Celebrating 10 Years in Canada

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2 Corporate Profile Habib Canadian Bank (HCB) was established in 2001 and is a wholly-owned subsidiary of Habib Bank AG Zurich. HCB is a Schedule II bank in Canada and a member of the Canadian Deposit Insurance Corporation (CDIC). The Bank brings with it extensive international banking knowledge and experience, and a comprehensive global network. HCB not only offers competitive products but also complements these products with unsurpassed service, which is a "Habib tradition." HCB specializes in International Trade, Commercial Lending, Commercial and Residential Mortgages and Consumer Banking Services, which include Chequing, Savings and Term Deposit Accounts, Internet Banking, Debit Cards and Bill Payment Systems. The Bank is a member of the global Habib network of banks and financial institutions. This network serves customers all over the world including North America, Europe, Africa, Middle East and South East Asia. HCB's competitive strength comes from its quality service and understanding the needs of its customers, from the small depositor to the larger corporate international institutions. This approach makes us truly YOUR BANK IN CANADA. Proud of our past Confident of our future Celebrating 10 Years in Canada 1

3 Chairman s Report I am happy to present the 10th Annual Report for Habib Canadian Bank for the year ended December together with the Auditors' Report. The Canadian economy, which had started to recover during the year slowed down again towards the end of The Bank of Canada in its December Issue of its Financial System review stressed that the global and Canadian economies are slowing down and warned that the risk of another global economic shock is rising and Canadians may not be prepared for it. The Bank said the main risk is the growing seriousness of Europe's government debt crisis. Another threat is the unwillingness of countries to take action to reduce imbalances in exports and imports between countries. Canadians won't be spared another shock, the bank said, because during the current period of tough economic times, they have continued to take on debt. Household debt has risen to 145 per cent of disposable income as Canadians have taken advantage of super-low interest rates to purchase homes and other consumer items on credit. The central bank has raised its benchmark lending rate three times this year, by 25 basis points each in June, July and September. Since the last announcement in October, the bank has left rates unchanged as Canada's growth slowed. If interest rates rise, or employment falls, many Canadians could find themselves in over their heads, the bank's review said. Canada's real gross domestic product (GDP) rose 0.8% in the fourth quarter (annualized at 3.3 percent), led by exports, with a 0.4% gain from the previous quarter. Final domestic demand advanced 1.2%. Businesses reduced inventories by $5 billion in the fourth quarter, after strong build-ups in the two previous quarters. Business investment in plant and equipment expanded for the fourth consecutive quarter, while investment in housing fell for the second time in a row. All major industrial sectors, with the exception of manufacturing, increased their output in the fourth quarter. Service-producing industries increased 0.9% while goods production increased 0.5%. The largest contributing sector was mining and oil and gas extraction. The public sector (education, health services and public administration combined), wholesale and retail trade, real estate and construction also contributed to the overall increase. Manufacturing declined following five consecutive quarterly increases. The Canadian dollar has continued to get stronger and it seems that this trend will continue into Canada, like other countries, slashed interest rates to nearly zero as the recession hit in While the central bank nudged rates up three times this year since June, borrowing costs remain very low at only 1 percent. Experts believe the central bank will resume rate hikes in the middle of 2011, and push up the benchmark overnight rate four times next year to reach 2 percent. The divergence in monetary policy followed by Canada and United States will likely support the Canadian dollar as it rises through parity with the U.S. dollar in It has hovered near the one-to-one level for many months, and pushed through briefly a handful of times this year. A bullish outlook for commodities should also help support the Canadian dollar as demand for resources, led by Brazil, Russia, India and China, will remain strong next year, the outlook for precious metals is also expected to be robust. In spite of the economic slowdown, by the grace of God, Habib Canadian Bank had an acceptable year. All areas of operation performed well throughout the year thus minimizing the effects of the economic slowdown. The deposits increased by 15 percent to $120.6 million while loans increased to $46.8 million and income closed at $281,000. The Bank continues to follow the traditional policy of our parent Bank by maintaining high liquidity and a conservative and well-secured approach to lending. In 2011 the bank will celebrate its 10 years of existence in Canada and will plan a series of events during the year to commemorate this milestone. I would like to thank our clients for their continued patronage and loyalty, the staff for their dedication and commitment and my fellow Board members for their valuable advice throughout the year. Muhammad Habib Chairman 2

4 KPMG LLP Chartered Accountants Bay Adelaide Centre 333 Bay Street Suite 4600 Toronto ON M5H 2S5 Canada Telephone (416) Fax (416) Internet To the Shareholder of Habib Canadian Bank We have audited the accompanying financial statements of Habib Canadian Bank, which comprise the balance sheet as at December 31, 2010, the statements of operations and comprehensive income, changes in shareholder's equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion INDEPENDENT AUDITORS' REPORT In our opinion, the financial statements present fairly, in all material respects, the financial position of Habib Canadian Bank as at December 31, 2010, and its results of operations and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles. Chartered Accountants, Licensed Public Accountants March 15, 2011 Toronto, Canada 3

