Annual Report 2009/2010

Transcription

1 Annual Report 2009/2010

2 Contents 2 Board of Directors NBE's Mission Chairman's Letter NBE's Strategy NBE's performance in Key achievements in FY Auditor's Report Balance Sheet as at June 30, 2010 Income Statement Proposed Dividends Cash Flows Changes in Shareholders Equity Notes to the Accounts Main Branches NBE's presence worldwide

3 3 Board of Directors Tarek Hassan Amer Chairman Hisham Ahmed Okasha Deputy Chairman Sherif Mohamed Elwy Deputy Chairman Mahmoud Montaser Ibrahim Board Member El Sayed Mohamed Marzouk Elkosayer Board Member Dr. Ziad Ahmed Bahaa El Din Board Member Adel Hosny Hussein Board Member Hussein Gawdat El Gueretly Board Member

4 NBE's Mission To maintain its leadership of the banking industry, and unfailingly seek to boost its performance so as to maximize the efficiency of its financial intermediary role, which supports development, strengthens the national economy and maintains the financial and banking stability. This is in addition to safeguarding deposits and realizing outstanding returns on invested capital. 4

5 Chairman's Letter 5 Marking year twelve in the second century of NBE's distinguished business journey, I am pleased to share with you, through our annual report, the achievements grabbed by NBE during the FY 2009/10 thanks to the collaborative efforts of its family. Amidst the ongoing repercussions of the global financial crisis throughout FY 2009/10, NBE proudly managed to take its yearly net profit beyond EGP 2 bn., growing 123% yoy. NBE is thus held as the fastest growing bank in the Egyptian and regional markets reflecting a ROE of 16.2% versus 10.5% for the previous year. In addition, net interest income rose 60% to EGP 5.5 bn., realizing the highest growth rate among Egyptian banks, whereas operating revenues soared 113% to EGP 3.7 bn. NBE succeeded in supporting its capital base with EGP 3.8 bn. during the FY 2009/10, taking advantage of the large profits generated for the year. During the year under review NBE's financial position grew 15% to EGP 299 bn. in June 2010 versus EGP 259 bn. for the previous FY. Total deposits rose to EGP 245 bn., with a growth rate of 12% yoy and a market share of 27.4% of total national banking deposits. This emphasizes the growing confidence our customers place in us in reaction to the modernization we are introducing to products/services in branches, particularly after deploying the new service model in 157 branches compared to 40 last FY. NBE has extended new loan facilities totaling EGP 19 bn., growing 23% yoy, to meet the required funding for various economic sectors, the most salient of which are oil, electricity, building materials, tourism and transportation. Credit facilities offered for large corporate customers rose by EGP 23.2 bn. in the FY 2009/10. As for SMEs, NBE has been keen to cope with the nature of this sector through streamlining procedures for credit extension and case studies. NBE has further adopted a decentralized approach in extending credit for SMEs to ensure timely decision making. NBE's SME credit portfolio amounted to EGP 10.6 bn.

6 NBE takes pride in being a stakeholder with total equity participations of 29% in 186 national projects with total capital of EGP 45 bn.. This has driven NBE to establish a host of companies for managing these participations including Al Ahly for Land Cultivation and Reclamation, Nile Holding for Development and Investment, Egyptian Company for Managing Real Estate Assets and Investment, Upper Egypt Company for Food Industries, Al Ahly Medical Projects and Services and Al Ahly Financial Leasing. During the FY 2009/10, NBE introduced a set of new retail products including the re-launch of mortgage and auto loans in addition to issuing 60,000 credit cards, which takes the total number of credit cards to 413,000 cards. This helped retail loans portfolio grow 23% yoy (Average growth rate for the Egyptian banking body: 11%) to EGP 15.6 bn. NBE commands 35% of the Egyptian credit and debit cards market and the largest ATM network (990 machines as at June 2010). NBE also manages the largest banking network with 428 units nation-wide as at June 2010 and has maintained an effective presence in international markets through NBE (UK) Limited, NBE NY Branch, NBE Shanghai Branch, and NBE's representative offices in Johannesburg South Africa, Dubai UAE and Addis Ababa Ethiopia and a wide network of correspondents worldwide. As per the Banker Magazine's Top 1000 World Banks, NBE came ahead of all Egyptian banks and 392 globally in terms of Tier 1 capital in June 2010 versus 441 in the previous year. For the first time for an Egyptian bank, NBE issued international bonds with the sum of US$ 600 million in the global market. The bonds were received with an overwhelming demand from international financial institutions and funds, which reflects confidence in NBE at the international level. In recognition of its high performance during the FY 2009/10, NBE was granted several awards by the banking community's leading and reputable periodicals in Europe, Africa and the Middle East. The Banker Magazine granted NBE the Best Bank in Egypt Bloomberg Loan Syndications rankings for MENA region ranked NBE the 2nd in the field of arranging, marketing and underwriting syndicated loans. 6

