in the Official Gazette on 31 January 2003, interest paid in respect of Certificates issued by Lebanese jointstock companies after 31 January 2003 is subject to withholding tax at the rate of five per cent. Under applicable Lebanese laws and regulations, taxes withheld on bonds and deposit certificates held by banks, financial institutions and trading entities subject to income tax in Lebanon, pursuant to Chapter 1 of the Income Tax Code, may be credited against the Holder s annual corporate income tax. Capital Gains Tax no Lebanese tax will be payable in respect of any gain, whether realised or unrealised, made by a nonresident of Lebanon from any sale or other disposition of any Certificates. Capital gains realised on the sale of Certificates between two nonresidents of Lebanon are not subject to tax in Lebanon. Inheritance Taxes no Lebanese inheritance or similar tax will be payable by the holder of any Certificate who is a nonresident of Lebanon, provided that the Certificates owned by such Holder are not located in Lebanon. Stamp Duties no stamp, registration or similar duties or taxes will be payable in Lebanon by any nonresident of Lebanon in connection with its purchase of any of the Certificates upon issue. Persons considering the purchase of the Certificates should consult their own tax advisers concerning the application of Lebanese tax laws to their particular situations, as well as any consequences of the purchase, ownership and disposition of the Certificates arising under the laws of any other taxing jurisdiction. EU Savings Tax Directive Under EC Council Directive 2003/48/EC on the taxation of savings income, each Member State is required to provide to the tax authorities of another Member State details of payments of interest or other similar income paid by a person within its jurisdiction to, or collected by such a person for, an individual resident or certain limited types of entity established in that other Member State; however, for a transitional period, Austria, Belgium and Luxembourg may instead apply a withholding system in relation to such payments, deducting tax at rates rising over time to 35 per cent. The transitional period is to terminate at the end of the first full fiscal year following agreement by certain noneu countries to the exchange of information relating to such payments. Belgium has replaced this withholding tax with a regime of exchange of information to the Member State of residence as from 1 January

112 A number of noneu countries and certain dependent or associated territories of certain Member States have adopted similar measures either provision of information or transitional withholding) in relation to payments made by a person within its jurisdiction to, or collected by such a person for, an individual resident or certain limited types of entity established in a Member State. In addition, Member States have entered into provision of information or transitional withholding arrangements with certain of those dependent or associated territories in relation to payments made by a person in a Member State to, or collected by such a person for, an individual resident or certain limited types of entity established in one of those territories. On 13 November 2008 the European Commission published a proposal for amendments to the Directive, which included a number of suggested changes which, if implemented, would broaden the scope of the requirements described above. The European Parliament approved an amended version of this proposal on 24 April Investors who are in any doubt as to their position should consult their professional advisers. Luxembourg Taxation The following is a general description of certain Luxembourg tax considerations relating to the Certificates. It specifically contains information on taxes on the income from the Certificates withheld at source and provides an indication as to whether the Issuer assumes responsibility for the withholding of taxes at the source. It does not purport to be a complete analysis of all tax considerations relating to the Certificates, whether in Luxembourg or elsewhere. Prospective purchasers of the Certificates should consult their own tax advisers as to which countries tax laws could be relevant to acquiring, holding and disposing of the Certificates payments of interest, principal and/or other amounts under the Certificates and the consequences of such actions under the tax laws of Luxembourg. This summary is based upon the law as in effect on the date of this Prospectus. The information contained within this section is limited to withholding taxation issues, and prospective investors should not apply any information set out below to other areas, including but not limited to) the legality of transactions involving the Certificates. All payments of interest and principal by the Luxembourg Paying Agent under the Certificates can be made free and clear of any withholding or deduction for or on account of any taxes of whatsoever nature imposed, levied, withheld, or assessed by Luxembourg or any political subdivision or taxing authority thereof or therein, in accordance with the applicable Luxembourg law, subject however to: i) ii) the application of the Luxembourg law of 21 June 2005 implementing the European Union Savings Directive Council Directive 2003/48/EC) and providing for the possible application of a withholding tax currently 35 per cent. as of 1 July 2011) on interest paid to certain non Luxembourg resident investors individuals and certain types of entities called residual entities ) in the event of the Issuer appointing a paying agent in Luxembourg within the meaning of the abovementioned directive see, EU Savings Tax Directive ); the application as regards Luxembourg resident individuals of the Luxembourg law of 23 December 2005 which has introduced a ten per cent. final withholding tax on savings income i.e. with certain exemptions, savings income within the meaning of the Luxembourg law of 21 June 2005 implementing the European Union Savings Directive). This law should apply to savings income accrued as from 1 July 2005 and paid as from 1 January Responsibility for the withholding of tax in application of the abovementioned Luxembourg laws of 21 June 2005 and 23 December 2005 is assumed by the Luxembourg paying agent within the meaning of these laws and not by the Issuer. 105

113 SUBSCRIPTION AND SALE Deutsche Bank AG, London Branch the Manager ) has, in a subscription agreement dated 13 December 2012 the Subscription Agreement ) and between the Issuer and the Manager upon the terms and subject to the conditions contained therein, agreed to subscribe for the Certificates at their issue price of per cent. of their principal amount. The Issuer has agreed to reimburse the Manager for certain expenses incurred in connection with its management of the issue of the Certificates. The Manager is entitled in certain circumstances to be released and discharged from its obligations under the Subscription Agreement prior to the closing of the issue of the Certificates. Pursuant to a selling agency agreement dated 5 December 2012, the Issuer has appointed MedInvestment Bank, s.a.l. the Selling Agent ) as selling agent in connection with the issue and offering of the Certificates the Selling Agency Agreement ). The Issuer has agreed to pay the Selling Agent a fee in relation to its services as selling agent. United Kingdom Each of the Manager and the Selling Agent has represented, warranted and undertaken that: a) b) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of the Certificates in circumstances in which Section 211) of the FSMA does not apply to the Issuer; and it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Certificates in, from or otherwise involving the United Kingdom. United States of America The Certificates have not been and will not be registered under the Securities Act. Certificates may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons, except pursuant to an exemption from, or a transaction not subject to, the registration requirements of the Securities Act. Each of the Manager and the Selling Agent has agreed that, except as permitted by the Subscription Agreement or the Selling Agency Agreement, it will not offer, sell or deliver the Certificates within the United States or to, or for the account or benefit of, U.S. persons. In addition, until 40 days after commencement of the offering, an offer or sale of Certificates within the United States by a dealer, whether or not participating in the offering, may violate the registration requirements of the Securities Act. Lebanon The marketing, offering, distribution and sale of the Certificates in Lebanon shall comply with all applicable laws and regulations in Lebanon, in particular, Law No. 234 dated 10 June 2000 and Central Bank Basic Decision No dated 28 June 1996, as amended. General The Manager has represented, warranted and agreed that it has complied and will comply with all applicable laws and regulations in each country or jurisdiction in which it purchases, offers, sells or delivers Certificates or possesses, distributes or publishes this Prospectus, in all cases at its own expense. The Selling Agent has represented, warranted and agreed that it has complied and will comply with all applicable laws and regulations in each country or jurisdiction in which it offers, sells or delivers Certificates or possesses, distributes or publishes this Prospectus, in all cases at its own expense. Persons into whose hands this Prospectus comes are required by the Issuer, the Manager and the Selling Agent to comply with all applicable laws and regulations in each country or jurisdiction in which they purchase, offer, sell or deliver Certificates or possess, distribute or publish this Prospectus, in all cases at their own expense. 106

