2009 Arab Banking Corporation, Popularly Known As ABC, Is an International Universal Bank Headquartered in Manama, Kingdom of Bahrain

FOCUSING ON BUILDING PARTNERSHIPS ANNUAL REPORT 2009 Arab Banking Corporation, popularly known as ABC, is an international Universal Bank headquartered in Manama, Kingdom of Bahrain. Our network is spread over 21 countries in the MENA and GCC, Europe, the Americas and Asia. ABC, founded in 1980, is listed on the Bahrain stock exchange and our major shareholders are the Kuwait Investment Authority, Central Bank of Libya and Abu Dhabi Investment Authority.

ABC is a leading regional bank in Trade Finance, Treasury, Project & Structured Finance, Corporate Banking & Financial Institutions, Syndications as well as Islamic Banking. We also provide Retail Banking services in the MENA region. ABC’s strategy of diversified growth led to the development of its widespread network of branches, representative offices and subsidiaries in Arab world countries and international financial centres, including London, Paris, Milan, Frankfurt, Madrid, Stockholm, New York, Moscow, Grand Cayman, Sao Paulo, Singapore, Istanbul, Tehran, Bahrain, Abu Dhabi, Baghdad, Amman, Beirut, Cairo, Tripoli, Tunis and Algiers.

CONTENTS Our Vision 1 Board of Directors 2 Organisation Chart 4 Head Ofﬁce Management 6 Directors’ Report 8 Global Network 11 Financial Highlights 12 Review of Operations 14 Corporate Governance 30 Group Financial Review 60 Independent Auditors’ Report 67 Consolidated Balance Sheet 68 Consolidated Statement of Income 69 Consolidated Statement of Cash Flows 71 Consolidated Statement of changes in Equity 72 Notes to the Consolidated Financial Statements 73 Head Ofﬁce Directory 112 International Directory 113

Focusing on building partnerships At ABC Group, we’re building closer relationships with customers by listening, creating and delivering tailor-made products and services that suit every customer, partner and investor. We believe this approach will build long lasting and mutually rewarding partnerships.

ABC Group Annual Report 2009 ARAB BANKING CORPORATION Annual Report 2009

Steps taken to improve efﬁciency have borne fruit with the Group springing back into proﬁt in 2009.

VISION To become a leading Universal Bank in MENA that delivers superior shareholder returns, provides distinctive service and products to its customers and is able to attract, develop and retain top talent.

1 BOARD OF DIRECTORS

Mohammed Hussain LayasHilal Mishari Al-Mutairi Hareb Masood Al-Darmaki Abdallah Saud Al Humaidhi

Dr. Anwar Ali Al-Mudhaf Eissa Mohammed Al Suwaidi Hassan Ali Juma

Mr. Mohammed Hussain Layas EC RC ‡ Dr. Anwar Ali Al-Mudhaf AC RC ‡ Chairman - Libyan citizen Director - Kuwaiti citizen B.A. Accounting and Business Management, University of Benghazi, Libya; M.B.A. and Ph.D. in Finance, Peter F. Drucker Graduate School of Diploma of the Institute of Economic Development, Washington, U.S.A. Management, Claremont Graduate University, California, U.S.A. Executive Chairman of Libyan Investment Authority; former Executive Chairman & CEO of Al-Razzi Holding Company; a Director of the Chairman and General Manager of Libyan Foreign Bank; former Deputy Board of Governors of the Oxford Institute for Energy Studies and Chairman of British Arab Commercial Bank, London, U.K.; Banque Chairman of Banco ABC Brasil S.A. He is also a lecturer in corporate Intercontinentale Arabe, Paris, France and Arab International Bank, Cairo, ﬁnance; investment management and ﬁnancial institutions at Kuwait Egypt. Mr. Layas joined the Board of Arab Banking Corporation (B.S.C.) in University. Dr. Al-Mudhaf has formerly served as Director of the 2001 with over 35 years’ experience in international banking. Board of the Public Institution for Social Security (PIFSS), advisor to

EC‡ the Finance and Economic Affairs Committee at Kuwait’s Parliament, Mr. Hilal Mishari Al-Mutairi Vice Chairman in AlMal Investment Company, former Chairman of Deputy Chairman - Kuwaiti citizen International Bank of Asia in Hong Kong, and a Director of Al-Ahli B.Sc. in Economics, Alexandria University, Egypt. Bank of Kuwait. Dr. Anwar is a member of the economic task force First Vice Chairman, Kuwait Chamber of Commerce & Industry. Director set up to deal with the implications of the global financial crises in of Kuwait Investment Authority. Past offices include Minister of Trade Kuwait. He is also a member of the Board of Directors of the Public and Industry of Kuwait; General Manager of Kuwait Investment Authority for Applied Education. Dr. Al-Mudhaf joined Arab Banking Company and Chairman of Kuwait Clearing Company. Mr. Al-Mutairi Corporation (B.S.C.)’s Board in December 1999 and has over 15 years’ is also a Director of ABC International Bank plc, U.K. He has been a experience in banking and finance. Director of Arab Banking Corporation (B.S.C.) since 2001 and has more than 35 years of commercial and financial industry experience. Mr. Eissa Mohammed Al Suwaidi AC GC ‡ Director - U.A.E. citizen EC RC ‡ Mr. Hareb Masood Al-Darmaki B.Sc. in Economics, Northeastern University of Boston, U.S.A. Deputy Chairman - U.A.E. citizen Executive Director of Abu Dhabi Investment Council. He is also a B.Sc. in Economics and Politics, Bristol University, England and Master Director of Abu Dhabi National Oil Company for Distribution (ADNOC of Arts in International Studies, School of Advanced International Distribution), International Petroleum Investment Company, Abu Studies of John Hopkins University, U.S.A. Dhabi Fund for Development, Emirates Investment Authority and Executive Director, Private Equities Department at Abu Dhabi Investment Emirates Integrated Telecommunications Company “du”. He is also Authority. Mr. Al-Darmaki is also the incumbent Chairman of Gulf Capital the Chairman of Abu Dhabi Commercial Bank and also serves as the and director of Qatar Telecom (Qtel) (amongst other companies). He Vice Chairman of Arab Banking Corporation – Egypt (S.A.E.). He has joined the Board of Arab Banking Corporation (B.S.C.) in March 2007 been a Director of Arab Banking Corporation (B.S.C.) since 1995, with with over 30 years’ experience in international finance. over 23 years in investment banking. EC GC NC ‡ Mr. Abdallah Saud Al Humaidhi Mr. Hassan Ali Juma AC RC æ Director - Kuwaiti citizen Director - Bahraini citizen M.S. American University of Beirut. Fellow of the Chartered Institute of Management Accountants Chairman and Managing Director, Commercial Facilities Company, (FCMA), U.K. Kuwait and Member of the Board and the Executive Committee of President and Chief Executive of Arab Banking Corporation (B.S.C.); Kuwait Investment Authority. Mr. Al Humaidhi is also a Member of Chairman of Arab Banking Corporation - Egypt (S.A.E.); Arab Banking the Board of Kuwait Chamber of Commerce & Industry and Director Corporation Jordan; Arab Financial Services Co. (E.C.); ABC Islamic Bank of ABCIB. He has been a Director of Arab Banking Corporation (B.S.C.) and Deputy Chairman of ABC International Bank plc, U.K. Former since 2001 and has over 20 years’ experience in the banking and Managing Director of National Bank of Bahrain; former Chairman of investment sectors. Bahrain Telecommunications Company. Mr. Juma has been a Director of Arab Banking Corporation (B.S.C.) since 1994. He has more than 34 years’ experience as a commercial banker.

2 ABC Group Annual Report 2009 Dr. Saleh Helwan Al Humaidan Yousef Abdelmaula Mohamed Abdel Salam Shokri

Dr. Mohammed A. Abusneina Saeed Al-Hajeri Dr. Khaled S. Kawan

Dr. Saleh Helwan Al Humaidan NC § Dr. Mohammed A. Abusneina NC GC ‡ Director - Saudi citizen Director - Libyan citizen Ph.D. in Agricultural Economics, Oklahoma State University, U.S.A. Ph.D in Economics, Indiana University, U.S.A. General Manager, Arab Investment Company, Riyadh; Member of Director of the Banking Supervision and Exchange Control the Boards of Saudi International Petrochemical Company, Jubail and Department of the Central Bank of Libya. Director of Arab Banking Saudi Investment Fund, London, U.K.; Chairman, Financial Investment Corporation - Egypt (S.A.E.). Previously, Dr. Abusneina was the Bank, Sudan. Dr. Humaidan is also the Deputy Chairman of Arab Chairman and member of the Board of Directors of the National Banking Corporation (Jordan). He has over 26 years of experience Banking Corporation (Libya) and served as Dean of the Faculty in the economic and investment fields gained through his work at of Economics & Commerce of Garyounis University. Dr. Abusneina the Saudi Arabian Ministry of Planning, the Saudi Development is also a member of the Board of Directors of Arab Yemen Fund, and the Arab Investment Company. Dr. Humaidan joined Arab Libya Holding Company. He joined the Board of Arab Banking Banking Corporation (B.S.C.) as a Director in 2001. Corporation (B.S.C.) in February 2007 and has more than 20 years’ experience in international economics and banking. Mr. Yousef Abdelmaula EC GC § Director - Libyan citizen Mr. Saeed Al-Hajeri EC NC ‡ M.B.A. Hartford University, U.S.A. Director - U.A.E. citizen Mr. Abdelmaula is the Vice Chairman of Corinthia Group of Companies, B.A. from Lewis and Clark College, USA, and Chartered Financial former Executive Director of the Libyan Foreign Investment Board. He Analyst (CFA). serves also as Director on the boards of Libyan Foreign Bank and Arab Mr. Saeed Al Hajeri is a Board Member of ADIA, and heads its Banking Corporation (Jordan). Mr. Abdelmaula has more than 20 years of Emerging Markets Department. Mr. Al Hajeri is also a Board Member banking experience. of Abu Dhabi Tourism Development and Investment Company (TDIC); Zayed University; the Higher Corporation for Specialised Economic Mr. Mohamed Abdel Salam Shokri EC AC ‡ Zones (HCSEZ) and Dubai Cable Company (DUCAB). Mr. Al Hajeri is Director - Libyan citizen a member of the CFA Institute Board of Governors and MSCI Barra Masters Degree in Accounting Science, Oklahoma City University, U.S.A. Executive Advisory Board. Mr. Al Hajeri joined the Board of Arab Deputy Governor, Central Bank of Libya. Chairman of Arab Banking Banking Corporation (B.S.C.) in March 2007, with over 15 years Corporation (Algeria). Past offices include Deputy Chief Executive, experience in international finance. General Manager of British Arab Commercial Bank, London, UK.; Chairman and General Manager of Gumhouria Bank, Libya; Deputy Dr. Khaled S. Kawan General Manager and Director of Libyan Arab Tunisian Bank; Secretary to the Board & Deputy Chief Executive – Libyan citizen Chairman of the Libyan Banks Association and Director of a number Ph.D. (Doctorat D'Etat) in Banking Laws, University of Paris (Sorbonne), of other banks and financial institutions across the region. Mr. Shokri France. has been a Director of Arab Banking Corporation (B.S.C.) since April, Dr. Kawan joined ABC in June 1991, having previously spent some 2006 and has over 30 years’ experience as a banker. time with a prime French Law firm in Paris. He had been Group Legal Counsel until January 2010, when he was appointed as Deputy Chief Executive. Dr. Kawan also represents ABC as a Director on the boards of Arab Banking Corporation – Egypt (S.A.E.) and Arab Banking Corporation (Jordan).

EC Member of the Executive Committee AC Member of the Audit Committee GC Member of the Corporate Governance Committee RC Member of the Risk Committee NC Member of the Nomination & Compensation Committee

‡ Non-Executive æ Executive § Independent

3 ORGANISATION CHART

Board of Directors Board Secretary: Dr. Khaled Kawan

Audit Committee

President & Chief Executive Hassan A. Juma Group Audit: Jehangir Jawanmardi

Deputy Chief Executive Dr. Khaled Kawan

Group Chief Operating Ofﬁcer Sael Al Waary Group Chief Financial Ofﬁcer Global Corporate Communications Roy Gardner

Global Information Technology Group Planning & Financial Control

Group Policies & Procedures Ofﬁce of Strategy Management

Group Legal Treasury Balance Sheet Management

Group Compliance

Operations Group Treasury Amr Gadallah Accounts & Expenses Management

Premises & Engineering Bahrain Treasury

International Wholesale Banking Other Treasury Units in the Group

Bahrain-based Global Products Chief Credit & Risk Ofﬁcer Vijay Srivastava (Acting Chief Credit & New York Branch Risk Ofﬁcer)

Grand Cayman Branch Credit Department Baghdad Branch Remedial Loans & Recovery

Tunis Branch (OBU) Risk Management

ABC International Bank plc

Branches: Group Human Resources London, Frankfurt, Milan, Paris Marketing Ofﬁces: Istanbul, Madrid, Rossendale (U.K.), Stockholm, Moscow Banco ABC Brasil, S.A ABC Islamic Bank (E.C.), Bahrain

Representative Ofﬁces: Abu Dhabi, Singapore, Tehran, Tripoli (Libya), Arab Financial Services BSC(c) Beirut (Lebanon)

MENA Subsidiaries

Arab Banking Corporation - Algeria

Arab Banking Corporation - Egypt (S.A.E.)

Arab Banking Corporation - Tunisie, S.A.

Arab Banking Corporation (Jordan)

Group Retail R. Sethu Venkateswaran

4 ABC Group Annual Report 2009 The Group focused on creating a robust balance sheet through a deleveraging and de-risking process.

5 HEAD OFFICE MANAGEMENT

Mr. Hassan Ali Juma | President & Chief Executive Fellow of the Chartered Institute of Management Accountants (FCIMA), U.K. Mr. Juma assumed the position of President & Chief Executive of ABC on 1 April 2008, having previously served as Chief Executive Ofﬁcer of National Bank of Bahrain since 1984 and Managing Director of NBB since 1997. Mr. Juma has been a director of Arab Banking Corporation (B.S.C.) since 1994, and is deputy chairman of ABC International Bank plc, U.K., chairman of Arab Banking Corporation – Egypt (S.A.E.), chairman of Arab Banking Corporation – (Jordan), chairman of Arab Financial Services BSC (c), and a director of National Bank of Bahrain. He was formerly chairman of Bahrain Telecommunications Company and Umniah Mobile Company, Jordan. Mr. Juma has more than 35 years' experience as a commercial banker.