7 NBE has further upgraded its IT area and ATM/POS infrastructure. The Bank has also initiated the construction of a modern data center up to the established global standards and we are migrating for the new core banking solution, Flexcube. In addition, Al-Ahly Phone and the Interactive Voice Response services (IVR) were introduced through our call center at Smart Village. These services are managed by a highly trained and qualified team to provide first class service 24h/7days a week for NBE's customers. Pursuing the restructuring plan of branches/regional headquarter(s) was established. We are planning to open at least 30 branches in a two-year window to help attain NBE's established objectives for acquiring larger market share and courting new customer brackets, particularly loan customers. In line with our strategy for investing in the human capital, 44,000 training opportunities were offered for the staff during the FY 2009/10. We have also worked on forming a team of qualified internal trainers along with providing a workplace environment supportive of hard work and selfimprovement values. Last but not least, I am fully confident that our initiatives for maintaining the prestigious position of NBE and serving our dear country shall be rewarded and our efforts for taking NBE forward shall be crowned by making it the flagship of the MENA region' s banks. 7 Tarek Amer Chairman

8 NBE's Strategy 8 NBE launched a number of strategic initiatives, upon which the upcoming phase rests, so that NBE can maintain its privileged position within the banking market. The most salient initiatives are: Focusing on boosting credit and attracting new large corporate/sme customers. Enhancing marketing capabilities and developing credit policies on retail banking products so as to court new customer segments and increase NBE's market share. Introducing products and rolling out the new service model in 170 branches, supported by further investments in IT infrastructure, to provide prime services for customers. Raising employees' productivity through training and development, thus enhancing growth and profitability.

9 NBE's performance as at June Net yield EGP bn Jun-07 Jun-08 Jun-09 Jun-10 Commissions and fees of banking services EGP bn Jun-07 Jun-08 Jun-09 Jun-10

10 10 Net profit for the year EGP MM Jun-07 Jun-08 Jun-09 Jun-10 Provisions EGP bn Jun-07 Jun-08 Jun-09 Jun-10

11 Total financial position 11 EGP bn Jun-07 Jun-08 Jun-09 Jun-10 Return on equity (%) Jun-07 Jun-08 Jun-09 Jun-10

12 Total deposits 12 EGP bn Jun-07 Jun-08 Jun-09 Jun-10 Total loans EGP bn Jun-07 Jun-08 Jun-09 Jun-10

13 NBE's key achievements in FY 2009/ Notwithstanding the challenges faced by the economic and banking system during FY , NBE was able to achieve a net profit growth of 123% to realize more than EGP 2 bn. in profit. Accordingly, NBE was the most growing bank in the Egyptian and regional market. This led to almost double the return on equity, which reached 16.2%. Net profit for the year Return on equity EGP MM 2007 (%) Jun-07 Jun-08 Jun-09 Jun-10 Jun-07 Jun-08 Jun-09 Jun-10 - NBE courted during the year under review deposits with the sum of EGP 26 bn. to total EGP 245 bn. in June 2010, with a growth rate of 12% against 10% in the banking sector as a whole. - Local-currency deposits accounted for EGP 197 bn., and foreigncurrency deposits recorded EGP 48 bn. - NBE's market share increased during the year under review to seize about 27.4% of total deposits in the banking sector.

14 14 Total deposits Deposits by economic sector as at June 2010 EGP bn. (%) Financial intermediaries; 2.2 Others; 2 Government; 10.2 Public and public business; 6.2 Private business; 8 Household, 71.4 Jun-07 Jun-08 Jun-09 Jun-10 - Net sales of investment certificates, issued and managed by NBE on behalf of the government, accounted by the end of the year under review for EGP 91 bn., going up by 12.3% vis-à-vis the previous year. - NBE introduced new saving pools including the new five-year certificate which attracted EGP 8 bn. in 6 months, and the foreigncurrency certificate with upfront return. During the year under review, NBE injected new loans with the sum of EGP 19 bn. for financing different economic sectors and breaking through new investments. - Total loan portfolio increased 6% during the year under review to reach EGP 101 bn. - Private sector received about 44.5% of total loans granted by NBE. - New loans extended by NBE for all economic sectors during the year under review amounted to EGP 19 bn. - NBE led the banking sector in syndicate loans, to be internationally ranked the second according to Bloomberg in the Middle East and North Africa in the field of arranging, marketing and underwriting syndicate loans on the banking market.

15 15 - NBE issued international bonds of US$ 600 MM., which have been widely subscribed for by financial institutions and international saving funds with high coverage rates. - NBE provided new credit packages (including re-launching mortgage and auto loans) backed by a sophisticated customer service. Total loans EGP bn Performing loans Non-performing loans Jun-08 Jun-09 Jun-10 Workout of NPLs - Being keen on minimizing NPLs, NBE has carried out settlements of EGP 4.5 bn. for 581 customers. - NPLs' cash proceeds during the year under review reached EGP 2.1 bn. against EGP 1.6 bn. year-over-year. - NBE made settlements of EGP 5.5 bn. for public business sector companies, and collected marginal returns of about EGP 1 bn.