5 Balance Sheet (In thousands of Canadian dollars) December 31, 2010, with comparative figures for 2009 Assets Cash resources: Cash Interest-bearing deposits with banks Loans (notes 4 and 5) Other: Customers' liability under acceptances Derivatives (note 14) Office equipment and leasehold improvements (note 6) Future tax assets (note 8) Other assets $ 267 $ ,895 74,680 90,162 74,867 46,794 45, $ 137,774 $121,220 Liabilities and Shareholder's Equity Liabilities: Deposits (note 7): Individuals Businesses Deposit-taking institutions (note 10) Other: Acceptances Derivatives (note 14) Other liabilities $ 56,755 $ 41,717 23,589 24,707 40,340 38, , , , Shareholder's equity: Capital stock: Authorized: Unlimited common shares, no par value Issued and fully paid: 1,500,000 common shares 15,000 15,000 Retained earnings 1, ,047 15,854 Commitments and contingent liabilities (note 11) $ 137,774 $121,220 See accompanying notes to financial statements. On behalf of the Board: Director Director 4

6 Statement of Operations and Comprehensive Income (In thousands of Canadian dollars) Year ended December 31, 2010, with comparative figures for 2009 Interest income: Interest-bearing deposits with banks $ 327 $ 170 Loans 1,943 2,141 2,270 2,311 Interest expense: Deposits Net interest income after recovery of credit losses 1,766 1,870 Other income 1,826 1,844 Net interest and other income 3,592 3,714 Non-interest expenses: Salaries and staff benefits 1,899 1,843 Premises and equipment, including amortization Other 1,043 1,056 3,311 3,275 Income before income taxes Income taxes (note 8) Net income and comprehensive income for the year $ 193 $ 285 See accompanying notes to financial statements. 5

7 Statement of Changes in Shareholder's Equity (In thousands of Canadian dollars) Year ended December 31, 2010, with comparative figures for 2009 Capital stock, beginning and end of year $ 15,000 $ 15,000 Retained earnings, beginning of year $ 854 $ 569 Net income for the year Retained earnings, end of year $ 1,047 $ 854 See accompanying notes to financial statements. 6

8 Statement of Cash Flows (In thousands of Canadian dollars) Year ended December 31, 2010, with comparative figures for 2009 Cash flows from operating activities: Net income for the year $ 193 $ 285 Adjustments to determine net cash provided by operating activities: Write-off of office equipment and leasehold improvements 2 Amortization Change in other items, net (126) Cash flows from financing activities: Deposits, net of withdrawals 16,184 32,445 Cash flows from (used in) investing activities: Loans, net of repayments (1,011) 10,128 Interest-bearing deposits with banks (15,215) (43,175) Purchase of office equipment and leasehold improvements, net (90) (8) (16,316) (33,055) Increase (decrease) in cash 80 (125) Cash, beginning of year Cash, end of year $ 267 $ 187 Supplemental cash flow information: Interest paid $ 415 $ 429 Income taxes paid See accompanying notes to financial statements. 7

9 Notes to Financial Statements (In thousands of Canadian dollars) Year ended December 31, 2010 Habib Canadian Bank (the "Bank") is a wholly owned subsidiary of Habib Bank AG Zurich, Switzerland (the "Parent"), and is licensed to operate as a bank in Canada with full banking powers under the Bank Act. The Bank was incorporated on April 5, 2000 and commenced operations on March 22, Significant accounting policies: These financial statements have been prepared in accordance with Section 308(4) of the Bank Act which states that, except as otherwise specified by the Office of the Superintendent of Financial Institutions Canada (the "OSFI" or "Superintendent"), the financial statements are to be prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). The significant accounting policies used in the preparation of these financial statements, including the accounting requirements of the Superintendent, are summarized below. These accounting policies conform, in all material respects, to Canadian GAAP. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenue and expenses during the year. Actual results could differ from those estimates as additional information becomes available in the future. (a) Loans: Loans are initially measured at fair value plus incremental direct transaction costs and subsequently remeasured at their amortized cost (net of an allowance for credit losses) using the effective interest method. Interest income is accounted for on the accrual basis, except on loans classified as impaired. A loan is classified as impaired when, in management's opinion, there has been deterioration in credit quality to the extent that there is no longer reasonable assurance as to the timely collection of the full amount of principal and interest. Loans where interest or principal is contractually past due 90 days are recognized as impaired, unless management determines that the loan is fully secured, in the process of collection and the collection efforts are reasonably expected to result in either repayment of the loan or restoring it to a current status within 180 days from the date the payment has become contractually in arrears. All loans are classified as impaired when interest or principal is past due 180 days, except for loans guaranteed or insured by the Canadian government, the provinces or a Canadian government agency, which are classified as impaired when interest or principal is contractually 365 days in arrears. When a loan is classified as impaired, recognition of interest in accordance with the terms of the original loan agreement ceases. Subsequent payments (interest or principal) received on an impaired loan are recorded as a reduction of the recorded investment in the loan. Loans are generally returned to accrual status when the timely collection of both principal and interest is reasonably assured and all delinquent principal and interest payments are brought current. Loan origination fees, including loan restructuring or renegotiation fees, are considered to be adjustments to loan yield and are deferred and amortized to interest income over the term of the loan. Commitment fees are treated on the same basis if there is reasonable expectation that the commitment will be called upon and will result in a loan; otherwise, the fees are deferred and amortized to non-interest income over the term of the commitment. Other fees and commission income, including account servicing fees, investment management fees and sales commissions, are recognized as the services are performed. (b) Allowance for credit losses: The Bank maintains a balance in the allowance for credit losses which is considered adequate to absorb all potential credit-related losses in its portfolio of balance sheet items, including interest-bearing deposits with banks, loans, 8