Dr. Khaled S. Kawan | Deputy Chief Executive Ph.D. (Doctorat D'Etat) in Banking Laws, University of Paris (Sorbonne), France. Dr. Kawan joined ABC in June 1991, having previously spent some time with a prime French Law ﬁrm in Paris. He had been Group Legal Counsel until January 2010, when he was appointed Deputy Chief Executive. Dr. Kawan also represents ABC as a Director on the boards of Arab Banking Corporation – Egypt (S.A.E.) and Arab Banking Corporation (Jordan).

Mr. Sael Al Waary | Group Chief Operating Officer B.Sc. (Hons) degree in Computer Sciences from the University of Reading, United Kingdom. Mr. Al Waary was appointed to the role of Group Chief Operating Officer for ABC Group in 2006. Prior to that, he was Senior Vice President and Head of Group Support. In 1997, Mr. Al Waary relocated from London to the Bahrain Head Office to direct ABC’s Global Information Technology functions. Mr. Al Waary originally joined the ABC Group in 1981 and, from 1986, was the General Manager of ABC (IT) Services Ltd., the wholly-owned subsidiary and technology arm of the ABC Group. He has over 29 years of experience in banking. Mr. Al Waary is a Director of Banco ABC Brasil B.S.C (c) S.A., Arab Banking Corporation Egypt (S.A.E.), Arab Banking Corporation (Jordan) and Bahrain-based Arab Financial Services (AFS).

Mr. Roy Gardner | Group Chief Financial Officer Member of the Institute of Chartered Accountants of Scotland. Mr. Roy Gardner joined ABC in May 2009. Previously he held a number of senior posts with Citigroup including Chief Financial Officer for Global Treasury and Trade Solutions, Chief Financial Officer for Russia and the CIS, Chief Financial Officer for Emerging Markets Corporate Banking and Head of Strategic Planning for Corporate and Investment Banking activities in CEEMEA. He has worked for 20 years in the Middle East as a finance professional and a corporate finance banker, including a number of years with Saudi American Bank where latterly he held the post of Chief Financial Strategist.

Mr. Amr Gadallah | Group Treasurer MA in Economics, American University, Cairo, Egypt; MA in International Economics, George Washington University, Washington D.C., U.S.A. Before joining ABC in 1990, Mr. Gadallah spent 5 years working for Arab International Bank, Cairo, Egypt and Dean Witter, Chicago U.S.A. Since 1999 he served as ABC’s Assistant Group Treasurer, responsible for Money Markets, Derivatives, Structured Products and Treasury Support. Mr. Gadallah was appointed Group Treasurer in January 2007. He is a director of ABC Islamic Bank (E.C.), Bahrain and ABC Investments, Jordan.

6 ABC Group Annual Report 2009 Mr. Jehangir Jawanmardi | Group Chief Auditor B.A. in Economics and Accounting, University College London, Fellow of the Institute of Chartered Accountants in England and Wales, U.K. Mr. Jawanmardi trained as a chartered accountant with KPMG in London. He joined Hill Samuel Group in 1976 and was appointed a Director of Hill Samuel Bank in 1986, where he spent over 20 years developing his expertise in various aspects of internal audit in the investment banking and asset management arena. He transferred to Lloyds TSB Group in the UK in January 1997 where he was Head of Audit, Wholesale and International Banking, prior to joining ABC Group in May 2004 as Group Chief Auditor.

Mr. Souheil Badro | Head of Global Financial Institutions MBA in Finance, American University, Washington, D.C., U.S.A.; MSc in Economics, St. Joseph University, Lebanon Mr. Badro who joined ABC as Arab World Division Head in 2006 was appointed Head of Universal Banking in October 2008. He is a director of Arab Banking Corporation – Algeria, Arab Banking Corporation – Tunisie and ABC Islamic Bank (E.C.). Mr. Badro began his banking career at Credit Libanais in 1975, before moving to Manufacturers Hanover Trust, where he held various senior positions in New York., Paris and Bahrain. In 1992, he moved to Chemical Bank, Bahrain and in 1996 to Chase Manhattan Bank as Vice President and Head of Financial Institutions. In 1998, Mr. Badro joined Société Générale, where he was seconded to the Dubai Regional Representative Ofﬁce Managing Director, Corporate and Investment Banking - MENA.

Mr. Vijay Srivastava | Acting Chief Credit & Risk Ofﬁcer B. Com, Bombay University; Chartered Accountant, Institute of Chartered Accountants of India. Mr. Srivastava who joined Arab Banking Corporation in September 2009, started his banking career with HSBC, India, in 1984 working in Operations and Corporate Banking. He joined ABN AMRO Bank in 1992 and for six years was based in Dubai as a senior relationship banker, heading Corporate Banking for the last two years. In 1998 Mr. Srivastava moved to the Risk Management Division at ABN AMRO’s headquarters in Amsterdam where he worked with credit teams covering Asia, the Americas and subsequently – on an industry basis – Integrated Energy. In 2004, as Chief Credit Ofﬁcer, he helped set up the dedicated risk function for the Global Transaction Services Division(GTS). Mr. Srivastava has also taught at the ABN AMRO Academy in Amsterdam.

7 DIRECTORS' REPORT

Mr. Mohammed Layas, Chairman (All ﬁgures stated in US dollars)

In 2009 ABC Group successfully weathered continuing adverse market conditions to return to proﬁtability, with a consolidated net proﬁt of $122 million compared with a loss of $880 million the previous year.

ABC’s rights issue of June 2008, which increased its issued share capital by $1 billion, laid the foundation for the Group’s good performance in 2009. These additional resources enabled it to make full provision against the Group’s weaker assets, which had been impacted by the deteriorating financial markets. The performance of ABC Group, in spite of the extremely unfavourable operating environment, also demonstrated well the inherent stability and resilience of its core earnings streams, both from its international and regional trade finance, project finance, corporate banking, Islamic finance and Treasury activities, in addition to its growing retail banking network across North Africa and the Levant.

The Group’s total operating income rose by nearly 6% to $641 million. This was achieved largely on the back of a 42% increase in its non-interest operating income, which expanded to $250 million, as net interest income at $391 million was 9% lower than in 2008, reﬂecting the reduced size of the lending and securities portfolios combined with the impact of generally lower international interest rates. Net impairment provisions were $115 million, compared with the $1,055 million in aggregate in 2008, which had been necessitated chieﬂy by the deterioration in the securities portfolios that year. The Group’s operating expenses were meanwhile successfully managed down to $326 million, a 7% reduction on 2008, despite absorbing additional costs related to business expansion and restructuring.

ABC is working to achieve its new vision - to become a leading MENA-based Universal Bank – primarily through the increase of its retail-based revenues. The transformation plan formulated by the Group for it to achieve these ends, however, comprises a number of strategic initiatives, of which the foremost is the substantial expansion of the retail banking businesses. The International Wholesale Banking division is to refocus on developing relationship banking and cross-selling capabilities in order to maximise the client proﬁtability. Efﬁciency initiatives are being implemented, aimed at reducing the Group’s cost: income ratio in steady steps. The Group’s risk appetite is being better aligned to its operational plans. A new Group HR function is being set up and will shortly begin the process of fully integrating human resources into the plan.

In pursuit of these initiatives, in 2009 the Group brought its senior people together in a series of workshops and strategic planning meetings to consider ways in which implementation of its transformation plan could be achieved as quickly as possible. The consensus that emerged as a result of this intensive series of meetings led in turn to the creation of a united, collaborative approach amongst management to the task at hand, the results of which were immediately apparent. The retail banking units in North Africa and the Levant have expanded their delivery platforms by almost a quarter in terms

8 ABC Group Annual Report 2009 To fund its expansion and acquisition strategy, ABC increased its paid-up capital from $2.0 billion to $3.11 billion.

of total number of branches, whilst achieving signiﬁcant advances in total revenues. Wholesale Banking is now more streamlined, while the steps taken to improve efﬁciency are already bearing fruit, with the Group’s cost: income ratio at the end of 2009 down to 51%. Credit risk and business management are meanwhile working together towards achieving greater and speedier responsiveness to clients’ needs, whilst focusing account managers on the Group’s risk strategy.

During the year the Group focused on creating a robust balance sheet through a deleveraging and de-risking process combined with a strict credit stance - particularly for longer term credits. This change resulted in a reduction in total assets of about 9%, reﬂected primarily in an 8% fall in the loans and advances portfolio as run offs were only partially replaced, together with a 10% reduction in the non-trading securities portfolio. The Group is well capitalised and its liquidity position remains comfortable.

Given the size of its existing operations in MENA, ABC has been researching opportunities in the region for potential expansion, both through new start ups and by acquisition - provided that a suitable banking operation complementing the Group’s current proﬁle, and at attractive valuation, is identiﬁed. To fund its expansion and acquisition strategy ABC’s shareholders approved, on 28 January 2010, an increase in its paid-up capital from $2.0 billion to $3.11 billion by way of a priority rights share offering.

As is usual at this time, we would like to express our thanks to the Group’s management and staff worldwide for all their hard work, loyalty and dedication over the past year. We would also like to thank the regulatory authorities in all the jurisdictions in which our various units operate, and in particular the Central Bank of Bahrain, for their support and guidance.

Finally, 2010 marks the end of your Board of Directors’ customary three-year tenure of ofﬁce as representatives of the shareholders of ABC. A new Board will be appointed at the next Annual General Meeting. I should therefore like to take this opportunity, on behalf of the Board, to express our gratitude to our shareholders for allowing us to serve the ABC Group, which has been both an immense privilege and a pleasure.

Mohammed Layas Chairman

9 DIRECTORS' REPORT

Note: In compliance with the Central Bank of Bahrain Rulebook Volume 1 Chapter PD1.4.3 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 2009.

31-Dec-09 1-Jan-09 Directors’ Shares 192,330 192,330 Senior Managers’ Shares - - Total 192,330 192,330

Directors’ remuneration allowances and expenses for attendance at Board meetings for 2009 amounted to US$2,148,000 (2008: US$2,287,000).

2009 2008 % of shares held No. of shares No. of % of total No. of shares No. of % of total shareholders outstanding shareholders outstanding shares shares Less than 1% 100,012,010 1,338 5.0 100,012,010 1,346 5.0 1% up to less than 5% 164,561,080 4 8.2 164,561,080 4 8.2 5% up to less than 10% ------10% up to less than 20% ------20% up to less than 50% 1,735,426,910 3 86.8 1,735,426,910 3 86.8 50% and above ------Total 2,000,000,000 1,345 100.0 2,000,000,000 1,353 100.0

10 ABC Group Annual Report 2009 GLOBAL NETWORK 31 December 2009

ABC is expanding in the MENA. THE ABC GROUP US$ millions 2009 Highlights ABC Parent (ABC BSC) ABC Group Total assets 17,050 25,965 Total non-trading securities 7,818 9,552 Total loans and advances 4,230 10,949 Total deposits 12,433 20,246 Shareholders' funds 2,191 2,191

ARAB WORLD DIVISION US$ millions ABC Islamic 2009 Highlights ABC Algeria ABC Jordan AFS ABC Egypt ABC Tunisie Bank

Total assets 588 1,318 862 73 921 160 Total non-trading securities - 369 213 8 11 - Total loans and advances 195 894 401 - 269 19 Total deposits 367 1,133 681 2 725 133 Shareholders’ funds 155 177 136 60 150 19 Number of branches 12 - 19 - 23 4

OTHER SUBSIDIARIES US$ millions 2009 Highlights ABC International Bank plc Banco ABC Brasil Total assets 4,025 4,214 Total non-trading securities 633 459 Total loans and advances 1,759 2,928 Total deposits 2,863 3,360 Shareholders' funds 464 700 Number of branches 4 6

11 FINANCIAL HIGHLIGHTS

2009 2008 2007 2006 2005 Earnings (US$ million) Net interest income 391 431 298 249 193 Other operating income 250 176 393 235 159 Total operating income 641 607 691 484 352 Profit before provisions, taxation and non-controlling interests 315 255 416 222 141 Impairment provisions - net (115) (1,055) (230) - 14 Profit before taxation and non-controlling interests 200 (800) 186 222 155 Net profit (loss) for the year from continuing operations 122 (880) 125 202 129

Financial Position (US$ million) Total assets 25,965 28,486 32,744 22,402 17,588 Loans and advances 10,949 11,931 12,329 8,622 6,833 Placements with banks and other ﬁnancial institutions 3,949 4,017 5,268 4,160 3,264 Trading securities 135 126 747 757 593 Non-trading securities 9,552 10,623 12,890 7,828 6,003 Shareholders’ funds 2,191 1,793 1,867 2,068 1,926

Ratios (%) Profitability Cost: Income ratio (costs as % of gross operating income) 51 58 40 54 60 Net profit (loss) as % of average shareholders' funds 5.9 (51.6) 6.2 10.2 6.8 Net profit (loss) as % of average assets 0.46 (2.88) 0.45 0.94 0.81 Dividend cover (times) - - - 2.0 1.8 Capital Risk weighted assets (US$ million) 19,863 19,537 20,893 14,107 10,476 Capital base (US$ million) 3,347 3,159 3,006 2,225 2,089 Risk asset ratio - Tier 1 13.4 12.8 10.9 13.5 17.6 Risk asset ratio – Total 16.9 16.2 14.4 15.8 19.9 Average shareholders’ funds as % of average total assets 7.8 5.6 7.2 8.7 11.9 Loans and advances as a multiple of shareholders’ funds (times) 5.0 6.7 6.6 4.2 3.5 Total debt as a multiple of shareholders’ funds (times) 10.9 14.7 16.4 9.8 8.1 Term financing as multiple of shareholders’ funds (times) 1.07 1.39 1.38 0.93 0.82

12 ABC Group Annual Report 2009 2009 2008 2007 2006 2005 Assets Loans and advances as % of total assets 42.2 41.9 37.7 38.5 38.9 Securities as % of total assets 37.3 37.7 41.6 38.3 37.5 Non-accrual loans as % of gross loans 3.5 1.9 1.3 2.0 3.6 Loan loss provisions as % of non-accrual loans 131.1 181.6 196.9 208.2 154.6 Loan loss provisions as % of gross loans 4.6 3.5 2.5 4.2 5.6 Impaired securities as a % of gross non-trading securities 6.0 10.6 5.5 - - Securities provisions as a % of impaired securities 91.3 93.9 41.5 - - Securities provisions as a % of gross non-trading securities 5.50 9.98 2.3 - - Liquidity Liquid assets ratio 55.0 54.7 58.8 58.1 57.8 Deposits to loans cover (times) 1.5 1.9 2.2 2.0 2.0

Share Information Basic Earnings per share - Proﬁt for the year $0.06 ($0.57) $0.13 $0.20 $0.13 Dividends per share - Cash - - - $0.10 $0.07 Net asset value per share $1.10 $0.90 $1.87 $2.07 $1.93

Capitalisation (US$ million) Authorised 2,500 2,500 1,500 1,500 1,500 Issued, Subscribed and fully paid-up 2,000 2,000 1,000 1,000 1,000

*At an extraordinary general meeting of the shareholders of the Bank held on 28 March 2006, it was resolved to change the nominal value of the shares of the Bank from US$10 per share to US$1 per share. The number of shares has been amended to reﬂect this change for all the years.