114 GENERAL INFORMATION Authorisation The creation and issue of the Certificates has been authorised by a resolution of the Board of Directors of the Issuer dated 5 November 2012 and a resolution of the shareholders dated 20 November Governmental, Legal and Arbitration Proceedings There are no governmental, legal or arbitration proceedings, including any such proceedings which are pending or threatened, of which the Issuer is aware), which may have, or have had during the 12 months prior to the date of this Prospectus, a significant effect on the financial position or profitability of the Issuer and its Subsidiaries. Significant/Material Change There has been no material adverse change in the prospects of the Issuer and its Subsidiaries, taken as a whole, since 31 December 2011, nor any significant change in the financial or trading position of the Issuer and its Subsidiaries, taken as a whole, since 30 June Auditors The Annual Financial Statements have been audited by Deloitte & Touche and Ernst & Young p.c.c., independent auditors, as stated in their reports appearing herein. Deloitte & Touche and Ernst & Young p.c.c. are members of the Lebanese Association of Certified Public Accountants, the professional body which oversees audit firms in Lebanon. The 2012 Interim Financial Statements have been reviewed by Deloitte & Touche and Ernst & Young p.c.c. in accordance with the International Standards on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity, as stated in their report appearing herein. Documents on Display Copies of the following documents may be inspected during normal business hours at the offices of the Fiscal Agent at Winchester House, 1 Great Winchester Street, London EC2N 2DB, United Kingdom for 12 months from the date of this Prospectus: a) b) c) the constitutive documents of the Issuer; the Agency Agreement; the Deed of Covenant; and d) the audited consolidated financial statements of the Issuer for the years ended 31 December 2011 and 31 December 2010 and the unaudited consolidated interim financial statements of the Issuer for the six months ended 30 June This Prospectus is published on the website of the Luxembourg Stock Exchange, being Estimated Expenses Estimated total expenses related to the admission to trading are approximately EUR 5,000. Yield On the basis of the Issue Price, the gross semiannual real yield on the Certificates is per cent. on an annual basis. ISIN, Common Code and WKN The Certificates have been accepted for clearance through Euroclear and Clearstream, Luxembourg. The ISIN is XS , the common code is and the WKN is A1HDXK. 107

115 Interests in the Issue Save for any fees payable to the Manager and the Selling Agent pursuant to the Subscription Agreement and the Selling Agency Agreement, respectively, as specified in Subscription and Sale, so far as the Issuer is aware, no person involved in the issue or the Certificates has an interest material to the issue. 108

116 INDEX TO FINANCIAL STATEMENTS Interim Consolidated Financial Statements of BankMed, s.a.l. as at and for the sixmonth period ended 30 June F2 Review Report... F4 Interim Consolidated Statement of Financial Position... F5 Interim Consolidated Income Statement... F7 Interim Consolidated Statement of Comprehensive Income... F8 Interim Consolidated Statement of Changes in Equity... F9 Interim Consolidated Statement of Cash Flows... F10 Notes to the Interim Condensed Consolidated Financial Information... F11 Audited Consolidated Financial Statements of BankMed, s.a.l. as at and for the year ended 31 December F35 Independent Auditors Report... F37 Consolidated Statement of Financial Position... F39 Consolidated Income Statement... F41 Consolidated Statement of Comprehensive Income... F42 Consolidated Statement of Changes in Equity... F43 Consolidated Statement of Cash Flows... F44 Notes to the Consolidated Financial Statements... F45 Audited Consolidated Financial Statements of BankMed, s.a.l. as at and for the year ended 31 December F160 Independent Auditors Report... F162 Consolidated Statement of Financial Position... F164 Consolidated Income Statement... F166 Consolidated Statement of Comprehensive Income... F167 Consolidated Statement of Changes in Equity... F168 Consolidated Statement of Cash Flows... F169 Notes to the Consolidated Financial Statements... F170 F1

117 BANKMED S.A.L. INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION AND REVIEW REPORT SIXMONTH PERIOD ENDED JUNE 30, 2012 F2

118 BANKMED S.A.L. INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION AND REVIEW REPORT SIXMONTH PERIOD ENDED JUNE 30, 2012 TABLE OF CONTENTS Page Review Report 1 Interim Condensed Financial Information: Interim Consolidated Statement of Financial Position 23 Interim Consolidated Income Statement 4 Interim Consolidated Statement of Comprehensive Income 5 Interim Consolidated Statement of Changes in Equity 6 Interim Consolidated Statement of Cash Flows 7 Notes to the Interim Condensed Consolidated Financial Information F3 831

119 F4

120 BANKMED S.A.L. INTERIM CONSOLIDATED STATEMENT OF FINANCIAL POSITION Notes ASSETS Cash and central banks Deposits with banks and financial institutions Financial assets at fair value through profit or loss Loans to banks Loans and advances to customers Loans and advances to related parties Investment securities Customers' acceptance liability Investments in associates and other investments Assets acquired in satisfaction of loans Goodwill Property and equipment Other assets Total Assets 6 7 Unaudited) June 30, 2012 December 31, ,947,502,816 2,425,054,950 2,840,697,709 1,555,207, ,166, ,469,544 5,770,291,578 1,161,789,453 4,752,208, ,853, ,760, ,235, ,301, ,869, ,778,547 19,880,284, ,643, ,598,549 5,260,185,295 1,011,080,198 5,418,525,207 74,426, ,625, ,116, ,942, ,622, ,720,979 17,775,392,100 1,527,279, ,345, ,865,158 1,369,906, ,462,209 1,042,743, ,926,363 1,103,352,699 FINANCIAL INSTRUMENTS WITH OFFBALANCE SHEET RISK Guarantees and standby letters of credit Documentary and commercial letters of credit Forward exchange contracts 16 FIDUCIARY DEPOSITS AND ASSETS UNDER MANAGEMENT THE ACCOMPANYING NOTES 1 TO 20 FORM AN INTEGRAL PART OF THE INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION F5

121 BANKMED S.A.L. INTERIM CONSOLIDATED STATEMENT OF FINANCIAL POSITION Unaudited) June 30, 2012 Notes LIABILITIES Deposits from banks and financial institutions Customers deposits at fair value through profit or loss Customers' deposits at amortized cost Related parties' deposits at amortized cost Acceptances payable Borrowings from banks and financial institutions Certificates of deposit Other liabilities Provisions Total liabilities 8 9 December 31, ,570, ,826,003 5,523,399 14,048,267,051 1,891,574, ,853, ,697, ,567, ,502,072 48,624,546 18,374,180,830 6,453,686 12,079,765,737 2,201,998,805 74,426, ,224, ,448, ,187,434 41,661,991 16,285,992, ,000, ,750,000 81,799,394 3,213, ,000, ,750,000 70,731,064 3,213, ,245, ,997,879 10,075, ,696,256 7,200, ,999,438 74,484,610) 38,861,099) 90,392,057 1,353,826, ,276,993 1,506,103,509 36,367,785) 46,619,657) 175,291,707 1,351,196, ,203,304 1,489,399,567 EQUITY Share capital Preferred shares Legal reserve Property revaluation reserve Reserve for general banking risks and other reserves Reserves for assets acquired in satisfaction of loans Retained earnings Cumulative change in fair value of financial assets at fair value through other comprehensive income Currency translation adjustment Profit for the period/year Equity attributable to the Group Noncontrolling interest Total equity Total Liabilities and Equity 19,880,284,339 17,775,392,100 THE ACCOMPANYING NOTES 1 TO 20 FORM AN INTEGRAL PART OF THE INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION 3 F6