10 1. Significant accounting policies (continued): derivatives, acceptances and other credit-related contingent liabilities, such as letters of credit and guarantees. The allowance for credit losses consists of general (collective) allowance and specific (individual) allowance for impaired credits. The general allowance is established to absorb incurred credit losses on the portfolio, for which losses cannot yet be determined on an item-by-item basis. Specific allowances are determined on an item-by-item basis and represent the amount required to reduce the carrying value of an impaired loan to its estimated realizable value. The allowance for credit losses, which is charged to the statement of operations, represents the credit loss experience for the year and is added to the allowance for credit losses to bring the allowance to a level which management considers adequate to cover credit-related losses in its portfolio of balance sheet items. (c) Office equipment and leasehold improvements: Office equipment is carried at cost less accumulated amortization. Amortization is calculated using rates ranging from 15% to 25% that allocate the cost of the assets over their estimated useful lives and, in the case of leasehold improvements, over the aggregate term of the lease. (d) Foreign exchange: Assets and liabilities denominated in foreign currencies are translated into Canadian dollars at rates prevailing at year end. Income and expense items denominated in foreign currencies are translated into Canadian dollars at the approximate average exchange rates prevailing throughout the year. Realized and unrealized foreign exchange gains and losses are included in other income. (e) Income taxes: The Bank uses the asset and liability method of accounting for income taxes. Under the asset and liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the year that enactment or substantive enactment occurs. (f) Acceptances: Acceptances comprise undertakings by the Bank to pay bills of exchange drawn on customers. The Bank expects most acceptances to be settled simultaneously with the reimbursement from the customers. The Bank's potential liability under acceptances is reported as a liability in the balance sheet. The Bank's recourse against the customer in the event of a call on any of these commitments is reported as an offsetting asset of the same amount. Fees earned are reported as other income. (g) Derivative instruments: Derivative instruments are financial contracts whose value is derived from interest rates, foreign exchange rates or other financial or commodity indices. In the ordinary course of business, the Bank enters into various derivative contracts, including interest rate and foreign exchange forwards, futures, swaps, options and hedges. Derivative contracts are either exchange-traded 9

11 1. Significant accounting policies (continued): contracts (including futures and options) or negotiated over-the-counter ("OTC") contracts (including forwards, swaps and options). The Bank enters into such contracts for trading purposes, as well as to manage its exposures to currency and interest rate fluctuations as part of the Bank's asset/liability management program. Trading activities are only undertaken to meet the needs of the Bank's customers. Derivative instruments used in trading activities are marked to market and the resulting net gains or losses are recognized as non-interest income in the statement of operations and comprehensive income in the current year. Derivatives are carried at fair value and are reported as assets where they have a positive fair value and as liabilities where they have a negative fair value. Where appropriate, a portion of the marked-to-market gain is deferred and amortized over the life of the related contracts to cover credit risks and administrative expenses. Accrued interest receivable and deferred gains on derivatives are recorded in other assets and accrued interest payable and deferred losses are recorded in other liabilities. Interest income or expense and amortized gains or losses are recorded in interest income or interest expense, as applicable. (h) Interest income and expense: Interest income and expense presented in the statement of operations and comprehensive income include: (a) (b) interest on financial assets and liabilities at amortized cost on an effective interest basis; and fair value changes in qualifying derivatives (including hedge ineffectiveness) and fair value changes on the related hedged items arising from the hedged risk when interest rate risk is the hedged risk. The Bank opted not to apply hedge accounting. (i) Loan fees: Loan fees, which are included in other income, are accrued over the term of the related loan contract. (j) Financial Instruments - Disclosures: In June 2009, The Canadian Institute of Chartered Accountants ("CICA") issued amendments to Handbook Section 3862, Financial Instruments - Disclosures ( Section 3862 ), to expand disclosures of financial instruments consistent with new disclosure requirements made under International Financial Reporting Standards ("IFRS"). These amendments were effective for the Bank commencing January 1, 2009 and introduce a three-level fair value hierarchy that prioritizes the quality and reliability of information used in estimating the fair value instruments. The fair values for the three levels are based on: Level 1 - quoted prices in active markets Level 2 - models using observable inputs other than quoted market prices; and Level 3 - models using inputs that are not based on observable market data 2. Changes in accounting policies: (a) Current year changes: There were no substantive changes in accounting policies relevant to the Bank's financial statements as at December 31,