Principal shareholders % Registered address Publicly quoted company listed Kuwait Investment Authority (Kuwait) 29.687 Arab Banking Corporation (B.S.C.) on Bahrain Stock Exchange. Central Bank of Libya (Libya) 29.525 ABC Tower, Diplomatic Area (Commercial Registration Abu Dhabi Investment Authority (UAE) 27.557 P.O. Box 5698, Manama Number 10299) Individual and Institutional Investors 13.231 Kingdom of Bahrain

13 REVIEW OF OPERATIONS

Mr. Hassan Ali Juma, President & Chief Executive (All ﬁgures stated in US dollars unless otherwise indicated)

The ABC Group is focusing on expanding universal banking operations via its units in the MENA region. These units offer retail, corporate and treasury services, while wholesale services (corporate and structured ﬁnance, trade ﬁnance, Islamic banking services, syndications and treasury) fall under International Wholesale Banking. The long term objective is to expand through a combination of organic expansion and acquisition in the region.

Considering the general downturn in domestic and regional economies and the drop in international oil prices, the Group’s retail business in North Africa and the Levant performed well and even exceeded expectations. Also, the continued exercise of prudent credit policies led to loan loss provisions at these subsidiaries being below market averages.

GEOGRAPHIES: MENA SUBSIDIARIES

Arab Banking Corporation - Algeria In spite of the fall in international hydrocarbon prices the Algerian economy grew by an estimated 2.1%, compared with 3.8% in 2008. Although the hydrocarbons sector remains by far the economy’s main economic driver and principal contributor to the traditional trade and current account surpluses, the government has been making strenuous efforts in recent years to stimulate growth in other sectors. In 2009 it adopted a number of measures to discourage imports and promote domestic production, amongst which was a new requirement for all imports to be paid for by means of letter of credit, sweeping aside the more traditional methods such as documentary collections and open account payments.

New legislation also brought the development of the consumer credit market to a standstill by banning all forms of consumer finance other than housing loans. Another reform removed the longstanding requirement for state-owned companies to bank only with state-owned financial institutions, permitting domestic and foreign private sector banks for the first time to compete for business from the public sector. Finally, the government introduced tough new minimum capital requirements for banks. These measures together had a marked impact on the Algerian banking industry.

The measure most affecting ABC Algeria was the requirement for a substantial increase in its equity capital. As ABC opted to contribute more than its proportionate share of the increase, its ownership in ABC Algeria increased from 70% to 88%, evidencing its strong commitment to the Algerian market. The increase in paid up capital, bringing it up to $142 million, combined with the adoption of an aggressive new branch expansion programme, marked a new

14 ABC Group Annual Report 2009 The aim of ABC's transformation plan: Improving proﬁtability through an integrated approach to business development across all product lines.

and exciting chapter in the evolution of ABC Algeria. Following the capital increase the bank took the opportunity to strengthen its equity participation in ALC, the leading Algerian leasing company, from 34% to 41%.

In a year when ABC Algeria recorded steady growth in its customer numbers and business portfolio, it introduced a number of new products and services designed to generate revenues to replace those previously earned from its car and personal loans businesses. It focused mainly on the smaller enterprise and professional and self-employed sectors, potentially lucrative alternative revenue earners. At the same time it has developed a new housing loan product intended to place it in the forefront of the housing market, which it will be launching in 2010 along with a series of new savings packages.

At $33.7 million, ABC Algeria’s total operating income was 19% higher than 2008’s $28.4 million, as non-interest income soared by 45% to $15.4 million while net interest margin increased by 3% to $18.3 million. As operating expenses were marginally lower at $15.6 million, net operating income was 46% higher at $18.1 million. After speciﬁc and general provisions and taxation for the year, net proﬁt was $12.8 million, 27% higher than in 2008.

Two new branches were inaugurated during the year, with 8 more anticipated to be opened in each of the three years 2010-13. Its ATM network is likewise to be expanded over a 3-year period. The bank is meanwhile working towards introducing the Group’s ABC Online product, enabling it to deliver the full range of e-banking services to its customers.

ABC Algeria’s continuing progress in introducing modern, efﬁcient banking to the Algerian market was duly recognised when it was awarded the accolade “The Best Bank in Algeria for 2009” by Global Finance magazine.

Arab Banking Corporation - Egypt (S.A.E.) Although the Egyptian economy did experience some secondary repercussions from the recession in the developed world, its growth slowed only to around 4.7% in fiscal year 2008-09, from 7.2% in 2008. The current account balance, however, fell into deficit (2.4% of GDP) for the first time since 2001.

ABC Egypt was successful in minimising the negative impact on its assets of the reduced economic growth by developing and diversifying its credit portfolio into new sectors and attracting a wider client base. While its total operating income rose slightly in 2009 to $35.1 million, its operating expenses were well contained at $21.0 million, 8% lower than in 2008, resulting in a net operating income of $14.1 million. However, after setting aside provisions and allowing for taxation, the bank recorded a 19% lower net proﬁt of $9.0 million, compared with $11.1 million recorded in 2008.

15 REVIEW OF OPERATIONS

An aggressive new branch expansion programme marked an exciting chapter in the evolution of the retail network.

ABC Egypt’s retail branch expansion continued apace, as it opened 4 more branches over the course of the year. For 2010, it anticipates further branch openings, with the network expected to reach 28 branches in all.

Arab Banking Corporation (Jordan) Despite Jordan experiencing an estimated 7% GDP growth in 2009, in the face of growing uncertainty in local and regional markets ABC Jordan’s management concentrated on preserving asset quality and managing growth in its targeted sectors. The overriding theme was expansion of retail banking operations, while seeking to extend the reach of existing services and simultaneously introducing new products to the market aimed at segments unaffected by market conditions such as public sector employees. The bank also sought to improve and upgrade its investment services and brokerage franchise, despite poor conditions in the stock market. It was a year of minimal growth on the corporate front, however, as the bank’s conservative risk appetite, combined with reduced corporate lending demand in the Jordanian market generally, dampened expansionary prospect at least for the time being.

ABC Jordan’s total assets rose slightly to $866 million compared with $831 million at year end 2008. Off-balance sheet assets fell somewhat, ending the year at $179 million. The bank’s brokerage offshoot, ABC Investments, experienced a substantial fall in both operating and net income as a result of a 57% drop in trading volume on the Amman Stock Exchange, which was the main cause of ABC Jordan recording a lower total operating income of $43.2 million compared with $45.7 million in 2008. However, at $22.8 million its operating expenses were also lower than in 2008 and its net operating income of $20.4 million was therefore only 8% below the $22.2 million achieved the year before. The net proﬁt of $13.0 million was 7% less than the 2008 result.

In line with the Group’s retail banking expansion strategy, the bank opened 6 new branches and installed 14 new ATMs. Its joint campaigns with major car retailers proved successful, as was its credit card and personal loan products advertising campaigns. The IT department successfully completed the migration of the bank’s Euronet ATM connection from Bahrain to the new and much larger location in India. It also ﬁnalised the development of a new system for tracking collection cheques for corporate customers and made preparations for a new online trading service at ABC Investments, scheduled for launch early in 2010.

For 2010, ABC Jordan plans to re-launch its ﬁnancing facilities designed for SMEs and to introduce its new capital leasing product. A client segmentation exercise is being undertaken jointly with the International Wholesale Banking Division in Bahrain to ensure that marketing and customer service efforts are targeted towards the most valuable relationships. A major push towards streamlining operations and managing costs is also planned.

16 ABC Group Annual Report 2009 A key objective is expansion via aquisition and organic growth.

Arab Banking Corporation - Tunisia Although Tunisia’s GDP growth rate is estimated to have remained positive in 2009 at around 3.0%, compared with 4.6% in 2008, the economic downturn in Europe nevertheless continued to impact its export sector. ABC’s offshore branch in Tunisia responded to the less positive economic environment by permitting its loan book to decline steadily while concentrating any new lending on shorter tenor loans. This, together with the impact of lower international and domestic interest rates, resulted in reduced net interest margin earnings. However, this fall was partly compensated by increased revenues from documentary credits and guarantees, resulting in a healthy increase in commission and other income over that for 2008. Thus its total income fell by only about 8% overall. Its operating expenses were well contained which, with a net recovery of loan loss provisions, helped to produce an increased net income for the year.

The position at ABC Tunisie, the Group’s onshore banking unit, was not dissimilar, its total assets reducing marginally to $160 million. With a total operating income of $3.3 million and operating expenses of $4.8 million, the bank’s net operating loss was $1.5 million. After some recovery of past years’ provisions, however, the bank reported a net loss of $1.2 million, with the combined net result for the Tunisian operations being $2.3 million.

ABC Tunisie opened its fourth branch in Tunisia, Le Belvédère branch located in the central business district of the capital, focusing mainly on retail activities. It plans to continue expansion of the retail branch network in 2010, concentrating on promoting consumer-oriented products such as its enhanced car loan and personal loan products and e-banking services, to add to its traditional trade ﬁnance and cash management services targeted at its commercial customers.

GROUP PRODUCTS a) International Wholesale Banking International Wholesale Banking comprises Corporate & Structured Finance, Global Trade Finance, Islamic Financial Services and Syndications, spread across the Bahrain and London Hubs, together with ABC’s New York and Baghdad branches. The Division is focused on delivery of ABC’s suite of wholesale banking products, while working closely with Treasury to offer client-oriented risk management solutions, such as foreign exchange, interest rate and commodity price hedging, and investment products, including structured investments.

For International Wholesale Banking, ABC’s transformation plan is aimed at improving proﬁtability through an integrated approach to business development across all product lines, while improving the Group’s ability to source and win business through cross-product training and skills development for all Relationship and Product Managers.

17 REVIEW OF OPERATIONS

An active advisory role for ABC's (P&SF) team in the landmark Disi Water Project (Jordan)...

CORPORATE & STRUCTURED FINANCE

In April 2009 the Corporate Banking & Financial Institutions (CB&FI) and Project & Structured Finance (P&SF) departments were aligned under common management. Corporate & Structured Finance group’s mission is to exploit the synergies, efficiencies and capabilities of these two departments, capturing and maximising the benefit of ABC’s multi-product marketing and relationship management platform to deliver the whole gamut of debt based products – from the provision of simple working capital facilities, through financial advisory, to the structuring and arranging of finance for complex investment projects.

C&SF is at the heart of ABC’s International Wholesale Banking transformation plan, working closely with other specialist global product teams at Head Ofﬁce and through ABC banking subsidiaries worldwide to maximise cross-selling and offer banking products and services tailored to each individual client.

CORPORATE BANKING & FINANCIAL INSTITUTIONS

CB&FI is the primary relationship management and marketing unit for the Group in the GCC area. Its experienced senior relationship managers act as country coordination managers, developing client relationships for the Group, a platform closely aligned with the Group’s transformation plan, emphasising cross-selling of appropriate Group products to each client. CB&FI actively markets all the Group’s products for delivery by specialist product groups while also delivering core credit products directly to its corporate and institutional customers. It additionally covers international ﬁnancial institutions and multinational corporations active in the GCC area which offer suitable opportunities to ABC’s Bahrain- based business units or MENA-based retail banking subsidiaries.

During the year CB&FI maintained its focus on developing new MENA region relationships and servicing existing government, ﬁnancial institution and corporate clients based in the GCC area and multinational companies operating there, emphasising the Group’s ability to deliver multiple product solutions to all aspects of their businesses.

CB&FI looks forward to renewed growth and opportunities in the GCC, as the region’s economies and capital markets are expected to emerge from the recent downturn more quickly than other regions, underpinned by the combination of strong hydrocarbon based revenues, the industrialisation and employment related policies of regional governments and continuing investment interest from both the private and public sectors.

18 ABC Group Annual Report 2009 and the ﬁnancing of Emirates Steel at the Industrial City of Abu Dhabi (ICAD).

PROJECT & STRUCTURED FINANCE

The P&SF team, based in Bahrain and in Europe, offers integrated ﬁnancial solutions to its regional and international clientele throughout the MENA region, combining ﬁnancial advisory seamlessly with project, structured and asset based lending services. Its activities serve a wide range of important regional industries, chief among which are the petrochemicals, oil and gas, power and water, mining and metals, infrastructure development, shipping, aviation and telecommunications sectors.

2009 witnessed further retrenchment in the project and structured finance market in the MENA region. In such an environment, ABC adopted a cautious approach to new transactions, focusing on consolidating relationships. However, the team continued to expand its financial advisory services and secured a number of advisory mandates over the year, of which the Cairo Waste Water project in Egypt and the Djerba Desalination project in Tunisia were particularly noteworthy. ABC’s advisory assignment for Gama Enerji of Turkey on the landmark Disi Water Conveyance project in Jordan was duly completed when the $1.1 billion financing was successfully closed in June 2009 – here ABC assisted Gama Enerji in securing 21-year debt financing from a number of multilateral and development agencies, at the same time structuring an innovative synthetic interest rate swap which enabled the Government of Jordan to manage its interest rate exposure while also providing lenders their required interest stream.

The team undertook selective new lending business with sponsor groups having a strong existing relationship with the Group. Successful closures included the $700 million Emirates Steel financing, several asset backed financings and ABC’s participation in the financing arranged for a group of investors led by the Corinthia Group for the new 5 star Metropole Hotel in London.