122 BANKMED S.A.L. INTERIM CONSOLIDATED INCOME STATEMENT Unaudited) SixMonth Period Ended June 30, Notes Interest income Interest expense Net interest income Fee and commission income Fee and commission expense Net fee and commission income 558,091, ,287, ,114,947) 328,207,242) 175,976, ,080,712 Net results on financial instruments at fair value through profit or loss Gain from derecognition of financial assets measured at amortized cost Other operating income Net operating revenues 43,301,528 6,735,832) 36,565,696 42,454,506 3,674,663) 38,779, ,561,600 8,801, ,809,653 45,793,742 71,189,324 36,935, ,707, ,786,904 Provision for credit losses net of writeback) Loss from writeoff of loans Net operating revenues after impairment charge for credit losses 71,513,738) 42,684,933) 138,832) 234,347) 310,054, ,867,624 Staff costs Administrative expenses Depreciation and amortization Writeback of impairment of assets acquired in satisfaction of loans Writeback of/provision) for contingencies 103,912,966) 79,510,578) 8,900,469) 72,653,076) 74,609,142) 8,044,822) 58,216 2,070,374 2,163,860 1,613,793) Profit before taxes Income tax expense Profit for the period 119,859, ,110,651 23,133,427) 21,636,021) 96,725,927 89,474,630 Attributable to: Equity holders of the Group Noncontrolling interest 90,392,057 6,333,870 96,725,927 88,853, ,377 89,474,630 THE ACCOMPANYING NOTES 1 TO 20 FORM AN INTEGRAL PART OF THE INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION 4 F7

123 BANKMED S.A.L. INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Unaudited) SixMonth Period Ended June 30, Profit for the period 96,725,927 89,474,630 Other comprehensive income OCI ) Currency translation adjustment 15,498,377 Net loss on financial assets at fair value through other comprehensive income 44,269,077) Income tax relating to components of other comprehensive income 10,574,856) 53,218,164) 6,152,252 Net other comprehensive income for the period 22,618,448) 6,664,267 57,128,753) 74,107,479 32,345,877 Equity holders of the Group 60,033,790 36,359,517 Noncontrolling interest 14,073,689 Total comprehensive income for the period Attributable to: 74,107,479 4,013,640) 32,345,877 THE ACCOMPANYING NOTES 1 TO 20 FORM AN INTEGRAL PART OF THE INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION 5 F8

124 BANKMED S.A.L. INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Unaudited) Legal Reserves Property Revaluation Reserve Reserve for General Banking and Other Reserves Reserve for Assets Acquired in Satisfaction of Loans 81,967,343 20,040,998 4,525,239 2,966,022 Capital Preferred Shares Balance at December 31, 2010 Effect of IFRS9 early adoption Note 5) Total comprehensive income Difference of exchange Allocation of 2010 profit Transfer from retained earnings to reserve for general banking risk Disposal of assets acquired in satisfaction of loans Decrease in noncontrolling interest in a subsidiary Dividend distribution Other Balance at June 30, ,000, ,750, ,000, ,750,000 71,418,401 3,213,000 98, ,805,254 Balance at December 31, 2011 Total comprehensive income Difference of exchange Allocation of 2011 profit Disposal of assets acquired in satisfaction of loans Transfer between legal reserve and retained earnings Dividend distribution Other Balance at June 30, ,000, ,750,000 70,731,064 21,602) 15,920,301 3,213, ,997,879 22,093, ,000, ,750,000 55,177, ,838 15,701,417 4,830,369) 81,799,394 3,213,000 3,213,000 16,698, , ,245,809 Equity Attributable to the Group Cumulative Change in fair Value of Financial Assets Through Other Currency Retained Comprehensive Translation Earnings Income Adjustment 238,530,586 5,258,387 2,311, ,562,208 16,698,894) 98,019) 7,393,242 56,908,125) 491, ,547,094 7,200,617 3,029, ,999, ,864) 134,248, ,792) 10,075, ,569, ,171,890) 46,553,897) 36,843,215 4,830,369 56,909,787) 161,284) 369,696,256 36,367,785) 38,116,825) 74,484,610) 20,963,486) 5,939,839) Total 157,270,645 1,555,039, ,913,503) 88,853,253 36,359,517 2,851, ,270,645) 56,908,125) 491,637 88,853,253 1,271,920,134 46,619,657) 7,758, ,291,707 1,351,196,263 90,392,057 60,033, ,466) 175,291,707) 38,861,099) NonControlling Interest 26,903,325) Profit for the Period 56,909,787) 161,284) 90,392,057 1,353,826, ,220,214 3,752,937) 4,013,640) 6 156,161) 96, ,394,454 1,664,259, ,666,440) 32,345,877 2,851, ,161) 56,908,125) 588,615 1,373,314, ,203,304 14,073,689 1,489,399,567 74,107, ,466) 152,276,993 THE ACCOMPANYING NOTES 1 TO 20 FORM AN INTEGRAL PART OF THE INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION F9 Total 56,909,787) 161,284) 1,506,103,509

125 BANKMED S.A.L. INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS Unaudited) SixMonth Period Ended June 30, Notes Cash flows from operating activities: Profit for the period Adjustments for: Writeback of provision for impairment of assets acquired in satisfaction of loans Net), writeback) Depreciation and amortization Allowance for impairment of loans and advances less writeback Provision for collective impairment less writeback Provision for contingencies Loss from writeoff of loans Effect of exchange rate fluctuation on goodwill Amortization of commissions and discount on certificates of deposit Realized gain)/loss on sale of financial assets at fair value through profit or loss Gain from derecognition of financial assets measured at amortized cost Unrealized gain)/loss on financial assets at fair value through profit or loss Equity income from investments in associates Accretion of securities premium/discounts, net Gain from sale of property and equipment Gain on sale of assets acquired in satisfaction of loans Currency translation adjustment Decrease/increase) in financial assets at fair value through profit or loss Increase in loans and advances Increase)/decrease in loans to banks Increase in loans and advances to related parties Decrease)/increase in deposits with banks and financial institutions and compulsory deposits and deposits with central banks Decrease/increase) in other assets Decrease)/increase in deposits from banks and financial institutions Increase in other liabilities Decrease in customers deposits designated at fair value through profit or loss Decrease in related parties accounts designated at fair value through profit or loss Increase/decrease) in customers accounts at amortized cost Decrease)/increase in related parties accounts at amortized cost Decrease in provisions for contingencies Increase/decrease) in noncontrolling interest Exchange difference on retained earnings and legal reserves and other adjustments Net cash provided by operating activities Cash flows from investing activities: Decrease in availableforsale and held to maturity investment securities Increase in financial assets at fair value through other comprehensive income Decrease in financial assets at amortized cost Increase in investment in an associate and other investments Increase in investment properties Increase)/decrease in assets acquired in satisfaction of loans Increase in property and equipment Proceeds from sale of assets acquired in satisfaction of loans Net cash provided by investing activities 96,725, Cash flows from financing activities: Decrease in certificates of deposit Decrease)/increase in borrowings from banks and financial institutions Dividends paid Net cash used in)/provided by financing activities Net increase in cash and cash equivalents Cash and cash equivalents Beginning of period Cash and cash equivalents End of period ,216) 8,900,469 18,507,017 53,006,721 7,467, , , ,171 3,406,590) 107,809,653) 3,836,389) 1,805,941) 3,627, ,062) 2,373,755) 7,758, , ,510,928) 17,870,995) 150,709,255) 764,113,046) 6,963,983 10,300,570) 205,072, ,287) 1,968,501, ,424,307) 505,423) 7,739, ,466) 428,769,529 8,587,584) 734,817, ,783) 2,082,469) 43,921,536) 3,277, ,255,579 94,477) 6,526,460) 56,909,787) 63,530,724) 1,048,494,384 1,723,482,854 2,771,977,238 89,474,630 2,163,860) 8,044, ,747 42,550,186 3,494, ,347 5,263,576) 212,000 9,045 71,189,324) 316,952 2,766,305) 7,527,273 34,457) 3,282,796) 5,939,839) 7,849,517) 687,214,458) 49,928,612 77,448,702) 283,183,577 75,106,650) 45,956,258 59,387,055 34,898,660) 2,950,037) 3,231,206) 432,968,919 1,637,106) 8,447,137) 2,851,133 36,850,742 63,662, ,412,860) 566,205,478 1,485,252) 4,505,918) 73,244,993 9,344,995) 8,420, ,783,651 94,478) 69,207,568 56,908,125) 12,204, ,839,358 1,572,763,823 2,040,603,181 THE ACCOMPANYING NOTES 1 TO 20 FORM AN INTEGRAL PART OF THE INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION 7 F10