12 2. Changes in accounting policies (continued): (b) Future changes in accounting policies and disclosures: Transition to International Financial Reporting Standards: Canadian public companies are required to prepare their financial statements in accordance with IFRS, as issued by the InternationalAccounting Standards Board, for fiscal years beginning on or after January 1, Effective January 1, 2011, the Bank will adopt IFRS as the basis for preparing its financial statements. The Bank will prepare its first IFRS financial statements for the year ended December 31, 2011 in accordance with IFRS 1 Firsttime Adoption of International Financial Reporting Standards. IFRS 1 requires extensive disclosure explaining how the transition from previous GAAP to IFRS affected the reported financial position, financial performance and cash flows of an entity. These disclosures include reconciliations of equity and reported profit or loss at the date of transition to IFRS and at the end of the comparative period presented in the entity's first IFRS financial statements, explaining material adjustments to the balance sheet and income statement, and identifying separately the correction of any errors made under previous GAAP; an entity that presented a cash flow statement under previous GAAP also explains any material adjustments to its cash flow statement. The Bank's date of transition to IFRS is January 1, 2010, and the end of the comparative period is December 31, The Bank does not anticipate that disclosures to be made under IFRS 1 will include a material impact of adopting IFRS to the Bank's financial results as Canadian GAAP requirements relevant to the Bank's financial statements were congruent with IFRS at the date of transition to IFRS and the end of the comparative period. 3. Nature and extent of risk arising from financial instruments: Risk management framework overview: The primary goal of risk management at the Bank is to minimize risk. Risk is anything that will cause a desired objective not to be achieved. Risk, in varying degrees, is present in virtually all business activities of financial institutions and the Bank recognizes that it is an unavoidable consequence of doing business. The key objectives of the risk management process are to ensure that the outcome of risk-taking activities is within the Bank's risk tolerance, and that there is an appropriate balance between risk and reward. Accordingly, the Bank does not seek to avoid risk, but to manage it in a controlled manner commensurate with the expected reward. The Board of Directors (the "Board") establishes a conservative culture with respect to the Bank's overall risk appetite. The Board has overall responsibility for risk management and reviews and approves risk management strategies, policies, standards and key limits. The Board ensures there are sufficient and qualified risk management resources across the Bank to meet the risk management objectives. The Board, directly or through its committees, the Audit Committee and Conduct Review and Risk Management Committee, receives regular updates on the key risks of the Bank. Risks are managed by the senior management of the Bank within the policies and limits established by the Board. Senior management plays a key role in the risk management process and is responsible for implementation of the policies and establishing a control environment by developing processes to monitor and measure risk and ensure compliance with laws and regulations. The Internal Audit Group of the Parent independently monitors and reports to senior management and the Board on the effectiveness of risk management policies, procedures and internal controls. The internal auditors have unrestricted access to the Bank's staff, information and records and to the Audit Committee. The Bank's enterprise risk framework and risk management processes are reviewed by the InternalAuditor annually. There was no significant change in the risk management framework from the previous year. The Bank is exposed to four major types of risk: operational risk as follows: credit, liquidity, market (all from its use of financial instruments) and (a) Credit risk: Credit risk is the risk of loss resulting from the failure of a borrower or counterparty to honour its financial or contractual obligations to the Bank. 11

13 3. Nature and extent of risk arising from financial instruments (continued): The Bank manages credit risk through specific credit policies that are approved by the Board. These policies set out the procedures for identifying and measuring credit risk, evaluating and approving credit, ongoing monitoring and managing such risk. Senior management of the Bank is responsible and accountable for managing credit risk. Independent oversight of credit risk is also provided by the Chief Risk Officer. Credit authority is delegated to senior management and for credits outside their authorities to the Parent and, subsequently, to the Conduct Review and Risk Management Committee. Risk ratings are attached to each credit and they are regularly reviewed and monitored to ensure emerging difficulties are identified and corrective action is taken. The Bank's policy is to pursue secured lending and, consequently, a significant portion of the credit portfolio is secured. (b) Liquidity risk: Liquidity risk refers to the Bank's ongoing ability to meet its financial obligations as they come due in a cost-effective manner. The Bank manages liquidity risk through specific policies that are approved by the Board. The Bank is conservative in its liquidity policy and constantly maintains a high level of liquidity by keeping substantial balances in liquid assets and in short-term interbank placements. To ensure that the Bank has sufficient liquid assets on hand, the liquidity risk management includes the use of an automated tool for measuring any mismatch in the liquidity positions to determine funding requirements, monitoring the level of core and large deposits, control of concentration limits, and the computation of liquidity ratios. The Bank has developed a Liquidity Contingency Plan to be used in times of market disruption or other emergency situations in order to provide the Bank with sufficient funds to continue its business, including use of such alternative sources of funding as a credit line with the Bank's Parent. (c) Market risk: Market risk is the risk of loss due to changes in interest and foreign currency rates. The Bank manages these risks through specific policies that are approved by the Board. Interest rate risk arises from the impact that changes in interest rates may have on income due to the mismatch between variable rate asset and liability positions. The Bank does a maturity mapping for liquidity and a scenario analysis for interest rate risk, whereby the impact of certain predefined interest rate movements within each maturity bracket are analyzed and compared to a benchmark. The Bank follows a conservative policy of matching interest rate-sensitive asset and liability positions and has a process in place to monitor these positions. Foreign currency risk is the risk of loss due to changes in foreign exchange rates. Foreign exchange activities are customer-related and the Bank does not execute foreign exchange transactions on its own account, except to hedge or cover open positions. The Bank follows a conservative policy in relation to foreign currency risk. Accordingly, the Bank has only a small exposure to such risk and has no long-term open positions. Open position limits are established and monitored. (d) Operational risk: Operational risk is the risk of loss resulting from external events, human error or from inadequate or failed internal processes and systems. The Bank has established policies that have been approved by the Board to manage and control this risk. Operations and the handling of day-to-day risks are the responsibility of management. In this regard, detailed operating procedures have been developed with built- in checks and balances. One of the key controls built into the procedures is the concept of dual control, whereby transactions of any consequence require the interaction of more than one person. The Bank has developed and tested a disaster recovery plan for its operations. Risk mitigation through insurance is used where appropriate. 12