P&SF believes that the improving global economic environment should filter down to the regional project and structured finance market in time. However, project funding will remain challenging, with financings trending towards shorter tenors and tighter structures in order to achieve successful closures. Indeed, many projects now tend to win governmental approval conditioned specifically on the encouragement of downstream economic activity as a means of ensuring spinoff benefits to the home economy, and these smaller downstream projects will increasingly themselves require funding assistance. With such financings playing a vital role in ongoing economic development, P&SF foresees that there will be increasing opportunities to develop its advisory franchise, while also building on ABC’s successful lead arranger reputation to generate more small to medium-sized transactions, thus consolidating its premier position in project and structured finance in the MENA region.

19 REVIEW OF OPERATIONS

Global Trade Finance produced outstanding results in 2009, delivering record revenues and an increase in net proﬁt over 2008.

GLOBAL TRADE FINANCE

Global Trade Finance (GTF) produced outstanding results in 2009, delivering record total revenues and an increase in net profit over 2008. Whilst ABCIB’s European network spearheaded this strong performance, Group units worldwide, including GTF’s Bahrain Hub and ABC’s New York branch, were also important contributors. Moreover, these results were achieved within a broadly static cost base and head count, contributing significantly to improved Groupwide operating efficiency. A combination of buoyant MENA region import demand, partly reflecting the maintenance – albeit with some cutbacks – of public sector spending programmes in certain countries, together with generally elevated pricing levels, provided a supportive background for revenue generation, although this was tempered by intensified competition among banks.

The credit crunch affected GTF in a number of, sometimes conﬂicting, ways. On the one hand, with the MENA region outperforming the global economy in terms of growth and trade ﬂows, business opportunities continued to present themselves. On the other, generally tighter liquidity and scarcer capital resource availability across the banking sector tended to constrain business operations, necessitating an appropriate use of risk mitigants, selective marketing and careful management of clients’ expectations and the prioritising of core client relationships. The tighter and more uncertain market environment led to a general upward re-pricing of risk, which also aided bottom line performance.

GTF progressed towards meeting one of the Group’s main strategic aims: raising its market share in MENA-related international trade ﬁnancing, advancing in three critical areas:

• expansion of the Group’s geographical reach and ability to originate and source trade ﬂows to the MENA region; • cooperation with other ABC product groups and operating entities so as to maximise opportunities for internal business leverage; • ongoing product development, aimed at both extending and improving existing business structures and providing innovative trade ﬁnancing solutions.

The new Moscow representative office, set to open in early 2010, aims to identify exporters based in Russia, Ukraine and Belarus trading with the MENA region and produce opportunities to assist in financing the trade flows. It is anticipated that this initiative will provide a significant boost to the Group’s non-MENA geographic reach.

20 ABC Group Annual Report 2009 GTF played an outstanding role as a provider of innovative tailored trade ﬁnance solutions.

Looking to 2010 and beyond, GTF’s ability to increase the Group’s market share in MENA region trade ﬂow ﬁnancing will remain sensitive to underlying trends in growth, trade and the global operating environment. The MENA region is however expected to continue to outperform global growth averages and MENA region countries remain in the forefront of those undertaking large scale, concerted, anti-cyclical public spending programmes.

ISLAMIC FINANCIAL SERVICES

The Group offers its Shari’a-compliant products through four gateways: ABC Islamic Bank, ABCIB’s Islamic Asset Management (IAM) unit, ABCIB’s alburaq brand retail ﬁnancial services and Group Treasury.

2009 was a tough and challenging year for Islamic Financial Services. With a severe recessionary backdrop and markets suffering from credit and demand contraction, the focus shifted away from marketing growth towards portfolio and account management.

The ﬁrst challenge was to manage, in a transparent manner, the increased cost of funding which had affected regional markets. In cases where there were market disruption provisions in ﬁnancing agreements, it was essential to work in cooperation with other banks to ensure standardisation of treatment across the industry. Where no such provisions were incorporated into documentation, it was important to build trust in bilateral negotiations to solve the problem to both parties’ mutual satisfaction. ABC Islamic Bank and ABCIB’s IAM consequently spent much of the year working through their asset portfolios, managing in the end successfully to re-price the affected facilities.

IAM was successful in 2009 in structuring an important murabaha facility for a major European multinational company for the import of equipment into the Middle East. It also introduced, in conjunction with ABCIB’s Treasury, a new deposit product aimed at attracting Islamic liabilities from institutional and corporate depositors, and arranged the Islamic ﬁnancing of a number of prime residential properties in London for high net worth investors.

2010 looks promising for the growth of Islamic finance. Several European countries have recently introduced, or are in the process of introducing, enabling legislation that will further the expansion of Islamic financial products. IFS intends to continue to integrate its products into the range offered by the Group business platform and its fellow product groups, both in Europe and elsewhere. Its focus will continue to be the provision of Islamic financing solutions for its target market customers, working closely with the Group’s non-Islamic business units, and on developing tailored corporate and trade related products. It will also seek to develop MENA-based corporate and individual business relationships and attract Islamic liabilities in conjunction with the Treasury teams.

21 REVIEW OF OPERATIONS

SYNDICATIONS

The regional syndicated loan market was signiﬁcantly impacted over the year, as the low levels of activity across much of the global marketplace affected even the relatively stable MENA region. Banks in the region approached new lending warily, favouring the stronger rated corporate names, although even in such cases terms were much less favourable than in prior years and usually conditional on ancillary business being obtained. Loans typically carried maturities of 1-3 years compared with 3-5 years in the past. Additional challenges arose from a decline in cross-border lending, the restructuring of Kuwaiti syndicated facilities and the defaults under syndicated facilities provided to regional corporations.

ABC’s Syndications group took steps early on to redeploy several members of the team to other Group units in anticipation of the declining lending activity, choosing instead to focus on working with each relationship unit in support of existing relationships able to offer attractive commercial terms and good prospects of reciprocal business. A good example was the highly successful syndication, with ABC acting as mandated lead arranger, for African Export- Import Bank, Cairo in its one year dual tranche $180 million and €85 million syndicated term loan, which was closed in December and was marked by its signiﬁcant oversubscription from a diverse group of syndicate lenders.

b) Group Retail The retail business maintained its growth momentum throughout the year, as the distribution network continued to expand across the existing operational areas, widening customer target segments whilst continuing to offer customers seamless and convenient access to all the Group’s services.

With 11 new branches opened across the region, the distribution network grew to 58 branches in 2009. Further expansion is planned for 2010 under the Group’s strategic plan to establish an 80+ regional branch network, subject to regulatory approvals, over the medium term. The ATM network will also grow in line with branch openings, ensuring availability of service and convenience for the expanding customer base. Distribution channels have been further strengthened through an expanded sales force of well trained direct sales teams with a mission focused on one-to-one selling.

A regional Call Centre should be fully established in 2010, to further enhance service quality and extend communication channels for customers. A regional Collection System is also planned, aimed at improving proﬁtability and ensuring asset portfolio quality through enhanced collection and follow up capabilities.

In 2008 the Group launched a project to create a unique, common brand identity across the geographies where it operates. As part of this exercise, in 2009 a number of workshops were held in Bahrain to emphasise the Group’s customer-centric approach to business development and delivery and encourage the design and launch of innovative products.

c) Group Treasury The year saw Group Treasury playing a pivotal role coordinating the Bahrain, New York and London Treasury departments in ensuring the availability at all times of the liquidity necessary for the smooth functioning of all the Group’s business units. During the year a number of bilateral agreements with ﬁnancial institutions and investors resulted in the raising of signiﬁcant amounts of medium term deposits, extending the Group’s liabilities structure.

Group Treasury directs the Bahrain and London Treasury Hubs and treasury offices of all ABC branches and subsidiaries. Bahrain Hub is active in most treasury related products, including foreign exchange, derivatives (interest rate and currencies), Arab world currency markets, structured products, money markets, Islamic murabaha, fixed income proprietary portfolio trading and investments and customer portfolio management. It also plays a crucial role in the development and introduction of new products, including innovative Islamic products for sophisticated treasury hedging and yield enhancement strategies, such as Islamic forwards, Islamic options and Islamic structured funding risk hedges. London Hub - whilst also managing smaller proprietary investment portfolios for ABCIB and catering to GCC and MENA customers that prefer to deal with a UK-based entity - focuses on developing financial institutions and corporate

22 ABC Group Annual Report 2009 customer related business in Europe and seeking out business in emerging Eastern European countries, particularly with institutions having Middle East and Arab world dealings.

The treasury departments of New York and Tunis branches meanwhile concentrate on funding their assets and on providing customer related services. ABC subsidiaries’ treasury departments likewise focus on self-funding, managing local currency proprietary portfolios and developing customer business.

Looking ahead, and in anticipation of reduced availability of medium-term money through the syndication and bond markets at least for the foreseeable future, Group Treasury will continue to build customer deposits through intensiﬁed joint marketing with the business units, whilst continuing to work on diversifying and lengthening the maturity proﬁle of ABC’s liabilities.

While concentrating most attention on the prime objective of maintaining ample liquidity, Group Treasury also pursues the strategic objective of achieving rising and consistent profitability by building a strong customer relationship base and a diversified income mix. Despite the challenges that undoubtedly lay ahead, Group Treasury remains positive as regards the future. A new dedicated Treasury Sales function is to be created in early 2010, tasked with diversifying and expanding the Group’s liabilities sources as well as lengthening their maturities profile.

OTHER SUBSIDIARIES AND BRANCHES

ABC International Bank plc The UK economy was among the hardest hit in the OECD over the recessionary period, which inevitably impacted on ABCIB’s operations. On the other hand, the MENA region countries, on which most of the business of ABCIB is focused, managed to avoid the worst of the effects of global recession, although the average rate of growth across the region dropped to only 1.5%.

ABCIB managed its liquidity and funding in a prudent manner, beneﬁting from its stable and reliable customer base which allowed it to strengthen its liquidity by reducing the mismatch in each maturity band and at the same time increase its medium and long term funding. However, its deliberately conservative policy of maintaining a substantial daily long position came at a signiﬁcant cost, as surplus funds had to be placed out on the inter-bank market at very low yields.

In US dollar terms, ABCIB’s total assets remained almost unchanged at $4.0 billion. However, its loans and advances portfolio grew by 11% to $1.8 billion. Its total operating income at $90.7 million was 18% down from last year and was negatively impacted by declining sterling pound foreign exchange rate and interest rates. While there was a 33% fall in its net interest income to $42.0 million, a 19% growth in its fees and commissions revenues to $52.7 million partially offset it. As before, the Trade Finance business line was the main contributor, with 69% of total revenues. Treasury and Project & Structured Finance contributed 14% and 13% respectively, while Islamic Financial Services contributed 3%, down from 5% the year before, a consequence of the bank’s decision to reduce medium term risk and improve liquidity.

Operating expenses amounted to $58.8 million, therefore resulting in a net operating income of $31.9 million compared with $52.1 million in 2008. After loan loss provisions and taxation, however, ABCIB recorded a net proﬁt of $15.2 million, 11% below 2008’s performance.

A restructuring of ABCIB’s corporate structure during the year resulted in its ownership now being held directly by ABC rather than indirectly through a UK-based holding company as hitherto. One of the beneﬁts of the restructuring was a £96 million ($155 million) increase in ABCIB’s regulatory capital, lifting its capital ratio to a healthy 18.0%, well above the minimum mandated requirement.

23 REVIEW OF OPERATIONS

Focus will be on the continued provision of Islamic ﬁnancing solutions for target market customers, and the development of tailored corporate and trade related products.

For the future, the MENA region is expected to continue to outperform global growth averages, providing opportunities for ABCIB in all business areas. In a move towards securing an expanding share of MENA-related trade flow servicing, ABCIB opened a representative office in Moscow in early 2010 – the first Arab bank in the Russian market – providing the Group with an expanded non-MENA geographical reach and an enhanced ability to originate and source commercial flows to the MENA region.

Banco ABC Brasil S.A. Brazil was one of the ﬁrst countries in the world to emerge from the global downturn, closing the year with an annualised GDP growth rate close to 8.0%.

ABC Brasil is what is known in Brazil as a multiple bank, specialising in the extension of credit to medium sized to large corporates – those with annual revenues of $15 million - $1 billion. It has one of the most diversiﬁed customer portfolios of all the mid-sized banks. Over its 19-year existence it has built up a solid customer base by providing its customers with value added products tailored to their individual needs. Since its 2007 initial public offering on the Sao Paulo Stock Exchange, the bank has focused on a combination of organic and regional growth in bringing about its steady expansion. In the case of medium sized companies its strategy has been based on geographical expansion, opening new agencies and ofﬁces in support of its operations, while in the case of major corporations it has concentrated on organic growth through strengthening and deepening existing relationships while prospecting for new clients.

In 2009, Brazilian bank mergers together with the withdrawal from the market of several foreign banks combined to bring about a change in the dynamics of the credit markets, to ABC Brasil’s advantage, as the demand from corporates for sophisticated ﬁnancial services of the kind in which the bank specialises has intensiﬁed.

Banco ABC Brasil’s total assets rose over the year to $4.3 billion as its total loan portfolio expanded by 60% to $3.2 billion. However, its total operating income fell by 10% to $194.6 million from $216.6 million. Its operating expenses rose slightly to $83.8 million, producing an operating proﬁt of $110.8 million, 17% less than the previous year’s $133.8 million. After loan loss provisions of $27.1 million and taxation charge of $35.3 million, the bank’s net proﬁt for the year was $47.2 million, 43% down on 2008.

For 2010, the government’s core economic policies are likely to remain in place and credit should start expanding once more. ABC Brasil is therefore conﬁdently planning for future growth.

24 ABC Group Annual Report 2009 ABC Islamic re-examines its portfolio.

ABC Islamic Bank (E.C.) With the changing economic environment, ABC Islamic Bank, like all Islamic banks in the region, was compelled to re-examine its portfolio and work closely with customers and other banks in re-pricing facilities and in some cases deferring drawdown as projects were themselves deferred.

ABC Islamic Bank’s balance sheet reduced by some $143 million over the year. Net margin income was reduced from $25.9 million in 2008 to $20 million in 2009 as a result of lower yields on the existing portfolio which came under pressure due to higher funding costs. Fees and commission income was also lower, decreasing from $5.9 million in 2008 to $0.3 million in 2009 due to the decline in new facilities being closed. Nevertheless, a few quality transactions with sovereign and quasi-sovereign issuers were booked. Despite conservative provisioning reﬂecting recent problems in the regional corporate market, the year ended with the bank returning a net proﬁt of $10.1 million compared with $25.6 million in 2008.

