2005 - Bank ABC
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Registered Address Arab Banking Corporation Group ABC Tower, Diplomatic Area PO Box 5698, Manama Kingdom of Bahrain (Commercial Registration Number 10299) www.arabbanking.com Arab Banking Corporation Group Annual Report 2005 Our mission is to: • Consistently generate increasing value for our shareholders • Specialise in Arab-related activities across the world • Invest in international financial institutions that diversify and enhance shareholder value • Attract and retain high quality employees by providing rewarding careers Our key objectives are to create and maintain: • A strong presence in the Arab world, and internationally, to complement and achieve optimal diversification of our earning stream • A strong risk management process • An effectively managed expense base focused on generating increasing shareholder value • A strong and liquid financial institution with emphasis on asset quality Contents FINANCIAL STATEMENTS 2 The Board of Directors 29 Auditors’ Report 4 Directors’ Report 30 Consolidated Balance Sheet 8 Global Network 31 Consolidated Statement of Income 9 Financial Highlights 32 Consolidated Statement of Cash Flows 10 The President & Chief Executive’s Review of Operations 23 Corporate Governance 26 Group Financial Review 33 Consolidated Statement of Changes in Equity 34 Notes to the Consolidated Financial Statements 51 Head Office Directory FABR 173 52 International Directory 1 ABC’s Project Finance team with a United Stainless Steel Company (USCO) official at the construction site for USCO’s new stainless steel mill in Bahrain. extensive local presence “Our vision is to be the premier and most innovative international Arab financial group. The way ahead remains challenging, but we are confident that the Group is well on the way to achieving its strategic aims.” Mr. Mohammed H. Layas, Chairman Annual Report 2005 ABC Group The Board of Directors .................................. .................................. .................................. Mr. Mohammed .................................. .................................. .................................. .................................. Husain Layas .................................. .................................. .................................. EC * RC * .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. Mr. Khalifa .................................. .................................. .................................. .................................. Mohammed .................................. .................................. .................................. Al-Kindi .................................. .................................. .................................. EC✚ GC * .................................. .................................. .................................. .................................. .................................. Libyan Chairman B.A. Accounting and Business Management, University of Benghazi, Libya; Diploma of the Institute of Economic Development, Washington, U.S.A. U.A.E. citizen Deputy Chairman B.Sc. in Economics, East Michigan University, U.S.A. Kuwaiti Deputy Chairman B.Sc. in Economics, Alexandria University, Egypt. Deputy Managing Director, Abu Dhabi Investment Authority, Chairman, National Bank of Abu Dhabi and a Director of Abu Dhabi Aviation. Mr. Al-Kindi is also a Director of ABC International Bank plc, U.K. He has been a Director of ABC since 1992 and has over 25 years’ experience as an investment banker as well as holding a number of directorships in various public corporations. Second Vice Chairman, Kuwait Chamber of Commerce & Industry. Director of Kuwait Investment Authority. Past offices include Minister of Trade and Industry of Kuwait; General Manager of Kuwait Investment Company and of Kuwait Clearing Company. Mr. Al-Mutairi is also a Director of ABC International Bank plc, U.K. He has been a Director of ABC since 2001 and has more than 35 years of commercial and financial industry experience. Chairman, Libyan Foreign Bank. Deputy Chairman and former Director of British Arab Commercial Bank, London, U.K, Banque Intercontinentale Arabe, Paris, France and Arab International Bank, Cairo, Egypt. Mr. Layas joined the Board of ABC in 2001 with over 35 years’ experience in international banking. .................................. .................................. .................................. Mr. Farhat Omar .................................. .................................. .................................. .................................. Ekdara .................................. .................................. .................................. EC GC NC .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. Director Libyan B.A. in Economics, Garyounis University, Libya; Masters Degree in Money, Banking and Finance, Sheffield University, U.K. The Board of Directors 2 Governor, Central Bank of Libya; and Chairman of ABC International Bank plc, U.K. A former Deputy Chairman of Wahda Bank, Libya, Mr. Ekdara has been a Director of ABC since 2001 and has over 15 years’ experience in banking and other business sectors. EC GC .................................. .................................. .................................. Mr. Abdallah Saud .................................. .................................. .................................. .................................. Al Humaidhi .................................. .................................. .................................. EC GC NC* .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. Director M.S. American University of Beirut. Kuwaiti Chairman and Managing Director, Commercial Facilities Company, Kuwait and Member of the Board and the Executive Committee of Kuwait Investment Authority. Mr. Al Humaidhi is also a Member of the Board of Kuwait Chamber of Commerce & Industry and Director of Arab Banking Corporation – Egypt (S.A.E.). He has been a Director of ABC since 2001 and has over 20 years’ experience in the banking and investment sectors. Member of the Executive Committee AC Member of the Audit Committee NC Member of the Corporate Governance Committee RC Member of the Risk Committee * Chairman ABC Group Annual Report 2005 .................................. .................................. .................................. Mr. Hilal Mishari .................................. .................................. .................................. .................................. Al-Mutairi .................................. .................................. .................................. EC✚ .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. Mr. Eissa Mohammed .................................. .................................. .................................. .................................. Al Suwaidi .................................. .................................. .................................. EC AC * .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. Director U.A.E. citizen B.Sc. in Economics, Northeastern University of Boston, U.S.A. Executive Director of Abu Dhabi Investment Authority and Director of Abu Dhabi National Oil Company For Distribution (ADNOC-FOD), International Petroleum Investment Company and National Bank of Abu Dhabi. Also Vice Chairman of Arab Banking Corporation - Egypt (S.A.E.). He has been a Director of ABC since 1995, with over 20 years in investment banking. Member of the Nomination and Compensation Committee ✚ Deputy Chairman .................................. .................................. .................................. Dr. Anwar Ali .................................. .................................. .................................. .................................. Al-Mudhaf .................................. .................................. .................................. AC RC .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. Saudi Kuwaiti Director M.B.A. and Ph.D. in Finance, Peter F. Drucker Graduate School of Management, Claremont Graduate University, California, U.S.A. Director Ph.D. in Agricultural Economics, Oklahoma State University, U.S.A. General Manager, Arab Investment Company, Riyadh; Member of the Boards of Saudi International Petrochemical Company, Jubail and Saudi Investment Fund, London, U.K.; Chairman, Saudi Moroccan Development Investment Company, Casablanca. Dr. Humaidan is also the Deputy Chairman of Arab Banking Corporation (Jordan). He has over 25 years of experience in the economic and investment fields gained through his work at the Saudi Arabian Ministry of Planning, the Saudi Development Fund, and the Arab Investment Company. Dr. Humaidan joined ABC as a Director in 2001. Dr. Al-Mudhaf is currently the Chairman & CEO of Al-Razzi Holding Company; the General Manager of Kuwait Health Insurance Company; Chairman of Banco ABC Brasil; a Director of Credit One Company Kuwait for Commerce & Programmes; a Director of the Board of Governors in the Oxford Institute for Energy Studies; a Director of the Kuwait Public Institute for Social Security. He is also a lecturer in corporate finance; investment management and financial institutions at Kuwait University. Dr. Al-Mudhaf has formerly served as an advisor to the Finance and Economic Affairs Committee at Kuwait’s Parliament. Dr. Al-Mudhaf joined ABC's Board in December 1999 and has over 15 years’ experience in banking and finance. .................................. .................................. .................................. Mr. Yousef Abdelmaula .................................. .................................. .................................. .................................. EC GC .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. Dr. Saleh Lamin .................................. .................................. .................................. .................................. El-Arbah .................................. .................................. .................................. AC .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. Libyan Libyan Director B.A. in Economics, University of Benghazi, Libya; M.B.A. University of Hartford, U.S.A.; Ph.D. in Economics, Academy of Science, Hungary. Director M.B.A. Hartford University, U.S.A. Mr. Abdelmaula is the Executive Director of the Libyan Foreign Investment Board. He serves also as Director on the boards of Libyan Foreign Bank and Arab Banking Corporation (Jordan). Mr Abdelmaula has more than 20 years of banking and investment experience. .................................. .................................. .................................. Dr. Khaled S. Kawan .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. Director of Accounting at the Central Bank of Libya; former Undersecretary of the Ministry of Planning, Economy and Commerce, Libya. Also a Director of Arab Banking Corporation - Tunisie. Dr. El-Arbah has been a Director of ABC since 1996 and has over 30 years’ experience in central government. Dr. El-Arbah previously held a chair in Macroeconomics from the University of Gharian (Libya). .................................. .................................. .................................. Mr. Mubarak Rashid .................................. .................................. .................................. .................................. Al-Mansouri .................................. .................................. .................................. NC RC .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. U.A.E. citizen Director B.Sc. in Finance, M.B.A. University of West Florida, U.S.A. Director General, Abu Dhabi Retirement Pensions and Benefits Fund, Abu Dhabi; Director of Arab International Bank, Egypt; also Director of Arab Banking Corporation (Jordan). Mr. Al-Mansouri has been a Director of ABC since 1997 and has more than 15 years’ experience in investment and commercial banking. .................................. .................................. .................................. Mr. Hassan Ali Juma .................................. .................................. .................................. .................................. AC RC .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. Bahraini Director Fellow of the Chartered Institute of Management Accountants (FCIMA), U.K. Managing Director of National Bank of Bahrain; Chairman of Bahrain Telecommunications Company. Also Director of ABC International Bank plc, U.K. Mr. Juma has been a Director of ABC since 1994. He has more than 25 years’ experience as a commercial banker. 3 The Board of Directors .................................. .................................. .................................. Dr. Saleh Helwan .................................. .................................. .................................. .................................. Al Humaidan .................................. .................................. .................................. NC .................................. .................................. .................................. .................................. .................................. .................................. .................................. .................................. Libyan Secretary to the Board & Legal Counsel Ph.D. (Doctorat D'Etat) in Banking Laws, University of Paris (Sorbonne), France. Secretary to ABC's Board of Directors since July 1992, Dr. Kawan joined ABC in June 1991, having previously spent some time with a prime French Law firm in Paris. He was made Legal Counsel and Head of Legal & Compliance in March 2004. Dr. Kawan also represents ABC as a Director on the boards of Arab Banking Corporation – Egypt (S.A.E.) and Arab Banking Corporation (Jordan). Annual Report 2005 ABC Group Directors’ Report Last year we said that 2004 marked a turning point for ABC, at the time it shed its largest non-core subsidiaries and embarked on a major organisational restructuring. Mr. Mohammed H. Layas, Chairman (All figures stated in US dollars) Directors’ Report 4 The first action freed up substantial resources from two highly profitable disposals, providing a considerable boost to ABC’s capital base and laying down the necessary conditions for it to embark on future expansion. The second shifted the Group’s orientation away from a mainly geographical configuration towards a strictly product-based structure, designed to encourage and stimulate the latent synergies available from re-focusing Group units on a set of common goals. 2005, the first full year under the new structure, did not disappoint. As the units settled into the new modus operandi it quickly became apparent that the product-based matrix template worked exceedingly well. The business units, from the branches and marketing offices of ABC International Bank plc – the Group’s European arm – to the Arab world wholesale and retail banking units, to the New York and Singapore offices, committed themselves to the new marketing regime, resulting in deal after deal being arranged jointly between offices often an ocean apart, or introduced by banking subsidiaries in the Arab World to mainstream specialist departments, or passed to other subsidiaries in the Group better able to assist the client. The published result, an 18% increase in net profit to $129 million is highly commendable given that the disposals in 2004 effectively reduced the Group’s total assets by 50% (and total loans and advances by over 60%), significantly impacting its historical earning capability. Combined with the increase in its capital base the Group was left quite under-leveraged (at year-end 2004 its risk asset ratio - RAR - stood at 23.9%). Total assets grew in 2005 by 18%, and total loans and advances by 14% (an increase of $821 million) resulting in RAR of 19.9% at the year-end. It is a tribute to the new product groups that the lost revenues from the erstwhile Spanish and Hong Kong subsidiaries have been entirely replaced – and more – by healthy, new-shoot growth in the Group’s core businesses. Naturally, it will take time to build our assets to the optimal level - especially as we are determined not to sacrifice asset quality in the name of growth - but the year’s performance amply demonstrates, in our view, the wisdom of our charted course. Through steady and cautious asset expansion and judicious fee-earning product acquisition, combined with good impaired asset recovery management, the Group was therefore able to increase its net operating income by 16% to $366 million. After deduction of operating expenses of $211 million, representing a growth rate over 2004 of only 6% - and that largely accountable by higher ABC Group Annual Report 2005 performance-related staff expenses - the Group realised a pre-tax profit of $155 million, 34% up on 2004. In addition to the successful bedding in of the product-based matrix structure, 2005 also witnessed the implementation of a corporate matrix structure, building on the product matrix paradigm, covering the key support areas of risk management, information technology and audit. This additional layering of the matrix structure now reinforces the relationship between Group headquarters and business units, to an extent never seen before. The change represents not simply a move towards a more centralised institution administratively but, vitally, a more synergistic Group where all units, through their various departmental connections with other Group members and Group headquarters, are made aware of the work and initiatives of others, of their own contribution to the Group commonwealth and of the benefits available to them from this lattice-work of interlocking relationships. As these groundbreaking events were unfolding, another quiet revolution was taking place in risk management in ABC Group – the creation of an infrastructure designed both to emphasise and institutionalise the more conservative credit culture now consciously adopted by the Group and to capture the synergistic potentialities available from a multi-layered matrix-based organisation structure. 2004 had seen the creation of the Board Risk Committee at the apex of the credit decision process, charged with determining the Group's risk strategy and policy, ensuring the continuous evaluation of the risks to which the Group is exposed and designing and implementing appropriate internal controls to minimise those risks. This was followed in 2005 by two further significant initiatives: the establishment by each subsidiary of its own Board Risk Committee with analogous responsibilities, guided by Head Office Risk Department, and the commencement of a two-year technology project to implement a new credit risk management infrastructure. The technology upgrade is now more than halfway complete and should not only provide the Group with full Basel II compliance capability but should moreover significantly enhance analytical standards and risk assessment competencies. One further building block was laid down over the last two years – the introduction of new job evaluation and performance assessment systems, initially at ABC Head Office but destined for implementation at all subsidiaries, branches and representative offices. The job evaluation system grades all jobs from top management Total Assets ($ million) 20,000 15,000 10,000 5,000 0 Deposits ($ million) 10,000 5,000 0 14,922 ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ 2004 2005 ........................................ 10,587 13,418 Shareholders’ Funds ($ million) 2,000 1,500 1,000 500 17,588 0 ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ 2004 2005 ........................................ 1,926 1,852 Short and Long Term Loans ($ million) 4,000 3,000 2,000 1,000 0 2004 2005 ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ 2004 2005 ........................................ Short term Loans 3,366 3,723 Long term Loans 2,646 3,110 Assets Breakdown Percentage ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. ................................................. 2004 2005 ................................................. ................................................. ................................................. 2004 37% 2005 34% Arab World 27% 20% 4% 5% Western Asia Europe 22% 30% 6% 6% 4% 5% North Latin Others America America 5 Directors’ Report 15,000 ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ ........................................ 2004 2005 ........................................ the pre-eminent financial institution 2005, the first full year under the new structure, did not disappoint. As the units settled into the new modus operandi it quickly became apparent that the product-based matrix template worked exceedingly well. Annual Report 2005 ABC Group Directors’ Report down, while under the ‘Balanced Scorecard’ system the performance of each individual is assessed in a transparent manner against set objectives. Compensation is then determined by reference to that individual’s contribution to team results, within the context of overall Group performance. This combination of factors – the opportunity to build the Group’s balance sheet selectively and judiciously, adhering to new, strong credit assessment and judgmental techniques set in a conservative credit and supportive Groupwide organisational culture, with a shared and strong value system and supported by a management by objective approach – will, we are confident, be a major contributor to the Group’s ability to achieve consistent, continually improving, shareholder returns In the future. In our quest for reliable medium term funding, 2005 saw the successful launch of ABC’s $2.5 billion Euro Medium Term Deposit Note (EMTDN) programme, listed on the London Stock Exchange and designed to give ABC multi-currency medium term funding flexibility. ABC’s successful benchmark debut issue under the programme, a $400 million 5-year floating rate deposit note issue, rated BBB by Standard & Poor’s and Fitch Ratings, provided hard evidence of the recognition accorded the Group’s strength and recent performance by both rating agencies and the international investment market. Looking ahead, the Group, in recognition of the sea change witnessed in recent years in the economic performance across the Arab world – which we are convinced is not wholly the result of higher hydrocarbon prices – and the increasing sophistication of regional investors who seek experienced international fund managers and alternative and cheaper finance and capitalraising sources, has decided on the creation of a new key product group, Investment Banking. The new group was formally launched in January 2006 with the addition to ABC’s senior management team of an Investment Banking head, soon to be joined by a selected team of specialists in corporate finance, capital and equity markets, and fund management. Directors’ Report 6 Meanwhile, we remain on track with our plans for gradual extension of our representation throughout the MENA region. At our domestic banking subsidiaries, we continue to expand our branch, ATM and cash deposit machine networks and to complete the implementation of Internet and SMS technologies in those units not yet offering these services, in our efforts to widen our customer base. The year will also mark the completion of the deployment of the global technological upgrade programme for all the wholesale banking units, together with the major part of the implementation of the new retail banking standardisation programme to unify all the domestic subsidiaries. In the wholesale banking arena, the new Iraq branch, established in late 2005 and already providing trade finance services to several Iraqi government agencies and multinationals, will gradually widen its product and customer base. As negotiations progress with the Libyan Central bank in regard to our outstanding operating licence application there, the Group has now opened similar discussions with the Central bank of Syria. A representative office was meanwhile inaugurated in Lebanon in early 2006. In closing, as our Group looks forward with confidence to steady and cautious growth, the Board would like to record its appreciation for the continuing dedication and professionalism of the Group’s management and staff, in particular this year for their enthusiastic response to the need to adjust to new ways of working and collaborating with their colleagues. We would also like to express our thanks to all the regulatory authorities overseeing our operations throughout the world for their guidance, in particular to the Bahrain Monetary Agency for its unstinting support. Mohammed Layas Chairman Note: In compliance with the Bahrain Monetary Agency Circular No. BMA/751/93, EDBC/782/93 and ODG/407/03 set out below are the interests of Directors and Senior Managers in the shares of Arab Banking Corporation (B.S.C.) and the distribution of shareholding for the year ended 31 December 2005. 