14 3. Nature and extent of risk arising from financial instruments (continued): (e) Capital management: Capital levels for Canadian banks are regulated pursuant to guidelines issued by OSFI, based on standards issued by the Bank for International Settlements. Regulatory capital is allocated to two tiers: Tier 1 and Tier 2. Tier 1 capital comprises the more permanent components of capital and consists primarily of common shareholder's equity, noncumulative preferred shares, the majority of which do not have conversion features into common shares, and the eligible amount of innovative capital instruments. In addition, goodwill is deducted from Tier 1 capital. Tier 2 capital consists mainly of subordinated debentures, trust subordinated notes, the eligible amount of innovative capital instruments that could not be included in Tier 1 capital, and an eligible portion of the total general allowance for credit losses. Total capital is defined as the total of Tier 1 and Tier 2 capital less deductions as prescribed by OSFI. Regulatory ratios are calculated by dividing Tier 1 and Total capital by risk-adjusted assets ("RAA"). The calculation of RAA is determined by OSFI-prescribed rules relating to on-balance sheet and off-balance sheet exposures and includes an amount for the market risk exposure associated with trading portfolios. In addition, OSFI formally establishes risk-based capital targets for deposit-taking institutions. These targets are currently a Tier 1 capital ratio of 7% and a Total capital ratio of 10%. In addition to the Tier 1 and Total capital ratios, Canadian banks are required to ensure that their assets-to-capital multiple, which is calculated by dividing gross-adjusted assets by Total capital, and does not exceed a maximum level prescribed by OSFI. Effective November 1, 2007, OSFI adopted new guidelines based on "International Convergence of Capital Measurement and Capital Standards: A Revised Framework - Comprehensive Version (June 2006)" known as Basel II, which introduced several changes from the predecessor standard, Basel I. The Bank's Tier 1 and Tier 2 regulatory capital and ratios for the year ended December 31, 2010 and comparative information for the prior period have been calculated using Basel II (StandardizedApproach). (f) Internal CapitalAdequacyAssessment Process ("ICAAP"): In October 2010, OSFI issued Guideline - Internal Capital Adequacy Assessment to Process for Deposit-Taking Institutions ("Guideline E-19") to outline their expectations with respect to an institution's ICAAP as described in Part 3 of the Basel II Framework. It is OSFI's expectation that every federal regulated deposit-taking institution, including Canadian subsidiaries of foreign banks, will put into place an ICAAP that covers the consolidated operations from the top level regulated entity in Canada. The Bank has developed its own detailed ICAAP document in accordance with the OSFI Guideline E-19 that covers the following six main ICAAP components: (i) (ii) (iii) (iv) (v) (vi) Board and senior management oversight; Sound capital assessment and planning; Comprehensive assessment of risks; Stress testing; Monitoring and reporting; and Internal control review. 13