Another challenge for ABC Islamic Bank in this difﬁcult year was to maintain, and indeed broaden if possible, its liability base, in an environment of high volatility in money markets and severe liquidity dislocation, exacerbated by the downgrading of regional risk ratings. The bank’s response was a concerted and geographically broad based liability marketing effort, focusing on product differentiation. As a consequence of this effort the liability base was successfully maintained while the number of relationships increased.

Arab Financial Services B.S.C.(c) AFS is the leading Arab company for electronic banking, personal payments instruments and related services. Established in Bahrain in 1984, it pioneered the concept of outsourcing card processing in the region and was the ﬁrst company to set up an end-to-end card outsourcing environment in Bahrain. Euronet Middle East, a joint venture between AFS and Euronet Worldwide, provides a range of services complementing AFS’ own, including debit card management, ATM/POS outsourcing services, gateway service and bill payment.

Its gross revenues increased by 6% to $19.8 million from $18.7 million in 2008, as its card centre revenues grew by 16%. Its success was partly due to EMV migration among its bank clients, while its conservative investment policy helped to minimise losses on its investment portfolio. Its provision against investment losses of $1.0 million in 2009 was well below the $2.2 million provision taken in 2008. Its focus on cost optimisation led to a reduction in operating expenses, enabling it to achieve a net proﬁt of $4.3 million, signiﬁcantly above 2008’s $1.1 million.

25 REVIEW OF OPERATIONS

TOTAL ASSETS SHORT & LONG TERM LOANS $ MILLIONS $ MILLIONS

35,000 7,000

30,000 6,000

25,000 5,000

20,000 4,000

15,000 3,000

10,000 2,000

5,000 1,000

0 0 2008 2009 2008 2009 28,486 25,965 Short Term Loans 6,758 Short Term Loans 5,465 Long Term Loans 5,173 Long Term Loans 5,484 Total Loans11,931 Total Loans 10,949

BRANCHES

ABC New York Branch maintains an emphasis on supporting US-MENA trade, offering a wide range of trade finance products spanning documentary credit issuance and confirmation, contract bonding, receivables financing and financing in conjunction with US government agencies and multilateral export agencies. The branch also actively cross-sells the services of the specialist product groups as it develops its relationships with prime corporate customers.

ABC Baghdad branch focuses on the provision of trade finance related facilities, including import documentary credits for government ministries and state-owned companies, guarantees and oil export credit confirmations. As Iraq continues to move towards internal stability its oil and other resources are set to be increasingly exploited, benefiting the economy and in turn generating liquidity for much needed infrastructure development. The branch looks forward to contributing the Group’s expertise in assisting the country’s future economic growth.

CREDIT & RISK GROUP

During the year CRG embarked on a number of initiatives:

Credit Risk ABC engaged external consultants to independently review the credit process and procedures and recommend how they may be optimised. Their recommendations are currently being implemented.

A tool to calculate economic capital and RAROC at portfolio level was implemented, while the model for RAROC measurement at the transactional level was further enhanced to more appropriately price risk by factoring in the impact of global recession on probability of default and loss given default.

26 ABC Group Annual Report 2009 SHAREHOLDERS' FUNDS DEPOSITS $ MILLIONS $ MILLIONS

30,000

2,500 25,000

2,000 20,000

1,500 15,000

1,000 10,000

500 5,000

0 0 2008 2009 2008 2009 1,793 2,191 22,790 20,246

Market Risk The Market Risk/ALM platform provided by Quantitative Risk Management (QRM) moved from test to production environment. The model is being used for:

• calculating VaR for all trading and available for sale portfolios; • conducting hypothetical and scenario stress tests for both trading and available for sale portfolios; • calculating component VaR across all portfolios; • applying ad hoc prepayment sensitivity stress test scenarios to the ABS securities sensitive to prepayment and extension risk; and • decomposing total diversiﬁed VaR into non-sub-additive asset class components with the resulting diversiﬁcation effect.

Market Risk Management department conducted a due diligence review of the trading activities and the risk management function at ABC Brasil, as the ﬁrst step towards an integrated Groupwide risk oversight.

Operational Risk ABC’s operational risk management system’s capabilities were enhanced, with key improvements including framework integration and reporting.

In line with the Group’s decentralised approach, the responsibility for day-to-day management of operational risk was transferred to the business unit operational risk managers, although ABC continued to implement enhancements to the operational risk management framework and process. A central risk register was created and a control library established to further improve the analytical capabilities and risk reporting. Linking of the framework components, such as Risk & Control Self Assessments (RCSA), Key Indicators (KIs) and operational loss data, was initiated to provide an integrated view of operational risk for senior management.

While the Group has adopted the Standardised Approach under Basel II for operational risk capital measurement and allocation, it continues to build the basis for advanced measurement capabilities, including collection of operational loss data and key indicators.

27 REVIEW OF OPERATIONS

BREAKDOWN OF ASSETS BY REGION - 2009 BREAKDOWN OF ASSETS BY REGION - 2008 PERCENTAGE PERCENTAGE

Arab World 40% North America 24% Arab World 42% North America 27% Western Europe 16% Latin America 16% Western Europe 16% Latin America 11% Asia 2% Other 2% Asia 2% Other 2%

Retail Risk The Group’s proprietary scorecard by retail product was rolled out to all units.

The Group Retail Policy was exhaustively reviewed and a revised Policy launched.

In coordination with Retail Banking, a project to implement a world class retail collection system was launched.

Remedial Loans Unit

Non-Performing Loans as a percentage of gross loans increased from 1.9% in 2008 to 3.5% in 2009, reﬂecting the adverse global market conditions. Due to the deteriorating economic and credit environment ABC increased its total loan provisions by $121 million to cover further asset weakening. The provisions coverage ratio (total provisions as a percentage of non-performing loans) fell from 181.6% in 2008 to 131.1% in 2009. However, non-performing loans as a percentage of equity was 18.5%, compared with 13.1% at the end of 2008.

In 2008 and 2009, the RLU Policy was fully revised and reissued, expanding and upgrading the provisioning policy and management of impaired assets so as to be consistent across the Group.

A new Head Ofﬁce based Recovery & Support unit has been set up to assist retail subsidiaries in remedial loan management and relationship banking. As a ﬁrst step the unit plans the creation of a centralised MIS database for corporate remedial loans, accessible to all retail units, allowing the sharing of experience in this area.

GLOBAL INFORMATION TECHNOLOGY

During 2009, GIT was predominantly engaged in the Group Retail Core Systems Standardisation Programme where signiﬁcant progress was made on this major strategic initiative supporting the Group’s transformation strategy, in particular with the implementation of the Group Retail Core Banking Systems for ABC Egypt, covering all business lines across all 23 branches. The go-live is scheduled for mid-February 2010, marking a signiﬁcant phase in the Group’s overall strategic focus on universal banking. GIT has also established the necessary local disaster recovery centres as well as a global disaster recovery centre in London. GIT will kick off the next major phase in 2010 with the launch of the Group Retail Core Banking Systems for ABC Jordan. ABC Algeria and ABC Jordan achieved the completion of EMV compliance in 2009, while the year also saw the deployment of informational ABC Online capability at ABC Egypt and

28 ABC Group Annual Report 2009 ABC Global Information Technology set up local and global disaster recovery centres.

ABC Algeria. A project to implement a universal banking Call/Contact Centre will be launched in 2010 in support of the Group’s business direction.

A key part of the Group’s transformational strategy involves enhancing existing IT decision support capabilities. In 2009, the Group Data Warehouse, an in-house solution, was developed to extend the existing repository, providing ‘on-the- fly’ reporting for all information related to customer balance sheet and P&L consolidation, profile summary, placement profile summary, customer exposure profile, etc. In addition, GIT completed another in-house system, the Account Planning tool, to assist relationship managers to create detailed account plans by providing relevant information in real time, significantly reducing manual inputs and checks. This was rolled out to all wholesale units, and there are further plans to roll it out to corporate clients of the retail units in early 2010.

The new market risk system was successfully implemented and the liquidity risk compliance project was launched in preparation for the new reporting regulatory requirements of the CBB and the UK’s FSA, with stress testing planned in 2010.

Operational efﬁciencies for ABCIB London and Frankfurt were achieved through the introduction of greater automated functionality through real time interfaces and set up of participations and reimbursements, balance check, postings and contracts.

As part of its programme of continuous review and enhancement of all regulatory compliance systems and procedures, GIT initiated the second phase of the Anti-Money Laundering project. A new system with more advanced AML detection, transaction monitoring and proﬁling functionality, complementing the existing system and further strengthening Group capabilities, was implemented in Bahrain. Rollout to other units will continue in 2010.

Enterprise messaging and continuous security enhancements were the main focus in 2009 for the technology infrastructure projects covering global telecommunications and enterprise-wide systems. In 2010, GIT will continue with security enhancements as well as focusing on operational efﬁciencies in the area of SWIFT technical infrastructure centralisation and expanding server virtualisation technology.

29 CORPORATE GOVERNANCE

(All ﬁgures stated in US dollars unless otherwise indicated)

Arab Banking Corporation (B.S.C.) was incorporated in 1980 as a Bahrain joint stock company. Following various changes to, and increases in, its capital ABC is now licensed by the Central Bank of Bahrain (CBB) as a Conventional Wholesale Bank with an authorised capital of $2,500 million and a paid-up capital of $2,000 million. Ownership of its shares, which have been listed on the Bahrain Stock Exchange since 1990, is spread between its founding shareholders - the Kuwait Investment Authority, the Central Bank of Libya and the Abu Dhabi Investment Authority - and international and regional private investors.

Historically, ABC has long been a pioneer among its Bahrain-based peers in good Corporate Governance principles and practices. These principles and practices were formalised in May 2004 when ABC adopted internationally recognised best practice Corporate Governance Principles and Guidelines, an integral part of which commits ABC to communicate all relevant information to its stakeholders on time, clearly and through a variety of channels including a well-maintained and up-to-date website.

BOARD OF DIRECTORS

The Board of Directors is responsible for the overall direction, supervision and control of the Group. It is also responsible for monitoring management performance, causing financial statements to be prepared which accurately disclose the Group’s financial position, convening and preparing the agenda for shareholder meetings, monitoring conflicts of interest, preventing abusive related party transactions and assuring equitable treatment of all shareholders. The Board 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. The Board has adopted a formal charter specifying the matters reserved to it, including the specific requirements and responsibilities of the Directors. There are currently 12 Directors on the Board, with varied backgrounds and experience and who individually and collectively exercise independent and objective judgement in meeting their responsibilities. Other than the President & Chief Executive all Directors are non-executive and currently 2 are independent non-executive directors as defined in the CBB’s Rule Book. The posts of Chairman and President & Chief Executive are held by different Directors and each has separate, clearly defined responsibilities. As a rule Directors do not have, and in 2009 no Director at any time during the year had, any direct or indirect material interest in any contract of significance with ABC or any of its subsidiaries.

The Board and its Committees are supplied with full and timely information to enable them to discharge their responsibilities. In this respect, the Board, its Committees and all Directors have access to senior management, external

30 ABC Group Annual Report 2009 ABC has long been seen as a pioneer in Corporate Governance matters among Bahrain-based ﬁnancial institutions.

consultants and advisors and to the Board Secretary, who is responsible for ensuring that the Board procedures and applicable rules and regulations are observed.

There are a number of Board Committees to which speciﬁc responsibilities have been delegated by the Board. Each such Committee has its own formal written charter. The main such Committees are:

• The Executive Committee, which is responsible for exercising the powers of the Board in the management of the business and affairs of the Group when the Board is not in service, save for those which the Board expressly reserves for itself.

• The Audit Committee, which is responsible to the Board for ensuring the integrity and effectiveness of the Group’s system of ﬁnancial, accounting and risk management controls and practices and for monitoring compliance with the requirements of the regulatory authorities in the various countries in which the Group operates. The Committee is also responsible for recommending the appointment, compensation and oversight of the external auditors and the appointment of the internal auditor.

• The Corporate Governance Committee, which assists the Board in shaping and monitoring the Corporate Governance policies and practices of the Group and evaluating compliance with policies and procedures; the Committee also reviews and assesses the adequacy of the Group’s policies and practices on corporate governance.

• The Board Risk Committee, which is responsible for the continual review and approval of the Group’s Credit and Risk Policies and the consideration and approval of related limit applications and those matters that are beyond senior management’s delegated authority. The Committee reviews and makes recommendations to the Board regarding the Medium Term and Annual Risk Strategy/Appetite, within which business strategy, objectives and targets are formulated. The Committee delegates authority to senior management to conduct day-to-day business within the prescribed policy and strategy parameters, whilst ensuring that processes and controls are adequate to manage the Group’s Risk Policies and Strategy.

• The Nominations and Compensation Committee is responsible for the formulation of the Group’s executive and staff remuneration policy as well as senior management appointments.

31 CORPORATE GOVERNANCE

INTERNAL CONTROLS

The Board of Directors is responsible for the establishment and review of the Group’s system of internal control. In addition to minutes and reports submitted to it by the Board Risk Committee (BRC) and the Audit Committee identifying any signiﬁcant issues relating to the adequacy of the Group’s risk management policies and procedures, the Board receives reports and recommendations from its Corporate Governance Committee and its Nominations and Compensation Committee for its consideration. The Board also receives regular reports from management identifying performance versus budget, major business issues and the impact of the external business and economic environment on its areas of responsibility.

Day-to-day responsibility for internal control rests with management. There is in place a process of identifying, evaluating and managing the signiﬁcant risks faced by the Group, the key elements of which can be summarised as:

• A well-deﬁned management structure with clear authorities and delegation of responsibilities, documented procedures and authority levels to ensure that all material risks are properly assessed and controlled.

• Internal Control Policies that require management to identify major risks and monitor the effectiveness of internal procedures in controlling and reporting on them.

• A robust Compliance function including, but not limited to, Anti-Money Laundering and Anti-Insider Trading policies.

• An internal audit function, exercised through Group Audit, which reports to the Audit Committee on the effectiveness of key internal controls in relation to the major risks faced by the Group and conducts reviews of the efﬁcacy of management oversight in regard to delegated responsibilities as part of its regular audits of Group departments and business units.