1/1/2005 31/12/2005 Directors’ Shares Senior Managers’ Shares 9,670 16,923 9,670 532 Total 26,593 10,202 Directors’ remuneration, allowances and expenses for attendance at Board meetings for 2005 amounted to US$1,524,000 (2004: US$ 1,282,000). No. of shares 2005 No. of shareholders % of total outstanding shares 8,407,479 10,021,134 81,571,387 100,000,000 1,328 5 3 1,336 8.41 10.02 81.57 100.00 No. of shares 2004 No. of shareholders % of total outstanding shares 8,407,479 10,021,134 81,571,387 100,000,000 1,343 5 3 1,351 8.41 10.02 81.57 100.00 % of shares held Less than 1% 1% up to less than 5% 5% up to less than 10% 10% up to less than 20% 20% up to less than 50% 50% and above Total ABC Group Annual Report 2005 Directors’ Report 7 embarking on future expansion We remain on track with our plans for gradual extension of our representation throughout the MENA region. Annual Report 2005 ABC Group Global Network 2005 Highlights .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... ARAB WORLD DIVISION OTHER SUBSIDIARIES THE ABC GROUP .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... Global Network 8 .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. ABC International Bank plc .................................................................................................................................................................................................................. ABC Parent (ABC BSC) Arab Banking Corporation – Algeria .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. US$ millions .................................................................................................................................................................................................................. US$ millions US$ millions .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. Total Assets 3,399 .................................................................................................................................................................................................................. Total Assets 341 .. .................................................................................................................................................................................................................. .. Total Assets 12,941 .................................................................................................................................................................................................................. .. Total Loans and Advances 1,352 Total Loans and Advances 83 .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. Total Deposits 2,582 .. Total Deposits 272 .................................................................................................................................................................................................................. Total Loans and Advances 3,371 .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. Shareholders’ Funds 444 Shareholders’ Funds 46 .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. Total Deposits 9,381 Number of Branches 4 .................................................................................................................................................................................................................. Number of Branches 4 .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. Shareholders’ Funds 1,926 .. .................................................................................................................................................................................................................. Banco ABC Brasil S.A. .. ABC Islamic Bank (E.C.) .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. US$ millions .. US$ millions .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. Total Assets 1,094 .. Total Assets 610 .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. ABC Group .. .................................................................................................................................................................................................................. Total Loans and Advances 835 Total Loans and Advances 374 .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. Total Deposits 862 .................................................................................................................................................................................................................. Total Deposits 549 .. .................................................................................................................................................................................................................. .. US$ millions .................................................................................................................................................................................................................. .. Shareholders’ Funds 136 Funds Shareholders’ 56 .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. Number of Branches 4 .. Number of Branches .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. Total Assets 17,588 .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. Arab Banking Corporation (Jordan) .. .................................................................................................................................................................................................................. Total Loans and Advances 6,833 .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. US$ millions .. .................................................................................................................................................................................................................. .. Total Deposits 13,491 .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. Total Assets 581 .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. Shareholders’ Funds 1,926 .. Total Loans and Advances 261 .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. Total Deposits 422 .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. Shareholders’ Funds 75 .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. Number of Branches 13 .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. Arab Banking Corporation – Egypt (S.A.E.) .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. US$ millions .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. Total Assets 409 .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. Total Loans and Advances 179 .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. Deposits Total 296 .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. Shareholders’ Funds 96 .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. Number of Branches 12 .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. Arab Banking Corporation – Tunisie, S.A. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. US$ millions .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. Total Assets 217 .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. Total Loans and Advances 45 .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. Total Deposits 203 .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. Shareholders’ Funds 10 .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. Branches Number of 1 .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. .................................................................................................................................................................................................................. .. ABC Group Annual Report 2005 Financial Highlights 2004 2003 Re ed * 2002 Re ed ** 2001 .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... Ea n ngs Ne n e es ncome 193 152 158 464 469 .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... 159 153 259 257 293 O he ope a ng ncome US$ m on .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... a ope a ng ncome 417 721 762 To 352 305 .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... P o be o e p ov s ons ax and m no y n e es s 141 106 203 230 288 .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... W eback/(P ov s ons o c ed osses) 14 10 (74) (204) (128) .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... 87 26 160 P o be o e ax and m no y n e es s 155 116 .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... 129 109 71 (41) 102 Ne p o ( oss) o he yea om con nu ng ope a ons .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... Ne p o o he yea om d scon nued ope a ons 470 49 .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... F nanc a To a asse s 17 588 14 922 30 068 28 915 26 545 .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... and advances 833 012 15 921 14 981 14 225 Loans 6 6 Pos on .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... 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.................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... 593 184 86 373 341 T ad ng secu es .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... ad ng secu es 003 617 5 204 4 632 3 616 Non T 6 3 .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... 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P o ab y Ra os % .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... Cos ncome a o (cos s as % o g oss ope a ng ncome) 60 65 51 68 62 .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... 68 30 1 79 (2 8) 54 Ne p o ( oss) as % o ave age sha eho de s unds .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... Ne p o ( oss) as % o ave age asse s 0 81 4 07 0 83 (0 15) 0 38 .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... 1 84 1 93 1 81 1 54 D v dend cove ( mes) .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... Cap a .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... R sk we gh ed asse s (US$ m on) 10 476 8 249 18 051 19 015 17 891 .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... 2 089 1 974 2 661 2 495 2 373 Cap a base (US$ m on) .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... R sk asse a o - T e 1 17 6 15 7 12 0 11 5 11 8 .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... 19 9 23 9 14 7 13 1 13 3 R sk asse a o To a .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... 11 9 13 5 10 5 52 72 Ave age sha eho de s unds as % o ave age o a asse s .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... 3 5 3 2 10 0 10 9 7 6 Loans and advances as a mu p e o sha eho de s unds ( mes) .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... 81 70 17 6 19 8 12 9 To a deb as a mu p e o sha eho de s unds ( mes) .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... 0 82 0 99 1 17 1 59 0 97 Te m nanc ng as mu p e o sha eho de s unds ( mes) .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... 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Asse s .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... Loans and advances as % o o a asse s 38 9 40 3 52 9 51 8 53 6 .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... 37 5 25 5 17 6 17 3 14 9 Secu es as % o o a asse s .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... oss oans ua oans as % o g 4 9 45 Non-acc 4 5 3 6 5 1 .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... 154 6 141 4 102 0 94 7 94 8 Loans oss p ov s ons as % o non-acc ua oans .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... Loan oss p ov s ons as % o g oss oans 56 72 46 46 43 .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... 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L qu d asse s a o 57 8 56 4 42 1 43 1 40 9 .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... Depos s o oans cove ( mes) 2 0 1 8 1 6 1 5 15 .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... Sha e $1 29 $5 79 $1 20 ($0 41) $1 02 Bas c Ea n ngs pe sha e - P o o he yea .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... n o ma on -Po om con nu ng ope a ons $1 29 $1 09 $0 71 $0 00 $0 00 .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... D v dends pe sha e Cash $ 0 70 $ 2 90 $ 0 70 $ 0 00 $0 70 .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... ock S 0 062 sha es .................................................................................................................................................................................................................... .................................................................................................................................................................................................................... ............................................................................................................................................................................ Ne asse va ue pe sha e $19 26 $18 52 $16 84 $14 57 $19 89 Cap a sa on US$ m on Au ho sed ssued Subsc bed and u y pa d-up 1 500 1 000 1 500 1 000 1 500 1 000 1 500 1 000 1 500 1 000 * F gu es o 2003 es a ed o exc ude amoun s e a ng o he d scon nued ope a ons whe e equ ed ** F gu es o 2002 es a ed o ow ng ev s ons o n e na ona Accoun ng S anda d 39 P nc pa sha eho de s Reg s e ed add ess Kuwa nves men Au ho y (Kuwa ) Cen a Bank o L bya (L bya) Abu Dhab nves men Au ho y (Abu Dhab ) nd v dua and ns u ona nves o s A ab Bank ng Co po a on (B S C ) ABC Towe D p oma c A ea PO Box 5698 Manama K ngdom o Bah a n Pub y quo ed ompany ed on Bah a n S o k Ex hange Comme a Reg a on Numbe 10299 Annual Report 2005 ABC Group 9 F nanc a H gh gh s 2005 The President & Chief Executive’s Review of Operations Although world economic growth fell short of 2004’s record 5%, the 4.7% p.a. average growth over the last 2 years amply demonstrates the pace of expansion exhibited by the strongest economies. Ghazi M. Abdul-Jawad, President & Chief Executive (All figures stated in US dollars unless otherwise indicated) The President & Chief Executive’s Review of Operations 10 In the OECD, South Korea led the way with an estimated 4.1% GDP growth, followed by the United States with 3.5%. Japan managed an encouraging 2.5%. Although the euro zone’s overall growth was muted (several countries managing only 1% or so), some countries performed well – Spain for example turning in a remarkable 3.3%. Britain recorded 1.7% growth. China’s growth was, at an estimated 9.3%, again the highest among Asian economies, although India’s booming economy is fast closing the gap. The Arab world, too, saw robust economic expansion. While oil and gas producers reaped the benefits of higher energy prices, the non-energy producers also benefited, as continued economic growth in the industrialised economies helped to sustain demand for their agricultural and merchandise export products and tourism services. Population-driven imperatives also led to many infrastructure project start-ups such as those in the water, power, telecoms and transportation sectors. Liquidity in the region continued to rise, flowing into regional stock markets and property as well as infrastructure and tourism developments. The Group was in turn able to benefit from these favourable conditions, by taking full advantage of its lead position in the region as a provider of speciality financial products - project, structured, trade and Islamic financing, forfaiting, tailored treasury products and advisory services - as much as through the extension of traditional trade finance and retail banking services. Thus, despite the pressure on margins caused by high market liquidity, we were able to maintain our interest revenues from our loan portfolio through portfolio growth of nearly 14%. While the Group rebuilds its leverage following the major disposals in 2004, excess equity is invested in low-risk instruments and earnings from this source therefore increased significantly. These factors contributed to a 27% rise in our net interest income. Although our non-interest income increased by only 4%, this was better than had been expected considering the lead time applicable to the many medium-term project and other structured financings currently in course of completion. Our total income, excluding loan loss provision write-backs, was therefore $47 million, or 15%, above that for 2004. By keeping the rise in our operating expenses down to 6%, we were able to achieve a net operating income (including provision write-backs of $14 million) of $155 million, more than 33% higher than 2004’s $116 million, a most satisfactory result. ABC Group Annual Report 2005 I mentioned last year that the Group had identified six key product areas on which to focus its development efforts in the future – Treasury, Trade Finance, Project & Structured Finance, Retail Banking, Islamic Banking and Syndications. The progress of these product groups is outlined in the following pages, together with that of individual retail banking subsidiaries, ABC International Bank plc – responsible for assisting and financing European-MENA trade flows on behalf of the Group - ABC Brasil S.A. and our key head office departments. To these products we have, however, decided to add a seventh – Investment Banking. The decision to create a new product group, based in Bahrain, is the result of our conviction that the MENA region’s recent strong growth represents not just a temporary surge in investment activity fuelled by increased oil and gas revenues but is, rather, indicative of a fundamental shift in the region’s economic landscape. Indeed, the energy-producing countries continue to base their annual budgets on highly conservative assumptions, such that even if oil prices were to fall below, say, $50 a barrel, this would not affect the projects and other expenditure planned for the medium term – particularly by the GCC countries. We believe that scheduled infrastructure expenditure by both the oil producing and non-producing states is now largely driven by those states’ need to satisfy the demands of their growing populations for employment and higher living standards. Moreover, these governmental initiatives are rapidly being followed by new privateenterprise investment from within the region and abroad. We are convinced that the region is now ready for the development of regional capital markets and stock exchanges and for intermediation services which channel the resources of private savers and investors into new forms of funding for investors seeking to leverage on their equity stakes in new projects and enterprises. The task of our new product group will be to provide the conduit for these initiatives, by way of corporate finance and advisory services, public and private equity issues, private placements and, for the investor, first class fund management services. We shall be actively building the stage for this venture over 2006 and I hope to report satisfactory progress next year. The President & Chief Executive’s Review of Operations 11 robust economic expansion The Group had identified six key product areas on which to focus its development efforts in the future – Treasury, Trade Finance, Project & Structured Finance, Retail Banking, Islamic Banking and Syndications. Annual Report 2005 ABC Group The President & Chief Executive’s Review of Operations As our product groups develop new business relationships throughout the MENA region and in those countries that form the region’s natural trading partners, while the Arab World Division builds on our existing platforms through network and service expansion and the establishment of promising new regional outlets, we believe we are now well on the road to achieving consistent double-digit growth. ..................................................................................................... ..................................................................................................... ..................................................................................................... ..................................................................................................... ..................................................................................................... Product Groups ..................................................................................................... ..................................................................................................... The President & Chief Executive’s Review of Operations 12 Group Treasury Group Treasury’s role as central coordinator of ABC Group’s funding and liquidity management remains the most important of its strategic objectives of liquidity, profitability and customer relationships. ABC’s liquidity is monitored daily to ensure that ABC Group is prepared and able to meet any contingency arising worldwide. ABC Group’s medium-term requirements are met through a combination of certificates of deposit, note issues, private placements and other borrowings by ABC or ABCIB, managed or coordinated by Group Treasury. In 2005, Group Treasury successfully launched a $2.5 billion EMTDN (Euro Medium Term Deposit Note) Programme, mandated to Citibank and HSBC and listed on the London Stock Exchange. The Programme was structured to enable deposit notes to be issued, in order that investors would rank pari passu with all other large depositors under Bahrain Law. Both the Programme itself, and ABC’s debut issue of 5-year floating rate deposit notes, were given long term ratings of BBB by S&P and Fitch Ratings and, due to oversubscription, the benchmark issue was successfully closed at $400 million. The issue also introduced the Group to a whole new set of investors, mainly from European and Far Eastern markets. The Programme’s flexibility will enable ABC to enter into bilateral transactions and private placements in any currency, or over any period, in addition to launching further general issues. Under Group Treasury’s direction, the core Bahrain and London Hubs have also continued to focus on diversification of ABC Group’s funding and revenue streams. Both these hubs, through aggressive calling and regular interaction at all levels, have been building a diversified funding base, widening and deepening relationships with corporate and financial institutional customers, central banks and government entities, as well as developing Islamic and other products designed to encourage new funding sources and fee income business. Group Treasury also made great strides in its role as a major revenue generator and contributor to ABC Group’s overall profitability. Treasury’s FX and Derivatives trading and proprietary portfolio activities have helped in diversifying ABC Group’s revenue mix and its performance was recently recognised externally when ABC received the accolade ‘Best Treasury Bank in the Middle East’ under Euromoney magazine’s 2005 Awards for Excellence. The Group was in turn able to benefit from these favourable conditions, by taking full advantage of its lead position in the region as a provider of speciality financial products. ABC Group Annual Report 2005 Project & Structured Finance ABC has the largest dedicated project and structured finance team based in the Arab world, providing advisory, structuring and arranging services to a growing regional and international client base. In addition to its Bahrain headquarters, the Project & Structured Finance group, which was expanded in 2005 to meet the demands of an exceptionally strong market, maintains specialist teams in London and Paris, allowing it to cover the entire MENA region more effectively. The launch of the $3.6 billion Qatargas II financing in the summer of 2004 marked the beginning of a surge in Middle East project financings that has yet to abate. The GCC in particular accounted for a significant part of the $30 billion raised in 2005 for Middle East projects, including a number of high profile loan arrangements in which ABC was a mandated lead arranger. Successful deals include $1.5 billion for Qatar Chemical Company (II) and $760 million raised for the related Qatofin project; $4.6 billion for Ras Laffan Liquefied Gas Company; $1.011 billion for Bahrain Petroleum Company’s low sulphur production project and $770 million raised for Aromatics Oman LLC. One of the main factors responsible for the recent tremendous increase in project activity is the availability of low-cost hydrocarbons, which has enabled regional oil and gas-rich states to push ahead with petrochemical and industrial development projects benefiting, respectively, from low cost feedstock and low electricity prices. Non-hydrocarbon producing countries, too, have initiated infrastructure and privatisation programmes, designed to broaden their economic base. Several such projects are now either in the advanced planning stage - for example in Tunisia, Morocco and Jordan - or indeed have already been completed, as with Turkey’s recent port, telecom and steel privatisations. Population growth is also driving infrastructure development in the region - as demand for power and potable water grows exponentially, new plants or major expansions are being planned throughout the region. Here, ABC was able to expand the scope of its advisory services in 2005 with a joint P&SF Bahrain/London team supporting one of the bidders for the acquisition and expansion of a power and water plant in Bahrain. Building on its experience in regional telecoms, P&SF also achieved notable success as a mandated lead arranger for the $490 million financing for Algeria’s third GSM licence on behalf of Wataniya Telecom Algeria. Current growth trends look set to continue, with over $75 billion of projects in the pipeline. However, the financing arena is very competitive. Several international