126 BANKMED S.A.L. NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION YEAR ENDED JUNE 30, GENERAL INFORMATION BankMed S.A.L. the Bank ) is a Lebanese joint stock company, registered under Number 5261 in the Lebanese Commercial Register on August 13, 1950 and under Number 22 in the list of banks published by the Central Bank of Lebanon. The principal activities of the Bank and its subsidiaries the Group) consist of conventional commercial and private banking through a network of 59 branches in Lebanon in addition to a branch in Cyprus, a subsidiary in Switzerland and a subsidiary in Turkey with 27 branches). BankMed S.A.L. is wholly owned by GroupMed Holding) S.A.L. and its headquarters are located in Clemenceau, Beirut, Lebanon ADOPTION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS IFRSs) Standards and Interpretations effective for the current period The following new and revised standards and interpretations have been applied in the current year with no material impact on the disclosures and amounts reported for the current and prior years, but may affect the accounting for future transactions or arrangements: IAS 12 Deferred Tax: Recovery of Underlying Assets Amendment) This amendment to IAS 12 includes a rebuttable presumption that the carrying amount of investment property measured using the fair value model in IAS 40 will be recovered through sale and, accordingly, that any related deferred tax should be measured on a sale basis. The presumption is rebutted if the investment property is depreciable and it is held within a business model whose objective is to consume substantially all of the economic benefits in the investment property over time, rather than through sale. Specifically, IAS 12 will require that deferred tax arising from a nondepreciable asset measured using the revaluation model in IAS 16 should always reflect the tax consequences of recovering the carrying amount of the underlying asset through sale. IFRS 7 Disclosures Transfers of financial assets Amendment) The IASB issued an amendment to IFRS 7 that enhances disclosures for financial assets. These disclosures relate to assets transferred as defined under IAS 39). If the assets transferred are not derecognized entirely in the financial statements, an entity has to disclose information that enables users of financial statements to understand the relationship between those assets which are not derecognized and their associated liabilities. If those assets are derecognised entirely, but the entity retains a continuing involvement, disclosures have to be provided that enable users of financial statements to evaluate the nature of, and risks associated with, the entity s continuing involvement in those derecognized assets. 8 F11

127 2.2 Standards and Interpretations in issue but not yet effective The Group has not applied the following new standards, amendments and interpretations that have been issued but not yet effective: Effective for Annual Periods Beginning on or After IFRS 10 Consolidated Financial Statements* replaces the parts of IAS 27 Consolidated and Separate Financial Statements that deal with consolidated financial statements, and SIC 12 Consolidation Special Purpose Entities. IFRS 10 uses control as the single basis for consolidation, irrespective of the nature of the investee and includes a new definition of control. IFRS 10 requires retrospective application subject to certain transitional provisions providing an alternative treatment in certain circumstances. IAS 27 Consolidated and Separate Financial Statements* and IAS 28 Investments in Associates and Joint Ventures* have been amended for the issuance of IFRS 10. January 1, 2013 IFRS 11 Joint Arrangements* replaces IAS 31 Interests in Joint Ventures and SIC13 Jointly Controlled Entities Non monetary Contributions by Venturers. IFRS 11 establishes two types of joint arrangements: Joint operations and joint ventures. The two types of joint arrangements are distinguished by the rights and obligations of those parties to the joint arrangement. In addition, joint ventures under IFRS 11 are required to be accounted for using the equity method of accounting, whereas jointly controlled entities under IAS 31 can be accounted for using the equity method of accounting or proportionate. IAS 28 Investments in Associates and Joint Ventures has been amended for the issuance of IFRS 11. January 1, F12

128 Effective for Annual Periods Beginning on or After IFRS 12 Disclosure of Interests in Other Entities* is a disclosure standard and is applicable to entities that have interests in subsidiaries, joint arrangements, associates and/or unconsolidated structured entities. In general, the disclosure requirements in IFRS 12 are more extensive than those in the current standards. IFRS 13 Fair Value Measurement defines fair value, establishes a single framework for measuring fair value, and requires disclosures about fair value measurement. The scope of IFRS 13 is broad and applies to both financial and nonfinancial items for which other IFRSs require or permit fair value measurement and disclosures about fair value measurements, except in specified circumstances. In general, the disclosure requirements in IFRS 13 are more extensive than those required in the current standards. Amendments to IAS 1 Presentation of Other Comprehensive Income. The amendments retain the option to present profit or loss and other comprehensive income in either a single statement or in two separate statements. However, items of other comprehensive income are required to be grouped into those that will and will not subsequently be reclassified to profit or loss with tax on items of other comprehensive income required to be allocated on the same basis. Amendments to IAS 19 Employee Benefits eliminate the corridor approach and therefore require an entity to recognize changes in defined benefit plan obligations and plan assets when they occur. Amendments to IFRS 7 Financial Instruments: Disclosures enhancing disclosures about offsetting of financial assets and liabilities. Amendments to IAS 32 Financial Instruments: Presentation relating to application guidance on the offsetting of financial assets and financial liabilities. 10 F13 January 1, 2013 January 1, 2013 July 1, 2012 January 1, 2013 January 1, 2013 January 1, 2013

129 IAS 28 Investment in Associates and Joint Ventures as revised in 2011): As a consequence of the new IFRS 11 and 12, IAS 28 has been renamed IAS 28 Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates. The amendment becomes effective for annual periods beginning on or after January 1, * In May 2011, a package of five Standards on consolidation, joint arrangements, associates and disclosures was issued, consisting of IFRS 10, IFRS 11, IFRS 12, IAS 27 as revised in 2011) and IAS 28 as revised in 2011). These five standards are effective for annual periods beginning on or after 1 January Earlier application is permitted provided that all of these five standards are applied early at the same time. The directors anticipate that the adoption of the above Standards and Interpretation will have no material impact on the financial statements of the Group in the period of initial application, except for IFRS 13 which may affect the amounts reported in the financial statements and result in more extensive disclosures in the financial statements. 3. SIGNIFICANT ACCOUNTING POLICIES A. Statement of Compliance: The interim condensed consolidated financial information for the sixmonths period ended June 30, 2012 has been prepared in accordance with IAS 34 Interim Financial Reporting. The interim condensed consolidated financial information do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group s annual financial statements for the year ended December 31, The accounting policies adopted in the preparation of the interim condensed consolidated financial information are consistent with the accounting policies adopted in the preparation of the annual consolidated financial statements for the year ended December 31,2011, except for the adoption of new standard and interpretations described in note 2, as applicable: B. Basis of Preparation and Measurement: The consolidated financial statements have been prepared on the historical cost basis except for the following: Land and buildings acquired prior to 1993 are measured at their revalued amounts based on market prices prevailing during 1996, to compensate for the effect of the hyperinflationary economy prevailing in the earlier years. Financial assets and liabilities at fair value through profit and loss are measured at fair value. Equity securities at fair value through other comprehensive income are measured at fair value. Derivative financial instruments are measured at fair value. Assets and liabilities are grouped according to their nature and are presented in an approximate order that reflects their relative liquidity. The principal accounting policies adopted are set out below: 11 F14