• A comprehensive planning and budgeting process that delivers detailed annual ﬁnancial forecasts and targets for Board approval.

• A Group Risk Management function, comprising overarching Head Ofﬁce risk management committees and a dedicated risk management support group.

MANAGEMENT COMMITTEE

The Management Committee is responsible for ensuring the ongoing, enduring performance and health of the Group by making decisions and sponsoring activities that create the right environment for the Group to operate in and provide oversight of the Group’s day-to-day operations. In addition to any required ad hoc meetings to consider urgent and important matters, the Committee meets regularly to consider the following matters:

• High level reviews of the Group’s ﬁnancial condition • Monthly Business Reviews of performance versus budget • High level planning for the following month • Detailed analysis of selected themes (depending on the time of the year) such as budgets, portfolio review, marketing campaigns

Quarterly:

• Reviews of quarterly performance • Reviews of strategy • Team building

32 ABC Group Annual Report 2009 COMPLIANCE

Compliance risk is the risk of legal or regulatory sanctions, material or ﬁnancial loss or loss to reputation that a bank may suffer as a result of its failure to comply with laws, regulations, rules, reporting requirements, codes of conduct and standards applicable to its activities.

In accordance with CBB rules, ABC has appointed a Compliance Ofﬁcer, who also performs the role of Group Compliance Ofﬁcer and is responsible for:

• Proactively identifying and evaluating compliance risks; • Monitoring, managing, mitigating and reporting compliance risks; • Investigating and reporting all compliance breaches; • Assessing the appropriateness of ABC’s compliance policies and procedures; • Advising management and staff on compliance and regulatory matters.

Throughout its network of ofﬁces, the Group has developed written guidelines for staff on the appropriate implementation of laws, regulations, rules and standards through policies and procedures, including Code of Conduct, Market Conduct and Compliance Policy, which are approved by the Board of Directors and are updated on a regular basis.

The compliance function provides an independent oversight on behalf of the Board of Directors and senior management and thus is independent from any other business, support or control functions, in order to allow it to carry out its work freely and objectively. From an organisational viewpoint, the compliance function reports directly to senior management and the Audit Committee, with direct access to the Board of Directors if necessary. In addition, in case of need the Group Compliance Ofﬁcer has the right and the authority to contact the CBB or the appropriate local regulator in any country where the Group operates.

Each operating entity in the Group, to the extent required by applicable laws and regulations, has appointed a local Compliance Officer to ensure adherence to local requirements and regulatory issues. At the Group level the Compliance Officer is also responsible for coordinating the identification and management of the Group’s compliance risk in collaboration with the local heads of compliance in Group units.

ABC has appointed a Money Laundering Reporting Officer (MLRO), who also performs the role of Group MLRO and who reports to the Group Compliance Officer. The MLRO is responsible for ensuring compliance with laws and regulations with respect to Anti-Money Laundering (AML) throughout ABC’s network of 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 and 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 which include detailed requirements for identification and verification of customers. These policies preclude all operating units 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 has been obtained.

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. Each MLRO is also responsible for reviewing and reporting to the respective unit’s regulator and senior management any suspicions concerning a customer or a transaction.

The responsibilities of the Group MLRO include formulating, issuing and implementing the Group’s AML strategies and policies on an ongoing basis, overseeing appropriate AML training of all relevant staff, supervising and coordinating the activities of each unit’s MLRO and reporting to the senior management, the Audit Committee and the Board of Directors on critical money laundering issues.

33 CORPORATE GOVERNANCE

Figure 1: Board and Senior Management Oversight

Monitoring

Risk Identiﬁcation Ex ante control Quality Assurance Process (all stages)

Quantiﬁcation of Aggregation Risk and capital

INSIDER TRADING POLICY

ABC has an established Insider Trading Policy to ensure that Insiders are aware of the legal and administrative requirements regarding holding and trading in securities and to prevent abuse of inside information.

It is ABC’s policy that no Insider who is aware of material inside information relating to ABC may trade the ordinary shares, any preferred stock, options to purchase shares or warrants, convertible debentures or derivative securities of ABC other than with the prior approval of the Board’s trading committee, or engage in any other action to take personal advantage of such information, or pass that information on to others outside ABC. It is also ABC’s policy that no Insider who, in the course of working for ABC, learns of material inside information about a company with which ABC does business, including a subsidiary or afﬁliate of ABC, may trade in the securities of such a company until such information is made available to the public or is no longer material.

In order to reduce the chances of tipping of inside information and avoid circumstances where an Insider may fall into breach of the Insider Trading Policy, a number of restrictions on trading as well as prohibitions are in place that must be observed by Insiders at all times.

COMPENSATION

The Nominations and Compensation Committee of the Board of Directors is responsible for reviewing ABC’s human resources and compensation policies and making the necessary recommendations to the Board for its approval. The Committee ensures that ABC’s remuneration levels remain competitive so as to enable it to continue to attract, develop and retain skilled staff to meet its strategic objectives. The Committee also ensures that effective procedures are in place to enable it and senior management to monitor and evaluate the performance of staff.

ABC has in place comprehensive policies regarding the remuneration and benefits provided to members of the Board of Directors and its Committees, senior management and staff. In regard to Directors, compensation comprises fixed annual remuneration fees and attendance allowances, while for senior management and staff, compensation comprises a number of fixed elements, covering salary, allowances and benefits, in addition to variable, performance-related elements.

34 ABC Group Annual Report 2009 Figure 2: Risk Management Structure

Board Committees

Audit Corporate Governance Executive Committee Committee Committee

Nomination & Board Risk Committee Compensation Committee

Risk Management Committees

Operational Risk Head Ofﬁce Risk Management Head Ofﬁce Credit Asset & Liability Management Consumer Credit Committee (RMC) Committee (HOCC) Committee (ALCO) Committee (ORCO) Committee (HOCCC)

RISK MANAGEMENT

Risk is inherent in the Group's activities and is managed through a process of ongoing identiﬁcation, measurement and monitoring, subject to risk limits and other controls. The Group is exposed to credit risk, market risk, liquidity risk, interest rate risk, operational risk, legal and strategic risks as well as other forms of risk inherent in its ﬁnancial operations.

Over the last few years the Group has invested heavily in developing a comprehensive and robust risk management infrastructure. This includes risk identiﬁcation processes under credit, market and operational risk spectrums, risk measurement models and rating systems as well as a strong business process to monitor and control these risks. Figure 1 outlines the various congruous stages of the risk process.

Executive Management is responsible for implementing the Group’s Risk Strategy/Appetite and Policy Guidelines set by the Board Risk Committee (BRC), including the identification and evaluation on a continuous basis of all significant risks to the business and the design and implementation of appropriate internal controls to minimise them. This is done through the BRC, senior management committees as shown above and the Credit & Risk Group in Head Office.

Within the broader governance infrastructure, the Board Committees carry the main responsibility for best practice management and risk oversight. At this level, the BRC oversees the deﬁnition of risk appetite, risk tolerance standards and risk process standards to be kept in place. The BRC is also responsible for coordinating with other Board Committees in monitoring compliance with the requirements of the regulatory authorities in the various countries in which the Group operates.

The Risk Management Committee (RMC) reviews risk methodology and parameters including credit, market, operational, liquidity and retail risks.

The Head Ofﬁce Credit Committee (HOCC) is responsible for credit decisions at the higher levels of the Group’s lending portfolio, setting country and other high level Group limits, dealing with impaired assets, provisioning and general credit policy matters.

The Asset and Liability Committee (ALCO) is mainly responsible for deﬁning long-term strategic plans and short- term tactical initiatives for directing asset and liability allocation prudently for the achievement of the Group’s strategic goals. ALCO monitors the Group’s liquidity and market risks and the Group’s risk proﬁle in the context of economic

35 CORPORATE GOVERNANCE

RISK MANAGEMENT (Continued)

developments and market ﬂuctuations to ensure that the Group’s ongoing activities are compatible with the risk/ reward guidelines as approved by the BRC.

As part of its overall risk management, the Group also uses derivatives and other instruments to manage exposures resulting from changes in interest rates, foreign currencies, equity risks, credit risks, and exposures arising from forecast transactions. The risk proﬁle is assessed before entering into hedge transactions, which are authorised by the appropriate level of seniority within the Group. The effectiveness of hedges is monitored monthly by the Group.

The Operational Risk Management Committee (ORCO) is responsible for deﬁning long-term strategic plans and short- term tactical initiatives for operational risk, and for monitoring and prudently managing exposure to operational risks including strategic and reputation risk.

The Head Ofﬁce Consumer Credit Committee (HOCCC) is responsible for credit decisions at the higher levels of the Group’s consumer lending portfolio, setting country and other high level Group limits, dealing with impaired assets and general credit policy matters.

The Credit & Risk Group (CRG) has overall responsibility for centralised credit policy and procedure formulation, country risk and counterparty analysis, approval/review and 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 and operational 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.

The management structure explained above, supported by teams of risk and credit analysts and the Group’s IT systems, therefore provides a coherent infrastructure for the management of the Group’s credit and risk functions.

Each ABC subsidiary is responsible for managing its own risks and has its own Subsidiary Board Risk Committee, Credit Committee and (in the case of major subsidiaries) ALCO, or equivalent, with responsibilities generally analogous to the Group committees.

The CBB requirements, which act as a common framework for the implementation of the Basel II Accord in the Kingdom of Bahrain, came into effect on 1 January 2008.

The Basel II Accord is built on three pillars:

• Pillar I deﬁnes the regulatory minimum capital requirements by providing rules and regulations for measurement of credit risk, market risk and operational risk. The requirement of capital has to be covered by a bank’s own regulatory funds.

• Pillar II addresses the bank’s internal processes for assessing overall capital adequacy in relation to risks (ICAAP). Pillar II also introduces the Supervisory Review and Evaluation Process (SREP), which assesses the internal capital adequacy.

• Pillar III complements the other two pillars and focuses on enhanced transparency in information disclosure, covering risk and capital management, including capital adequacy.

The Group has adopted the Standardised approach for credit risk, market risk and operational risk for regulatory

36 ABC Group Annual Report 2009 reporting purposes. The Group’s risk-weighted capital requirements for credit, market and operational risks are described herein. The disclosures in this section are in addition to the consolidated ﬁnancial statements presented in accordance with International Financial Reporting Standards (IFRS) and other sections of the annual report. However the credit risk exposures as detailed in this section differ from the credit risk exposures as reported in the consolidated ﬁnancial statements due to the application of different methodologies under Basel II and IFRS 7. Differences arise primarily due to the following:

• Under the Basel II framework, for credit-related contingent items, the nominal value is converted to an exposure through the application of a credit conversion factor (CCF). The CCF is at 20%, 50% or 100% depending on the type of contingent item, and is used to convert off-balance sheet notional amounts into an equivalent statement of ﬁnancial position exposure. In the consolidated ﬁnancial statements, the nominal values of credit-related contingent items are considered off-balance sheet.

• In this section, the credit exposures are classiﬁed as per the Standard Portfolio Approach mentioned in the CBB’s Basel II capital adequacy framework covering the Standardised Approach for credit risk. In the case of guaranteed exposures, the exposures would normally be reported based on the guarantor; however in the consolidated ﬁnancial statements the assets are presented based on asset class (i.e. securities, loans and advances etc.).

• Under the Basel II framework, eligible collateral is taken into consideration when arriving at the net exposure, whereas collateral is not netted in the consolidated ﬁnancial statements.

• Under the Basel II framework, securities in the non-trading securities portfolio are considered at cost, whereas they are considered at fair value in the consolidated ﬁnancial statements.

• Under the Basel II framework, certain items are considered as a part of the regulatory capital base, whereas these items are netted off against assets in the consolidated ﬁnancial statements.

CREDIT RISK

ABC Group’s portfolio and credit exposures are managed in accordance with the Group Credit Policy, which applies Groupwide qualitative and quantitative guidelines, with particular emphasis on avoiding undue concentrations or aggregations of risk. ABC's banking subsidiaries are governed by speciﬁc credit policies that, whilst 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, industries, etc.

The ﬁrst level of protection against undue credit risk is through the Group’s counterparty, country, industry, customer and customer group credit threshold 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 then controlled through a tiered hierarchy of delegated approval authorities based on the risk rating of the customer under the Group’s internal credit rating system.

Where unsecured facilities sought are considered to be beyond prudential limits, Group policies require collateral to mitigate the credit risk in the form of cash, securities and legal charges over the customer's assets or third-party guarantees. The amount and type of collateral depends on an assessment of the credit risk of the counterparty. Management monitors the market value of collateral, requesting additional collateral where required in accordance with the underlying agreement. Management also monitors the market value of collateral held during its review of the adequacy of the allowance for impairment losses. The Group also makes use of master netting agreements with counterparties.

37 CORPORATE GOVERNANCE

CREDIT RISK (Continued)

The Group employs a Risk Adjusted Return on Capital (RAROC) measure to evaluate the risk/reward relationship at the transaction approval stage. RAROC analysis is also conducted on a portfolio basis, aggregated for each business segment, business unit and for the Group as a whole.

Day-to-day management of existing credit exposure is the responsibility of the business unit account 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. Senior management and the BRC review quarterly the exposure profile of the Group from the various risk parameters. Group Audit meanwhile 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. These measures collectively constitute the main lines of defence against undue risk for the Group.

Credit exposures found to rank below a satisfactory risk rating are segregated and more actively supervised as impaired assets under the guidance or supervision of the CRG’s Remedial Loans Unit (RLU). Impaired assets are reviewed regularly by the respective business units, with progress reports submitted at least quarterly to the RLU, who in turn reports their progress to senior management and regulators. 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 losses, through a quarterly portfolio review and adequacy of provisioning exercise compliant with IAS 39 reporting. An unencumbered portfolio provision (Collective Impairment Provision) is also maintained to cover unidentiﬁed possible future losses.

Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the Group’s performance to developments affecting a particular industry or geographical location.

In order to avoid excessive concentrations of risk, Group policies and procedures include specific guidelines which focus on country and counterparty limits and the importance of maintaining a diversified portfolio. Identified concentrations of credit risks are controlled and managed accordingly.