15 4. Loans: An analysis of the Bank's loan portfolio, net of unearned income and allowance for credit losses, by category and by location of ultimate risk, is as follows: Canada: Commercial mortgages Residential mortgages Business loans Personal loans Other: Residential mortgages Business loans Personal loans $ 20,763 $ 25,932 2,611 1,962 9,624 9,611 7,953 4, ,517 3, ,147 46,136 Allowance for credit losses Total loans, net of allowance for credit losses $ 46,794 $ 45,783 As at December 31, 2010, total loans include $6,164 ( $4,736) denominated in foreign currencies. Personal An analysis of the Bank's exposures by sectors is as follows: Tradingrelated Lending-related and other loans loans Undrawn OTC Total Total Outstanding commitments (1) Other (2) derivatives (3) exposure (3) exposure Residential mortgage $ 2,713 $ $ $ $ 2,713 $ 2,198 Personal loans 8,530 5,374 1, ,963 9,807 Total 11,243 5,374 1, ,676 12,005 Business Steel wholesale Real estate Clothing and textile wholesale Hospitality and lodging Other Total Total exposure 6, ,394 13,450 20,459 1, ,776 23,730 3, ,074 4,252 3, ,533 5,848 1,681 2,958 3, ,293 7,829 35,904 5,062 4, ,070 55,109 $ 47,147 $ 10,436 $ 5,100 $ 63 $ 62,746 $ 67,114 (1) Includes contingent liabilities such as letters of credit and guarantees. (2) Includes foreign exchange forward replacement values. (3) Total exposure represents exposure at default, which is expected gross exposure upon the default of an obligor. allowances and does not reflect the impact of credit risk mitigation. This amount is before any specific 14

16 4. Loans (continued): Collateral and other security enhancements: The Bank holds collateral against business and personal loans in the form of mortgage interest over property, other securities over assets, and guarantees. Estimates of fair value are based on the value of collateral assessed at the time of borrowing, and generally are not updated, except when a loan is individually renewed or assessed for impairment. An estimate of the fair value of collateral and other security enhancements held against business and personal loans is shown below: Loans outstanding Collateral security Property Cash and term deposits Bank guarantees Other Unsecured $ 31,030 $ 34,805 $ 102,297 $ 76,836 3,746 2,260 3,746 2,260 4,400 3,068 4,400 3,068 7,545 5,804 7,545 5, Past due and impaired assets and allowance for credit losses: $ 47,147 $ 46,136 $ 117,988 $ 87,968 (a) (b) At December 31, 2010 and 2009, the Bank had no past due or impaired assets. At December 31, the Bank's allowance for credit losses is as follows: Specific General allowance allowance Total Total Balance, beginning and $ $ 353 $ 353 $ 353 end of year An analysis of the allowance by loan category is as follows: Specific General allowance allowance Total Total Commercial mortgages $ $ 180 $ 180 $ 214 Residential mortgages Business loans Personal loans Balance, end of year $ $ 353 $ 353 $ 353 (c) Loans with renegotiated terms: Loans with renegotiated terms are loans that have been restructured due to deterioration in the borrower's financial position and where the Bank has made concessions that it would not otherwise consider. At December 31, 2010 and 2009, the Bank has no loans with renegotiated terms. 15

17 6. Office equipment and leasehold improvements: Accumulated Net book Net book Cost amortization value value Office equipment and leasehold improvements $ 1,064 $ 792 $ 272 $ 327 Amortization for the year amounted to $143 ( $145). 7. Deposits: The following is an analysis of the Bank's deposits by category: Payable Payable Payable on after on a fixed demand notice date Total Total Individuals $ 15,273 $ 657 $ 40,825 $ 56,755 $ 41,717 Businesses 16,799 6,790 23,589 24,707 Deposit-taking institutions 15,664 24,676 40,340 38,076 Total deposits $ 47,736 $ 657 $ 72,291 $ 120,684 $ 104,500 As at December 31, 2010, total deposits include $45,011 ( $43,530) denominated in foreign currencies. 8. Income taxes: The Bank has temporary differences of approximately $595 ( $617) available to reduce future years' income tax liabilities. A valuation allowance of $128 ( $141) has been recorded for accounting purposes against future tax assets. Income tax expense differs from the amounts computed by applying the combined federal and provincial income tax rate of 32.00% ( %) to the effect of permanent differences, change in the valuation allowance and effect of changes in tax rates. The components of the future tax assets at December 31, 2010 are presented below: Future tax assets: Office equipment - differences in net book value and undepreciated capital cost $ 14 $ 17 General allowance for credit losses Deferred income Less valuation allowance Balance, end of year $ 47 $ 43 16

18 9. Segmented information: (a)an analysis of the Bank's aggregate outstanding interest-bearing deposits with banks, loans and acceptances by geographic segment, on the basis of the location of ultimate risk, is as follows: Canada $ 126,327 $ 114,488 United Kingdom 4,599 5,081 United States 5, Other $ 136,867 $ 120,505 (b)total interest income, based on country of residence of the borrower, for the year ended December 31, is as follows: Canada $ 2,228 $ 2,265 United Kingdom United States 2 4 Other 16 5 $ 2,270 $ 2, Related party transactions: In the normal course of business, the Bank enters into transactions with its directors, the Parent and companies under common control. As at December 31, 2010, deposits payable to the Bank's Parent and companies under common control amounted to $39,921 ( $37,673) and deposits receivable amounted to $4,525 ( $4,979). Interest of $117 ( $51) was paid to the Bank's Parent and companies under common control in respect of deposits payable, and interest of $20 ( $34) was received in respect of deposits receivable. The Bank has loans to directors and officers and their interests in the amount of $889 as at December 31, 2010 ( $760). Interest of $33 ( $31) was received in respect to these loans. The Parent has guaranteed certain loans of the Bank amounting to $3,845 ( $2,740) at no cost to the Bank. Management fees of $225 ( $225) were paid by the Bank to its Parent. 11. Commitments and contingent liabilities: Credit commitments: In the normal course of business, the Bank enters into various commitments to meet the credit requirements of its customers. Such commitments at December 31, 2010 include: (a) (b) $5,100 ( $8,960) for documentary and commercial letters of credit and standby letters of credit, which require the Bank to honour drafts presented by third parties upon completion of specific activities or make payments where the customer is unable to meet financial obligations. In the event of a call on these commitments, the Bank has recourse against its customers; and $10,436 ( $12,009) for commitments to extend credit, which represent undertakings to make credit available in the form of loans or other financings, subject to certain conditions. 17