16 16 Settlements of non-performing loans EGP bn Jun-08 Jun-09 Jun-10 NBE's strategy relies upon boosting credit and attracting new large corporate/sme customers to support the national economy. - NBE increased facilities granted to large companies during the year under review to reach EGP 23.2 bn. - Key facilities made available by NBE during the year under review are as follows: financing oil production projects with the sum of EGP 8.2 bn. facilities of EGP 2.8 bn. for construction materials sector. facilities of EGP 2.6 bn. for electricity generation projects. facilities of EGP 1.7 bn. for transportation sector. facilities of EGP 1.6 bn. for tourism sector. - NBE's efforts during the year with respect to arranging, marketing and underwriting syndicate loans enabled the Bank to obtain the second rank in the Middle East and North Africa in this field according to Bloomberg.

17 17 - SME's portfolio amounted to EGP 10.6 bn. in June NBE took several actions that aimed at promoting and supporting this active business, the most salient of which are: Restructuring the entire portfolio, and assigning 690 banking officers to serve SME's. Entering into agreements with interested donors such as French Development Agency, European Investment Bank and United Nation Industrial Development Organization (UNIDO) to support this business. Streamlining credit sanction procedures and credit study techniques according to the nature and type of business to accelerate decision making. Focusing on providing finance for projects under the Social fund for Development Scheme, by putting up EGP 320 MM. for 6400 eligible projects as well as increasing the finance provided for NGOs to reach EGP 520 MM. in the form of 1.5 MM. micro loans. Tending to introduce new programs and products to meet most of SME customer needs, such as Al-Ahly for Doctors and Al-Ahly for Pharmacies. In support of NBE's role in contributing to investment in national projects across different economic sectors. - NBE participated up to the end of June 2010 in 186 projects with a total capital of EGP 44.9 bn. where NBE's share accounted for EGP 13.1 bn. - During the year under review, NBE took part in 16 projects with the sum of EGP 1.5 bn., both in the form of new equity participation and capital increase in existing companies. The greatest majority of funds was injected into the development projects of the South Valley and are includes Upper Egypt for Food Industries and cement production project in Sohag.

18 18 - NBE's policy recently targets establishing economic entities linking the Egyptian market to neighbour markets, including Sudan and Nile Basin countries, to achieve development and investment goals. Accordingly, several companies were incorporated and projects were established in neighboring countries such as National Bank of Egypt (Sudan), Africa Investment & Development Company and Nile Holding Co. for Development & Investment. In the field of retail banking, NBE proceeded with upgrading and developing products and branches network - Rolling out and implementing the new service model in 170 branches, which improved branches' profitability. - Establishing the largest call center in Smart Village in line with international standards, introducing Al-Ahly Phone service, launching IVR service and supporting the center with highly trained staff to better provide banking services for customers. - Spreading a wide network of 990 ATMs all over the country. - Having the largest number of banking units (428 units) in Egypt in June This led to greater retail loans - Retail loans witnessed a 23% growth during the year under review to reach EGP 15.6 bn. - New credit packages were made available the most important of which are mortgage and auto loans. This is in addition to issuing new credit cards such as World Cup Visa and Master Platinum.

19 19 Retail loans EGP bn Jun-08 Jun-09 Jun-10 Treasury Department made the best use of funds, which resulted in a 76% growth of return on invested deposits, supported the exchange market and increased NBE's share in foreign trade finance. - Executing further interbank sales/purchases in foreign currency with the sum of USD 7.5 bn., as well as dollar interbank sales/purchases with the sum of USD 5.4 bn. till June Boosting return on invested deposits by 76% to record EGP 9.8 bn. Return on invested deposits EGP bn Jun-08 Jun-09 Jun-10 - Taking the lead in treasury bills and government bonds operations in primary and secondary markets.

20 20 - Enhancing derivatives services for NBE's customers to hedge them against the risks of exchange and interest rates fluctuation. - Boosting FX trading volume to reach USD 6.5 bn. during the year under review, compared to USD 4.5 bn. in the previous year, yielding a 3% growth in FX trading profits to record EGP 297 MM. FX trading volume US$ bn Jun-08 Jun-09 Jun-10 - Free market resources pooled amounted to USD 7 bn. for the purposes of opening documentary credits and meeting customer needs of foreign currency. - During the year under review, import credits totalled USD 11.6 bn., export credits accounted for USD 3.5 bn. and foreign LGs reached USD 1.7 bn. NBE's share in Egyptian foreign trade finance thus rose to 23%. - Secondary market trading was promoted by T-bills sales/purchases and realized returns of EGP 5.8 bn. - A portfolio of Egyptian international bonds was created with the sum of EGP 3.9 bn., with a return of 14.74% (i.e. EGP 343 MM). - NBE takes the lead in trading treasury bills and government bonds in primary and secondary markets, and ranks the first in terms of trading volume.