banks with significant underwriting appetite have recently entered the local project finance market and this together with the strong regional liquidity has put pressure on lending margins. P&SF has therefore concentrated on seeking lead arranging mandates where yields can be enhanced through subsequent sell-down. Furthermore, as growth trends extend across Trade Finance Global Trade Finance activities are centred on the Group’s two hubs, at ABCIB’s European headquarters in London and the head office in Bahrain. During 2005 the London Hub’s Trade Finance unit enjoyed a further increase in turnover, especially in receivables financing, forfaiting and other forms of bespoke trade finance, which complement its more traditional products such as documentary letters of credit, guarantees, bonding and commodity finance. As ABCIB Trade Finance has begun to reap the twin benefits of the inter-Group synergies emerging out of the product matrix structure and the closer integration of ABCIB’s European branches and new marketing offices, its contribution to the Group has increased significantly. Total volumes for on and off balance sheet items in 2005 thus exceeded US$5.5 billion, the result of the financing of trade flows to and from 19 Arab world countries. The Bahrain Hub’s Trade Finance unit, meanwhile, continued to grow its origination and distribution capabilities, firmly establishing itself as an integral part of the product group’s activity. The Bahrain unit’s Trade Finance product range is equally diverse, although its key growth area is in its forfaiting activity. With the Singapore representative office now focusing its efforts on trade finance and forfaiting under the direction of the Bahrain unit, Bahrain Trade Finance hopes to develop opportunities to finance more Far EastMENA trade flows. In 2005 the product group’s efforts and performance were duly recognised through the award of ‘Best Regional Bank in the Middle East and North Africa’ by Trade Finance magazine and ‘Best Trade Bank in the Middle East’ by Trade & Forfaiting magazine. For 2006, its increased profile and marketing activities look to continue, as it seeks to leverage on its expanding client base to increase opportunities for intermediating in the increasing international trade flows with the MENA region. Islamic Financial Services In 2005, the Islamic Financial Services product group underwent rapid development in terms of product range offered, skill base employed, asset growth and profitability. ABC Group’s Islamic finance activities now stretch across wholesale, corporate, treasury and retail areas, benefiting from access to the Group’s geographically diverse network, with its availability to both the Arab world and western markets, and from the synergistic advantages available from harnessing the skills of its teams of specialists in project finance, trade finance, syndications, treasury and capital markets. Equally, the Shari’a-compliant structuring expertise of ABC Islamic Bank in Bahrain and ABCIB’s Islamic Asset Management unit in London is a central resource available to other ABC product groups and banking units. There were some notable achievements in product development during the year, many of them innovative and groundbreaking in the Islamic banking market. ABC Islamic Bank launched a highly successful sukuk issue – the first of its kind - on behalf of a leading Kuwaiti consumer finance and investment company. It also unveiled two new Shari’a-compliant hedging instruments, both of which were well received by investors in the marketplace. Meanwhile, ABCIB announced the first buy-to-let, self-certification and discounted rate Islamic mortgage products aimed at British resident Muslims - hailed by Muslim community leaders and commentators for achieving real equivalence with conventional mortgage products, these offerings were an immediate success and business volumes have grown quickly. The London team also rolled out a Shari’a-compliant intermodal container leasing contract and, in the commercial real estate field, introduced a Parallel Phased Istisna’a contract, an innovative product which enables Islamic finance to compete on equal terms with conventional commercial development finance. Finally, ABCIB launched the world’s first Shari’a-compliant mezzanine financing of a single shipping asset (a VLCC vessel) - structured as a sukuk, the issue was then distributed out of Bahrain by ABC Islamic Bank, an excellent example of the enhanced benefits now accruing from the product matrix organisation structure. The Bahrain and London teams have been expanded through recruitment of additional high calibre staff, and IFS is well placed to meet the growing worldwide demand for Islamic banking products. Retail Banking & SME For the Retail Banking product group, 2005 saw a continuation of business growth momentum, as distribution channels were expanded throughout the Group’s retail banking subsidiaries. In Algeria, retail banking supporting infrastructure was installed as the unit prepared for a 2006 product launch, commencing with the opening of 3 new branches. The strategic objective also calls for new consumer lending products to be developed and distributed through both existing and new channels, particularly in Algiers. Meanwhile, the Egyptian and Jordanian subsidiaries successfully launched their own marketing campaigns, innovatively involving the participation of some leading consumer brands. Under the business model developed in Head Office a direct sales approach was also introduced in these subsidiaries with the purpose of widening the distribution reach and developing alternative sales channels aimed at increasing both the customer acquisition rate and the banks’ market share. As part of the ongoing cost-minimisation initiative, an option for outsourcing credit and debit card management to Arab Financial Services, ABC’s affiliate company based in Bahrain, and card transaction processing on the ATM network to Euronet, was launched in coordination with Head Office Global Information Technology. In the area of risk management, the Group consumer credit policy was re-emphasised in all units and a portfolio review and evaluation process initiated, with the aim of strengthening consumer credit risk management and assisting the identification of early warning trends. Retail workshops have been organised to ensure the migration of best practices throughout the retail delivery units and to improve skill levels through effective intra-unit communication, shared experience and collective learning exchange programmes. Annual Report 2005 ABC Group 13 The President & Chief Executive’s Review of Operations North Africa and the Levant, advisory and arranging opportunities are being pursued where ABC is well positioned through its branch networks and representative offices to play a leading role. The outlook for P&SF therefore remains highly positive. The expanded team will focus on developing the advisory franchise and generating more non-loan related fee income, while continuing to build on ABC’s successful underwriter and lead arranger reputation, consolidating ABC’s premier position in the MENA region. The President & Chief Executive’s Review of Operations Syndications This was another record year for the Syndications group, both in terms of deals closed and underwriting income generated. Working with the ABC Group business units, the team successfully closed 11 syndicated transactions, 4 of which were under sole mandates. Successes included sole mandates for a $240 million amortising term loan facility for an Iranian bank, and a secured amortising medium term loan for a major Kuwaiti finance company, launched at $100 million but increased following oversubscription to $150 million. Both syndications were successfully placed among a wide group of regional and international lenders. The team also worked closely with ABC Islamic Bank in negotiating and winning the sole mandate to arrange and syndicate a $50 million Musharaka Sukuk for The Investment Dar Company, Kuwait, again a highly successful and oversubscribed debut financing, where the issue size was eventually doubled. In the project finance field, Syndications acted as joint bookrunner for the successful BAPCO financing. While the Syndications group admirably reinforced ABC’s leading role in the MENA region in 2005 the team, already grown in response to market demand, expects to expand further in 2006 to meet the many new opportunities anticipated in the near future. The demand for infrastructure investment in North Africa and the Levant, for instance, appears to be reaching the stage where it cannot be satisfied solely from local sources, and Syndications therefore plans to build an early lead in the origination and distribution market there, in a repeat of its highly successful strategy in the Tunisian syndicated market over 2001-2004 where it gained a dominant position. The GCC syndicated market, where total demand for finance reached an unprecedented $41 billion in 2005 (four times the norm), also presents an abundance of opportunities of interest to ABC Group, particularly in project related finance – where demand hit $21 billion – and the burgeoning corporate market, which reached $15 billion in 2005 driven by corporate expansion and mergers and acquisition activity and which shows no signs of abating. The President & Chief Executive’s Review of Operations 14 Government & Financial Institutions The Government & Financial Institutions (G&FI) unit enjoyed a 40% increase in gross income over 2004, as new relationships were forged and new products developed for the benefit of its clients. Among the unit’s achievements in the year were the structuring and successful launching of a subordinated loan issue for a Kuwaiti prime bank and a major syndicated loan facility for a Kuwaiti finance company arranged in conjunction with Syndications group. It also won sole mandates from two Iranian banks for substantial trade finance facilities and a highly successful debut borrowing for a Tunisian bank. While the Syndications group admirably reinforced ABC’s leading role in the MENA region in 2005 the team, already grown in response to market demand, expects to expand further in 2006 to meet the many new opportunities anticipated in the near future. ABC Group Annual Report 2005 ..................................................................................................... ..................................................................................................... ..................................................................................................... ..................................................................................................... Banking Group ..................................................................................................... ..................................................................................................... ..................................................................................................... Arab Banking Corporation - Egypt (S.A.E.) Following several years of economic recession, the Egyptian economy began a new economic cycle in 2004. Growth continued in 2005, with Egyptian GDP rising 4.9% in the fiscal year to June 2005 and the current account also registering a surplus, of 3.3% of GDP. Business sentiment improved in tandem, sucking in more imports but also increasing inward investment. The Central Bank’s more coherent monetary management policy, focused on inflation as the bedrock of monetary policy, led in the first half of the year to steadily increasing interest rates and a significant real appreciation of the Egyptian pound against the Dollar. The rate of inflation consequently gradually subsided (from a high of 11.3% in 2004), enabling the Central Bank to manage interest rates down in the second half. ABC’s investment in ABC Egypt was increased in June 2005 through a rights issue that raised an additional $50 million capital for the bank. ABC Egypt enjoyed growth in all business sectors. As its Corporate Banking Division has developed closer associations with the leading syndication banks and larger corporations, its portfolio has both grown and achieved greater diversity. The Correspondent Banking Division has likewise expanded its trade finance relations with local and international banks, enabling it to deliver comprehensive, value-added trade finance products to a growing clientele. The Retail Banking Group has also enlarged its liability and loan product range, unveiling both its new credit card, offered through ABC’s Bahrain-based specialist affiliate Arab Financial Services, and a Bancassurance initiative in conjunction with Allianz Egypt which enables customers to avail themselves of a variety of savings and insurance schemes. These new products, together with the expanded delivery channels - a new branch was opened at El Haram and the ATM network expanded to 33 machines – helped to achieve a tangible improvement in Retail Banking’s asset portfolio. ABC Egypt’s net interest margin rose by 25% to $10.3 million, partly as a result of its capital increase in June, as well as increased interest rates. Other income grew by 37% to $4.5 million to give a total operating income of $14.8 million, 28% up on 2004. With operating expenses remaining stable, net operating income was a creditable $3.4 million compared with only $0.3 million in 2004. After accounting for credit recoveries, provisions and taxation, net profit was more than double that of 2004, at $4.5 million. ABC Egypt is confident that the structural reform process will accelerate in 2006 and impact positively on the local business environment, supporting the bank’s loan portfolio expansion strategy. At the same time it intends to continue its efforts to improve the quality of its assets, building on its recent achievement of an internal portfolio risk rating matching that of Egyptian sovereign risk. Delivery channels will be further expanded with the opening of a new branch in Heliopolis in early 2006, while more new asset and liability products are to be added to the bank’s ever-increasing repertoire. The President & Chief Executive’s Review of Operations 15 From left: Sh. Rashed Al Khalifa, Corporate & Institutional Banking, Mr. Amr El-Ashmawi, Trade Finance & Forfaiting and Mr. John McWall, Syndications building relationships While the Arab World Division builds on our existing platforms through network and service expansion and the establishment of promising new regional outlets, we believe we are now well on the road to achieving consistent double-digit growth. Annual Report 2005 ABC Group The President & Chief Executive’s Review of Operations Arab Banking Corporation (Jordan) In 2005 Jordan’s economy continued the strong rate of growth experienced in 2004, driven partly by the reconstruction efforts in Iraq (for which Jordan is the main hub) and partly by the strengthening manufacturing, transport and communications sectors. GDP growth reached 7.5% p.a. in the first three-quarters of 2005, just a little higher than for the same period of 2004. Increased exports were, however, exceeded by merchandise imports, causing the trade deficit to widen considerably. ABC Jordan has been providing financial services to the expanding sectors of the economy for many years, and 2005 was no exception as the total loan portfolio grew by a quarter. The year also witnessed the launch of several new non-lending products, notably prepaid debit cards, MasterCard issuance and SMS banking. The ATM network was expanded, selected branches renovated and preparations completed for the opening of a new branch in early 2006. Successful efforts to reduce non-performing loans through effective follow up procedures resulted in NPLs falling to less than 4% of total loans, 120% covered by specific loan loss provisions. As yet another outstanding performance was recorded at ABC Jordan, total revenues rose by 33% to $38.5 million. After deduction of operating expense, provisions and taxation, net profit was 68% higher at $16.7 million. Consequently, earnings per share hit a new record high at JD0.344. In 2006 ABC Jordan intends to intensify its marketing efforts, focusing especially on high-profit products like credit cards and Bancassurance and backed by an expanding product base, sales team and branch network. It will also continue the expansion of its ATM network, to which it will add new cash deposit and cash exchange machines. The President & Chief Executive’s Review of Operations 16 Arab Banking Corporation - Algeria The Algerian economy again achieved remarkable progress in 2005 as GDP grew by 6.5% and foreign exchange reserves rose by a further $10 billion to $50 billion, pushing the external debt ratio down to a healthy 20%. The main contributors to the improving performance were the high oil and gas revenues combined with increasing foreign investment. The downside, for the banking industry, was the resultant strong market liquidity which, combined with the growing competition between the local and the private sector banks, put further pressure on margins. ABC Algeria had an excellent year, with increases of 39% to $8.3 million in its net interest income and 37% to $10.7 million in non-interest income, on the back of a 37% loan portfolio expansion, a substantial increase in trade finance turnover and increased money market and marketable securities earnings. Total operating income was $19.0 million, 42% higher than 2004. With operating expenses well contained, together with some recovery of previously incurred loan loss provisions, the bank returned a net profit of $8.1 million, a 63% improvement over the previous year and a welcome return to the above-20% returns on equity seen in earlier years. Following a strategic reorganisation in 2004 ABC Algeria has repositioned itself to concentrate on trade finance and retail banking activities. Its new retail division aims to expand the branch network ABC Group Annual Report 2005 over time by 11 more outlets, commencing with 3 new Algiers branches in 2006. With its IT systems upgrade now successfully implemented, ABC Algeria is confident of being able to deliver quality products to an expanding corporate and retail customer base. Arab Banking Corporation - Tunisia Despite the sharp rise in crude oil prices in 2005, and the challenges encountered by the textile sector following the dismantling of the Multi-Fibre Agreement and the quota system, the Tunisian economy still managed a 4.2% GDP growth rate in 2005. This was due mainly to the recovering tourism industry, increased exports and the growth in foreign investments and remittance transfers from Tunisian workers abroad, resulting in a stronger balance of payments and a subdued inflation rate. ABC’s Tunisian units concentrated on enhancing credit risk management whilst seeking new and diversified sources of revenue and profitability. At ABC Tunisie, a conservative strategy led to a reduction in the loan portfolio, producing an overall drop in total assets - nevertheless, the bank’s net interest margin increased by two-thirds to $2.5 million. As net commission and other income remained stable at $0.7 million, total operating income rose by 42% to $3.1 million which, however, after deduction of operating expenses of $4.9 million and loan loss provisions of $13.3 million relating to earlier years (as the bank replaced ABC guarantees with its own specific provisions following an increase in its paid up capital), was transformed into a net loss for the year of $15.1 million. Now that the troubled period of poor loan performance is behind it, ABC Tunisie believes that it is well on the way to recovery. Besides its existing corporate and commercial banking activity, ABC Tunisie seeks to diversify its revenue streams by extending good quality personal loans to corporate clients’ employees and other services to selected medium to high worth individuals. The activities of ABC’s Tunis branch, which concentrates on larger trade finance and corporate financings, complete the suite of services offered by ABC Group in Tunisia. ABC Islamic Bank (E.C.) Following the reorganisation in 2004 of ABC Group’s Islamic franchise under a single product group and the completion of a largely successful transitional year, 2005 witnessed a quantum shift in performance for ABC Islamic Bank. Total income doubled to $8.0 million and, after increased operating expenses reflecting mainly bonus accruals and increased premises expenses, net income increased by 186%. This excellent performance was the result of a combination of 50% balance sheet growth and a deliberate shift towards fee-based earnings. Moreover, the growth in footings was funded through externally generated liabilities, reflecting the success of a concerted liability marketing campaign. Initiatives aimed at broadening the bank’s product base included the launch of two Shari’a-compliant hedging products, Muwa’amah and Tabdeel, equating to conventional currency and interest rate swaps. Both were well received by GCC investors. The bank also managed a highly successful debut sukuk issue on behalf of The Investment Dar Company, the first for a Kuwaiti finance company. This Sukuk Al Musharika was structured, arranged and underwritten by ABC Islamic Bank at the $50 million level, following which it was 100% oversubscribed. The bank was also mandated ABC International Bank plc 2005 witnessed two distinct patterns of economic behaviour in ABCIB’s areas of operations. On the one hand, those European countries where ABCIB is physically represented exhibited a lacklustre performance, with many large euro zone economies remaining weak. On the other, economic growth in ABCIB’s key target markets in the MENA region provided more than sufficient business opportunities, both in infrastructure development and import financing. Whereas the substantial increase in foreign exchange reserves of the region’s hydrocarbon exporting countries – particularly in the GCC countries - underpinned the continuing development of their energy and other infrastructure, the wider North Africa and Levant areas also experienced a surge in investment activity, as greater emphasis was placed on infrastructure and privatisation programmes designed to broaden their economic base. The Group’s product-led matrix management structure introduced in 2004 was meanwhile firmly integrated in ABCIB in 2005 and, in the generally favourable environment in the MENA region, the bank’s freshly focused approach to marketing and product delivery was rewarded by notable improvements in performance across all ABCIB’s operating areas. Arab Banking Corporation closes US$150 million syndicated Medium Term Loan facility for Commercial Facilities Company (S.A.K.) The MENA region’s fiscal surpluses led to strong demand for all kinds of trade finance and intermediation services. ABCIB’s Trade Finance Unit consequently enjoyed a surge in demand for its specialist and general services, particularly receivables financing and forfaiting facilities. Despite intensified competition in the market, the unit, which aims to offer exporters a comprehensive range of products and services, from traditional products to structured, customised solutions developed specifically for its clients, achieved turnover and profitability levels significantly in excess of 2004 levels. High liquidity levels in the MENA region, however, led to many transactions being financed at local level – often in local currency – and several countries’ foreign debt being refinanced at lower cost or retired altogether. While this somewhat restricted the opportunities for ABCIB’s project team and subdued its returns, the team nevertheless achieved some notable successes, including being mandated lead arranger for the $490 million financing for Wataniya Telecom Algeria, in respect of the third Algerian GSM licence, and achieving widespread recognition for its $76 million ship finance for the Pacific Star Group, which innovatively combined a conventional senior debt tranche with a single asset Islamic sukuk. The Islamic Asset Management team continued its theme of innovative product development. Following its success with the first Shari’a-compliant mezzanine financing of a single shipping asset to be brought to the market – the Al Safeena sukuk issue – it arranged the lease of 1,500 containers to a major European shipping line under a specially written Shari’a-compliant intermodal container leasing contract. In a buoyant UK real estate market, it arranged the partial finance, under its new Parallel Phased Istisna’a contract, of a £30 million residential development project in the north of England. Its Al Bait UK Real Estate Fund, launched with Global Securities House of Kuwait in 2004, meanwhile continued to benefit from a growing sector allocation. ABCIB’s Islamic retail finance arm, which offers financial products to British resident Muslims under the ‘alburaq’ brand, introduced a much expanded, and market leading, Islamic mortgage product range, now being distributed through Bristol & West Building Society and selected branches of Lloyds TSB. The number of applications is anticipated to rise rapidly in 2006. Recognising the premier nature of the offering, Islamic Banking & Finance magazine named alburaq