Single name concentrations are monitored on an individual basis. The Group’s internal economic capital methodology for credit risk addresses concentration risk through the application of single-name concentration add-on. Under the CBB’s single obligor regulations, banks incorporated in Bahrain are required to obtain the CBB’s approval for any planned exposure to a single counterparty, or group of connected counterparties, exceeding 15% of their regulatory capital base.

As at 31 December 2009, the Group’s exposures in excess of 15% of the obligor limits to individual counterparties were as shown below:

On balance Off balance $ million sheet exposure sheet exposure Total exposure Counterparty A 1,639 - 1,639 Counterparty B 1,428 - 1,428 Counterparty C 1 842 843

38 ABC Group Annual Report 2009 Deﬁnition of exposure classes per Standard Portfolio

The Group has a diversiﬁed funded and unfunded credit portfolio. The exposures are classiﬁed as per the Standard Portfolio approach under the CBB’s Basel II Capital Adequacy Framework covering the Standardised approach for credit risk.

The descriptions of the counterparty classes along with the risk weights to be used to derive the risk weighted assets are as follows:

a. Claims on sovereigns These pertain to exposures to governments and their central banks. Claims on Bahrain and other GCC sovereigns are risk weighted at 0%. Claims on all other sovereigns are given a risk weighting of 0% where such claims are denominated and funded in the relevant domestic currency of that sovereign. Claims on sovereigns other than those mentioned above are risk weighted based on their credit ratings.

b. Claims on public sector entities (PSEs) Listed Bahrain PSEs are assigned a 0% risk weighting. Other sovereign PSEs, where claims are denominated in the relevant domestic currency and for which the local regulator has assigned a risk weighting of 0%, are assigned 0% risk weighting by the CBB. PSEs other than those mentioned above are risk weighted based on their credit ratings.

c. Claims on multilateral development banks (MDBs) All MDBs are risk weighted in accordance with ABC's credit rating except for those members listed in the World Bank Group which are risk weighted at 0%.

d. Claims on banks Claims on banks are risk weighted based on the ratings assigned to them by external rating agencies, however short-term claims on locally incorporated banks may be assigned a risk weighting of 20% where such claims on the banks are of an original maturity of three months or less and are denominated and funded in either Bahraini Dinars or US Dollars.

Preferential risk weights that are one category more favourable than the standard risk weighting are assigned to claims on foreign banks licensed in Bahrain with an original maturity of three months or less and denominated and funded in the relevant domestic currency. Such preferential risk weights for short-term claims on banks licensed in other jurisdictions are allowed only if the relevant supervisor also allows this preferential risk weighting to short-term claims on its banks.

No claim on an unrated bank may receive a risk weight lower than that applied to claims on its sovereign of incorporation.

Investments in subordinated debt of banking, securities and ﬁnancial entities are risk weighted at a minimum risk weight of 100% for listed entities or 150% for unlisted entities, unless such investments exceed 20% of the eligible capital of the investee entity, in which case they are deducted from ABC's capital.

e. Claims on the corporate portfolio Claims on the corporate portfolio are risk weighted based on credit ratings. Risk weightings for unrated corporate claims are assigned at 100%.

39 CORPORATE GOVERNANCE

CREDIT RISK (Continued)

Deﬁnition of exposure classes per Standard Portfolio (Continued)

f. Claims on regulatory retail exposures Retail claims that are included in the regulatory retail portfolio are assigned risk weights of 75% (except for past due loans), provided they meet the criteria stipulated in the CBB’s Rule Book.

g. Past due exposures The unsecured portion of any loan (other than a qualifying residential mortgage loan) that is past due for more than 90 days, net of speciﬁc provisions (including partial write-offs), is risk-weighted as follows:

(a) 150% risk weighting when speciﬁc provisions are less than 20% of the outstanding amount of the loan;

(b) 100% risk weighting when speciﬁc provisions are greater than 20% of the outstanding amount of the loan.

h. Residential retail portfolio Lending fully secured by ﬁrst mortgages on residential property that is or will be occupied by the borrower, or that is leased, is risk weighted at 75%. However, where foreclosure or repossession in respect of a claim can be justiﬁed, the risk weighting is 35%.

i. Equity portfolios Investments in listed equities are risk weighted at 100% while those in unlisted equities are risk weighted at 150%.

j. Other exposures These are risk weighted at 100%.

Credit exposure and risk weighted assets

Gross Risk- credit Funded Unfunded Cash Eligible weighted Capital $ million exposure exposure exposure collateral guarantees assets charge Cash 36 36 - - - - - Claims on sovereigns* 4,430 4,060 370 - 19 459 55 Claims on public sector entities ** 5,535 5,436 99 62 - 2,867 344 Claims on multilateral development banks 132 132 - - - - - Claims on banks 8,880 7,019 1,861 918 368 4,291 515 Claims on corporate portfolio 10,691 8,737 1,954 1,060 149 8,915 1,070 Regulatory retail exposures 235 232 3 - - 176 21 Past due exposures 140 140 - - - 150 18 Residential retail portfolio 17 17 - 17 - 6 1 Equity portfolios 70 70 - - - 93 11 Other exposures 207 207 - - - 207 25

30,373 26,086 4,287 2,057 536 17,164 2,060

40 ABC Group Annual Report 2009 * Includes Ginnie Mae & Small Business Administration Pools ** Includes exposures to Collateralized Mortgage Obligations (CMOs) of Freddie Mac and Fannie Mae both of which are deemed to be Government Sponsored Enterprises (GSE).

Monthly average gross exposures and the risk weighted assets for 2009 were $30,072 million and $17,113 million respectively.

Geographical distribution of exposures The geographical distribution of exposures, impaired assets and the related impairment provisions can be analysed as follows:

Gross credit Impaired Speciﬁc provision Impaired Speciﬁc provision $ million exposure loans impaired loans securities impaired securities North America 6,910 - - 540 512 Western Europe 5,051 49 32 - - Other Europe 46 - - - - Arab World 12,257 333 213 58 34 Other Africa 5 - - - - Asia 1,151 - - 10 10 Australia/New Zealand 195 - - - - Latin America 4,758 23 20 - - 30,373 405 265 608 556

In addition to the above speciﬁc provisions, the Group has collective impairment provisions amounting to $166 million .

The geographical distribution of gross credit exposures by major type of credit exposures can be analysed as follows:

North Western Other Arab Other Australia/ Latin $ million America Europe Europe World Africa Asia New Zealand America Total Cash - - - 36 - - - - 36 Claims on sovereigns* 1,621 462 - 1,871 - 92 - 384 4,430 Claims on public sector entities ** 3,202 94 - 2,223 - 6 - 10 5,535 Claims on multilateral - 37 - 95 - - - - 132 development banks Claims on banks 952 3,322 4 3,211 2 545 190 654 8,880 Claims on corporate portfolio 1,087 997 42 4,424 3 498 5 3,635 10,691 Regulatory retail exposures - 1 - 168 - - - 66 235 Past due exposures - 10 - 130 - - - - 140 Residential retail portfolio - 15 - 2 - - - - 17 Equity portfolios 33 1 - 26 - 10 - - 70 Other exposures 15 112 - 71 - - - 9 207

6,910 5,051 46 12,257 5 1,151 195 4,758 30,373

* Includes Ginnie Mae & and Small Business Administration pools. ** Includes exposures to CMOs of Freddie Mac and Fannie Mae both of which are deemed to be GSE.

41 CORPORATE GOVERNANCE

CREDIT RISK (Continued)

Industrial sector analysis of exposures The industrial sector analysis of exposures, impaired assets and the related impairment provisions can be analysed as follows:

Specific Specific provision provision Gross Funded Unfunded Impaired impaired Impaired impaired $ million exposure exposure exposure loans loans securities securities Manufacturing 4,407 3,359 1,048 90 63 1 - Mining and quarrying 62 44 18 4 3 - - Agriculture, fishing and forestry 39 35411 - - Construction 867 615 252 3 2 - - Financial 11,695 9,733 1,962 166 93 574 527 Trade 481 410 71 82 49 - - Personal / Consumer finance 631 592 39 13 9 - - Commercial real estate financing 259 258 1---- Residential mortgage 17 17----- Government 7,577 7,207 370 30 30 10 10 Technology, media & telecommunications 386 298 882132 Transport 711 622 89 1 1 - - Other sectors 3,241 2,896 345 13 13 20 17

30,373 26,086 4,287 405 265 608 556

42 ABC Group Annual Report 2009 RISK MANAGEMENT (Continued)

The industrial sector analysis of gross credit exposures by major types of credit exposures can be analysed as follows:

Com- mercial Technol- Agri- real ogy, Mining culture, Personal estate Resi- media & Manu- and fishing / Con- financ- dential Telcom- factur- quarry- and Con- sumer ing mort- Govern- munica- Trans- Other $ million ing ing forestry struction Financial Trade finance gage ment tions port sectors Total Cash ------36 36 Claims on sovereigns* 53 - - - 38 - - - - 4,336 - 3 - 4,430 Claims on public sector entities ** 825 - - - 1,077 57 - - - 3,223 8 71 274 5,535 Claims on multilateral development banks - - - - 132 ------132 Claims on banks - - - - 8,880 ------8,880 Claims on corporate portfolio 3,497 62 39 864 1,458 388 399 259 - - 375 637 2,713 10,691 Regulatory retail exposures 1 - - 3 - 1 226 - - - 1 - 3 235 Past due exposures 30 - - - 49 35 6 - - 18 - - 2 140 Residential retail portfolio ------17 - - - - 17 Equity portfolios 1 - - - 61 - - - - - 2 - 6 70 Other exposures ------207 207 4,407 62 39 867 11,695 481 631 259 17 7,577 386 711 3,241 30,373

* Includes Ginnie Mae & and Small Business Administration pools. ** Includes exposures to CMOs of Freddie Mac and Fannie Mae both of which are deemed to be GSE.

43 CORPORATE GOVERNANCE

Exposure by external credit rating The Group uses external ratings from Standard & Poor’s, Moody’s, Fitch Ratings and Capital Intelligence (accredited External Credit Assessment Institutions) [ECAIs]. The breakdown of the Group’s exposure into rated and unrated categories is as follows:

Net credit exposure (after credit risk $ million mitigation) Rated exposure Unrated exposure Cash 36 - 36 Claims on sovereigns 4,430 4,057 373 Claims on public sector entities* 5,473 3,427 2,046 Claims on multilateral development banks 132 132 - Claims on banks 7,962 6,327 1,635 Claims on corporate portfolio 9,631 1,356 8,275 Regulatory retail exposure 235 - 235 Past due exposures 140 5 135 Equity portfolios 70 - 70 Other exposures 207 - 207 28,316 15,304 13,012

* Includes Ginnie Mae & Small Business Administration pools. ** Includes exposures to CMOs of Freddie Mac and Fannie Mae both of which are deemed to be GSEs.

It is the Group's policy to maintain accurate and consistent risk ratings across the credit portfolio through an internal risk rating system. Risk ratings are supported by a variety of ﬁnancial analytics, combined with processed market information, to provide the main inputs for the measurement of counterparty credit risk. All internal ratings are tailored to the various categories and are derived in accordance with the Group's Credit Policy, and are assessed and updated regularly. Each risk rating class is mapped to grades equivalent to Standard & Poor’s, Moody’s, Fitch Ratings and Capital Intelligence rating agencies.

The Group uses a 23-point rating scale to grade corporate and financial institution obligors, of which 20 are performing grades. The Group’s vendor and internally developed rating tools use financial and non-financial factors besides peer and sector comparisons in arriving at counterparty obligor ratings and may be notched up or down based upon contingents or credit support as appropriate.

44 ABC Group Annual Report 2009 Maturity analysis of funded exposures Residual contractual maturity of the Group’s major types of funded credit exposures, except for CMOs and Small Business Administration pools amounting to $4,760 million and the FRN portfolio of $3,138 million, based on expected to be realised or settled, is as follows:

within Total Over 1 1 - 3 3 - 6 6 - 12 within 12 1 – 5 5-10 10 - 20 20 Un- Total over $ million month months months months months years years years years dated 12 months Total

Cash 36 - - - 36 ------36 Claims on sovereigns* 3,082 181 98 287 3,648 284 114 2 2 10 412 4,060 Claims on public sector entities** 4,104 63 55 90 4,312 257 384 465 1 17 1,124 5,436 Claims on multilateral development banks 95 37 - - 132 ------132 Claims on banks 4,234 376 816 404 5,830 532 627 - - 30 1,189 7,019 Claims on corporate portfolio 837 1,133 982 967 3,919 3,327 929 201 2 359 4,818 8,737 Regulatory retail exposures - 12 3 5 20 98 70 2 - 42 212 232 Past due exposures 57 38 37 1 133 4 1 - 1 1 7 140 Residential retail portfolio ------14 3 - 17 17 Equity portfolios ------70 70 70 Other exposures ------207 207 207

12,445 1,840 1,991 1,754 18,030 4,502 2,125 684 9 736 8,056 26,086

* Includes exposures to Ginnie Mae and Small Business Administration pools. * * Includes exposures to CMOs of Freddie Mac and Fannie Mae both of which are deemed to be GSEs.

45 CORPORATE GOVERNANCE

Maturity analysis of unfunded exposures The residual contractual maturity analysis of unfunded exposures is as follows:

within Total Over 1 1 - 3 3 - 6 6 - 12 within 12 1 – 5 5-10 10 - 20 20 Un- Total over $ million month months months months months years years years years dated 12 months Total Claims on sovereigns 18 27 22 27 94 275 1 - - - 276 370 Claims on public sector entities 6 5 29 6 46 38 14 1 - - 53 99 Claims on banks 293 416 244 412 1,365 476 13 - 7 - 496 1,861 Claims on corporate portfolio 141 410 208 455 1,214 632 78 10 20 - 740 1,954 Regulatory retail exposures - 2 - - 2 1 - - - - 1 3

458 860 503 900 2,721 1,422 106 11 27 - 1,566 4,287

Unfunded exposures are divided into the following exposure types in accordance with the calculation of credit risk weighted assets in the CBB’s Basel II capital adequacy framework:

(a) Credit-related contingent items comprising letters of credit, acceptances, guarantees and commitments.

(b) Derivatives, which are contracts the values of which are derived from one or more underlying ﬁnancial instruments or indices and include futures, forwards, swaps and options in the interest rate, foreign exchange, equity and credit markets.

In addition to counterparty credit risk, in accordance with the Basel II accord derivatives are also exposed to market risk, which requires a separate capital charge.