21 21 NBE adopts a balanced investment policy in managing securities portfolios to expand equity base and promote stock market - Portfolios (trading/available-for-sale) were well managed during the year under review, which resulted in achieving returns of EGP MM. - Sub-custodian and local consultancy services were rendered to the foreign funds in which NBE shares, in addition to book keeping services. - The Bank is considering the establishment of the eighth mutual fund for fixed-income instruments with a capital of EGP 100 MM. NBE's efficiency has been enhanced by centralizing operations which consumed two thirds of branches' time needed to provide customer service, and a strong IT infrastructure has been built - Swift and incoming transfers have been centralized, sparing the time of 833 employees who were re-trained in marketing and cross-selling. - E-collection has been applied in coordination with Tax Authority; therefore, NBE's revenues increased. - Gas-for-each-home loans were centralized, including 734,000 houses with the sum of EGP 903 MM. - ATMs' efficiency increased 95% by applying an advanced system to feed machines and monitor cash. - Investment Certificates Division was restructured, as 4 investment certificates and 23 saving pools have been centralized. - A call center was established and operated in Smart Village in line with international standards, and new systems were introduced to enhance the efficiency of services provided for customers such as Witness and CMS systems.

22 22 - The call center was equipped with new banking applications such as Essentis, MF, Al Ahly Phone, Al Ahly Internet Banking and IVR, to serve customers around the clock by providing several banking services over the phone. - Other projects are being prepared such as the second stage of IVR and CRM project. NBE was keen on developing human capabilities which represent a key tool of development and modernization in the Bank - 44,000 training opportunities were provided for all staff - A training center in Alexandria was equipped with necessary facilities and started operations. Seven other regional training centers are being equipped. - A team of in-house trainers (120 trainers) was created. - Management by objectives was applied with all positions and staff in the Bank. In continuation of the economic and developmental role, NBE seeks to take part in the social responsibility and support the Egyptian society - EGP 80 MM. was allocated to develop the infrastructure of a number of national projects in the field of health care and equip them with the latest medical devices. - A protocol was signed with Al Kasr Al Ainy Hospital to support the establishment of the new emergency hospital in line with the latest international standards. Under this protocol, the Bank shall donate EGP 20 MM. annually for 3 years. 600,000 patients all over the country are expected to benefit from the project. - Partnerships with Al-Azhar Educational Hospital, Heart Institute and Cancer Institute were signed to raise the level of medical services provided.

23 23 - EGP 10 MM. was given to support efforts to reduce poverty levels in most needy regions. To this end, sustainable development programs were launched and mega cultural projects (such as the New Egyptian Museum) were supported.

24 24 Auditors' Report on the Summarized Financial Statements of the National Bank of Egypt for fiscal year 2009/10 To Messrs: Shareholders of the National Bank of Egypt We have audited the financial statements of the National Bank of Egypt (S.A.E.) for fiscal year 2009/10 from which the attached summarized financial statements are derived according to the Egyptian Auditing Standards as well as the applicable local laws and regulations. In our report dated December 22, 2010, we expressed an unqualified opinion on the Bank's financial statements for fiscal year 2009/10 from which the attached summarized financial statements are derived. In our opinion, the attached summarized financial statements are consistent in all its material aspects with the Bank s complete financial statements for the fiscal year 2009/10. To fully understand the Bank s financial position as at June 30, 2010, as well as operating results of the said year together with the scope of our audits, the Bank s complete financial statements and our report dated December 22, 2010 on the same for the fiscal year 2009/10 must be referred to. Auditors (Signed) Medhat Mahmoud El Salawi Zarrouk & Co. Rödl & Partner (Middle East Egypt) Fellow of Egyptian Society of Accountants and Auditors (Signed) Mrs. Zaineb Abd El Hamid Central Auditing Organization Cairo, January 27 th, 2010

25 Balance Sheet as at 30/6/2010 Note No. 25 (EGP MM.) 30/6/ /6/2009 Assets Cash and balances with banks 74,134 77,108 Treasury bills and government bonds (net) 66,838 61,891 Trading financial investments Loans to customers and banks (net of provision) (7, 8) 81,600 75,127 Financial investments available for sale 6 48,929 22,672 Financial investments held to maturity 6 3,298 3,163 Financial investments in subsidiaries and associates 9 7,860 7,593 Debit balances and other assets 14,702 9,769 Fixed assets (net of accumulated depreciation) 1,201 1,055 Total Assets 298,637 ====== 259,077 ====== Liabilities and Shareholders Equity Liabilities Due to banks 24,415 12,803 Customers deposits , ,889 Dividends payable Credit balances and other provisions 11 10,592 8,719 Long-term loans 12 6,552 9,963 Total Liabilities 286,287 ======= 250,479 ======= Shareholders Equity Paid-up capital 2,250 2,250 Reserves 7,927 6,348 Carried forward profit (loss) Total shareholders equity 13 10,343 8,598 Net profit for the year 2,007 0 Total shareholders equity and net profit for the year 12,350 8,598 Total Liabilities and Shareholders Equity 298,637 ====== 259,077 ====== Contingent Liabilities and Commitments Liabilities against letters of guarantee and documentary credits...and other commitments 153, , The accompanying notes are an integral part of the financial statements.

26 Income Statement for the Fiscal Year Ended on June 30, (EGP MM.) Note No. 30/6/ /6/2009 Interest from loans and similar revenues 20,951 17,807 Less: Cost of deposits and similar expenses (15,409) (14,350) Net interest income 5,542 3,457 Net commissions and fees of banking services 1,626 1,550 Dividends Net trading income Other operating revenues 581 1,006 Net operating revenues 8,560 6,367 Less: Provisions (1,510) (1,386) Profit (loss) on financial investments (187) (589) General and administrative expenditure, depreciation, amortization and other expenses (3,170) (2,658) Net operating revenues 3,693 1,734 Non operating profit (loss) 8 3 Profit before taxes 3,701 1,737 Taxes (1,694) (837) Net profit for the year after taxes 2, Dividend per share (EGP) 14 0, The accompanying notes are an integral part of the financial statements.