the ‘Best Islamic Mortgage Provider’ in its global awards section. The alburaq programme was also a finalist in Mortgage Finance Gazette’s ‘Most Innovative UK Mortgage Product’ category, competing with a market place of 8,000 UK mortgage products. Project Finance magazine Winner of Deal of the Year award EMEA Petrochemicals Qatofin/Q-Chem II EMEA Oil & Gas RasGas 2+3 Annual Report 2005 ABC Group 17 The President & Chief Executive’s Review of Operations lead arranger for the $330 million Islamic finance tranche of the $1 billion Bahrain Petroleum Company (BAPCO) facility. Rationalisation of the bank’s Islamic fund platform resulted in the dissolution of ABC Islamic Fund in view of an element of product duplication with its other liquidity management fund, ABC Clearing Company. The latter’s operating base was accordingly expanded to accommodate the 99% of ABC Islamic Fund investors who elected to transfer their investment rather than be repaid outright. The Islamic credit card initiative was also suspended, earmarked for later re-launch directly into the retail market. Further rationalisation led to an additional $20 million capital injection from the parent and an intake of new specialist staff, increasing headcount from 9 to 15, both in anticipation of planned future growth. ABC Islamic Bank’s performance in 2005 marks a further step on the road to achieving its ambitious long-term aim - to be the premier innovative and service-oriented Islamic bank in the region. While the bank continues to focus on achieving a greater share of the regional corporate market, given the steady shift towards Islamic banking in the region (where industry growth is currently projected at 15-20% per annum), its long-term plans now include a major push into the growing Islamic capital market arena and careful planning towards eventual entry into the retail market. The President & Chief Executive’s Review of Operations 18 increased market profile At our domestic banking subsidiaries, we continue to expand our branch, ATM and cash deposit machine networks and to complete the implementation of Internet and SMS technologies in those units not yet offering these services, in our efforts to widen our customer base. ABC Group Annual Report 2005 The President & Chief Executive’s Review of Operations Banco ABC Brasil S.A. For Brazil, the year started with an overheated economy and inflationary pressures, forcing the monetary authorities to increase interest rates, which in turn led to appreciation of the Brazilian Real. As it became clear that the foreign trade balance and internal debt situation would not be negatively impacted by this cycle, the market adjusted to the new economic perspective with less price expansion and a downward inflationary trend. Inflation thus averaged around 5.7% for 2005 against a target of 5.1%. GDP growth for the year, forecast at 2.2%, although somewhat restrained was sufficient to confirm the validity of the economic policies being followed. Exports rose to $118 billion while imports expanded to $74 billion, the resultant resources flow permitting a reduction in external debt and increasing foreign appetite for Brazilian investments. Partly as a result of appreciation of the Real and partly in reflection of growth of the corporate and inter-bank (documentary credit and payroll lending related) credit portfolios, ABC Brasil’s total loans expanded in 2005 by 30% to $835 million. The bank also significantly increased its holdings of marketable securities. Lower average corporate spreads however meant that - even with close to zero default rates - the bank’s net interest margin, at $34.9 million, was 6% lower than 2004. Nevertheless, other income including treasury income improved to $9.3 million compared with 2004’s negative $2.2 million (which had reflected mainly treasury losses that year). Net operating income consequently rose 25% to $19.1 million however, due to significantly higher taxation provision, 2005’s net profit at $9.2 million was only 3% above that for the previous year. ABC Brasil foresees a favourable economic scenario for 2006, although not without some negative influences as a weakened government goes to the polls. It expects significant growth in both asset volumes and spreads, anticipating further appreciation of the Real against the Dollar, with the growing SME and retail loan businesses contributing more to the bottom line as they reach economically viable levels. Credit & Risk Group Implementing the recommendations of the Mercer Oliver Wyman (MOW) report following its 2004 feasibility study, various changes in the organisation and processes were made in 2005. As mentioned under Corporate Governance, Subsidiary Board Risk Committees (SBRCs) were formed at each of the major subsidiaries, along with committees analogous to the HOCC and ALCO in Head Office where they did not already exist. In addition the following were implemented: Processes Each business unit has now formulated and put in place its medium term and one-year Risk Strategy. Its Risk Profile – viewed from the perspective of Ratings, Industry, Country and Tenor – then undergoes regular quarterly review by its respective SBRC. A process has been put in place related to budgeting and business planning, whereunder the Risk Profile of each business unit’s Business Plan is consolidated and reviewed for acceptability within the approved Risk Strategy. A consolidated Group Risk Profile for the coming year is then reviewed by the Board Risk Committee (BRC). An exercise was conducted to establish prudential consolidated and individual ABC unit threshold approval levels in relation to credit exposure to corporate and financial institution customers. This was based on the combined impact of restrictions linked to each lending unit’s capital, profitability and legal lending limit, as well as to the customer’s risk rating and Probability of Default index. The results were used to set lending authorities for each unit’s SBRC (and the HOCC on a consolidated basis). In line with the BRC’s delegation of day-to-day management, additional credit approval authorities were then further delegated down the line to HOCC and unit Credit Committees where appropriate. This has speeded up the credit approval process for a significant number of cases. Risk Systems Enhancement ABC’s technology project plan, launched in 2004, aims at the creation of a new credit risk management infrastructure incorporating the key blocks recommended by MOW. Certain key elements were completed in 2005, namely the implementation of a new credit application processing system, limits and exposures management system, the associated data warehousing capability and Moody’s KMV suite of products, which will enhance analytical/underwriting standards as well as provide proxies for default estimates. Upon successful completion of the project plan, Basel II requirements will be met for ABC, who will simultaneously be provided with an effective economic capital allocation tool. Annual Report 2005 ABC Group 19 The President & Chief Executive’s Review of Operations ABC International Bank plc (continued) Organisationally, ABCIB made significant progress in crystallising the benefits of integration of the European branches, as the Frankfurt and Milan support operations were restructured and a number of administrative, payment and reporting responsibilities transferred to London. The centralisation of the regional Treasury offices in Europe in the London Hub resulted in significant cost savings as well as more efficient execution capabilities. ABCIB Treasury meanwhile addressed its two main priorities for the year - to lengthen the maturity of the bank’s liabilities and to broaden the deposit base - by, respectively, creating an investment platform to facilitate investment grade floating rate bond issues and initiating an aggressive programme to cross-sell treasury products to the bank’s commercial customer base. Significant growth in both areas is anticipated for 2006. In 2005 ABCIB’s operating income rose by 16% to £45.7 million. Interest margin grew by 10%, to £26.2 million, mainly on account of higher return on equity funds. Improved trade finance margin was offset by project finance run-offs. Non-interest income also improved, and was up 24% at £19.5 million, as trade finance activity surged and Islamic banking fees and sell down profits made a significant contribution. Operating expenses were reduced by 7% to £30.6 million as a result of a number of cost saving initiatives. ABCIB therefore reported an increase in net profit to £15.6 million, more than double 2004’s £6.6 million. The President & Chief Executive’s Review of Operations Risk Systems Enhancement (continued) Following its review of all ABC subsidiaries’ treasury activities in 2005, Market Risk Management (MRM)’s proposed new Group trading and investment limits and revised Asset Liability Mandate Policy were approved by ALCO and the BRC. MRM also conducted a strategic risk systems review to evaluate the existing systems capabilities and new solutions available in the market, resulting in the implementation of FOFIX (a Riskdata product), enhancing the Treasury team’s investment portfolio monitoring capability. MRM also initiated an internal capital allocation methodology and developed an enhanced capital allocation framework, due for testing in 2006. Global Information Technology The President & Chief Executive’s Review of Operations 20 2005 marked the completion by GIT of the Group’s original global technology upgrade and standardisation programme for the wholesale banking units. The core system only remains to be implemented at ABC’s new Iraq branch, along with a customised version at ABC Islamic Bank, both of which are scheduled for installation in 2006. Under the Group’s strategic plan to update and enhance its risk management capabilities, GIT also implemented ABC’s new, in-house developed, credit approval/limits system - its Enterprise Credit Risk Management System - significantly improving real-time global credit exposure monitoring/reporting, including advanced internal ratings analytical tools. Progress was maintained on the Arab World Retail Core Systems Standardisation Programme, intended to increase operational efficiency and reduce costs across the retail units. Based on the platform already in use at ABC Egypt, the system will operate through a Bahrain-based Retail Processing Hub, obviating the need for separate IT centres in each retail subsidiary. ABC Tunis/Tunisie will go live with the new system in early 2006, followed by the other retail units. Rollout of the Group’s standard Front Office Dealing and Position System to all Arab world domestic banking units commenced with ABC Jordan; ABC Egypt will follow in 2006. Deployment under the EMV Compliance initiative, which entails outsourcing the ATM driving and debit card management and implementing Euro Master & Visa (EMV) Compliance for all the Group’s Arab world retail banking units, was completed at ABC Jordan, with ABC Egypt and ABC Algeria scheduled for early 2006. Meanwhile, the Group’s global Trade Finance System, already operational in all wholesale banking units, was implemented at ABC Tunisie and will be progressively rolled out to the remaining retail banking units. Treasury Dealing Desk ABC Group Annual Report 2005 Among e-Business Initiatives in progress, the web-based ABC On-line e-Trade Finance system, which allows ABC customers to manage their global trade portfolios and issue documentary credits on-line, was successfully introduced at ABC Jordan. EISII - the latest generation of the EIS On-line Executive Information System, offering mobile ABC executives easy access to customer information and account details via pocket PCs - was also successfully deployed Groupwide. The Corporate Performance Management system, which enables senior management to view income streams from all the Group’s major products and assess operating units and individual account officer performance against goals, was installed at all wholesale banking units. New Anti-Money Laundering software, enhancing and complementing existing regulatory compliance and procedures, installed at the Bahrain headquarters in 2004, was rolled out in 2005 to ABCIB and ABC New York branch. The system scans payment traffic and customer static data against blacklist databases and is fully compliant with international regulatory requirements. Deployment will continue in 2006. For 2006, a key objective for GIT is the achievement of Basel II readiness, in addition to ongoing enhancement of ABC’s risk management capabilities, especially as regards the newly implemented credit systems, default estimation and portfolio management. Conclusion In conclusion, we view 2005’s performance with some satisfaction, especially considering that the year opened with the Group facing a much reduced asset volume and low leverage following the sale of our two major non-core subsidiaries. Our new product-based structure, coupled with enhanced credit management, have contributed to the substantially improved volume of good quality business that we have managed to put on our books and the replacement of the revenues lost from our subsidiary disposals in just one year. The asset and organisational base thus created will be our springboard, from which we will expand both our key product range and our delivery channels. We look towards 2006, therefore, with renewed confidence in our ability to meet our key goals and move nearer to realising our Vision - to be the premier international Arab financial group. Best Treasury Bank in the Middle East voted by Euromoney magazine The President & Chief Executive’s Review of Operations 21 renewed confidence Renewed confidence in our ability to meet our key goals and move nearer to realising our Vision to be the premier international Arab financial group. Annual Report 2005 ABC Group Corporate Governance 22 From left: Mr. Jehangir Jawanmardi, Audit Group Head, Mr. Riyad Al Dughaither, Chief Credit & Risk Officer Mr. Sael Al Waary, Support Group Head, Mr. Abdulmagid Breish, Deputy Chief Executive & Chief Banking Officer Mr. Essam El Wakil, Group Treasurer, Mr. Nour Nahawi, Arab World Division Head Mr. Asaf Mohyuddin, Planning & Financial Control Head capital management ABC’s capital management is aimed at maintaining an optimum level of capital to enable it to pursue strategies that build long-term shareholder value. ABC Group Annual Report 2005 Corporate Governance ..................................................................................................... ..................................................................................................... ..................................................................................................... ..................................................................................................... half-yearly meeting with the Head Office Credit Committee to discuss Board of Directors ..................................................................................................... ..................................................................................................... ..................................................................................................... major risk policy and planning issues. The Nomination and Compensation Committee is responsible for the formulation of the Group’s executive remuneration policy and senior management appointments and remuneration. The Committee has formal terms of reference approved by the Board and meets at least twice during the year. ..................................................................................................... ..................................................................................................... ..................................................................................................... ..................................................................................................... Compliance ..................................................................................................... ..................................................................................................... ..................................................................................................... In accordance with the rules of the Bahrain Monetary Agency (BMA), ABC has appointed a Compliance Officer and a Money Laundering Reporting Officer (MLRO). The role of the Compliance Officer is to act as central coordinator for the Group in respect of all matters relating to BMA regulatory reporting and other requirements. This responsibility currently lies with the Senior Vice President, Financial Control. The compliance ..................................................................................................... ..................................................................................................... ..................................................................................................... ..................................................................................................... function covers areas such as corporate governance, adherence ..................................................................................................... ..................................................................................................... ..................................................................................................... to best practices, codes of conduct and conflict of interest. Each operating entity in the Group, to the extent required by applicable law and regulation, has appointed a local compliance officer to ensure adherence to local requirements and regulatory issues. The BMA’s laws and regulations with respect of Anti-Money Laundering (AML) apply to all ABC branches and subsidiaries. The Group is committed to ensuring adherence to these regulations and to the recommendations of the Basel Committee and Financial Action Task Force which they incorporate, which are in turn reflected in ABC’s own Group AML Manual which has been approved by the Board of Directors. The Group has strict Know Your Customer policies and units are precluded from establishing a new business relationship until all relevant parties to the relationship have been identified, the nature of the business they expect to conduct has been established and satisfactory evidence of identity obtained. ABC’s AML policies are available on its website. The MLRO appointed in each unit is responsible for supervising the unit’s AML activities and for maintaining appropriate and effective systems, controls and records to ensure compliance with local AML regulations and the provisions of the Group AML Manual. The MLRO is also responsible for reviewing and reporting any suspicions concerning a customer or an account to that unit’s regulator and senior management. The responsibilities of the Group’s MLRO – currently the Head of Operations, Bahrain – include formulating, issuing and implementing the Group’s AML strategies and policies on an ongoing basis, overseeing appropriate AML training to all relevant staff, supervising and coordinating the activities of the unit MLROs and reporting to the President & Chief Executive and the Board of Directors on critical money laundering issues which require the attention of senior management. The Group MLRO reports directly to the President & Chief Executive, in addition to having a direct and independent reporting line to the BMA. Annual Report 2005 ABC Group 23 Corporate Governance The Board of Directors is responsible for the overall direction, supervision and control of the Group. It meets regularly (usually six times a year) to consider key aspects of the Group's affairs, strategy and operations. The shareholders appoint the Board for a specific term of three years. There are currently 12 Directors on the Board, all non-executive, with varied backgrounds and experience, who individually and collectively exercise independent and objective judgement. As a rule Directors do not have, and in 2005 no Director had at any time during the year, any direct or indirect material interest in any contract of significance with ABC or any of its subsidiaries. Specific responsibilities have been delegated to the following Board Committees: The Group Audit Committee is responsible to the Board for ensuring that the Group maintains an effective system of financial, accounting and risk management controls. The Committee also monitors compliance with the requirements of the regulatory authorities in the various countries in which the Group operates. It normally meets at least four times a year, regularly reviewing matters with both the external and Group Audit as well as selected members of management invited to discuss relevant issues. The Committee also makes recommendations to the Board regarding the appointment of external auditors. Group Audit Department reports directly to the Committee. The primary purpose of the Corporate Governance Committee is to assist the Board in shaping and monitoring the Corporate Governance policies and practices of the Group and to evaluate compliance with policies and procedures. The Corporate Governance Committee has a formal charter approved and reviewed by the Board and currently consists of four members, all of whom are non-executive directors of ABC. Amongst its other duties, the Committee reviews and assesses the adequacy of the Group’s policies and practices on corporate governance, all matters related to Board Committees and their membership, including the selection for service on ABC's subsidiaries’ boards of directors, Board and Board Committee compensation, related issues and management succession plans, making recommendations to the Board as appropriate. The Board Risk Committee comprises four members and acts on behalf of the Main Board on all risk issues. It is responsible for the continual review and approval of the Group’s Risk Policies and Medium Term and Annual Risk Strategy/Appetite, within which business strategy, objectives and targets are formulated. The Committee continuously reviews the Group’s Risk Profile to ensure that it is within the Risk Policies and Appetite parameters, meeting quarterly and reporting key developments at each Board meeting. The Committee delegates authority to senior management to conduct day-to-day business within the prescribed policy and strategy parameters, ensuring that processes and controls are adequate to manage Risk Policies and Strategy. It also holds a formal Corporate Governance ..................................................................................................... ..................................................................................................... ..................................................................................................... ..................................................................................................... avoiding undue concentrations or aggregations of risk. ABC's banking ..................................................................................................... Risk Management ..................................................................................................... ..................................................................................................... subsidiaries are governed by specific credit policies that, whilst Corporate Governance 24 closely following and subject to the Group Credit Policy, may be adapted to suit local practices and regulatory requirements as well as individual units' product and sectoral needs. The Credit Risk section of the CRG’s Risk Management Department (RMD) coordinates all technology development related to credit risk management and provides senior management with consolidated information on Group exposures to counterparties, countries and industries. The first level of protection against undue credit risk is through Group country, industry and other risk threshold limits, together with customer and customer group credit limits, set by the BRC and the HOCC and allocated between ABC and its banking subsidiaries. Credit exposure to individual customers or customer groups is controlled through a tiered hierarchy of delegated approval authorities based on the risk rating of the customer. Where unsecured facilities sought are considered to be beyond prudential limits, Group policies require collateral in the form of cash, securities, legal charges over the customer's assets or third-party guarantees to mitigate the credit risk. The Group also increasingly employs RAROC as a measure to evaluate the risk and reward relationship at the transaction approval stage. 