130 C. Basis of Consolidation: The interim condensed consolidated financial information of BankMed S.A.L. include the financial statements of the Bank as at June 30, 2012 and entities in which the Bank has a controlling financial interest. 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 Bank and its subsidiaries the Group ) have the same financial reporting year. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. Where necessary, adjustments are made to the financial statements of the subsidiaries and associates to bring their accounting policies in line with those used by other entities of the Group. Income and expenses of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition and up to the effective date of disposal, as appropriate. The consolidated subsidiaries as at June 30, 2012 comprise: Country of Incorporation Banks and Financial Institutions: Saudi Lebanese Bank S.A.L. MedInvestment Bank S.A.L. BankMed Suisse S.A. Allied Business Investment Corporation S.A.L. under liquidation) Turkland Bank A.S. Saudi Med Investment Company Percentage of Ownership % Date of Acquisition or Incorporation Business Activity Lebanon Lebanon Switzerland January 1, 1995 January 24, 1996 August 31, 2001 Commercial Banking Investment Banking Private Banking Lebanon Turkey Saudi Arabia November 30, 2001 January 28, 2007 May 21, 2007 Lebanon Lebanon November 27, 2007 May 19, 2011 Financial and Fund Management Commercial Banking Corporate Finance Advisory and asset management Financial Institution Financial Institution Lebanon Lebanon Lebanon Lebanon Lebanon Lebanon Lebanon Lebanon Lebanon Lebanon Lebanon Lebanon Lebanon Lebanon Lebanon Lebanon December 1, 1995 December 1, 1995 December 1, 1995 January 16, 1996 February 27, 2004 February 27, 2004 January 19, 2010 February 23, 2011 February 23, 2011 April 18, 2011 October 11, 2011 October 11, 2011 October 11, 2011 November 14, 2011 May 28, 2012 May 4, 2012 Owns Bank s Premises Owns Bank s Premises Owns Bank s Premises Owns Bank s Premises Owns Bank s Premises Owns Bank s Premises Owns Bank s Premises Real Estate Real Estate Real Estate Real Estate Real Estate Real Estate Real Estate Real Estate Real Estate Lebanon 100 May 20, 2003 Insurance Brokerage BVI Lebanon January 1, 2003 December 24, 1996 Med Properties Management S.A.L. Med Properties S.A.L. Holding Lebanon Lebanon January 15, 2009 April 23, 2008 Cynvest S.A.L. Holding Lebanon 100 December 23, 2008 Any activity outside of BVI Investment in shares and management of companies Real estate management services Investment in shares and management of companies Investment in shares and management of companies GroupMed Advisory Services Limited Formerly Interstar Investments Limited) Cyprus 100 January 26, 2008 Med Securities Investment Company S.A.L. Emkan Finance S.A.L. Real Estate: Al Hana S.A.L. Al Jinan S.A.L. Al Shams S.A.L. Centre Méditerranée S.A.L. Al Hosn Real Estate II S.A.L. Al Hosn Real Estate III S.A.L. 146 Saifi S.A.L. Al Narjess Real Estate S.A.L. Al Anshita Real Estate S.A.L. Al Bani S.A.L. Al Hosn Real Estate S.A.L. Anbar Real Estate S.A.L. Sakhret Bahr Real Estate S.A.L. Laura Real Estate S.A.L. Al Zomorodah Real Estate S.A.L 528 Real Estate S.A.L Insurance: GroupMed Insurance Brokers S.A.L. GMIB) Other: Medfinance Holding Ltd. Méditerranée Investment Holding 12 F15 Investment in shares and management of companies

131 All intragroup transactions, balances, income and expenses except for foreign currency transaction gains or loss) are eliminated on consolidation. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. Changes in the Group's ownership interests in subsidiaries that do not result in the Group losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Group's interests and the noncontrolling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the noncontrolling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to owners of the Bank. Upon the loss of control, the Group derecognizes the assets and liabilities of the subsidiary, any noncontrolling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control is recognized in profit or loss. If the Group retains any interest in the previous subsidiary, then such interest is measured at fair value at the date that control is lost. 4. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY In the application of the Group s accounting policies, which are described in note 3, the directors are required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The estimates and underlying assumptions made by the Group s management for the preparation of the interim condensed consolidated financial information were consistent with those used in the preparation of the consolidated financial statements as at and for the year ended December 31, F16

132 5. CLASSIFICATION OF FINANCIAL ASSETS ON THE DATE OF INITIAL APPLICATION OF IFRS 9: Effective January 1, 2011, the Group has early adopted IFRS 9 Financial Instruments. Below is a summary of the transitional classification and measurement adjustments to Group s investments securities on the date of initial application of IFRS 9. All other financial assets were classified as loans and receivables under IAS39 and have been classified at amortized cost under IFRS 9: Description of financial assets Previous Classification under Classification/designation IAS 39 IFRS 9 Quoted equity securities Available for sale/financial Financial assets at fair value assets designated at fair value through other comprehensive upon initial recognition income/financial assets at fair value through profit or loss Available for sale Financial assets at fair value through other comprehensive income Available for sale Financial assets at fair value through other comprehensive income Available for sale Financial assets at fair value through other comprehensive income Available for sale Financial assets at fair value through other comprehensive income Financial assets at amortized cost Financial assets designated at fair value through profit and loss upon initial recognition / Available for sale / Held to Maturity Available for sale / Held to Financial assets at amortized cost Maturity Available for sale Financial assets at amortized cost Unquoted equity securities Cumulative preferred shares issued by a Lebanese Bank Convertible preferred shares issued by a Lebanese Bank Nonconvertible preferred issued by a Lebanese Bank shares Lebanese Government bonds Certificates of Deposit issued by the Central Bank of Lebanon Certificates of deposit issued by banks Corporate debt securities Foreign government bonds Loans and advances Due from banks institutions Loans to banks and Available for sale/loans and receivables under Financial assets at amortized cost/financial assets at fair value through profit or loss Financial assets at amortized cost/financial assets at fair value through profit or loss Available for sale / Held to Maturity/Financial assets designated at fair value upon initial recognition Loans and receivables carried at Financial assets at amortized cost amortized cost) financial Loans and receivables carried at Financial assets at amortized cost amortized cost) Loans and receivables carried at Financial assets at amortized cost amortized cost 14 F17

133 Impact of early adoption of IFRS 9 The impact of the early adoption on the opening retained earnings, cumulative change in fair value of financial assets and noncontrolling interest as at January 1, 2011 was as follows: Carrying Amount as at December 31,2010 Carrying Amount as at January 1, 2011 upon Adoption of IFRS 9 Impact of early Adoption Retained earnings 238,530, ,788,973 Cumulative change in fair value of financial assets 354,569,002 83,397, ,171,890) Noncontrolling interest 109,220, ,467,277 3,752,937) Carrying Value Equity securities from available for sale to financial assets at fair value through other comprehensive income 5,258,387 Cumulative Change in Fair Value 697,592,374 79,782,629 Equity securities from available for sale to financial assets at fair value through profit or loss 1,374,302 Debt securities from availableforsale to financial assets at fair value through profit or loss 253,526,980 6,055,382 4,754,691, ,913, ,200,213 37,687,500 Debt securities from available for sale to financial assets at amortized cost Debt securities from heldtomaturity securities to financial assets at amortized cost Debt securities from loans and receivables to financial assets at fair value through profit or loss 15 F18 796,995)