27 27 Proposed Dividends for the Fiscal Year Ended on 30/6/2010 (EGP MM.) 30/6/ /6/2009 Net profit for the year (according to the Income Statement) 2, Less: Profit from sale of fixed assets transferred to capital reserve in accordance with the provisions of Article (40) of Law No. 159/1981 (6) (1) Net profit available for distribution 2, Distributed as follows: Fund of upgrading work systems and developing employees abilities and skills Legal reserve General reserve Reserve for the rise in fixed asset prices Supportive reserve Dividends to shareholders 967* 0 Staff share Supervision and management remuneration 131* 0 Total 2,001 ===== 899 ===== * The State s full share in profit and supervision and management remuneration are to be transferred to the supportive reserve with the sum of EGP 1,098,199,000.

28 28 Cash Flow Statement for the Fiscal Year Ended on 30/6/2010 (EGP MM.) 30/6/ /6/2009 Net cash flows from operating activities 11,334 2,311 Net cash flows from (used in) investment activities (1,083) (212) Net cash flows resulting from (used in) financing activities (3,517) (1,298) Net increase in cash and cash equivalent during the year 6, Cash and cash equivalent at the beginning of the year 14,504 13,703 Cash and cash equivalent at the end of the year 21,238 14,504 - The accompanying notes are an integral part of the financial statements.

29 Changes in Shareholders Equity as of 30/6/ /6/2009 Restated Description Capital Legal reserve General reserve Reserve for purchasing government bonds Reserve for the rise in fixed asset prices Capital reserve Supportive reserve Special reserve Fair value reserve for financial investments available for sale (EGP MM.) Carried forward profit Net profit for the year Balance at the beginning of the fiscal 2, ,942 1, ,742 year Movement during the year Net profit for the year Transferred to reserves (758) (758) 0 Transferred to the fund of upgrading work (36) (36) (36) systems Dividends (105) (105) (105) Balance at the end of the fiscal year 2, ,952 2, ,598 Total 30/6/2010 Description Capital Legal reserve General reserve Reserve for purchasing government bonds Reserve for the rise in fixed asset prices Capital reserve Supportive reserve Special reserve Fair value reserve for financial investments available for sale (EGP MM.) Carried forward profit Net profit for the year Balance at the beginning of the 2, ,952 2, ,598 fiscal year Movement during the year 1,990 2 (413) 1,579 Forwarded profit Net profit for the year 2,007 2,007 Balance at the end of the fiscal year 2, ,573* ,954 2, (19) 166 2,007 12,350 Total * Including reserves for the difference between the nominal value and the current value of the stand-by loan.

30 National Bank of Egypt Notes to the Financial Statements for the Fiscal Year Ended 30/6/ Activity: National Bank of Egypt (an Egyptian joint stock company) was established on June 25, 1898 as a commercial bank, and carries out its activities in accordance with the provisions of Law No. 88/2003. The Bank performs all banking operations related to its activity through its head office in Cairo and (428) banking units in addition to representative offices in Johannesburg, South Africa and Dubai, UAE, as well as a branch in New York City, USA and a branch in Shanghai City, China. 2- Significant accounting policies: 2/1 Bases of preparing financial statements The financial statements are prepared according to the rules of preparing and compiling banks' financial statements issued by CBE on June 27 th, 2002, and its amendments, in addition to amendments related to the financial investments issued on December 16 th, 2008 as well as the explanatory instructions attached thereto in April 2009 and in accordance with the related Egyptian laws and regulations. 2/2 Foreign exchange operations - The Bank maintains its accounts in Egyptian pound. Foreign currency transactions are recorded during the fiscal period at the exchange rates prevailing at the transaction date. The balances of assets and liabilities of cash nature in foreign currencies are re-evaluated at the end of the fiscal year according to the exchange rates prevailing at that date. The profits and losses resulting from settlement of transactions and the differences resulting from evaluation are booked to the Income Statement in the following items: Net trading income or net income arising from financial instruments originally classified at fair value through profit and

31 31 loss for financial assets/ liabilities held for trading or originally classified at fair value through profit and loss as the case may be. Other operating income (expenses) for other items. - The changes in fair value of monetary financial instruments in foreign currency classified as available for sale investments (debt instruments) should be segregated to revaluation differences arising from changes in the instrument amortized cost to be booked to the "Income Statement" under "Interest from Loans and Similar Income", differences arising from the change in prevailing foreign exchange rate to be booked to the "Income Statement" under "Other Operating Income (expenses)" and differences arising from changes in the fair value of the instrument to be booked to th e "Changes in Shareholders' Equity" under "Fair Value Reserve for Financial Investments Available for Sale". - Evaluation differences resulting from non-monetary items comprise profit and loss arising from fair value change such as shareholders' equity instruments held at fair value through profit and loss. Evaluation differences resulting from shareholders' equity instruments classified as "Available for Sale Investments" are booked to the "Changes in Shareholders' Equity" under "Fair Value Reserve". 2/3 Revenue recognition - Revenues are accounted for on the basis of maturity except for the interest on non-performing loans, which is not recognized as income if the collection of the interest or the principal is doubtful. Revenues of shares and mutual funds certificates are recognized upon the declaration of the dividends thereof. 2/4 Treasury bills Treasury bills are recorded according to their nominal value. The unearned revenues thereof are recorded in Credit balances and other liabilities and are deducted from the value of Treasury bills in the Balance Sheet.