2005 saw further enhancements to this process. Day-to-day management of existing credit exposure is the responsibility of the business unit officers who, in turn, must adhere to the detailed requirements for regular review of the customers and analysis of their financial and economic condition, under the oversight of the CRG’s Head Office Credit Department in the case of customers with limits exceeding the relevant business unit’s authority. Significant aggregated credit exposures are regularly reviewed by senior management, as are industry/sectoral exposures periodically. Business unit portfolios are subject to detailed semiannual Head Office reviews involving assessment of business focus and return as well as credit issues. A review of all risk ratings is conducted at the other quarter ends. Group Audit carries out separate Risk Asset Reviews of business units to assess and provide an independent opinion on the quality of their credit exposures and adherence to credit policies and procedures. In assessing its credit exposure, ABC applies an internally developed risk rating scale, under which credits with ratings 1-7 (with +ve and –ve modifiers) rank as satisfactory and non-performing or impaired credits are categorised into ratings 8-11 under four separate adverse risk ratings. Subject to minimum loan loss provision levels mandated under the Group Credit Policy, specific provisions in respect of impaired assets are based on estimated potential loss. Non-specific provisions are also maintained to cover unidentified possible future losses. Credit exposures found to rank below satisfactory grade are segregated and more actively supervised as impaired assets under the guidance or supervision of the CRG’s Remedial Loans Unit (RLU). The RLU provides business units with advice, assistance and training in relation to managing impaired assets, including development of realistic exit strategies and maximisation of credit recoveries. Impaired assets are reviewed regularly by Credit Risk ABC Group’s portfolio and credit exposures are managed in the respective business units, with progress reports at least quarterly accordance with the Group Credit Policy, which applies Groupwide to the RLU, who in turn reports their progress to senior management qualitative and quantitative guidelines, with particular emphasis on and regulators. In conducting its business and operations the Group encounters a variety of risks falling under the general categories of credit, market, liquidity, operational and legal risks. The Group seeks to manage these risks strategically to assist it in building shareholder value. The following describes the way in which it does this and the organisational structure it employs in doing so. At the apex of risk management is the Board Risk Committee (BRC). Once the BRC sets the Group's Risk Strategy/Appetite and Policy guidelines, it entrusts responsibility to senior management for implementation, including identifying and evaluating, on a continuous basis, significant risks to the business of the Group and designing and implementing appropriate internal controls to minimise them. This is done through the senior management committees and the Credit & Risk Group in Head Office whose head, ABC’s Chief Credit & Risk Officer, has a ’dotted’ functional reporting line to the BRC in addition to reporting directly to the President & Chief Executive. The Head Office Credit Committee (HOCC) is responsible for credit decisions at the higher levels of ABC’s lending portfolio, setting country limits, dealing with impaired assets and general credit policy matters. It normally meets weekly and comprises relevant members of senior management, chaired by the President & Chief Executive. The chief responsibility of the Asset and Liability Committee (ALCO) is to define long-term strategic plans and short-term tactical initiatives to direct asset and liability allocation prudently for the achievement of the Group’s strategic goals. ALCO additionally monitors the Group’s liquidity and market risks, economic developments, market fluctuations and the Group’s risk profile to ensure ongoing activities are compatible with the risk/reward guidelines approved by the BRC. ALCO generally meets monthly, is chaired by the President & Chief Executive and draws its membership from relevant senior management. The Board has recently mandated the creation of an Operational Risk Management Committee which, supported by a new Operational Risk Management Unit, will oversee the independent Operational Risk Management function. Each ABC subsidiary is responsible for managing its own risks. Each subsidiary has its own Subsidiary Board Risk Committee, Credit Committee and ALCO (in the case of major subsidiaries), or equivalent, with responsibilities generally analogous to the Group committees. The Credit & Risk Group (CRG) has overall responsibility for centralised credit policy and procedure formulation, country risk and credit exposure reporting, control and risk-related regulatory compliance, remedial loans management and the provision of analytical resources to senior management. It is also responsible for identifying market risks arising from the Group's activities, recommending to the relevant central committees appropriate policies and procedures for managing exposure to such risks and establishing the systems necessary to implement effective controls. ABC Group Annual Report 2005 Liquidity Risk ABC maintains liquid assets at prudential levels to ensure that cash can quickly be made available to honour all its obligations, even under adverse conditions. The Group is generally in a position of excess liquidity, its principal sources of liquidity being its deposit base, liquidity derived from its operations and inter-bank borrowings. It has specific policies regarding liquid assets coverage of short-term wholesale deposits and in particular the potential risk impact of withdrawals by large single depositors, ensuring that there is no reliance on any one customer or small group of customers. Maturity mismatch is also managed within internal policy limits. The maturity profile of the Group’s assets, liabilities and off-balance sheet items is given in Note 15 to the Financial Statements. or retained as open positions and managed for a profit. The Group's trading activities are largely managed in Bahrain, within appropriate limits and stop loss parameters. For all trading options products, RMD conducts a two-factor stress analysis. All volatility parameters are calculated by RMD. The Option stress adds another independent measurement of risk. Operational Risk Group policy dictates that the operational functions of booking, recording and monitoring of transactions are carried out by staff that are independent of the individuals initiating the transactions. Business units have primary responsibility for identifying and managing their own operational risks. As mentioned above, an independent Operational Risk Management Unit is being formed within the RMD, which will create the framework for best practice Operational Risk measurement under Basel II stipulations. The Group’s information technology arm is continually developing and refining the Group’s security software to ensure that its systems can reliably identify and intercept unauthorised access. The Group pays close attention to disaster recovery. All essential operational data required for business continuity are backed up on separate computers both within the Head Office and elsewhere in Bahrain, in addition to being downloaded hourly to the Group’s servers in London. Legal Risk Inadequate documentation, legal and regulatory incapacity or insufficient authority of a counterparty, contract invalidity or unenforceability, are all examples of legal risk. Management of this risk is the responsibility of the Head Office Legal & Compliance Department (LCD) and is carried out through effective consultation with internal and external legal counsels, together with close monitoring of the litigation cases involving the Group. All major Group subsidiaries have their own in-house legal departments, acting under the guidance of the LCD. ..................................................................................................... ..................................................................................................... ..................................................................................................... ..................................................................................................... Capital Management ..................................................................................................... ..................................................................................................... ..................................................................................................... The BMA is the lead regulator for ABC and sets and monitors its capital requirements on both a consolidated and an unconsolidated basis. Individual banking subsidiaries are regulated directly by their local banking supervisors, who set and monitor their capital adequacy requirements. The BMA requires each Bahrain-based bank or banking group to maintain a minimum ratio of total capital to risk-weighted assets of 12%, taking into account both on and off balance sheet transactions. ABC Group’s capital management is aimed at maintaining an optimum level of capital to enable it to Derivatives pursue strategies that build long-term shareholder value, whilst In the normal course of business, the Group enters into many kinds of always meeting minimum regulatory ratio requirements. Details of derivative activities in both its trading and banking books. ABC may risk weighted assets, capital base and the risk asset ratio are on occasion use derivatives to manage its own structural positions. provided in Note 27 of the consolidated financial statements. In the trading book, the Group assists customers and counterparties (typically financial and governmental institutions and major corporations) to alter their risk profile in a particular area of risk by structuring deals to suit individual needs. The positions accumulated from such activity are either passed on to others in the market Annual Report 2005 ABC Group 25 Corporate Governance Market Risk The Group has established risk management policies and limits within which exposure to market risk is monitored, measured and controlled by the RMD with strategic oversight exercised by ALCO. The RMD’s Market Risk Management (MRM) unit is responsible for developing and implementing market risk policy and risk measuring/monitoring methodology and for reviewing all new trading products and trading products and limits prior to ALCO approval. MRM’s core responsibility is to measure and report market risk against limits throughout the Group. Foreign Exchange Rate Risk - The Group is exposed to foreign exchange rate risk through both its trading portfolios and its structural positions. Foreign exchange rate risk is managed by appropriate limits and stop loss parameters determined by each subsidiary's local ALCO and approved by its Board. ABC's structural balance sheet positions, which relate to its net investment in its foreign subsidiaries, are reviewed regularly by ALCO in accordance with the Group's strategic plans and managed on a dynamic basis by Group Treasury, hedging such exposures as appropriate. Interest Rate Risk - In managing the interest rate risk resulting from the Group’s trading and banking activities, the effect of interest rate movements is assessed using sensitivity analyses and other modelling techniques. There are established limits on individual business units' aggregate maximum exposures to interest rate risk and on an overall basis for the core banking units. Board approved trading limits are monitored by RMD and any exceptions brought to the attention of ALCO. Equity, Debt Securities and Commodity Risk - As a normal part of its treasury trading activities, the Group is exposed to the risk of an adverse impact on its earnings due to movements in the prices of individual securities or commodities, or generally in the value of their respective markets or their related derivatives. Management of these risks is similar to that in relation to foreign exchange risk. Group Financial Review (All figures stated in US dollars) ..................................................................................................... ..................................................................................................... ..................................................................................................... ..................................................................................................... million (2004: $1,828 million) and certificates of deposit $73 Income Statement ..................................................................................................... ..................................................................................................... ..................................................................................................... million (2004: $94 million). Interest payable, taxation and other In 2005, the Group’s (after tax) net profit for the year increased to $129 million from $109 million in 2004. Net interest income was 27% higher than 2004, at $193 million (2004: $152 million), while non-interest income grew by 4% to $159 million (2004: $153 million). A $14 million net write back of provisions for impaired assets (2004: $10 million write back) contributed to a higher net operating income, which at $366 million was 16% higher than 2004 ($315 million). Operating expenses increased by 6% to $211 million (2004: $199 million). Profit before taxation and minority interests on continuing operations was therefore $155 million, an increase of 34% on 2004’s $116 million. After taxation on operations outside Bahrain of $20 million (2004: $3 million) and minority interests in subsidiaries of $6 million (2004: $4 million), the net profit for the year of $129 million was 18% higher than that for 2004. ..................................................................................................... ..................................................................................................... ..................................................................................................... ..................................................................................................... Sources and Uses of Funds ..................................................................................................... ..................................................................................................... ..................................................................................................... Group Financial Review 26 Liquid assets, comprising trading and non-trading securities, placements and liquid funds, totalled $10,169 million (2004: $8,409 million). Non-trading securities (almost entirely ‘available for sale’ securities) stood at $6,003 million (2004: $3,617 million), money market placements at $3,264 million (2004: $4,305 million) and liquid funds and trading securities at $902 million (2004: $487 million). The loans and advances portfolio stood at $6,833 million (2004: $6,012 million) while investments in associates, interest receivable, premises and equipment and other assets, in aggregate standing at $586 million (2004: $501 million), made up the remainder of the total assets. Placements, together with liquid funds of $309 million (2004: $303 million), represented 20.3% (2004: 30.9%) of total assets. Total liquid assets, including non-trading securities, represented 57.8% (2004: 56.4%) of total assets. These assets were funded by deposits from customers of $5,310 million (2004: $5,081 million), deposits from banks and other financial institutions totalling $8,108 million (2004: $5,506 million), term notes, bonds and other term financings of $1,575 ABC Group Annual Report 2005 liabilities amounted to $549 million (2004: $521 million) in aggregate. Deposits included $1,260 million (2004: $179 million) relating to sale and repurchase agreements. Term funding totalled $1,575 million (2004: $1,828 million). Total assets of the Group increased 18% by 2005 year-end to $17,588 million (2004: $14,922 million). Average assets were up 12% to $15,904 (2004: $14,228 million) while average liabilities, excluding shareholders' equity, amounted to $14,109 million (2004: $12,302 million). ..................................................................................................... ..................................................................................................... ..................................................................................................... ..................................................................................................... Credit Commitments, Contingent Items and Derivatives ..................................................................................................... ..................................................................................................... ..................................................................................................... At the end of 2005, ABC Group's consolidated off-balance sheet items stood at $12,105 million (2004: $12,790 million). The total credit risk-weighted asset equivalent of commitments and contingent ..................................................................................................... ..................................................................................................... ..................................................................................................... ..................................................................................................... items and derivatives was $1,402 million (2004: $1,383 million). ..................................................................................................... ..................................................................................................... ..................................................................................................... The total volume of documentary credits, acceptances and guarantees undertaken during the year was $7,884 million (2004: $6,180 million), 62% (2004: 53%) of which related to the Arab world. The Group uses a range of derivative products for the purposes of hedging and servicing customer-related requirements, as well as for proprietary trading purposes. The market risk-weighted equivalent of the exposures under these categories at the end of 2005 was $287 million (2004: $197 million). No significant credit derivative trading activities were undertaken during the year. ..................................................................................................... ..................................................................................................... ..................................................................................................... ..................................................................................................... Geographical and Maturity Distribution of the Balance Sheet ..................................................................................................... ..................................................................................................... ..................................................................................................... In 2005, ABC Group's total assets in the Arab world increased, although the proportion of its assets there fell from 37% to 34% as its assets in Western Europe fell from 27% to 20%. The Group’s assets in North America increased to 30% from 22% and Asia from 4% to 5%. The proportion of liabilities to Western Europe increased from 9% to 12% while those to Asia remained at 4%. The proportion of liabilities to the Arab world decreased from 77% to 71%. Assets (%) Arab world Western Europe Asia North America Latin America Others (%) Arab world Western Europe Asia North America Latin America Others Liabilities & Equity 2005 2004 2005 2004 34 20 5 30 6 5 37 27 4 22 6 4 71 12 4 5 5 3 77 9 4 2 4 4 100 100 100 100 Earning Assets 2005 2004 Loans & Advances 2005 2004 35 20 7 30 6 2 37 27 4 23 6 3 69 7 8 1 12 3 64 14 2 3 12 5 100 100 100 100 ..................................................................................................... ..................................................................................................... ..................................................................................................... ..................................................................................................... Distribution of Credit Exposure ..................................................................................................... ..................................................................................................... ..................................................................................................... An analysis of the maturity profile of earning assets shows that, at the end of 2005, 48% (2004: 60%) did not exceed one year’s maturity. Loans and advances maturing within one year amounted to 56% (2004: 56%) of all loans and advances. The proportion of liabilities maturing within one year was 76% (2004: 75%) of all liabilities and equity. Earning Assets 2005 2004 (%) Within 1 month 1 - 3 months 3 - 6 months 6 -12 months Over 1 year Undated Liabilities & Equity 2005 2004 25 9 5 9 49 3 28 12 10 10 38 2 53 17 4 2 10 14 44 17 10 4 9 16 100 100 100 100 ..................................................................................................... ..................................................................................................... ..................................................................................................... ..................................................................................................... ..................................................................................................... ..................................................................................................... ..................................................................................................... ABC Group’s credit exposure (defined as the gross credit risk to which the Group is potentially exposed) as at 31 December 2005 is given below. Customer type Banks Non-banks Sovereign Risk rating 1 = Exceptional 2 = Excellent 3 = Superior 4 = Good 5 = Satisfactory 6 = Adequate 7 = Watchlist 8 = Special Mention 9 = Substandard 10 = Doubtful 11 = Loss Funded Exposure Credit Commitments & Contingent Items 2005 2004** 2005 Derivatives* 2004** 1,180 1,518 1,782 97 23 1 45 72 1 4,195 4,480 121 118 27 3,699 2,303 1,709 2,318 1,740 2,069 333 96 10 33 94 104 154 767 854 1,591 469 223 11 22 - 50 798 533 863 674 1,379 134 11 33 4 1 3 53 38 24 2 1 - 4 33 12 28 38 2 1 - Group Financial Review ($ millions) 14,404 4,195 4,480 121 118 2005 2004** 7,183 5,350 4,446 5,577 4,094 4,733 1,109 2,029 1,057 16,979 14,404 4,914 1,646 3,020 2,545 2,113 2,450 171 50 15 27 28 16,979 * Derivative exposures are computed as the cost of replacing derivative contracts represented by mark-to-market values where they are positive, and an estimate for the potential change in market values reflecting the volatilities that affect them. ** 2004 data has been restated to reflect the change effected in 2005 to the master scale supporting ABC's risk rating system, which has been refined to become more conservative and risk sensitive. Annual Report 2005 ABC Group Group Financial Review ..................................................................................................... ..................................................................................................... ..................................................................................................... ..................................................................................................... are minimum 2:1 revenue to expense and a 15% risk-adjusted ..................................................................................................... Classified Loans and Provisions ..................................................................................................... ..................................................................................................... return on capital (RAROC). Based on its evaluation of the following Non-performing loans and off-balance sheet credits are formally defined as those in default on contractual repayments of principal or payment of interest in excess of 90 days. In practice, however, all credits that give rise to reasonable doubt as to timely collection, whether or not they are in such default, are treated as non-performing. Such credits are immediately placed on nonaccrual status, with all past due interest being reversed and accumulated unpaid interest thereafter excluded from income. The total of all loans on non-accrual status as at the end of 2005 was $262 million (2004: $331 million). Aggregate provisions at the end of 2005 stood at $405 million (2004: $468 million) and constituted 155% (2004: 141%) of all non-performing loans and 5.6% (2004: 7.2%) of gross loans and advances. An ageing analysis is given below in respect of all loans and advances on non-accrual, together with their related provisions: ($ millions) Less than 3 months 3 months to 1 year 1 to 3 years Over 3 years Principal Provisions Net Book Value 1 7 115 139 1 87 133 1 6 28 6 262 221 41 factors, management remains optimistic that the Group can