134 6. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS Financial assets at fair value through profit or loss consist of the following: Unaudited) June 30, 2012 Foreign Currency Base Accounts Debt securities issued by banks Debt securities issued by companies Credit linked notes issued by banks Lebanese Government bonds Other foreign government bonds Quoted equity securities Unquoted equity securities Accrued interest receivable 219,782,948 63,526,240 58,848,278 9,010, , ,838 14,487,947 4,626, ,166, F19 December 31, 2011 Foreign Currency Base Accounts 191,226,375 79,678,573 57,471,930 16,405, ,454 14,256,999 4,804, ,643,216

135 7. INVESTMENT SECURITIES LBP Financial assets at fair value through other comprehensive income A) Financial assets measured at amortized cost B) Accrued interest receivable on financial assets at amortized cost Unaudited) June 30, 2012 C/V of F/Cy Total LBP December 31, 2011 C/V of F/Cy Total 12,405,726 12,405, ,071, ,071, ,477, ,477,673 12,305,072 12,305, ,481, ,481, ,786, ,786,815 2,017,622,848 2,154,349,225 4,171,972,073 2,625,164,444 2,164,528,468 4,789,692,912 29,938,565 2,047,561,413 38,820,268 2,193,169,493 68,758,833 4,240,730,906 42,568,083 2,667,732,527 35,477,397 2,200,005,865 78,045,480 4,867,738,392 2,059,967,139 2,692,241,440 4,752,208,579 2,680,037,599 2,738,487,608 5,418,525, F20

136 A. Financial assets at fair value through other comprehensive income Unaudited) June 30, 2012 LBP Base Accounts Quoted equity securities Unquoted equity securities Convertible preferred shares issued by a Lebanese bank Noncumulative preferred shares issued by a Lebanese bank Deferred tax Amortized Cost Fair Value 11,321,086 12,405,726 11,321,086 F/Cy Base Accounts Cumulative Change in Fair Value 1,084,640 Amortized Cost Fair Value Allowance for Impairment Carrying Value Cumulative Change in Fair Value 540,803,082 8,652, ,847,947 8,558, ,740,915 8,558,689 3,780,056 3,867,762 37,687, ,923,388 37,904, ,178,979 12,405,726 1,084, ,696) 921, ,032) 107,032) 3,867,762 37,904, ,071,947 87, F21 92,062,167) 94,061) 217,081 91,851,441) 10,149,451 81,701,990)

137 December 31, 2011 LBP Base Accounts Quoted equity securities Unquoted equity securities Convertible preferred shares issued by a Lebanese bank Noncumulative preferred shares issued by a Lebanese bank Deferred tax Amortized Cost Fair Value 11,220,432 12,305,072 11,220,432 F/Cy Base Accounts Cumulative Change in Fair Value 1,084,640 Amortized Cost Fair Value Allowance for Impairment Carrying Value Cumulative Change in Fair Value 540,388,367 8,498, ,607,688 8,420, ,500,656 8,420,143 3,780,056 3,855,657 33,165, ,831,952 29,705, ,588,775 12,305,072 1,084, ,710) 921, ,032) 107,032) 3,855,657 29,705, ,481,743 75, F22 43,887,711) 78,386) 3,459,713) 47,350,209) 3,997,199 43,353,010)

138 B. Financial assets at amortized cost Unaudited) June 30, 2012 LBP Base Accounts Amortized Cost Lebanese Government bonds Certificates of deposit issued by the Central Bank of Lebanon Certificates of deposit issued by banks Corporate debt securities Other foreign government bonds Fair Value F/Cy Base Accounts Accrued Interest Receivable Amortized Cost Fair Value Accrued Interest Receivable 834,691, ,669,049 10,659,677 1,114,309,414 1,189,651,342 24,971,722 1,182,931,521 2,017,622,848 1,240,970,162 2,082,639,211 19,278,888 29,938, ,381,729 15,075,000 22,637, ,945,981 2,154,349, ,795,458 15,075,000 22,540, ,847,305 2,217,909,651 12,888,450 68, ,022 38,820,268 December 31, 2011 LBP Base Accounts Amortized Cost Lebanese Government bonds Certificates of deposit issued by the Central Bank of Lebanon Certificates of deposit issued by banks Corporate debt securities Other foreign government bonds Fair Value F/Cy Base Accounts Accrued Interest Receivable Amortized Cost Fair Value Accrued Interest Receivable 710,273, ,089,873 10,951,592 1,118,938,229 1,194,054,636 25,017,727 1,914,890,995 2,625,164,444 2,081,239,088 2,807,328,961 31,616,491 42,568, ,129,725 15,075,000 22,575, ,809,942 2,164,528, ,040,697 15,075,000 22,043, ,234,312 2,239,447,662 9,512,793 55, ,045 35,477, F23

139 Lebanese Government bonds include as at June 30, 2012, securities in foreign currencies pledged against a long term borrowing granted to the Group, and a soft loan from the Central Bank of Lebanon reflected under Borrowings from banks and financial institutions in addition to customers deposits reflected under customers deposits at amortized cost in the consolidated statement of financial position Notes 8 and 20). Other foreign government bonds include as at June 30, 2012, securities pledged against bank borrowings under sale and repurchase agreement, exchange transactions with the Central Bank of Turkey, open market operations and interbank money market transactions Note 20). Prior to the year 2011, the Group exchanged with the Central Bank of Lebanon Lebanese Government Eurobonds denominated in US Dollars with an aggregate nominal value of LBP404billion USD267.9million) against certificates of deposit in Lebanese Pound issued by the Central Bank of Lebanon. The difference resulting from the exchange in the amount of LBP80.55billion was deferred and amortized over the life of the new certificates of deposit maturing in 2014 as a yield enhancement. During the first half of 2012, the Group sold to the Central Bank of Lebanon certificates of deposit denominated in LBP with an aggregate nominal value of LBP750billion, of which LBP300billion originated from the exchange transaction referred to above. This transaction resulted in a gain on derecognition in the amount of LBP108billion including LBP23billion deferred from the previous transaction. The Group invested the total consideration received in a long term deposit with the Central Bank of Lebanon amounting to LBP900billion maturing in Income recognized from previous exchange transactions for the period ended June 30, 2012 amounted to LBP2.19billion and is recorded under interest income from financial assets at amortized cost in the consolidated income statement LBP7.2billion for the period ended June 30, 2011). As at June 30, 2012, deferred gain amounted to LBP21.12billion LBP46.81billion as at December 31, 2011). During 2012, the Group exchanged with the Central Bank of Lebanon certificates of deposit maturing in 2012 denominated in US Dollars with an aggregate nominal value of LBP261billion USD173.25million) against certificates of deposit issued by the Central Bank of Lebanon maturing in 2017 and The difference resulting from the exchange in the amount of LBP11.34billion was deferred and amortized over the life of the new certificates of deposit as part of the effective interest rate. Income recognized for the period ended June 30, 2012 amounted to LBP3.56billion and is recorded under interest income from financial assets at amortized cost in the consolidated income statement note 12). As at June 30, 2012, deferred gain amounted to LBP7.78billion. During the first half of the year 2011 and to maintain and enhance its liquidity position, the Group sold certificates of deposit maturing on April 25, 2015 of nominal value USD200million and recorded the resulting gain on sale in the amount of LBP66billion USD44million) under Gain from derecognition of financial assets measured at amortized cost in the consolidated income statement. F24