32 32 2/5 Financial assets designated at fair value through profit and loss - This group consists of trading financial assets and financial assets that the Bank upon initial recognition designates to be measured at fair value through profit and loss. - Financial instruments are designated as trading financial instruments if the Bank holds the same primarily for the purpose of short term profittaking or if they represent a part of specified financial instruments portfolio and there is evidence of recent short-term profit taking transactions. - Financial assets are originally designated at fair value through profit and loss when they relate to an investment portfolio that is managed and evaluated on a fair value basis according to investment strategy or risk management and are reported to senior management according to that basis. Such investments are then designated at fair value through profit and loss. - In all cases, the Bank should not reclassify any financial instrument into the group of financial instruments measured at fair value through profit and loss or into the group of trading financial assets. 2/6 Financial investments held to maturity Financial investments held to maturity are non-derivative assets with fixed or determinable payments and fixed maturity that the Bank's management has the ability and the intent to hold till maturity. All investments held to maturity are reclassified as financial investments available for sale if the Bank sells a significant amount of financial assets held to maturity except for emergency cases. 2/7 Financial investments available for sale Financial investments available for sale are non-derivative assets that the Bank has the intent to hold for undeterminable period. The financial investment available for sale may be sold to satisfy the need for liquidity or changes in interest or exchange rates or shares.

33 2/8 Financial assets 33 - Financial assets buying and selling operations are recognized as usual on the trade date which is the date that the Bank is committed to buy or sell the financial asset, financial investments held to maturity and financial investments available for sale. - Financial investments available for sale are subsequently measured at fair value whereas financial investments held to maturity are measured at amortized cost. - Profits and losses arising from changes in the fair value of financial investments available for sale should be recognized directly in shareholders equity until the financial asset is sold or impaired, at which time the cumulative profit or loss previously recognized in shareholders equity should be recognized in the Income Statement. - Interest income calculated by/with the amortized cost method and foreign-currencies profit and loss of monetary assets classified as financial investments available for sale are recognized in the Income Statement. Moreover, dividends arising from shareholders equity instruments classified as financial investments available for sale are recognized in the Income Statement when the Bank is entitled to collect the same. - Fair values of investments quoted in active markets are obtained on bid prices bases. Where no active market exists, or current bid prices are unobtainable, the Bank estimates the fair value using a variety of valuation techniques, including new neutral transactions, discounted cash flows analysis, option pricing, or other pricing models commonly used by market players. In case the Bank cannot estimate the fair value of shareholders equity instruments classified as financial investments available for sale, the Bank may measure the equity instruments at cost minus any impairment losses. - The Bank reclassifies debt financial assets classified within the financial instruments available for sale (bonds) from the financial instruments available for sale to the financial assets held to maturity at fair value at the date of reclassification, when the Bank has the intention and ability to hold the same for the foreseeable future or

34 34 maturity. Any related profits or losses that were previously recognized in shareholders equity are treated as follows: 1- In case of reclassified financial assets with fixed maturity, profits or losses and any related differences between the value at amortized cost and the value at maturity are amortized on the life period of the investment held to maturity using the effective interest method. In case of later impairment of the financial asset value and profits or losses that have been previously recognized directly in shareholders equity are recognized in the Income Statement under profit and loss. 2- Profits or losses related to financial assets without fixed maturity are held in shareholders equity till selling or disposing of the asset then recognized in the Income Statement under profit and loss. In case of later impairment of the financial asset value and profits or losses that have been previously recognized directly in shareholders equity are recognized in the Income Statement under profit and loss. 2/9 Financial investments in subsidiaries and associates: These investments are valued at their cost. If their fair value falls below their book value, the book value is so amended for each individual investment and the difference is charged to the Income Statement under Financial investments profits (losses)". If the fair value increases, the increase is credited to the same item, within the limits of the values previously charged to the Income Statements for previous fiscal periods. Investments in jointly controlled companies are also evaluated at cost. 2/10 Netting: Financial assets and liabilities are offset if there is a currently enforceable legal right to set off the recognized amounts and there is an intention to settle on a net basis, or to realize an asset and settle the liability simultaneously. Items of agreements of purchasing (selling) treasury bills with re-sale (repurchase) commitment at the net value are recorded in the balance sheet under Treasury bills and government bonds (net).