meet these targets over time: Political stability – On the whole, management believes that the Group's activities and assets are sufficiently widely diversified to provide a cushion against major losses from isolated cases of political instability. The Group has in place rigorous, regularly tested, disaster recovery procedures to face eventualities arising from political or other disruptions. The Group has no significant risk exposures outside of the Arab world, the USA and Europe. Energy prices – Global hydrocarbon prices have a direct impact on the annual budgets and infrastructure improvements of many of the countries in the Arab world. This in turn affects both the Group’s OECD-based exporting and contracting customers and its importer customers in the MENA region. When hydrocarbon prices are high, producing countries benefit, increasing their demand for capital equipment and construction services for infrastructure-building and development projects, in addition to consumer goods. Lower energy prices benefit residents of developed countries who in turn increase their appetite for tourism services and developing countries’ goods which enhances the revenues of the agricultural producers and ..................................................................................................... ..................................................................................................... tourism-dependent countries. The Group’s revenues can benefit from ..................................................................................................... ..................................................................................................... ..................................................................................................... either of these scenarios. The prognosis is for a steady increase in ..................................................................................................... hydrocarbon prices over the medium term, after some anticipated downward adjustment to current highs. ..................................................................................................... ..................................................................................................... ..................................................................................................... ..................................................................................................... ..................................................................................................... Group Capital Structure and Capital Adequacy Ratios ..................................................................................................... ..................................................................................................... Foreign currency values – Where ABC’s subsidiaries are capitalised 28 The Group’s capital base of $2,089 million comes substantially from the shareholders’ funds of $1,926 million, as was also the case in 2004 when shareholders’ funds of $1,852 million formed the greater part of the capital base of $1,974 million. The consolidated capital adequacy ratio as at 31 December 2005 was 19.9% (2004: 23.9%), significantly above the regulatory minimum of 12% and the 8% guideline under the Basel Accord for international banks. All ABC Group subsidiaries meet the capital adequacy requirements of their respective regulatory authorities. with currencies other than the US dollar, it is exposed to fluctuations in the values of those currencies. ABC takes all appropriate steps to hedge against such fluctuations where this is practicable or desirable. Volatility of currency markets - Foreign exchange rate volatility can affect the Group’s foreign exchange trading revenues. The Group believes that it benefits overall from currency volatility, in view of the opportunities for profitable proprietary trading thus generated. Group Financial Review Interest rates – Although the Group’s net interest revenue can be ..................................................................................................... ..................................................................................................... ..................................................................................................... negatively affected by interest rate changes, the impact is mainly on ..................................................................................................... ..................................................................................................... Factors Affecting Historical or Future Performance ..................................................................................................... ..................................................................................................... income from equity funds since its lending and marketable securities holdings are based predominantly on floating or short-term interest ABC Group seeks greater diversification in its revenue base primarily rates and therefore largely insulated from interest rate swings. through regional expansion and the facilitation of Arab world business investment and trade flows. Its activities include the financing of trade, investment and infrastructure development, often through innovative and tailored structures and through a wide array of available facilities, including Islamic banking, project and structured financing and treasury services and products. The Group's primary financial goal is consistent generation of value for its shareholders, including sustainable growth in earnings and assets per share. Having achieved its target of a maintainable capital adequacy ratio of at least 15%, its chief long-term goals ABC Group Annual Report 2005 Auditors’ Report to the Shareholders of Arab Banking Corporation (B.S.C.) We have audited the accompanying consolidated balance sheet of Arab Banking Corporation (B.S.C.) [the Bank] and its subsidiaries [the Group] as of 31 December 2005, and the related consolidated statements of income, cash flows and the changes in equity for the year then ended. These consolidated financial statements are the responsibility of the Bank’s Board of Directors. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of 31 December 2005 and of the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards. We confirm that, in our opinion, proper accounting records have been kept by the Bank and the consolidated financial statements, and the contents of the Directors’ report relating to these consolidated financial statements, are in agreement therewith. We further report, to the best of our knowledge and belief, that no violations of the Bahrain Commercial Companies Law, nor of the Bahrain Monetary Agency Law, nor of the memorandum and articles of association of the Bank have occurred during the year ended 31 December 2005 that might have had a material adverse effect on the business of the Bank or on its consolidated financial position and that the Bank has complied with the terms of its banking licence. We obtained all the information and explanations which we required for the purposes of our audit. 21 February 2006 Manama, Kingdom of Bahrain Auditors’ Report to the Shareholders of Arab Banking Corporation (B.S.C.) 29 Annual Report 2005 ABC Group Profit and Loss Account Consolidated Balance Sheet For the year ended 31 December 2005 31st December 2005 Note 2005 2005 £000 All figures in US$ million 2004 309 18,110 593 52,620 3,264 70,730 6,003 6,833 46,978 29 23,752 146 282 129 303 7,017 184 41,077 4,305 48,094 3,617 6,012 28,198 31 19,896 89 238 143 14,922 10,219 (1,574) 5,081 3,814 5,506 12,459 94 72 32,355 23 426 1,828 (26,630) 2004 £000 ASSETS Interest receivable and similar income arising from debt funds Liquid securities and certificates of deposit purchased Trading securities Other interest receivable and similar income Placements with banks and other financial institutions Non-trading securities Loans and advances Interest payable Investments in associates Net interest income Interest receivable Other assets Premises and equipment Cairo, Egyp3t 3 4 5 2 6 Fees and commissions receivable Fees and commissions payable LIABILITIES Dealing profits Deposits from customers Other operating income Deposits from banks and other financial institutions Certificates of deposit Interest payableincome Total operating Taxation Other liabilities BONDS AND OTHER TERM FINANCING TERM NOTES, expenses Administrative 7 8 94 17,588 16,754 (3,103) 183 5,310 1,932 8,108 15,766 73 109 39,518 44 396 1,575 (33,238) LIABILITIES TOTAL Depreciation and amortisation Provision release 5 15,615 (1,213) 1,494 13,030 (996) 3,371 (32,957) (24,255) TOTAL ASSETS 10 EQUITY Share capital Reserves Profit on ordinary activities before tax Retained earnings Tax (charge)/ credit on ordinary activities EQUITY ATTRIBUTABLE TO THE SHAREHOLDERS OF THE PARENT Minority Profit forinterests the financial year TOTAL EQUITY TOTAL LIABILITIES AND EQUITY Consolidated Profit andBalance Loss Account Sheet 14 30 3 6 7 1,000 430 6,561 496 (129) 1,926 47 6,432 1,000 428 8,100 424 523 1,852 40 8,623 1,973 1,892 17,588 14,922 A statement of total recognised gains and losses has not been included as there were no recognised gains or losses for the current or previous financial year other than those already dealt with in the profit and loss account. These consolidated financial statements were authorised for issue by the Board of Directors on 21 February 2006 and signed on their behalf by the Chairman and President & Chief Executive. Mohammed Layas Chairman The attached notes 1 to 27 form part of these consolidated financial statements. ABC Group Annual Report 2005 Ghazi M. Abdul-Jawad President & Chief Executive Balance Sheet Consolidated Statement of Income at 31st December 2005 2005 Year As ended 31 December Note 2005 2005 £000 All figures in US$ million 2004 2004 £000 OPERATING INCOME Assets Interest Cash andincome balances at central banks Interest expense Certificates of deposit purchased Loans and advances to banks Net interest income to customers Loans and advances Other operating income Debt securities Interest in associated undertakings Total operating Shares in Groupincome undertakings Tangible fixed assets Write Other back assetsof impairment provisions - net Prepayments and accrued income 705 24,223 (512) 190,000 695,260 193 896,427 159 79,117 4,809 352 1,075 3,613 14 3,292 17,035 366 1,914,851 512 8,098 (360) 239,441 287,482 152 664,224 153 18,341 923 305 1,165 2,931 10 1,340 13,112 315 1,237,057 18 19 20 21 22 23 134 23 1,246,744 54 116,855 32,119 211 27,683 12,864 155 185,594 121 24 585,381 54 132,750 40,112 199 13,058 12,182 116 196,289 7 1,621,859 (20) 979,772 (3) 8 9 10 11 13 14 15 16 17 NET OPERATING INCOME AFTER PROVISIONS Total assets OPERATING EXPENSES Staff Liabilities Premises and equipment Deposits from banks and other financial institutions Other Deposits from customers Certificates of deposit issued Total operating expenses Other liabilities Accruals and deferred income PROFIT BEFORE TAXATION Term borrowing Taxation on foreign operations NET PROFIT FOR THE YEAR FROM CONTINUING OPERATIONS Subordinated liability 24 135 44,154 113 47,175 182,296 66,542- 150,000 60,110 470 248,838 - 210,110 470 292,992 135 (6) 1,914,851 257,285 583 (4) 1,237,057 DISCONTINUED OPERATIONS (SUBSIDIARIES SOLD IN 2004) Equity shareholders’ funds NET PROFIT FOR THE YEAR FROM DISCONTINUED OPERATIONS 26 12 (b) 27 Capital resources NET PROFIT FOR THE YEAR Income attributable to minority interests Total liabilities and shareholders’ funds INCOME ATTRIBUTABLE TO THE SHAREHOLDERS OF THE PARENT Memorandum items BASIC EARNINGS PER SHARE (expressed in US $) Contingent liabilities - Profit for the year Acceptances and endorsements - Profit from continuing operations Guarantees and letters of credit 129 579 1.29 13,798 1.29 633,946 5.79 3,387 1.09 334,205 647,744 337,592 176,575 121,421 176,575 121,421 26 Commitments Other commitments 30 The attached notes 1 to 27 form part of these consolidated financial statements. Annual Report 2005 ABC Group 15 31 of Income Sheet Consolidated Statement Balance Called up share capital and loss account operations - net of tax discontinued Profit from Consolidated Statement of Cashflows Year ended 31 December 2005 All figures in US$ million Note 2005 2004 129 579 (14) 11 (10) 11 (6) - (9) (470) (409) 925 (958) (100) 261 2,749 33 (10) (112) (646) 357 164 1,834 (1,634) (65) (97) OPERATING ACTIVITIES Income attributable to the shareholders of the parent Items not involving cash flow: Write back of impairment provisions- net Depreciation Items considered separately: Gains less losses on non-trading securities Profit on sale of subsidiaries Changes in operating assets and liabilities: Trading securities Placements with banks and other financial institutions Loans and advances Other assets Deposits from customers Deposits from banks and other financial institutions Other liabilities Other non-cash movements 11 12 (b) 2,611 Net cash from (used in) operating activities (98) INVESTING ACTIVITIES (3,805) 1,513 (7) 2 1,198 (3,770) 2,462 (13) 3 (2,297) (120) Redemption of certificates of deposit - net Issue of term notes, bonds and other term financing Repayment of term notes, bonds and other term financing - 2003 Cash dividend paid - 2004 final/interim (19) 544 (779) (50) (25) 616 (105) (66) (226) Net cash (used in) from financing activities (304) 194 Net proceeds from sale of subsidiaries Purchase of non-trading securities Sale and redemption of non-trading securities Purchase of premises and equipment Sale of premises and equipment 12 (b) Net cash used in investing activities FINANCING ACTIVITIES Consolidated Statement of Cashflows 32 10 (4) (24) 8 Decrease in liquid funds Effect of exchange rate changes on liquid funds Liquid funds* at beginning of the year (2004: excluding US$ 390 million relating to subsidiaries sold in 2004) 303 319 Liquid funds* at end of the year 309 303 * Liquid funds comprise cash, nostro balances and balances with central banks. The cash flows of the previous year do not include the activities of Banco Atlantico S.A. Group companies, Spain and International Bank of Asia, Hong Kong which have been sold. The attached notes 1 to 27 form part of these consolidated financial statements. ABC Group Annual Report 2005 Consolidated Statement of Changes in Equity Year ended 31 December 2005 All figures in US$ million Attributable to shareholders of the parent Statutory reserve General reserve Total Minority interests Total equity 1,000 205 140 16 211 13 1,585 512 2,097 Foreign exchange translation adjustments Cumulative changes in fair values and other - - - (9) (13) - 2 (13) (7) - (13) (7) Net income recognised directly in equity - - - (9) (13) 2 (20) - (20) Net profit for the year – 2004 - - - - 579 - 579 4 583 Total recognised income and expense for the year - - - (9) 566 2 559 4 563 Transfers during the year Cash dividend - 2003 Interim cash dividend - 2004 Interim stock dividend - 2004 Sale of subsidiaries - 58 - 10 - (10) 3 - (58) (66) (226) (3) - - (66) (226) - 1,000 263 150 - 424 Foreign exchange translation adjustments Cumulative changes in fair values and other - - - - 6 - (11) 6 (11) 1 - 7 (11) Net income recognised directly in equity - - - - 6 (11) (5) 1 (4) Net profit for the year – 2005 - - - - 129 - 129 6 135 Total recognised income and expense for the year - - - - 135 (11) 124 7 131 Transfers during the year Dividend - 13 - - - (13) (50) - (50) - (50) 1,000 276 150 - 496 4 1,926 Balance at the end of the year 2003 Balance at the end of the year 2004 Balance at the end of the year 2005 15 1,852 (476) (66) (226) (476) 40 1,892 47 1,973 1) Others include treasury stock [2005 & 2004: Nil], extra-ordinary financial reserve [2005: Nil & 2004: US$ 10 million], capital reserve [2005 & 2004: Nil] and share premium [2005 & 2004: Nil]. 2) Retained earnings include US$ 2 million (2004: negative balance of US$ 4 million) representing net unrealised gains/losses on translation of investments in foreign subsidiaries into US dollars and non-distributable reserves amounting to US$ 144 million (2004: US$ 118 million). The attached notes 1 to 27 form part of these consolidated financial statements. Annual Report 2005 ABC Group 33 Consolidated Statement of Changes in Equity Cumulative Retained changes in Others 1 earnings 2 fair values Share capital Notes to the Consolidated Financial Statements 31 December 2005 1. Incorporation and Activities The Parent Bank, Arab Banking Corporation (B.S.C.), [the Bank] incorporated in the Kingdom of Bahrain by an Amiri decree, operates under an offshore banking licence issued by the Bahrain Monetary Agency. 2. Significant Accounting Policies The consolidated financial statements of Arab Banking Corporation (B.S.C.) and its subsidiaries [the Group] are prepared in accordance with International Financial Reporting Standards (IFRS) and in conformity with the Bahrain Commercial Companies Law and the Bahrain Monetary Agency Law. The following is a summary of the significant accounting policies which are consistent with those used in the previous year: Accounting convention These consolidated financial statements are prepared under the historical cost convention, as modified by the measurement at fair value of derivatives, trading and available for sale financial assets. In addition, as more fully discussed below, assets and liabilities that are hedged, items in fair value hedges, and are otherwise carried at cost, are adjusted to record changes in fair values attributable to the risk being hedged. The consolidated financial statements have been presented in United States Dollars which is the functional currency of the Group. Early adoption of IAS 32 and IAS 39 During 2003, the Group had early adopted the revised versions of IAS 32 and IAS 39 which would have become mandatory for the year ended 31 December 2005. Consolidation These consolidated financial statements include the financial statements of the Parent Bank and its subsidiaries after adjustment for minority interests and elimination of inter-company transactions and balances. The financial statements of the subsidiaries are prepared for the same reporting year as the Parent Bank, using consistent accounting policies. Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. Liquid funds Liquid funds comprise cash, nostro balances and balances with central banks. Trading securities Trading securities are initially recorded at cost and subsequently remeasured at fair value with any gains and losses arising from changes in fair values being included in the consolidated statement of income in the period in which it arises. Interest earned and dividends received are included in interest income and other operating income respectively. Notes to the Consolidated Financial Statements 34 Placements with banks and other financial institutions Placements with banks and other financial institutions are stated at cost net of any amounts written off and provision for impairment. The carrying values of such assets which are being effectively hedged for changes in fair value are adjusted to the extent of the changes in fair value being hedged. Resultant changes are recognised in the consolidated statement of income. Non-trading securities These are classified as follows: - Held to maturity - Available for sale All non-trading securities are initially recognised at cost, being the fair value of the consideration given including incremental acquisition charges associated with the security. Held to maturity Securities which have fixed or determinable payments and fixed maturity which are intended to be held to maturity, are subsequently measured at amortised cost, less provision for impairment in value. ABC Group Annual Report 2005 Notes to the Consolidated Financial Statements 31 December 2005 Available for sale Securities intended to be held for an indefinite period of time and which may be sold in response to needs for liquidity, changes in interest rates or equity prices are classified as “available for sale”. After initial recognition, these are normally remeasured at fair value, unless fair value cannot be reliably determined in which case they are measured at cost less impairment. Fair value changes which are not part of an effective hedging relationship, are reported as a separate component of equity until the investment is derecognised or the investment is determined to be impaired. On derecognition or impairment the cumulative gain or loss previously reported as "cumulative changes in fair value" within equity, is included in consolidated statement of income for the period. That portion of any fair value changes relating to an effective hedging relationship is recognised directly in the consolidated statement of income. Loans and advances Loans and advances quoted in an active market are classified as “held to maturity” or “available for sale” depending on management's intent. Loans and advances that are not quoted in an active market are classified as “unquoted loans and advances”. Unquoted loans and advances and held to maturity loans and advances are stated at amortised cost, less provision for impairment. Loans and advances classified as available for sale are stated at fair value. Unless unrealised gains and losses on remeasurement to fair value are part of an effective hedging relationship, they are reported as a separate component of equity until the loan is sold, collected or otherwise disposed of, or the loan is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in the consolidated statement of income for the period. In relation to loans and advances which are part of an effective hedging relationship any gain or loss arising from a change in fair value is recognised directly in the consolidated statement of income. The carrying values of loans and advances which are being effectively hedged for changes in fair value are adjusted to the extent of the changes in fair value being hedged. Investments in associates Investments in associates are accounted for by the equity method. Associates are enterprises in which the Bank exercises significant influence, normally where it holds 20% to 50% of the voting power. Premises and equipment Premises and equipment are stated at cost, less accumulated depreciation and provision for impairment in value, if any. Freehold land is not depreciated. Depreciation on other premises and equipment is provided on a straight-line basis over their estimated useful lives. Impairment is determined as follows: a) for assets carried at amortised cost, impairment is based on the present value of estimated future cash flows discounted at the original effective interest rate; b) for assets carried at fair value, impairment is the difference between cost and fair value; and c) for assets carried at cost, impairment is based on the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. In the case of impaired available for sale equity securities, any increase in fair value is recognised as an increase in cumulative changes in fair value directly in equity until disposed of. Deposits All money market and customer deposits are carried at amortised cost. An adjustment is made to these, if part of an effective fair value hedging strategy, to adjust the value of the deposit for the fair value being hedged with the resultant changes being recognised in the consolidated statement of income. Annual Report 2005 ABC Group 35 Notes to the Consolidated Financial Statements Impairment and uncollectability of financial assets An assessment is made at each balance sheet date to determine whether there is objective evidence that a specific financial asset may be impaired. If such evidence exists, an impairment loss is recognised in the statement of income. The recoverable amount is based on the net present value of anticipated future cash flows, discounted at the original interest rate. In addition to the provision for specific impaired loans and advances, a provision is made to cover impairment against specific group of assets where there is a measurable decrease in estimated future cash flows. Notes to the Consolidated Financial Statements 31 December 2005 2. Significant Accounting Policies (continued) Repurchase and resale agreements Assets sold with a simultaneous commitment to repurchase at a specified future date (‘repos’) are not derecognised. The counterparty liability for amounts received under these agreements is included in deposits from banks and other financial institutions or deposits from customers, as appropriate. The difference between sale and repurchase price is treated as interest expense using effective yield method. Assets purchased with a corresponding commitment to resell at a specified future date (‘reverse repos’) are not recognised in the balance sheet, as the bank does not obtain control over the assets. Amounts paid under these agreements are included in placements with banks and other financial institutions or loans and advances, as appropriate. The difference between purchase and resale price is treated as interest income using effective yield method. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event and the costs to settle the obligation are both probable and able to be reliably measured. Employee pension and other end of service benefits Costs relating to employee pension and other end of service benefits are generally accrued in accordance with actuarial valuations based on prevailing regulations applicable in each location. Revenue recognition Interest income and loan fees which are considered an integral part of the effective yield of a loan, are recognised using the effective yield method unless collectibility is in doubt. The recognition of interest income is suspended when loans become impaired, such as when overdue by more than 90 days. Other fee income and expense are recognised when earned or incurred. Premiums and discounts on non trading securities and loans and advances (except loans and advances carried at fair value through statement of income) are amortised using the effective interest method and taken to interest income. Where the Bank enters into an interest rate swap to change interest from fixed to floating (or vice versa) the amount of interest income or expense is adjusted by the net interest on the swap. Notes to the Consolidated Financial Statements 36 Fair values For securities, derivatives and loans and advances traded in organised financial markets, fair value is determined by reference to quoted market prices. Bid prices are used for assets and offer prices are used for liabilities. In the case of units in mutual funds, or similar investment vehicles fair values are based on the last published bid price. For unquoted securities fair value is determined by reference to brokers' quotes, recent transaction(s), the market value of similar securities, or based on the expected cash flows discounted at current rates applicable for items with similar terms and risk characteristics. The estimated fair value of deposits with no stated maturity, which includes non-interest bearing deposits, is the amount payable on demand. The fair value of forward exchange contracts is calculated by reference to forward exchange rates with similar maturities. The fair value of unquoted derivative instruments is determined either by discounted cash flows, internal pricing models or by reference to brokers’ quotes. Significant accounting judgements and estimates Judgements In the process of applying the Group's accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect in the amounts recognised in the financial statements: Classification of investments and quoted loans and advances Upon acquisition of an investment, management decides whether it should be classified as held to maturity, held for trading or available for sale. The Group classifies investments as trading if they are acquired primarily for the purpose of making short term profit. Securities intended to be held for an indefinite period of time and which may be sold in response to needs for liquidity, changes in interest rates or equity prices are classified as available for sale. Quoted loans and advances are classified as "held to maturity" or "available for sale" depending on management's intent. For those deemed to be held to maturity the Group ensures that the requirements of IAS 39 are met and in particular the Group has the intention and ability to hold these to maturity. ABC Group Annual Report 2005 Notes to the Consolidated Financial Statements 31 December 2005 Estimation uncertainty The key assumptions concerning the future and other key sources of estimation at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below: Impairment losses on financial assets On a quarterly basis the Group assesses whether a provision for impairment should be recorded in the income statement. In particular, considerable judgement by management is required in the estimation of the amount and timing of future cash flows when determining the level of provisions required. Such estimates are necessarily based on assumptions about several factors involving varying degrees of judgement and uncertainty, and actual results may differ resulting in future changes in such provisions. Impairment against specific group of financial assets In addition to specific provisions against individually significant loans and advances and investments, the Group also makes a provision to cover impairment against specific group of financial assets where there is a measurable decrease in estimated future cash flows. This provision is based on any deterioration in the internal grade of the financial assets since it was granted. The amount of provision is based on historical loss pattern for loans within each grading and is adjusted to reflect current economic changes. The internal grading process takes into consideration factors such as deterioration in country risk, industry, technological obsolescence as well as identified structural weakness or deterioration in cash flows. Taxation on foreign operations There is no tax on corporate income in the Kingdom of Bahrain. Taxation on foreign operations is provided for in accordance with the fiscal regulations applicable in each location. No provision is made for any liability that may arise in the event of distribution of the reserves of subsidiaries. A substantial portion of such reserves is required to be retained to meet local regulatory requirements. Foreign currencies Monetary assets and liabilities in foreign currencies are translated into US dollars at the market rates of exchange prevailing at the balance sheet date. Any gains or losses are taken to the consolidated statement of income. The assets and liabilities of foreign operations are translated at rates of exchange ruling at the balance sheet date. Income and expense items are translated at average exchange rates for the period. Foreign exchange translation gains and losses arising from translating the financial statements of subsidiaries into US dollars are recorded directly in retained earnings. Trade and settlement date accounting All “regular way” purchases and sales of financial assets are recognised on the trade date, i.e. the date that the Bank commits to purchase or sell the asset. Annual Report 2005 ABC Group 37 Notes to the Consolidated Financial Statements Derivatives The Group enters into derivative instruments including forwards, futures, forward rate agreements, swaps and options in the foreign exchange, interest rate and capital markets. These are stated at fair value. Derivatives with positive market values (unrealised gains) are included in other assets and derivatives with negative market values (unrealised losses) are included in other liabilities in the consolidated balance sheet. Changes in the fair values of derivatives held for trading activities or to offset other trading positions are included in other operating income in the consolidated statement of income. For the purposes of hedge accounting, hedges are classified into two categories: (a) fair value hedges which hedge the exposure to changes in the fair value of a recognised asset or liability; and (b) cash flow hedges which hedge the exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability or a forecasted transaction. Changes in the fair value of derivatives that are designated, and qualify, as fair value hedges and that prove to be highly effective in relation to the hedged risk, are included in other operating income along with the corresponding changes in the fair value of the hedged assets or liabilities which are attributable to the risk being hedged. Changes in the fair value of derivatives that are designated, and qualify, as cash flow hedges and that prove to be highly effective in relation to the hedged risk are recognised in a separate component of equity, and the ineffective portion recognised in the consolidated statement of income. The gains or losses on cash flow hedges recognised initially in equity are transferred to the consolidated statement of income in the period in which the hedged transaction impacts the income. Where the hedged transaction results in the recognition of an asset or a liability the associated gain or loss that had been initially recognised in equity is included in the initial measurement of the cost of the related asset or liability. Notes to the Consolidated Financial Statements 31 December 2005 All figures in US$ million 2. Significant Accounting Policies (continued) Hedge accounting is discontinued when the derivative hedging instrument either expires or is sold, terminated or exercised, no longer qualifies for hedge accounting or is revoked. Upon such discontinuance: - in the case of cash flow hedges, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the forecasted transaction occurs. When such transaction occurs the gain or loss retained in equity is recognised in the consolidated statement of income or included in the initial measurement of the cost of the related asset or liability, as appropriate. Where the hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the consolidated statement of income. - in the case of fair value hedges of interest bearing financial instruments any adjustment to the carrying amount relating to the hedged risk is amortised in the consolidated statement of income over the remaining term to maturity. Certain derivative transactions, while providing effective economic hedges under the Group's asset and liability management and risk management positions, do not qualify for hedge accounting under the specific rules in IAS 39 and are therefore accounted for as derivatives held for trading and the related fair value gains and losses reported in other operating income. Certain derivatives embedded in other financial instruments are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not carried at fair value through the income statement. These embedded derivatives are measured at fair value with the changes in fair value recognised in the income statement. Fiduciary assets Assets held in trust or in a fiduciary capacity are not treated as assets of the Group and, accordingly, are not included in the consolidated balance sheet. Offsetting Financial assets and financial liabilities are only offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and the Bank intends to settle on a net basis. 3. Trading Securities Externally managed funds Debt securities Equities 2005 2004 584 8 1 160 22 2 593 184 Externally managed funds represent investments in hedge funds (fund of funds) managed by internationally renowned asset managers. Notes to the Consolidated Financial Statements 38 4. Non-Trading Securities Available for sale AAA rated debt securities AA to A rated debt securities Other investment grade debt securities Other debt securities Equity securities Held to maturity - Debt securities 2005 2004 3,961 1,166 396 422 51 2,512 531 344 175 48 5,996 3,610 7 7 6,003 3,617 Available for sale investments include investments of US$ 340 million (2004: US$ 208 million) of a structured finance nature which are of investment grade and are managed by international investment banks with underlying investments in predominantly AAA rated debt securities. Unquoted equity securities of US$ 24 million (2004: US$ 20 million) are carried at cost. This is due to the unpredictable nature of future cash flows and lack of suitable alternative methods to arrive at a reliable fair value. ABC Group Annual Report 2005 Notes to the Consolidated Financial Statements 31 December 2005 All figures in US$ million 5. Loans and Advances 2005 2004 i) By industrial sector Financial services Other services Manufacturing Construction Trade Consumer Government Other 2,965 1,546 1,678 133 324 104 276 212 2,345 1,500 1,503 196 381 32 357 166 Loan loss provisions 7,238 (405) 6,480 (468) 6,833 6,012 ii) By classification Quoted loans and advances: Available for sale Held to maturity Unquoted loans and advances 2005 2004 62 3 7,173 160 1 6,319 Loan loss provisions 7,238 (405) 6,480 (468) 6,833 6,012 2005 2004 The movements in loan loss provisions during the year were as follows: 468 32 (46) (52) 3 608 42 (52) (99) (31) At 31 December 405 468 * Foreign exchange translation and other adjustments include US$ Nil (2004: U$ 25 million) transferred to provisions on nontrading securities following the restructuring of a loan converted partially into equity. At 31 December 2005 uncollected interest in suspense on past due loans amounted to US$ 182 million (2004: US$ 175 million). The gross carrying value of loans placed on a non-accrual basis amounted to US$ 262 million at the year end (2004: US$ 331 million). 6. Other Assets Positive fair value of derivatives (note 13) Assets acquired on debt settlement Staff loans Bank owned life insurance Securities sold awaiting value Deferred tax assets Others 2005 2004 72 11 16 25 35 10 113 73 11 11 25 10 16 92 282 238 The negative fair value of derivatives amounting to US$ 77 million (2004: US$ 89 million) is included in other liabilities (Note 8). Details of derivatives are given in Note 13. Annual Report 2005 ABC Group 39 Notes to the Consolidated Financial Statements At 1 January Charge for the year Write backs/recoveries Write-offs Foreign exchange translation and other adjustments * Notes to the Consolidated Financial Statements 31 December 2005 All figures in US$ million 7. Taxation on Foreign Operations Consolidated balance sheet: Current tax liability Deferred tax liability Consolidated statement of income: Current tax on foreign operations Deferred tax on foreign operations 2005 2004 11 33 5 18 44 23 11 9 10 (7) 20 3 In view of the operations of the Group being subject to various tax jurisdictions and regulations, it is not practical to provide a reconciliation between the accounting and taxable profits together with the details of effective tax rates. 8. Other Liabilities Negative fair value of derivatives (note 13) Margin deposits including cash collateral Employee related payables Non corporate tax payable Securities purchased awaiting value Cheques for collection Deferred income Accrued charges and other payables 2005 2004 77 66 46 12 48 17 25 105 89 98 41 10 10 19 13 146 396 426 The positive fair value of derivatives amounting to US$ 72 million (2004: US$ 73 million) is included in other assets (Note 6). Details of derivatives are given in Note 13. 9. Term Notes, Bonds and Other Term Financing In the ordinary course of business, the Parent Bank and certain subsidiaries raise term financing through various capital markets at commercial rates. Total obligations outstanding at 31 December 2005 Notes to the Consolidated Financial Statements 40 Aggregate maturities: 2006 2007 2008 2009 2010 Total obligations outstanding at 31 December 2004 All obligations bear floating rates of interest. ABC Group Annual Report 2005 Parent Bank Subsidiaries Total 100 300 50 500 399 126 100 - 226 400 50 500 399 1,349 226 1,575 1,460 368 1,828 Notes to the Consolidated Financial Statements 31 December 2005 All figures in US$ million 10. Equity a) Share capital 2005 2004 Authorised – 150 million shares of US$ 10 each 1,500 1,500 Issued, subscribed and fully paid – 100 million shares of US$ 10 each 1,000 1,000 b) Statutory reserve As required by the Articles of Association of the Bank and the Bahrain Commercial Companies Law, 10% of the net profit for the year is transferred to the statutory reserve. Such annual transfers will cease when the reserve totals 50% of the paid up share capital. The reserve is not available for distribution but can be utilised as security for purpose of a distribution in such circumstances as stipulated in the Bahrain Commercial Companies Law and following the approval of the Bahrain Monetary Agency. c) General reserve The general reserve underlines the shareholders’ commitment to enhance the strong equity base of the Bank. 11. Other Operating Income 2005 2004 94 (16) 6 11 9 27 28 Fee and commission income Fee and commission expense Gains less losses on non-trading securities Gains less losses on dealing in foreign currencies Gains less losses on dealing in derivatives Gains less losses on trading securities Gains less losses on loans carried at fair value through statement of income Other – net 72 (7) 9 1 11 7 20 40 159 153 12. Investments in Subsdiaries and Associates a) The principal subsidiaries, all of which have 31 December as their year end, are as follows: ABC International Bank plc ABC Islamic Bank (E.C.) Arab Banking Corporation (ABC) – Jordan Banco ABC Brasil S.A. ABC Algeria Arab Banking Corporation - Egypt [S.A.E.] ABC Tunisie Interest of Arab Banking Corporation (B.S.C.) (%) United Kingdom Bahrain Jordan Brazil Algeria Egypt Tunisia 100 100 87 84 70 98 100 The principal associate is Arab Financial Services B.S.C. (c), incorporated in Bahrain, with a 43% ownership (2004: 42%) Annual Report 2005 ABC Group 41 Notes to the Consolidated Financial Statements Country of incorporation Notes to the Consolidated Financial Statements 31 December 2005 All figures in US$ million 12. Investments in Subsdiaries and Associates (continued) b) Discontinued operations - Sale of subsidiaries The sales of the Bank’s retail subsidiaries, Banco Atlantico S.A. group of companies, Spain and International Bank of Asia Limited, Hong Kong, agreements for which were entered into in 2003, were completed during the previous year. Proceeds, net of expenses, from the sales of Banco Atlantico S.A. group of companies and International Bank of Asia Limited amounted to US$ 1,200 million and US$ 301 million, respectively; tax expense arising from the sales amounted to US$ 303 million and nil, respectively. The profit on disposal of the subsidiaries was calculated based on the carrying values as presented in the audited financial statements for the year ended 31 December 2003. The comparative figures relating to the previous year do not include the results of International Bank of Asia Limited and Banco Atlantico S.A. group of companies as these were sold effective 31 December 2003. 13. Derivatives In the ordinary course of business the Group enters into various types of transactions that involve derivative financial instruments. The table below shows the positive and negative fair values of derivative financial instruments. The notional amount is that of a derivative’s underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured. The notional amounts indicate the volume of transactions outstanding at year end and are not indicative of either market or credit risk. 2005 Positive Negative fair value fair value Derivatives held for trading: Interest rate and currency swaps Forward foreign exchange contracts Options Futures Forward rate agreements Derivatives held as hedges: Interest rate and currency swaps Forward foreign exchange contracts Futures 42 Notes to the Consolidated Financial Statements Risk weighted equivalents (credit and market risk) Notional amount Positive fair value 2004 Negative fair value Notional amount 33 18 14 6 - 34 12 8 7 - 2,137 1,585 2,403 232 - 49 9 11 2 - 44 10 15 - 1,989 1,727 2,626 508 10 71 61 6,357 71 69 6,860 1 - 16 - 1,235 318 - 1 1 20 - 612 749 89 1 16 1,553 2 20 1,450 72 77 7,910 73 89 8,310 299 208 Derivatives held as hedges include: a) Fair value hedges which are predominantly used to hedge fair value changes arising from interest rate fluctuations in loans and advances, placements, deposits and available for sale debt securities; and b) Cash flow hedges with a notional amount of US$ 5 million (2004: US$ 7 million), comprising interest rate swaps of US$ 5 million (2004: US$ 7 million), the fair value of which is immaterial. ABC Group Annual Report 2005 Notes to the Consolidated Financial Statements 31 December 2005 All figures in US$ million Derivative product types Forwards and futures are contractual agreements to either buy or sell a specified currency, commodity or financial instrument at a specific price and date in the future. Forwards are customised contracts transacted in the over-the-counter market. Foreign currency and interest rate futures are transacted in standardised amounts on regulated exchanges and are subject to daily cash margin requirements. Forward rate agreements are effectively tailor-made interest rate futures which fix a forward rate of interest on a notional loan, for an agreed period of time starting on a specified future date. Swaps are contractual agreements between two parties to exchange interest or foreign currency amounts based on a specific notional amount. For interest rate swaps, counterparties generally exchange fixed and floating rate interest payments based on a notional value in a single currency. For cross-currency swaps, notional amounts are exchanged in different currencies. For crosscurrency interest rate swaps, notional amounts and fixed and floating interest payments are exchanged in different currencies. Options are contractual agreements that convey the right, but not the obligation, to either buy or sell a specific amount of a commodity or financial instrument at a fixed price, either at a fixed future date or at any time within a specified period. Derivative related credit risk Credit risk in respect of derivative financial instruments arises from the potential for a counterparty to default on its contractual obligations and is limited to the positive fair value of instruments that are favourable to the Group. The majority of the Group’s derivative contracts are entered into with other financial institutions and there is no significant concentration of credit risk in respect of contracts with positive fair value with any individual counterparty at the balance sheet date. Derivatives held or issued for trading purposes Most of the Group’s derivative trading activities relate to sales, positioning and arbitrage. Sales activities involve offering products to customers. Positioning involves managing market risk positions with the expectation of profiting from favourable movements in prices, rates or indices. Arbitrage involves identifying and profiting from price differentials between markets or products. Also included under this heading are any derivatives which do not meet IAS 39 hedging requirements. Annual Report 2005 ABC Group 43 Notes to the Consolidated Financial Statements Derivatives held or issued for hedging purposes The Group has adopted a comprehensive system for the measurement and management of risk. Part of the risk management process involves managing the Group’s exposure to fluctuations in foreign exchange rates (currency risk) and interest rates through asset and liability management activities. It is the Group’s policy to reduce its exposure to currency and interest rate risks to acceptable levels as determined by the Board of Directors. The Board has established levels of currency risk by setting limits on currency position exposures. Positions are monitored on an ongoing basis and hedging strategies used to ensure positions are maintained within established limits. The Board has established levels of interest rate risk by setting limits on the interest rate gaps for stipulated periods. Interest rate gaps are reviewed on an ongoing basis and hedging strategies used to reduce the interest rate gaps to within the limits established by the Board. As part of its asset and liability management the Group uses derivatives for hedging purposes in order to reduce its exposure to currency and interest rate risks. This is achieved by hedging specific financial instrument, forecasted transactions as well as strategic hedging against overall balance sheet exposures. For interest rate risk this is carried out by monitoring the duration of assets and liabilities using simulations to estimate the level of interest rate risk and entering into interest rate swaps and futures to hedge a proportion of the interest rate exposure, where appropriate. Since strategic hedging does not qualify for special hedge accounting related derivatives are accounted for as trading instruments. The Group uses forward foreign exchange contracts and currency swaps to hedge against specifically identified currency risks. In addition, the Group uses interest rate swaps and interest rate futures to hedge against the interest rate risk arising from specifically identified loans and securities bearing fixed interest rates. The Group also uses interest rate swaps to hedge against the cash flow risks arising on certain floating rate loans. In all such cases the hedging relationship and objective, including details of the hedged item and hedging instrument, are formally documented and the transactions are accounted for as hedges. Notes to the Consolidated Financial Statements 31 December 2005 All figures in US$ million 14. Credit Commitments and Contingent Items Credit commitments and contingent items include commitments to extend credit, standby letters of credit, acceptances and guarantees, which are structured to meet the various requirements of customers. At the balance sheet date, the principal outstanding and the risk weighted equivalents were as follows: Short-term self-liquidating trade and transaction-related contingent items Direct credit substitutes, guarantees and acceptances Forward asset purchase commitments Undrawn loans and other commitments Risk weighted equivalents 2005 2004 2,657 498 19 1,021 2,663 430 1,387 4,195 4,480 1,390 1,372 15. Maturities of Assets, Liabilities and Off Balance Sheet Items The maturity analysis of assets, liabilities and off balance sheet items based on remaining period to the contractual maturity date, except for Mortgage