140 8. CUSTOMERS DEPOSITS AT AMORTIZED COST Deposits from customers at amortized cost at June 30, 2012 include coded deposit accounts in the aggregate amount of LBP8.7billion LBP8.6billion as at December 31, 2011). These accounts are subject to the provisions of Article 3 of the Banking Secrecy Law dated September 3, 1956 which provides that the Bank s management, in the normal course of business, cannot reveal the identities of these depositors to third parties. Deposits from customers at amortized cost include at June 30, 2012 deposits linked to Lebanese Government bonds in the aggregate of LBP263.55billion LBP268.15billion as at December 31, 2011). These bonds are owned by the Group and are classified as financial assets at amortized cost. Deposits from customers at amortized cost at June 30, 2012 include deposits received from nonresident banks and financial institutions relating to their fiduciary clients for a total amount of LBP1,997.05billion LBP635.73billion as at December 31, 2011) out of which LBP1,242.53billion are from a related company, a related bank and a subsidiary bank LBP387.65billion as at December 31, 2011). 9. OTHER LIABILITIES Unaudited) June 30, 2012 Accrued income tax and other taxes Withheld taxes on staff benefits and payments to nonresidents Withheld tax on interest Deferred tax liability Due to the National Social Security Fund Checks and incoming payment orders in course of settlement Blocked capital subscriptions for companies under incorporation Accrued expenses Financial guarantee contracts issued Fair value of derivatives Payable to personnel and directors Unearned revenues Escrow account for the issuance of preferred shares Sundry accounts payable 22 F25 December 31, ,481,801 25,022,635 3,535,462 2,717,380 9,751,883 1,725,295 5,518,315 2,673,708 9,509,355 1,583,632 43,958,734 23,775,006 2,659,521 42,733,535 3,740,212 2,069,097 75,754 13,094, ,382,925 95,576, ,502, ,605 42,414,472 2,730,713 2,059,758 62,512 10,748,421 75,250, ,187,434

141 The tax returns for the years 2008 to 2012 of BankMed S.A.L. and most of its subsidiaries remain subject to examination and final tax assessment by the tax authorities. Management does not expect any material additional tax liability as a result of the expected tax reviews. In 2012, BankMed S.A.L. was subject to tax examination for the fiscal years 2006 and 2007 which resulted in additional tax liability in the amount of LBP1.53billion paid during 2012 and charged to the consolidated income statement. Escrow account for the issuance of preferred shares represent an interest bearing escrow account in connection with the issuance of preferred shares by the Group as approved by the Board of Directors on November 22, The issuance of the preferred shares is still subject to the approval of the Central Bank of Lebanon. Fair value of derivatives consists of the following: Unaudited) June 30, 2012 Fair value of currency option contracts Other 2,007,646 61,451 2,069,097 December 31, ,059,758 2,059,758 The negative fair value of currency options is related to call and put options entered into by the Group with its customers and backtoback with a nonresident bank. The offsetting positive fair value is recorded under Other assets. 10. SHARE CAPITAL The capital of the Group as at June 30, 2012 and December 31, 2011 consists of 62,000,000 shares of LBP10,000 par value each, issued and fully paid. On April 3, 2012, the ordinary shareholders general assembly approved the distribution of dividends in the amount of LBP45.23billion USD30million) to the ordinary shareholders. On March 31, 2011, the ordinary shareholders general assembly approved the distribution of dividends in the amount of LBP45.23billion USD30million) to the ordinary shareholders. The Group has set up a special foreign currency position to the extent of USD71.15million as of June 30, 2012 and December 31, 2011 as a hedge of capital within the limits authorized by local banking regulations. 23 F26

142 11. PREFERRED SHARES During 2009, the Group issued Noncumulative Perpetual Redeemable Series 1 Preferred Shares for an amount of LBP150.75billion USD100,000,000) in accordance with the decision of the extraordinary general assembly of shareholders in its meeting held on July 24, 2009 and after the approval of the Central Bank of Lebanon dated September 12, On April 3, 2012, the ordinary shareholders general assembly approved the distribution of dividends in the amount of LBP11.68billion USD7.75million) to the holders of the preferred shares. On March 31, 2011, the ordinary shareholders general assembly approved the distribution of dividends in the amount of LBP11.68billion USD7.75million) to the holders of the preferred shares. 12. INTEREST INCOME Unaudited) Sixmonth Period Ended June 30, Interest income from: Deposits with the central banks Deposits with banks and financial institutions Deposits with related party banks and financial institutions Financial assets at amortized cost Loans to banks Loans to related banks Loans and advances to customers Loans and advances to related parties Receivable from properties sold with deferred payment Interest recognized on impaired loans and advances to customers 24 F27 60,677,218 10,249, , ,129,219 1,704, , ,964,220 68,626,586 73,448 2,427, ,091,603 8,163,745 4,143, , ,950,319 5,184, , ,282,587 64,262,255 68,788 3,407, ,287,954

143 13. INTEREST EXPENSE Unaudited) Sixmonth Period Ended June 30, Interest expense on: Deposits from banks and financial institutions Deposits from related party banks and financial institutions Securities lent and repurchase agreements Customers deposits at amortized cost Related parties deposits at amortized cost Borrowings from banks and financial institutions Certificates of deposit Other ,925,826 1,859,846 3,271, ,083,641 45,619,502 5,389,451 17,512, , ,114,947 13,291,306 1,005,733 1,693, ,910,017 13,238,673 4,584,185 17,417,547 65, ,207,242 NET RESULTS ON FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS This caption consists of the following: Unaudited) Sixmonth Period Ended June 30, Interest income on assets held at fair value through profit or loss Change in fair value of assets at fair value through profit or loss Interest expense on customers accounts designated at fair value through profit or loss Fee income on customers accounts designated at fair value through profit or loss Change in fair value of customers deposits at fair value through profit or loss Interest expense on related parties' accounts designated at fair value through profit or loss Net interest on other instruments designated at fair value through profit or loss Dividends received on assets held at fair value through profit or loss Gain/loss) on sale of assets held at fair value through profit or loss 25 F28 8,261,729 8,564,193 3,836, , ,661) 577 5, ,110) 483,319 14,967) 142, ,274 60,949 73,350 3,406,590 15,561,600 9,045) 8,801,456

144 15. OTHER OPERATING INCOME This caption consists of the following: Unaudited) Sixmonth Period Ended June 30, Dividends from equity investment securities Income from associates at equity method Gain on disposal of property and equipment Foreign exchange gain Gain on sale of assets acquired in satisfaction of loans Other 16. 8,054,990 1,805, ,062 12,292,735 2,373,755 21,040,259 45,793,742 10,983,311 2,766,305 34,457 9,977,786 3,282,796 9,890,914 36,935,569 FINANCIAL INSTRUMENTS WITH OFFBALANCE SHEET RISKS Forward exchange contracts outstanding as of June 30, 2012 and December 31, 2011 represent positions held for customers' accounts and at their own risk. The Group entered into such instruments to serve the needs of customers, and these contracts are fully hedged by the Group. The forward exchange contracts outstanding as at June 30, 2012 include a forward transaction for the purchase of USD100million versus CHF87.10million USD100million versus CHF87.1million as at December 31, 2011). 26 F29