35 35 2/11 Agreements of Purchasing (selling) with Re-sale (repurchase) Commitment Financial instruments sold pursuant to repurchase agreements are recorded in the assets to be added to value of Treasury bills and government bonds in the balance sheet. The commitment (purchasing and re-sale agreements) is recorded and discounted from the value of Treasury bills and government bonds in the balance sheet. The difference between sale and re-purchase prices is recognized as income accrued over the term of the agreements using the actual interest rate method. 2/12 Impairment of financial investments: 1. Financial investments held to maturity The Bank assesses at each balance sheet date whether there is objective evidence that a financial investment or a group of financial investments is impaired. A financial investment or a group of financial investments is impaired and impairment losses are incurred if there is objective evidence of impairment as a result of one or more loss events that occurred after the initial recognition of the investment (a loss event) and the loss event(s) has (have) had an impact on the estimated future cash flows of the financial investment or the group of the financial investments that can be reliably estimated. Objective evidence that a financial investment or a group of financial investments is impaired includes observable data that comes to the attention of the Bank about the following loss events: Significant financial difficulty of the obligor; It becomes probable that the obligor will enter bankruptcy or liquidation. 2. Financial investments available for sale The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets classified under financial investments available for sale is impaired. In case of shareholders equity instruments classified as financial

36 36 investments available for sale, a significant or prolonged decline in the fair value of instrument below its book value is considered in determining whether impairment exists. 2/13 Valuation of assets acquired by the Bank for settlement of debts Assets devolved to the Bank against some outstanding debts are booked to the balance sheet under Debit balances and other assets at the value of their transfer to the Bank. In case the fair value of these assets decreases below their transfer value at the date of the balance sheet, the differences are charged to the Income Statement. If the fair value increases, such increase is credited to the same item, within the limits of the values previously charged to the Income Statement for previous fiscal periods. 2/14 Provisions for loans and contingent liabilities A provision for specific loans and contingent liabilities is created, in addition to a percentage ranging between 1% and 5% of total loans and other contingent liabilities for general risks, in accordance with the rules of appraising customers creditworthiness stipulated by the CBE on June 6 th, Doubtful debts are written off by debiting the provision to which recoveries from previously written off loans are credited. 2/15 Contingent liabilities and commitments Contingent liabilities in which the Bank participates are recorded as an off-balance sheet item under Contingent liabilities and commitments as they do not represent actual assets or liabilities at the date of the balance sheet. 2/16 Cash and cash equivalent For the purpose of preparing the cash flow statement, the item Cash and cash equivalent embraces cash balances, balances with the Central Bank of Egypt, current account balances with banks and Treasury bills with maturities of three months from the date of acquiring the same.

37 2/17 Depreciation and amortization 37 Fixed assets (except for land) are depreciated by the straight-line method. The depreciation installment of all additions made to the assets, from the date of addition or eligible use and not for the entire period, is calculated using proper depreciation rates determined on the basis of the estimated useful life of every asset according to the following rates: Tools and equipment 10% Computers 20% Furniture 25% Means of transportation 20% Buildings 5% Expenses of preparing and fixing premises 10% Fixed assets are recorded at their acquisition cost and booked as net financial assets to the balance sheet after deducting depreciation. Improvements and renovations expenses for the Bank s leased premises are amortized over the period of the lease contract or the estimated useful life whichever is shorter. Intangible assets additions are amortized over a 5-year period at most. Fixed assets of overseas branches are depreciated by following the straight-line method at rates that conform to the accounting standards at the country where the branch operates. 2/18 Taxes Taxes due from the Bank are calculated according to the applicable laws, regulations and instructions whether in Egypt or any country in which the Bank has branches. A provision for taxes is formed, after preparing the necessary studies, in the light of tax claims.

38 3- Financial instruments and related risk management 38 3/1 Financial instruments A. The Bank s financial instruments are embodied in the financial assets and liabilities. Financial assets encompass cash balances, current accounts and deposits with banks, as well as financial investments and loans to customers and banks, while financial liabilities involve customer deposits and "due to banks". In addition, financial instruments incorporate the rights and obligations listed under Contingent liabilities and commitments. Note No. (2) of the Notes to the Financial Statements highlights the applied accounting policy concerning the rules of recognizing and measuring the main financial instruments and the related revenues and expenses. B. Forward contracts: As per the regulations of the Central Bank of Egypt, the Bank can engage in forward contracts only to the extent necessary to cover its needs of foreign currency or its customers needs to meet their foreign currency obligations resulting from their transactions through the Bank. All these contracts are short-term transactions. 3/2 Managing risks related to financial instruments: A. Interest-rate risk: The values of some financial instruments may fluctuate subject to the change in their interest rates. The Bank adopts some procedures to minimize these risks as follows: Linking borrowing and lending interest rates. Taking the discount rates of various currencies as a guide in determining interest rates. Monitoring the maturities of financial assets and liabilities with their related interest rates.