19 12. Interest rate sensitivity: Assets The following table summarizes balance sheet assets, liabilities and equity to arrive at the Bank's interest rate gap based on the earlier of contractual repricing and maturity dates: Liabilities and Shareholder's Equity Floating Within 3 3 months 1 to 5 Non-rate rate months to 1 year years sensitive Total Total Cash resources $ 60,455 $ 28,059 $ $ $ 1,648 $ 90,162 $ 74,867 Effective yield 0.88% 0.25% 0.67% 0.27% Loans 44,808 1, (353) 46,794 45,783 Effective yield 3.93% 2.00% 6.00% 3.90% 3.76% Other ,263 28,059 1, , , ,220 Liabilities: Deposits ,593 20,329 2,369 47, , ,500 Effective yield 0.20% 0.57% 0.95% 3.40% 0.46% 0.35% Other 1,043 1, Shareholder's equity 16,047 16,047 15, ,593 20,329 2,369 64, , ,220 Total gap $ 104,606 $ (21,534) $ (18,390) $ (1,969) $ (62,713) $ $ As at December 31, 2010, a one percentage point change in the market interest rate over a one-year period would have an impact of approximately $141 on net interest income over the next year. 18

20 13. Fair values of financial instruments: Assets The amounts set out in the table below represent the fair values of the Bank's on-balance sheet financial instruments using the valuation method and assumptions described below. The amounts do not include the fair value of underlying assets and liabilities that are not considered financial instruments, such as office equipment. The estimated fair value amounts are designed to approximate amounts at which instruments could be exchanged in a current transaction between willing parties who are under no compulsion to act. However, many of the Bank's financial instruments lack an available trading market. Therefore, fair values are based on estimates using present value and other valuation techniques, which are significantly affected by the assumptions used concerning the amount and timing of estimated future cash flows and discount rates, which reflect varying degrees of risk. Because of the estimation process and the need to use judgment, the aggregate fair value amounts should not be interpreted as being necessarily realizable in an immediate settlement of the instruments. Liabilities Fair Fair value over value over Fair Carrying carrying Fair Carrying carrying value value value value value value Cash resources $ 90,162 $ 90,162 $ $ 74,867 $ 74,867 $ Loans 46,794 46,794 45,783 45,783 Other Deposits $ 120,684 $ 120,684 $ $ 104,500 $ 104,500 $ Other 1,043 1, The following methods and assumptions were used to estimate the fair values of on-balance sheet financial instruments: Due to their short-term nature, the carrying values of certain on-balance sheet financial instruments are assumed to approximate their fair values. These financial instruments include cash resources, other assets, deposits and other liabilities. The estimated fair value of loans reflects changes in credit risk and general interest rates that have occurred since the loans were originated. The particular valuation methods used are as follows: (a) For floating-rate loans, fair value is assumed to be equal to carrying value as the interest rates on these loans automatically reprice to market. (b) For short-term fixed-rate loans, fair value is assumed to equal carrying value. (c) For all other loans, fair value is determined by discounting the expected future cash flows of the loans at market rates for loans with similar terms and credit risks. The Bank follows a fair value hierarchy to categorize the inputs used to measure fair value of financial instruments shown in the table below. The fair value hierarchy is based on quoted prices in active markets (Level 1), models using inputs other than quoted prices (Level 2), or models using inputs that are not based on observable market data (Level 3). Fair values of financial instruments: Asset Derivative Instruments Liability Valued using internal models (with observable inputs) $ 140 $ 21 $ 130 $ 21 19