Backed Securities, Small Business Administration pools and Collateralised Debt Obligations classified as non-trading securities amounting to US$ 3,770 million (2004: US$ 2,268 million) which is based on expected repayment dates is as follows: At 31 December 2005 Notes to the Consolidated Financial Statements 44 Within 1 1 to 3 3 to 6 6 to 12 month months months months Assets Liquid funds Trading securities Placements with banks and other financial institutions Non-trading securities Loans and advances Others 309 2 1 - 2,565 5 1,343 - 611 38 815 - Total assets 4,224 Over 20 years Undated Total - 1 585 309 593 54 36 788 - 34 650 2,372 1,967 861 2,022 665 - 884 334 - 5 - 51 586 3,264 6,003 6,833 586 1,465 878 1,547 4,395 2,633 1,218 6 1,222 17,588 1,293 427 77 188 23 - - - 5,310 1,632 27 312 28 129 - 125 - 13 - - - - 8,108 73 69 - - 150 1,349 - - - - 549 1,973 1,575 549 1,973 9,224 3,021 767 356 1,662 36 - - 2,522 17,588 Off Balance Sheet Items Credit commitments and contingent items 807 Foreign exchange contracts 2,446 Interest rate contracts 137 605 962 543 686 531 338 836 1,073 338 22 310 1,108 103 916 55 14 245 30 - - 4,195 4,313 3,597 Total liabilities, minority interests and equity 1 10 to 20 years 1 Liabilities, Minority Interests and Equity Deposits from customers 3,302 Deposits from banks and other financial institutions 5,897 Certificates of deposit 18 Term notes, bonds and other term financing 7 Others Equity and minority interests - 2 1 to 5 5 to 10 years years Total 3,390 2,110 1,555 1,484 2,203 1,019 314 30 - 12,105 At 31 December 2004 Total assets 4,280 1,633 1,423 1,425 3,524 1,569 353 4 711 14,922 Total liabilities, minority interests and equity 6,499 2,445 1,531 655 1,359 20 - - 2,413 14,922 Off Balance sheet items 3,515 2,334 1,955 1,663 2,204 957 135 27 - 12,790 ABC Group Annual Report 2005 Notes to the Consolidated Financial Statements 31 December 2005 All figures in US$ million 16. Interest Rate Risk Interest rate risk arises from the possibility that changes in interest rates will affect future profitability or the fair values of financial instruments. The bank is exposed to interest rate risk as a result of mismatches of interest rate repricing of assets and liabilities. The Board has established levels of interest rate risk by setting interest rate sensitivity limits Positions are monitored on an ongoing basis and hedging strategies used to ensure positions are maintained within established limits. The bank’s interest sensitivity position based on contractual repricing arrangements or maturity at 31 December 2005 has been shown in the table below: 1 to 5 years Over 5 years Noninterest bearing items Total Effective interest rates Liquid funds Trading securities Placements with banks and other financial institutions Non-trading securities Loans and advances Others 309 2 1 - 2 1 2 585 309 593 1.1 5.0 2,569 3,766 2,145 - 612 1,496 1,737 - 48 141 1,736 - 35 26 589 - 333 545 - 190 81 - 51 586 3,264 6,003 6,833 586 4.6 4.5 5.7 - Total assets 8,791 3,846 1,925 652 879 273 Deposits from customers Deposits from banks and other financial institutions Certificates of deposit Others 3,583 1,151 292 46 67 24 147 5,310 3.7 6,004 19 - 1,641 27 - 345 27 - 93 - 5 - - 20 549 8,108 73 549 3.9 4.4 107 - 1,068 - 400 - - - - 1,973 1,575 1,973 4.6 9,713 3,887 1,064 139 72 24 TERM NOTES, BONDS AND OTHER TERM FINANCING Equity and minority interests Total liabilities, minority interests and equity 1,222 17,588 2,689 17,588 On balance sheet gap Off balance sheet gap (922) 698 (41) 56 861 (181) 513 7 807 (281) 249 (1,467) (299) - - Total interest rate sensitivity gap (224) 15 680 520 526 (50) (1,467) - Cumulative interest rate sensitivity gap (224) (209) 471 991 1,517 1,467 - - At 31 December 2004 Cumulative interest rate sensitivity gap 450 539 720 771 1,666 - - 1,548 Annual Report 2005 ABC Group 45 Notes to the Consolidated Financial Statements 6 months Up to 1 1 to 3 3 to 6 to 1 month months months year Notes to the Consolidated Financial Statements 31 December 2005 All figures in US$ million 17. Significant Net Foreign Currency Exposures Significant net foreign currency exposures, arising mainly from investments in subsidiaries, are as follows: 2005 Long (Short) Currency (12) 228 54 13 (68) 2,332 Brazilian real Egyptian pound Jordanian dinar Pound sterling Saudi riyal Algerian dinar 2004 US$ equivalent (5) 40 76 22 (18) 32 Currency 11 190 36 9 (231) 1,725 US$ equivalent 4 31 51 18 (61) 24 18. Credit Risk Credit risk is the risk that a customer or counterparty will fail to meet a commitment, resulting in financial loss to the Group. Such risk arises from lending, trade finance, treasury and other activities undertaken by the Group. Credit risk is actively monitored in accordance with the credit policies which clearly define delegated lending authorities, policies and procedures. The management of credit risk also involves the monitoring of risk concentrations by industrial sector as well as by geographic location. For details of composition of loans and advances portfolio refer note 5. 19. Geographical Distribution of Assets, Liabilities and Off Balance Sheet Items 2005 Assets Western Europe Arab World Asia North America Latin America Other Notes to the Consolidated Financial Statements 46 2004 Credit commitments and Liabilities contingent and equity items Assets Credit commitments and Liabilities and contingent equity items 3,439 5,985 919 5,244 1,091 910 2,156 12,501 746 810 823 552 759 2,517 291 332 241 55 3,976 5,583 596 3,226 865 676 1,392 11,501 585 228 588 628 821 2,872 212 370 160 45 17,588 17,588 4,195 14,922 14,922 4,480 20. Segmental Information Segmental information is presented in respect of the Group's business and geographical segments. The primary reporting format, business segments is based on the products and services provided or the type of customer serviced and reflects the manner in which financial information is evaluated by management and the Board of Directors. For financial reporting purposes, the Group is divided into the following main business segments: Treasury focuses primarily on diversification of funding sources and revenue streams by marketing to develop and build long-term customer relationships, and investments in capital efficient and diversified investment portfolios. Project and Structured Finance offers clients and project sponsors considerable experience and proven ability in structuring, arranging, and syndicating complex transactions, and providing advisory services to clients throughout the Arab world. Trade Finance offers structured trade finance and forfaiting solutions to meet the needs of all types of customers, including government and financial institutions. Commercial banking and corporate offers a variety of products and services for its clients through a relationship-based approach and cooperation and coordination among the Group’s product and geographic units. Islamic banking services provides through its dedicated operations, institutional, corporate, high net worth and retail Sharia'acompliant products and services. ABC Group Annual Report 2005 Notes to the Consolidated Financial Statements 31 December 2005 All figures in US$ million Retail is aimed at offering a wide range of consumer finance and wealth management products to the retail sector. Other comprises items which are not directly attributable to specific business segments and earnings on the Group's net free capital. Unallocated operating expenses are reported separately. The results reported for the business segments are based on the Group's internal financial reporting systems. The accounting policies of the segments are the same as those applied in the preparation of the Group's consolidated financial statements as set out in Note 2. Transactions between segments are conducted at estimated market rates on an arm's length basis. Secondary segment information is based upon the location of the units responsible for recording the transaction. Primary segment information 2005 Project Commercial and banking Islamic structured Trade and banking Treasury finance finance corporate services Net interest and other income Segment result Retail Equity and Other Total 106 30 91 50 17 13 45 352 74 15 57 37 8 1 45 237 (82) Unallocated operating expenses Net Profit before taxation and minority interests from continuing operations Segment assets employed Segment liabilities, minority interests and equity 155 9,694 1,330 3,615 15,175 - - 1,329 755 171 694 17,588 - - - 2,413 17,588 2004 Project and structured Treasury finance Commercial banking Trade and finance corporate Islamic banking services Retail Equity and Other Total Net interest and other income 79 31 63 51 10 10 61 305 Segment result 55 17 27 25 4 2 61 191 Unallocated operating expenses Net Profit before taxation and minority interests from continuing operations Segment liabilities, minority interests and equity 116 8,107 1 ,483 12,581 - 2,783 1,156 595 98 700 14,922 - - - - 2,341 14,922 47 Notes to the Consolidated Financial Statements Segment assets employed (75) Annual Report 2005 ABC Group Notes to the Consolidated Financial Statements 31 December 2005 All figures in US$ million 20. Segmental Information (continued) 2005 Europe and Americas 120 Total Arab World 2004 Europe and Americas Total 35 155 106 10 116 - - - 773 - 773 12,845 4,743 17,588 10,292 4,630 14,922 Segment profit before taxation and minority interests from continuing operations Segment profit before taxation and minority interests from discontinued operations Segment assets Arab World 21. Repurchase and Resale Agreements Proceeds from assets sold under repurchase agreements at the year-end amounted to US$ 1,260 million (2004: US$ 179 million). Amounts paid for assets purchased under resale agreements at the year-end amounted to US$ 163 million (2004: US$ 49 million) and relate to customer product and treasury activities. 22. Transactions with Related Parties These are with major shareholders, directors, senior management, associates and other related parties. Transactions with related parties are made on the same commercial terms as those applicable to comparable transactions with unrelated parties and do not involve more than a normal amount of risk. The year end balances in respect of related parties included in the consolidated financial statements are as follows: Loans and advances Deposits from customers Major shareholders Directors Associates 2005 2004 660 2 9 671 16 407 6 - - 6 6 2005 2004 10 5 10 2 15 12 The expenses in respect of related parties included in the consolidated financial statements are as follows: Interest expense Notes to the Consolidated Financial Statements 48 Compensation of the key management personnel is as follows: Short term employee benefits Post employment benefits ABC Group Annual Report 2005 Notes to the Consolidated Financial Statements 31 December 2005 All figures in US$ million 23. Fiduciary Assets Funds under management at the year-end amounted to US$ 3,517 million (2004: US$ 3,208 million). These assets are held in a fiduciary capacity and are not included in the consolidated balance sheet. 24. Fair Value of Financial Instruments “Fair value” is the amount at which an asset could be exchanged or a liability settled in a transaction between knowledgeable, willing parties in an arm’s length transaction. Underlying the definition of fair value is the presumption that the Group is a going concern without any intention or requirement to curtail materially the scale of its operation. The carrying value of financial instruments is not significantly different from the fair values. 25. Assets Pledged as Security At the balance sheet date, in addition to the items mentioned in note 21, assets amounting to US$ 114 million (2004: US$ 125 million) have been pledged as security for borrowings and other banking operations. 26. Basic Earnings and Dividend per Share “Basic” earnings per share is calculated by dividing the net profit for the year by the weighted average number of shares during the year. No figures for diluted earnings per share have been presented, as the Bank has not issued any capital based instruments which would have any impact on earnings per share, when exercised. The Group’s earnings and dividend per share for the year are as follows: 2005 2004 Net profit for the year from continuing operations Net profit for the year Weighted average number of shares outstanding during the year (million) Basic earnings per share (US$) - Profit for the year - Profit from continuing operations 129 129 100 109 579 100 1.29 1.29 5.79 1.09 Dividend per share - Proposed cash dividend (US$) - Interim cash dividend paid (US$) - Interim stock dividend distributed (per share) 0.70 - 0.50 2.40 0.062 49 Notes to the Consolidated Financial Statements During the previous year, an interim cash dividend of US$ 2.4 per share and an interim stock dividend of 0.062 shares for each share held on 2 September 2004 was approved by the Board of Directors and the Bahrain Monetary Agency. This was paid/distributed on 13 October 2004. A final dividend of US$ 0.70 per share (2004: US$ 0.50 per share) has been proposed for approval at the Annual Ordinary General Meeting. Annual Report 2005 ABC Group Notes to the Consolidated Financial Statements 31 December 2005 All figures in US$ million 27. Capital Adequacy The risk asset ratio calculations, in accordance with the capital adequacy guidelines established for the global banking industry, are as follows: Capital base 2005 2004 Tier 1 capital Tier 2 capital 1,842 247 1,292 682 Total capital base 2,089 1,974 Risk Weighted Exposures Balance Risk weighted equivalents 2005 2004 2005 2004 Assets Cash and claims on, guaranteed by or collateralised by securities of central governments and central banks of OECD countries 2,830 2,873 - - Claims on banks and public sector companies incorporated in OECD countries and short term claims on banks incorporated in non-OECD countries 8,291 7,014 1,658 1,403 82 79 41 40 Claims on public sector entities, central governments, central banks and longer term claims on banks incorporated in non-OECD countries and all other assets, including claims on private sector entities 5,908 4,881 5,908 4,881 Off balance sheet items Credit commitments and contingent items (note 14) 4,194 4,480 1,390 1,372 Derivatives (note 13) 7,910 8,310 12 11 9,009 1,467 7,707 542 Total risk weighted assets 10,476 8,249 Risk asset ratio 19.9% 23.9% Claims secured by mortgage of residential property Credit risk weighted assets and off balance sheet items Market risk weighted assets and off balance sheet items * * Market risk capital requirements are based on the standardised measurement methodology. Notes to the Consolidated Financial Statements 50 ABC Group Annual Report 2005 Head Office Directory ABC Tower, Diplomatic Area, PO Box 5698, Manama, Kingdom of Bahrain Tel: (973) 17 543 000 Fax: (973) 17 533 163 / 17 533 062 Tlx: 9432 ABCBAH BN http://www.arabbanking.com webmaster@arabbanking.com Ghazi Abdul-Jawad President & Chief Executive Banking Group Arab World Division Nour Nahawi, Division Head Tel: (973) 17 543 272 nour.nahawi@arabbanking.com Co-ordination Unit Qutub Yousafali Tel: (973) 17 543 273 qutub.yousafali@arabbanking.com Treasury & Marketable Securities FX, Middle East Currencies & Sales Kareem Dashti Tel: (973) 17 533 044 karim.dashti@arabbanking.com Derivatives, MM, Islamic, New Products & Treasury Support Amr Gadallah Tel: (973) 17 543 555 amr.ghadallah@arabbanking.com Abdulmagid Breish Deputy Chief Executive & Chief Banking Officer Islamic Financial Services Duncan Smith Tel: (973) 17 543 347 duncan.smith@arabbanking.com Fixed Income Proprietary Investment & Trading Arif Mumtaz Tel: (973) 17 533 169 arif.mumtaz@arabbanking.com Legal & Compliance Dr Khaled Kawan, Legal Counsel Tel: (973) 17 543 367 khaled.kawan@arabbanking.com Retail Banking Sethu Venkateswaran Tel: (973) 17 543 710 rsethu.venkateswaran@arabbanking.com Portfolio Management Mahmoud Zewam Tel: (973) 17 533 169 mahmood.zewam@arabbanking.com Recovery Business Unit Nabil Hamdan Tel: (973) 17 543 522 nabil.hamdan@arabbanking.com Alternative Investments & Equity Pradeep Mehra Tel: (973) 17 543 441 pradeep.mehra@arabbanking.com Global Products Investment Banking Group Project & Structured Finance Graham Scopes Tel: (973) 17 543 622 graham.scopes@arabbanking.com Colin Geddes, Group Head Tel: (973) 17 543 319 colin.geddes@arabbanking.com Syndications John McWall Tel: (973) 17 543 967 john.mcwall@arabbanking.com Corporate Finance David Clarke Tel: (973) 17 543 539 david.clarke@arabbanking.com Corporate & Institutional Banking Rashed Al Khalifa Tel: (973) 17 543 314 rashed.alkhalifa@arabbanking.com Equities Stephen Inglis Tel: (973) 17 543 305 stephen.inglis@arabbanking.com Trade Finance & Forfaiting Paul Jennings, Global Head Tel: (44) (20) 7776 4040 paul.jennings@arabbanking.com Placement and Fund Raising Group Michael Miller Tel: (973) 17 543 589 michael.miller@arabbanking.com Audit Group Jehangir Jawanmardi Tel: (973) 17 543 387 jehangir.jawanmardi@arabbanking.com Planning & Financial Control Asaf Mohyuddin Tel: (973) 17 543 274 asaf.mohyuddin@arabbanking.com Support Group Sael Al Waary, Group Head Tel: (973) 17 543 707 sael.alwaary@arabbanking.com Corporate Communications & Premises & Engineering Nawaf Beyhum Tel: (973) 17 543 307 nawaf.beyhum@arabbanking.com Human Resources & Administration Dr Lulwa Mutlaq Tel: (973) 17 543 308 lulwa.mutlaq@arabbanking.com Operations Andrew Wilson Tel: (973) 17 543 714 andrew.wilson@arabbanking.com Global Information Technology Abbas Malalla Tel: (973) 17 543 724 abbas.malalla@arabbanking.com Amr El Ashmawi Tel: (973) 17 543 516 amr.elashmawi@arabbanking.com Treasury Group Essam El Wakil, Group Treasurer Tel: (973) 17 543 375 / 17 532 933 essam.elwakil@arabbanking.com Ali Mirza, Assistant Treasurer Tel: (973) 17 543 241 ali.mirza@arabbanking.com Credit & Risk Group Riyad M. Al Dughaither, Chief Credit & Risk Officer Tel: (973) 17 543 280 riyad.aldughaither@arabbanking.com Risk Management Department Abhijit Choudhury Tel: (973) 17 543 288 abhijit.choudhury@arabbanking.com Head Office Credit Department Kishore Rao Naimpally Tel: (973) 17 543 570 kishore.rao@arabbanking.com Remedial Loans Unit Stephen Jenkins Tel: (973) 17 543 713 stephen.jenkins@arabbanking.com Economics Department Margaret Purcell Tel: (973) 17 543 776 margaret.purcell@arabbanking.com Annual Report 2005 ABC Group 51 Head Office Directory Head Office International Directory Branches Representative Offices Subsidiaries Tunis (OBU) ABC Building, Rue du Lac d'Annecy, Les Berges du Lac, 1053 Tunis, Tunisia Tel: (216) (71) 861 861 (216) (71) 861 110 (Treasury) Fax: (216) (71) 860 921 / 860 835 Tlx: 12505 ABCTU TN abc.tunis@arabbanking.com Direct Dealing Reuters Code: ABCT Swift: ABCOTNTT Saddek O. El-Kaber, Resident Country Manager & General Manager Abu Dhabi 10th Floor, East Tower of the Trade Centre 2nd Street, Abu Dhabi Mall, PO Box 6689, Abu Dhabi, UAE Tel: (971) (2) 644 7666 Fax: (971) (2) 644 4429 abcrep@eim.ae Mohamed El Calamawy, Chief Representative ABC Islamic Bank (E.C.) ABC Tower, Diplomatic Area, PO Box 2808, Manama, Kingdom of Bahrain Tel: (973) 17 543 000 Fax: (973) 17 536 379 / 533 163 Tlx: 9432 / 9433 ABCBAH BN Naveed Khan, Managing Director naveed.khan@arabbanking.com Baghdad Al Saadon St., Al Firdaws Square National Bank of Iraq Building Baghdad, Iraq Tel: (964) (1) 7173774 / 7173776/717 3779 Fax: (964) (1) 717 3364 Mowafaq H. Mahmood, General Manager Mobile: (964) 790 161 8048 mowafaq.mahmood@arabbanking.com New York 32nd Floor, 277 Park Avenue, New York NY 10172-3299, USA Tel: (1) (212) 583 4720 Fax: (1) (212) 583 0921 Tlx: 661978/427531 ABCNY(General); 421911/661979 ABCFX (Dealing Room) Direct Dealing Reuters Code: ABCN Robert Ivosevich, General Manager Tel: (1) (212) 583 4863 robert.ivosevich@arabbanking.com L. Christian Rigby, Trade Finance Tel: (1) (212) 583 4873 christian.rigby@arabbanking.com International Directory 52 Rami El Rifai, Corporate Finance Tel: (1) (212) 583 4874 rami.elrifai@arabbanking.com Thomas Fitzherbert, Trade and Corporate Finance Tel: (1) (212) 583 4726 thomas.fitzherbert@arabbanking.com David Siegel, Treasurer Tel: (1) (212) 583 4783 david.siegel@arabbanking.com Grand Cayman c/o ABC New York Branch ABC Group Annual Report 2005 Tehran Ground floor, Number 12A, Nezami Ganjavi Street (corner of Hamassi Alley), Tavanir Street, Tehran, Iran Tel: (98) (21) 88662455 Fax: (98) (21) 88662388 arabbanking.teh@parsonline.net Aziz Farrashi, Chief Representative Tripoli That Emad Administrative Centre Tower 5, 16th Floor, PO Box 3578, Tripoli, Libya Tel: (218) (21) 335 0226/ 335 0227 / 335 0228 Fax: (218) (21) 335 0229 abc_rep_ly@lttnet.net Mansour Abouen, Chief Representative Singapore 9 Raffles Place, #60-03 Republic Plaza Singapore 048619 Tel: (65) 653 59339 Fax: (65) 653 26288 Kah Eng Leaw, Chief Representative kaheng.leaw@arabbanking.com ABC Securities W.L.L. ABC Tower, Diplomatic Area PO Box 5698, Manama, Kingdom of Bahrain Tel: (973) 17 535 760 Fax: (973) 17 533 012 Tlx: 9432 ABCBAH BN Mahmoud Zewam, General Manager mahmood.zewam@arabbanking.com Arab Banking Corporation - Algeria PO Box 367, 54 Avenue des Trois Freres Bouaddou, Bir Mourad Rais, Algiers, Algeria Tel: (213) (21) 541 515 / 541 534 Fax: (213) (21) 541 604 / 541 122 information@arabbanking.com.dz Swift: ABCODZAL Reidha Slimane Taleb, General Manager Ghassan Haikal, Deputy General Manager. Arab Banking Corporation - Egypt (S.A.E.) (ABC Bank, Egypt) 1, El Saleh Ayoub St., Zamalek, Cairo, Egypt Tel: (202) 736 2684 (10 lines)/ (202) 736 3629 Fax: (202) 736 3643 / 14 abcegypt@arabbanking.com.eg Tarek Helmy, Chief Executive Officer ABC Securities (Egypt) S.A.E. 1, El Saleh Ayoub St. Zamalek, Cairo, Egypt Tel: (202) 736 2684 (10 lines)/ (202) 736 3629 Fax: (202) 736 3643 / 14 Tarek Helmy, Chairman tarek.helmy@arabbanking.com.eg Arab Banking Corporation (Jordan) PO Box 926691, Amman 11190, Jordan Tel: (962) (6) 566 4183-5 (General) (962) (6) 569 2713 (Dealing Room) (962) (6) 560 8302 (Foreign Dept.) (962) (6) 562 3684 (Main Branch) Fax: (962) (6) 568 6291 (General) (962) (6) 562 3685 (Main Branch) Tlx: 22258/21114 ABC JO info@arabbanking.com.jo Ammar Al Safadi, Deputy Chief Executive & Acting Chief Executive International Directory ABC International Bank plc Head Office and London Branch Arab Banking Corporation House 1-5 Moorgate, London EC2R 6AB, UK Tel: (44) (20) 7776 4000 (General) (44) (20) 7726 4091 (Dealing Room) Fax: (44) (20) 7606 9987 (General) (44) (20) 7606 1710 (Dealing Room) Tlx: 893748 ABC GEN G (General) 892171 ABC FXL G (Dealing Room) Direct Dealing Reuters Code: ABCL Swift: ABCE GB 2L Michael Duval, Managing Director & Chief Executive Officer michael.duval@arabbanking.com William Playle, Head of Risk Management Tel: (44) (20) 7776 4135 william.playle@arabbanking.com ABC International Bank plc (Paris Branch) 4 rue Auber, 75009 Paris, France Tel: (33) (1) 49525400 Fax: (33) (1) 47207469 Tlx: 648343 ABC F (General) Alexander Ashton, General Manager alexander.ashton@arabbanking.com ABC International Bank plc (Frankfurt Branch) Neue Mainzer Strasse 75 60311 Frankfurt am Main, Germany Tel: (49) (69) 71403-0 Fax: (49) (69) 71403-240 Tlx: 411 536 AIBF D abcib.fra@arabbanking.com Gerald Bumharter, General Manager ABC International Bank plc Marketing Offices UK & Ireland Station House, Station Court, Rawtenstall Rossendale BB4 6AJ, UK Tel: (44) (1706) 237900 Fax: (44) (1706) 237909 John Clegg, john.clegg@arabbanking.com Iberia – Representative Office Paseo de la Castellana 163 2° Dcha, Madrid 28046, Spain Tel: (34) (91) 5672822 Fax: (34) (91) 5672829 Usama Zenaty, usama.zenaty@arabbanking.com Affiliate Arab Financial Services Company B.S.C. (c) PO Box 2152, Manama, Kingdom of Bahrain Tel: (973) (17) 290 333 Fax: (973) (17) 291 323 / 290 050 Tlx: 7212 AFS BN Rasool Hujair, Chief Executive Officer Fax: (973) 17 291 122 rasool.hujair@afs.com.bh Nordic Region Stortorget 18-20, SE-111 29 Stockholm Sweden Tel: (46) 823 0450 Fax: (46) 823 0523 Klas Henrikson, klas.henrikson@arabbanking.com Turkey – Representative Office Eski Büyükdere Cad. Ayazaga Yolu Sok Iz Plaza No:9 Kat:19 D:69 34398 Maslak - Istanbul, Turkey Tel: (90) (212) 329 8000 Fax: (90) (212) 290 6891 Muzaffer Aksoy, muzaffer.aksoy@arabbanking.com ABC (IT) Services Ltd. Arab Banking Corporation House 1-5 Moorgate, London EC2R 6AB, UK Tel: (44) (20) 7776 4050 Fax: (44) (20) 7606 2708 abcits@arabbanking.com Sael Al Waary, Director Banco ABC Brasil S.A. Av. Pres. Juscelino Kubitschek, 1400 04543-000 Itaim Bibi São Paulo – SP, Brazil Tel: (55) (11) 317 02000 Fax: (55) (11) 317 02001 Tito Enrique da Silva Neto, President tito.silva@abcbrasil.com.br International Directory ABC Tunisie ABC Building, Rue du Lac d’Annecy, Les Berges du Lac, 1053 Tunis, Tunisia Tel: (216) (71) 861 861 (216) (71) 861 110 (Treasury) Fax: (216) (71) 960 427 / 960 406 Tlx: 12505 ABCTU TN abc.tunis@arabbanking.com Direct Dealing Reuters Code: ABCT Swift: ABCOTNTT Sadok Attia, General Manager ABC International Bank plc (Milan Branch) Via Turati 16/18, 20121 Milan, Italy Tel: (39) (02) 863331 Fax: (39) (02) 86450117 Swift: ABCO IT MM Paolo Provera, General Manager paolo.provera@arabbanking.com Sami Bengharsa, Deputy General Manager Tel: (39) (02) 86333 sami.bengharsa@arabbanking.com Annual Report 2005 ABC Group