145 17. BALANCES / TRANSACTIONS WITH RELATED PARTIES In the ordinary course of its activities, the Group conducts transactions with related parties including shareholders, directors, subsidiaries and associates. Balances with related parties consist of the following: Unaudited) June 30, 2012 Balance Statement of Financial Position: Deposits with related banks and financial institutions Loans and advances to shareholders, directors and close family members Secured loans and advances Unsecured loans and advances Loans and advances to associated companies: Secured loans and advances Unsecured loans and advances Accrued interest on loans and advances to related parties Deposits from related banks and financial institutions Loans to related banks Deposits of shareholders, directors and other key management personnel and close family members Deposits of associated companies Accrued interest on related party deposits Receivable on properties sold with deferred payment Other liabilities Acceptances receivable Acceptances payable Financial Instruments with OffBalance Sheet Risk: Guarantees and standby letters of credit Documentary and commercial letters of credit Forward contracts: Currencies to be received Currencies to be delivered December 31, 2011 Balance 338,604,430 70,879, ,850,916 41, ,991, ,440,529 7,102,444 2,354,042 94,445,375 18,085, ,700,879 54, ,685 90,088,017 17,787, ,175,003 33,853,430 1,090,252,317 2,165,866,461 5,147,178 2,278,914 22,729,500 22,729,500 11,998,850 15,244,515 6,511, ,395) 517,985) 11,798, ,896, , ,745) 2,855,341 86,682, , ,232) Transactions with related parties are as follows: Unaudited) Sixmonth Period Ended June 30, Administrative expenses 16,778, F30 15,924,845

146 Interest income and interest expense from/to related parties are disclosed under notes 12 and 13. Interest rates charged on related parties balances outstanding are the same rates that would be charged in an arm s length transaction. 18. NOTES TO THE CASH FLOW STATEMENT Cash and cash equivalents for the purpose of the cash flow statement consist of the following: Unaudited) June 30, 2012 Cash Checks for collection Current accounts with central banks Time deposits with central banks Current accounts with banks and financial institutions Time deposits with banks and financial institutions Commercial papers Demand deposits from banks Time deposits from banks 95,589,739 41,483, ,059, ,827, ,725,238 1,914,624,128 15,075,000 18,828,825) 251,578,691) 2,771,977, ,338,121 48,233,273 88,974, ,307, ,920,959 1,249,918,434 45,203, ,829,170) 128,464,330) 2,040,603,181 December 31, Cash Checks for collection Current accounts with central banks Time deposits with central banks Current accounts with banks and financial institutions Time deposits with banks and financial institutions Demand deposits from banks Time deposits from banks 95,058, ,262,800 56,538,733 42,704,809 76,692,227 86,940, ,846, ,369, ,479, ,078, ,229,818 1,118,306,891 18,109,273) 49,867,440) 88,253,284) 74,032,655) 1,723,482,854 1,572,763,823 Time deposits with and from Central Banks and banks and financial institutions represent interbank placements and borrowings with an original term of 90 days or less. 28 F31

147 The following operating, investing and financing activities, which represent noncash items were excluded from the consolidated cash flow statement as follows: 19. a) Net decrease in change in fair value of financial assets at fair value through other comprehensive income and deferred tax asset in the amounts of LBP38.12billion and LBP6.15billion, respectively, against investment securities for the sixmonth period ended June 30, 2012 increase of LBP358.94billion and LBP46.57billion in fair value and deferred tax liability, respectively, against investment securities for the sixmonth period ended June 30, 2011). b) Increase in assets acquired in satisfaction of debts in the amount of LBP752million against loans and advances to customers for the sixmonth period ended June 30, 2012 LBP165.27billion for the sixmonth period ended June 30, 2011). c) Increase in deferred liability on income from associates of LBP243million against investments in associates and other investments for the sixmonth period ended June 30, 2012 increase in deferred liability on income from associates and increase in change in fair value on availableforsale securities in the amount of LBP307million, and LBP94million, respectively, for the period ended June 30, 2011). d) Increase in other assets in the amount of LBP1.87billion against a decrease in assets acquired in satisfaction of debts for the sixmonth period ended June 30, 2012 LBP95million for the sixmonth period ended June 30, 2011). e) Increase in financial assets at amortized cost, financial assets at fair value through other comprehensive income and financial assets at fair value through profit or loss in the amount of LBP5,569billion, LBP698billion and LBP255billion, respectively, against decrease in availableforsale investment securities and heldtomaturity investment securities in the amount of LBP5,786billion and LBP735billion, respectively for the sixmonth period ended June 30, f) Increase in retained earnings against decrease in change in fair value of availableforsale securities in the amount of LBP5.26billion for the sixmonth period ended June 30, ACQUISITIONS The Group acquired during the first half of the year 2012, 100% of the shares of a real estate company, Zumurouda Real Estate S.A.L, for an amount of USD1.79million LBP2.7billion) previously paid. The excess of the purchase price over the net asset value of the acquired interest in the amount of LBP1.5billion was recorded under Property and equipment in the consolidated statement of financial position as an adjustment to the fair value of the acquired real estate property. The acquisition of this subsidiary was approved by the Central Council of the Central Bank of Lebanon in year In addition, the Group acquired 100% of the shares of a real estate company, 528 Real Estate S.A.L, for an amount of USD17.51million LBP26.4billion) previously paid. The excess of the purchase price over the net asset value of the acquired interest in the amount of LBP19.9billion was recorded under Property and equipment in the consolidated statement of financial position as an adjustment to the fair value of the acquired real estate property. The acquisition of this subsidiary was approved by the Central Council of the Central Bank of Lebanon in F32

148 20. COLLATERAL GIVEN The carrying values of financial assets given as collateral are as follows as at June 30, 2012: Pledged Amount Lebanese government bonds at amortized cost Pledged deposits with banks and financial institutions Lebanese government bonds at amortized cost Other foreign government bonds at amortized cost 410,507,325 75,375,000 Long term borrowing 293,962,500 90,936, ,055,841 Soft loan Borrowing under sale and repurchase agreement Letters of guarantee Letter of credit Participation in letter of credit Customers deposits at amortized cost 90,936, ,055,841 Pledged deposits with banks and financial institutions 41,940,584 Lebanese Government bonds at amortized cost Corresponding Facilities Amount of Nature of Outstanding Facility Facilities 263,547,180 26,723, ,210 15,075, ,547,180 The carrying values of financial assets given as collateral are as follows as at December 31, 2011: Pledged Amount Lebanese Government bonds at amortized cost Pledged deposits with banks and financial institutions Lebanese Government bonds at amortized cost Other foreign government bonds at amortized cost 538,946,325 75,375,000 90,936,000 76,770,477 Pledge deposits with banks and financial institutions 24,692,850 Lebanese Government bonds at amortized cost 268,145, F33 Corresponding Facilities Amount of Nature of Outstanding Facility Facilities Long term borrowing 292,500,000 Soft loan 90,936,000 Borrowing under sale and repurchase agreement 76,770,477 Letter of guarantee 21,426,518 Letters of credit 1,597,844 Customers deposits 268,145,055 at amortized cost

149 In addition to the above, the Group has pledged Other government bonds at amortized cost with an aggregate value of LBP35.36billion LBP46.35billion as at December 31, 2011) in favor of the Central Bank of Turkey and the Turkish Stock Exchange against rights to perform and enter into money market and other open market operations. Deposits with banks and financial institutions include term placements in the amount of LBP75.7billion and current accounts in the amount of LBP146.6million as at June 30, 2012 LBP9.8billion and LBP1.04billion respectively and purchased checks in the amount of LBP1.36million as at December 31, 2011) with right of setoff against letters of guarantee amounting to LBP26.86billion LBP390million as at December 31, 201 in addition to acceptances payable amounting to LBP8.02billion and letters of credit amounting to LBP6.51billion). 31 F34

150 BANKMED S.A.L. CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS REPORT YEAR ENDED DECEMBER 31, 2011 F35

151 BANKMED S.A.L. CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS REPORT YEAR ENDED DECEMBER 31, 2011 TABLE OF CONTENTS Page Independent Auditors Report 12 Consolidated Financial Statements: Consolidated Statement of Financial Position 34 Consolidated Income Statement 5 Consolidated Statement of Comprehensive Income 6 Consolidated Statement of Changes in Equity 7 Consolidated Statement of Cash Flows 8 Notes to the Consolidated Financial Statements F

152 F37