21 14. Derivative financial instruments held or issued for trading purposes: All of the Bank's derivative contracts are OTC foreign exchange forward transactions that are privately negotiated between the Bank and the counterparty to the contract. Foreign exchange forwards are contracts in which one party contracts with another to exchange a specified amount of one currency for a specified amount of a second currency at a future date or range of dates. All derivative instruments were originated in Canada with maturities of six months or less. The Bank does not engage in other types of derivative products. The tables below provide an analysis of the Bank's derivative portfolio and related credit exposure: Fair value of derivative financial instruments: Favourable Unfavourable Favourable Unfavourable Foreign exchange forward contracts $ 140 $ 130 $ 21 $ 21 Notional principal and credit exposure: Current Credit Risk- Current Credit Risk- Notional replacement risk adjusted Notional replacement risk adjusted amount cost equivalent balance amount cost equivalent balance Foreign exchange forward contracts $ 21,747 $ 140 $ 370 $ 85 $ 3,439 $ 21 $ 57 $ 25 The notional amount is not recorded as an asset or liability as it represents the face amount of the contract to which a rate or price is applied to determine the amount of cash flows to be exchanged. Notional principal amounts do not represent the potential gain or loss associated with market risk and are not indicative of the credit risk associated with derivative financial instruments. Current replacement cost represents the cost of replacing all contracts that have a favourable fair value, using current market rates. It represents in effect the unrealized gains on the Bank's derivative instruments. Replacement cost disclosed in the table above represents the net amount of the asset and liability to a specific counterparty where the Bank has a legally enforceable right to offset the amount owed to the Bank with the amount owed by the Bank and the Bank intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. Credit risk equivalent represents the total replacement cost plus an amount representing the potential future credit exposure, as outlined in the CapitalAdequacy Guideline of the Superintendent. Risk-adjusted balance represents the credit risk equivalent, weighted based on the creditworthiness of the counterparty, as prescribed by the Superintendent. 21

22 15. Capital position: The table below provides a summary of the regulatory capital and ratios for the year ended December 31, 2010 and comparative information for the prior period. The Bank is in compliance with the imposed capital requirements to which it is subject: Capital structure and ratios: Tier 1 capital: Common shares $ 15,000 $ 15,000 Retained earnings 1, Total regulatory capital $ 16,047 $ 15,854 Risk-adjusted assets $ 69,962 $ 68,317 Capital ratios: Tier 1 capital 22.94% 23.21% Total assets (on- and off-balance sheet) $ 142,874 $ 130,180 Assets-to-capital multiple Employee benefit plans: The Bank has a defined contribution pension plan for eligible employees. Current service pension costs are expensed as funded. The total pension expense for the year was $89 ( $85).

23 Board of Directors From Left to Right, Front Row: Muslim Hassan, Muhammad H. Habib, Gregory P. King Back Row: Ali S. Habib, Jang Engineer, Robert Budd, Max MacIntyre DIRECTORS Muhammad H. Habib - Chairman Joint President Habib Bank AG Zurich Gregory P. King - Vice Chairman* Partner Gowling Lafleur Henderson Max MacIntyre* Director Jang Engineer* Associate Nawaz Taub & Wasserman Muslim Hassan Chief Executive Officer Habib Canadian Bank Robert Budd Chief Financial Officer Habib Canadian Bank Ali S. Habib Director * Members of the Conduct Review and Risk Management Committee and the Audit Committee 22

24 Products and Services With the benefit of its parent's experience and global network, Habib Canadian Bank is able to offer an extensive list of products and services for the Canadian market. The range of services currently in Canada include: Deposits Current Accounts Savings Accounts Term Deposits Debit Cards Credit Line of Credit Consumer Loans Residential Mortgages Commercial Loans Guarantees Standby Letters of Credit Trade Finance Trade Letters of Credit Bill Discounting Documentary Collections Other Foreign Exchange Telegraphic Transfers Home Remittances Internet Banking Bill Payments Safe Deposit Lockers Bank Drafts 24 Hour ABM s Other services available through the global network include: International Portfolio Management Financial Advisory Services Trustee Services Credit Cards Custodial Services Bullion and Silver Dealing Treasury Services Islamic Banking Management From left to right, Front Row: Muhammad Habib, Chairman, Muslim Hassan, President and Chief Executive Officer; Back Row: Ismail Mirza, AVP Branch Operations, Naveed Ul Hassan, Manager - Scarborough Branch, Robert Budd, Chief Financial Officer, Adil Mavalvala, VP and Chief Risk Officer 23

25 Global Network Canada Habib Canadian Bank, Head Office, Toronto Tel No. + (905) Branches Pakistan Habib Metropolitan Bank Ltd. Head Office, Karachi Tel No. + (9221) Branches Switzerland Habib Bank AG Zurich Head Office, Zurich Tel No. + (4144) Branch Kenya Habib Bank AG Zurich Administration Office, Nairobi Tel No. + (254-20) Branches United Kingdom Habib Bank AG Zurich Zonal Office, London Tel No. + (44207) Branches United Arab Emirates Habib Bank AG Zurich Administration Office, Dubai Tel No. + (9714) Branches Isle of Man Habib European Bank Ltd. Head Office, Douglas Tel No. + (441624) Branch South Africa HBZ Bank Limited Administration Office, Durban Tel No. + (2731) Branches Representative Offices Hong Kong Habib Bank AG Zurich Tel No. + (8522) Pakistan Habib Bank AG Zurich Tel No. + (9221) Bangladesh Habib Bank AG Zurich Tel No. + (0088) Mississauga Branch 24

26 Habib Canadian Bank, Annual Report 2010 Our Worldwide Network Scarborough Branch 25