39 39 Notes No. (29) and (30) of the Notes to the Financial Statements highlight statement of the maturities of financial assets and liabilities and statement of their related average interest rates applicable during the relevant period. B. Credit risk: Loans to customers and banks, financial investments in the form of bonds, current-account balances and deposits with banks, as well as the rights and obligations of others are all considered financial assets subject to credit risks. The risk is embodied in the potential default of any party in repaying all or part of the due amounts at maturity dates. The Bank adopts certain procedures to minimize the credit risk, mainly: Prepares credit studies on customers and banks before dealing with the same and determines the credit risk involved. Obtains sufficient guarantees to hedge against the risks that may arise upon customers' or banks' default. Conducts periodic evaluation of customers' and banks' creditworthiness and financial position to calculate the necessary provisions for non-performing loans. 4- Main accounting estimates and assumptions The Bank uses estimates and assumptions that affect the disclosed amounts of assets and liabilities during the next fiscal year. These estimates and assumptions are continuously evaluated based on historical experience and other factors containing the expectations of the future events that are considered reasonable in accordance with the available conditions and information. (A) Impairment of available for sale equity instruments The Bank determines the impairment of the shareholders equity instruments available for sale when there is a significant or continuous decline in fair value below their cost. A significant or continuous decline

40 40 needs a personal judgment. To make this judgment, the Bank assesses interalia the common share price volatility. In addition, impairment exists when there is evidence that the company invested in has a financial deterioration in its cash flows from operating and financing activities, industry or sector performance or technological advances. (B) Held to maturity financial investments Non-derivative financial assets with fixed or determinable payments and maturities are classified as financial investments held to maturity. This classification requires depending considerably on personal judgment, therefore the Bank tests whether there is a genuine intent and ability to hold such investments to maturity. If the Bank fails to hold such investments till maturity (except for certain circumstances such as selling an insignificant amount of financial investments held to maturity which are close to maturity date), such investments should be reclassified as available for sale. Accordingly, the said investments will be measured at fair value instead of amortized cost and the classification of any investments under this item will be suspended. 5- Financial assets held for trade (EGP MM.) 30/6/ /6/2009 Debt instruments: Government bonds 0 0 Other debt instruments Total debt instruments Foreign company shares 1 0 Total equity instruments 1 0 Total financial assets held for trade

41 6- Financial investments 41 (A) Financial investments available for sale: (EGP MM.) 30/6/ /6/2009 Listed debt instruments fair value 43,460 18,663 Listed equity instruments fair value Unlisted investments 5,036 3,063 Total financial investments available for sale (1) 48,929 ====== (B) Held to maturity financial investments: 22,672 ====== Listed debt instruments 1 1 Unlisted debt instruments 3,297 3,162 Total financial investments held to maturity (2) 3,298 3,163 Total financial investments (1+2) 52,227 ====== 7- Loans to customers and banks 25,835 ====== (EGP MM.) 30/6/ /6/2009 Discounted commercial bills Loans to customers 100,740 94,225 Loans to banks* ,880 94,655 Unearned discount (discounted commercial bills) (1) (4) Loan provision (18,271) (18,300) Earmarked returns (1,008) (1,224) Net loans and advances 81,600 ======= 75,127 ======= * Representing amounts due from some of the Bank s correspondents and maturing during the period from July 2010 to July 2017.

42 8- Loan provision (performing/ non-performing)+ 42 (EGP MM.) 30/6/ /6/2009 Specific General Total Specific General Total Balance at the beginning of the year 17,128 1,172 18,300 16, ,691 Provision made during the year (local branches) (NBE) Provision made during the year (local branches) (merged banks) Provision made during the year (overseas branches) 0 (4) (4) Transfers among provisions (636) 462* (174) (43)* Recoveries from loans previously written off Differences of re-evaluating provision balances in foreign currencies + (-) ,343 1,662 19,005 17,611 1,181 18,792 Used during the year (734) 0 (734) (483) (9) (492) Balance at the end of the year 16,609 1,662 18,271 17,128 1,172 18,300 =================================================================== * Transferred from the provision of performing loans in local and foreign currencies to the provision of non-performing loans in local and foreign currencies, in addition to the amount transferred from the provision of non-performing contingent liabilities in local and foreign currencies to the provision of non-performing loans in local and foreign currencies ++ Transferred from the provision of performing and non-performing contingent liabilities in local and foreign currencies to the provision of performing and non-performing loans in local and foreign currencies.

43 9- Financial investments in subsidiaries and associates 43 30/6/ /6/2009 EGP MM % EGP MM % A- Holdings in subsidiary banks and companies National Bank of Egypt (UK) Limited 1, , International Company for Animal Wealth Al Ahli Capital 4, , National for Real Estate Marketing and Consultancy Dreamland Co. for Conferences Dreamland Markets Co Dreamland Health Resort Dreamland Pyramids Co. for Golf Forsan Dreamland Co Dreamland Co. for Urban Development National Melamine and Urea Formaldehyde Co ,482 6,662 B- Holdings in associate banks and companies 1, ,860 ====== 7,593 ====== Financial investments in subsidiaries and associates are represented in: Financial investments quoted on stock exchange Financial investments unquoted on stock exchange 7,667 7,377 7,860 ====== Market value of financial investments quoted on stock exchange 724 ======= 10- Customers' deposits 7,594 ====== 739 ======= (EGP MM.) 30/6/ /6/2009 Demand deposits 13,349 12,984 Time and notice deposits 65,005 56,934 Certificates of saving and deposit 99,313 89,717 Saving deposits 62,993 56,050 Other deposits 4,068 3, ,728 ======= 218,889 =======