Credit-related contingent items As mentioned above, for credit-related contingent items, the nominal value is converted to an exposure through the application of a credit conversion factor (CCF). The CCF is at 20%, 50% or 100% depending on the type of contingent item, and is used to convert off-balance sheet notional amounts into an equivalent on-balance sheet exposure.

Undrawn loans and other commitments represent commitments that have not been drawn down or utilised at the reporting date. The nominal amount is the base upon which a CCF is applied for calculating the exposure. CCF ranges between 20% and 50%, for commitments with original maturity of up to one year and over one year respectively, and 0%, applicable to commitments which can be unconditionally cancelled at any time.

46 ABC Group Annual Report 2009 The table below summarises the notional principal amounts and the relative exposure before the application of credit risk mitigation:

Notional $ million Principal Credit exposure*

Short-term self-liquidating trade and transaction-related contingent items 5,987 2,820 Direct credit substitutes, guarantees and acceptances 1,913 911

Undrawn loans and other commitments 894 408

8,794 4,139

RWA 2,725

* Credit exposure is after applying CCF.

At 31 December 2009, the Group held eligible guarantees as collateral in relation to credit-related contingent items amounting to $328 million.

Derivatives 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 those derivatives which do not meet IAS 39 hedging requirements.

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 participates in both exchange traded and over-the-counter derivative markets.

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 was no significant concentration of credit risk in respect of contracts with positive fair value with any individual counterparty as at 31 December 2009.

The counterparty credit risk for derivative and foreign exchange instruments is subject to credit limits on the same basis as other credit exposures. Counterparty credit risk arises in both the trading book and the banking book.

For regulatory capital adequacy purposes, the Group uses the current exposure method to calculate the counterparty credit risk of derivative and foreign exchange instruments in accordance with the credit risk framework in the CBB’s Basel II capital adequacy framework. Counterparty credit exposure comprises the sum of replacement cost and potential future exposure. The potential future exposure is an estimate that reﬂects possible changes in the market value of the individual contract during the remaining life of the contract and is measured as the notional principal amount multiplied by an add-on factor.

47 CORPORATE GOVERNANCE

The aggregate notional amounts for interest rate and foreign exchange contracts as at 31 December 2009 were as follows:

Derivatives Foreign exchange $ million Interest rate contracts contracts Total

Notional – Trading book 3,777 5,623 9,400 Notional – Banking book 514 70 584

4,291 5,693 9,984

Credit RWA (replacement cost plus potential future exposure) 106 42 148

Market RWA 102 1,392 1,494

IMPAIRMENT OF ASSETS

Impairment and uncollectability of financial assets An assessment is made at each quarter to determine whether there is objective evidence that a specific financial asset or group of financial assets may be impaired. If such evidence exists, an impairment loss is recognised in the consolidated statement of income.

In respect of a borrower or a group of borrowers, evidence of impairment may include indications of:

(a) significant financial difficulty, default or delinquency in interest or principal payments; (b) the probability that it will enter bankruptcy or other financial reorganisation; and (c) based on observable data, a measurable decrease in estimated future cash flows, such as changes in arrears or economic conditions, which correlate with defaults.

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.

The Group uses the provision account to record impairments except for equity and similar investments, which are written down, with future increases in their fair value being recognised directly in equity.

Impairment losses on ﬁnancial assets On a quarterly basis the Group assesses whether any provision for impairment should be recorded in the consolidated statement of income. 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 provision 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.

48 ABC Group Annual Report 2009 Impairment against speciﬁc groups of ﬁnancial assets

In addition to specific provisions against individually significant loans and advances and securities, the Group also makes a provision to cover impairment against specific groups of financial assets where there is a measurable decrease in estimated future cash flows. This provision is based on deterioration of the financial assets decided by putting the portfolio through rigorous credit risk scenario testing and averaging the existing Expected Loss (EL) with a severely stressed scenario EL. Further, the amount of provision is also based on the 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 collateral held, deterioration in country risk, industry and technological obsolescence as well as identiﬁed structural weakness or deterioration in cash ﬂows.

Industry sector analysis of the speciﬁc and collective impairment provisions charges

$ million Manufacturing 37 Financial 45 Trade 31 Personal / Consumer ﬁnance 2 Government (6) Commercial real estate ﬁnancing 6 115

MARKET RISK

Market risk is the risk that the Group’s earnings or capital or its ability to support its business strategy will be impacted by changes in market rates or prices related to interest rates, equity prices, credit spreads, foreign exchange rates and commodity prices.

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 and investment products and product limits prior to ALCO approval. MRM’s core responsibility is to measure, report, monitor and control market risk. For further explanation please refer to Note 24 to the Financial Statements.

The Group classiﬁes market risk into the following:

• Trading Market Risk arises from movements in market risk factors in trading transactions where the main strategy is to trade in the short term.

• Non-Trading Market Risk in Securities arises from market factors impacting securities that are held for long-term investment.

• Non-Trading Asset and Liability Risk exposures arise where the re-pricing characteristics of the Group’s assets do not match with those of its liabilities.

49 CORPORATE GOVERNANCE

MARKET RISK (Continued)

As there is no speciﬁc measure that reﬂects all aspects of market risk, the Group analyses risk using various risk measures and reports the results to senior management.

The measurement techniques used to measure and control market risk are:

• Value-at-Risk (VaR) • Basis Point Value (BPV) • Stress Testing • Non-Technical Risk Measures

On an annual basis, the BRC reviews and approves VaR Trading Guidance, BPV Trading and Investment Limits, Options Stress Testing Trading Limits and Non-Technical Trading and Investment Limits.

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 of Directors. 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 arises from the possibility that changes in interest rates will affect future profitability or the fair values of financial instruments. The Group is exposed to interest rate risk as a result of mismatches of interest rate re-pricing of assets and liabilities. The most prominent market risk factor for the Group is interest rates. This risk is minimised as the Group’s rate sensitive assets and liabilities are mostly floating rate, where the duration risk is lower. In general, the Group uses matched currency funding and translates fixed rate instruments to floating rate to better manage the duration in the asset book.

INTEREST RATE RISK IN THE BANKING BOOK (IRRBB)

The Group uses the Basis Point Value (BPV) approach to control the IRRBB. BPV measures changes in economic value resulting from changes in interest rates. In the BPV methodology, the modified duration and, for some products, the effective duration approach is used to measure the IRRBB. Modified duration is a good measure of linear risk for interest rate sensitive products. Effective duration takes into consideration the fact that any embedded option has an impact on the sensitivity. The effective duration is typically a better representation of interest sensitivity than modified duration with products that have embedded options.

The BPV measure incorporates the entire rate sensitive segment of the balance sheet for the Group and is classiﬁed into appropriate buckets. Non-maturity interest rate sensitive assets and liabilities are bucketed in the short term. Equity is considered a non-interest sensitive component and is excluded from these computations. As at 31 December 2009, an immediate shift up by 25 basis points in interest rates would potentially impact the Group’s economic value by (-) $30 million.

As a normal part of its treasury trading activities, the Group may also be exposed to Equity, Debt Securities, Commodity and Volatility Risk. These risks are also monitored by MRM against Board approved limits.

50 ABC Group Annual Report 2009 The Group’s capital charge in respect of market risk in accordance with the Standardised methodology is as follows:

Year end Capital Capital charge Capital charge $ million RWA Charge –Minimum* –Maximum*

Interest rate risk - Speciﬁc interest rate risk 4 - - - - General interest rate risk 102 12 12 18 Equity position risk 12 1 1 9 Foreign exchange risk 1,386 166 77 166 Options risk 6 1 - 1

Total market risk 1,510 180

* The information in these columns shows the minimum and maximum capital charge of each of the market risk categories during the twelve-month period ended 31 December 2009.

EQUITY POSITION RISK

Equity position risk arises from the possibility that changes in the prices of equities or equity indices will affect future proﬁtability or the fair values of ﬁnancial instruments. The Group is exposed to equity risk in the trading position and investment portfolio, primarily in its core international and GCC markets.

Equity positions in the banking book

$ million Quoted Equities 26 Unquoted Equities 55 81

Realised gains during the year - Unrealised gains as at 31 December 2009 in equity 6

LIQUIDITY RISK

The Group 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. The Minimum Liquidity Guideline (MLG) is used to manage and monitor daily liquidity. The MLG represents the minimum number of days the Group can survive the combined outflow of all deposits and contractual drawdowns, under market value driven encashability scenarios. In addition, an internal liquidity/maturity profile is generated to summarise the actual liquidity gaps versus the revised gaps based on internal assumptions. The maturity profile of the Group’s assets, liabilities and off-balance sheet items is given in Note 24 to the Financial Statements.

51 CORPORATE GOVERNANCE

CURRENCY 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. The Group'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.

OPERATIONAL RISK

Operational risk is deﬁned as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk is inherent in all business activities and can never be eliminated entirely; however shareholder value can be preserved and enhanced by managing, mitigating and, in some cases, insuring against operational risk. Operational risk includes regulatory, reputational and documentation risk.

To manage Operational risk, a framework has been implemented across the Group which includes identiﬁcation, measurement, management, monitoring and risk control/mitigation elements. A variety of underlying processes and controls have also been put in place to support this framework. These include risk and control self-assessments, key risk indicators, event management, new product review and approval process and business contingency plans.

Operational risks are identified and assessed through the Risk & Control Self-Assessment (RCSA) process. Once identified the potential impact of the risks is assessed through a combination of likelihood and impact before (inherent risk) and after (residual risk) considering the effectiveness of the controls in place to manage the risks identified. Monitoring of risks and controls is done through the use of key indicators (KIs), where appropriate, against thresholds/escalation triggers, to ensure timely management action when a trigger is breached. Where required, corrective action plans are also formulated to address risks and control issues. A process to capture operational loss events has also been put in place.

The Group’s intention is to make operational risk transparent throughout the enterprise. As such, processes for regular quarterly reporting of relevant operational risk management information to business management, senior management, ORCO, BRC and the Board of Directors are in place.

The Group is currently following the Standardised Approach (TSA) for operational risk capital. As such, a detailed mapping of the Group’s business lines and gross income to the Basel II Business Line Framework has been completed and implemented.

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. Each business line – for these purposes including Operations, Information Technology, Human Resources, Legal & Compliance and Financial Control – is further responsible for employing the aforementioned framework process and control programmes to manage its operational risk within the guidelines established by Group policy and to develop internal procedures that comply with Group policies. To ensure that all operational risks to which the Group is exposed are adequately managed, support functions are also involved in the identiﬁcation, measurement, management, monitoring and control/mitigation of operational risk as appropriate.

In accordance with the Standardised methodology, as at 31 December 2009 the total capital charge in respect of operational risk was $143 million. This capital charge was computed by categorising the Group's activities into eight business lines (as deﬁned by the Basel II framework) and multiplying each business line's three-year average gross income by a pre-deﬁned beta factor.

52 ABC Group Annual Report 2009 BUSINESS RISK

Business risk represents the earnings volatility inherent in all business activities due to the uncertainty of revenues and costs associated with changes in the economic and competitive environment. Business risk is evaluated through a Business and Strategy Development process. A Risk Budget is developed at the start of each year along with a Business Plan by each unit. Subsequently, the actual quarterly performance is compared with that budgeted, including the historical volatility in earnings and detailed ﬁnancial budget which supports both the decision making and the planning process.

BUSINESS CONTINUITY

As part of ABC’s aim to meet local and international regulatory obligations as well as to protect the Group’s business functions, assets and employees, it has in place robust Business Continuity Plans across the Group. These plans are designed to provide each ABC subsidiary with the necessary guidelines and procedures to be used in case of an emergency. The plans were designed employing best practice methodology BS25999 as used by most UK and other European ﬁnancial institutions. The business continuity plans cover local and regional risk scenarios which might impact on any business unit in ABC Group. To address local disaster events the Group has established business continuity centres within the geographic location of each of the business units. To address a regional disaster scenario affecting Bahrain, ABC has established a licensed branch in the UK which is maintained in full operational status and with the capability of carrying out the majority of ABC’s activities. As regards certain activities relating to marketable securities, brokerage and client-related businesses, the alternative site selected is ABC’s subsidiary in Jordan, approval for which has been obtained from the Central Bank of Jordan. These two licenses will enable ABC Head Ofﬁce to carry out all of its functions from these two countries. These plans are being stress tested to ensure that the guidelines and procedures are fully effective. Continuous updates of these plans are performed on an annual basis, to ensure that they are kept up to date with changes in each ABC unit.

LEGAL RISK

Inadequate documentation, legal and regulatory incapacity or insufficient authority of a counterparty and contract invalidity or unenforceability are all examples of legal risk. Identification and management of this risk are the responsibilities of the Head Office Legal & Compliance Department and are carried out through 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 Legal & Compliance Department, which aims to facilitate the business of the Group by providing proactive, business oriented and creative advice.

CAPITAL STRUCTURE

The Group’s capital base comprises (a) Tier 1 capital which includes share capital, reserves, retained earnings and minority interests and (b) Tier 2 capital which consists of the subordinated term debt, collective impairment provisions, proﬁt for the current period and equity revaluation.

ABC’s issued and paid up share capital was $2,000 million at 31 December 2009, comprising 2,000 million shares of $1 each.

The subordinated term debt, amounting to $500 million, was raised under ABC’s $2,500,000,000 Euro Medium Term Deposit Note Programme and represents unsecured obligations of the Group and is subordinated in the right of payment to the claims of all depositors and creditors of the Group. These are issued for ten years with a call option which can only be exercised after ﬁve years. During the year, ABC repurchased a portion of its subordinated liabilities with a nominal value of $88 million. The resultant net gain amounting to $34 million is included in the consolidated

53 CORPORATE GOVERNANCE

CAPITAL STRUCTURE (Continued)

statement of income for the year ended 31 December 2009. The inclusion of the subordinated term debt in the Tier 2 capital base and the subsequent buy back has been approved by the CBB.

The Group’s capital base of $3,347 million comprises Tier 1 capital of $2,664 million and Tier 2 capital of $683 million as detailed below:

Breakdown of Capital Base

$ million Tier 1 Tier 2 Total Share capital 2,000 - 2,000 Share premium 110 - 110 Statutory reserve 309 - 309 General reserve 150 - 150 Retained earnings brought forward (261) - (261) Profit for the year - 122 122 Non- controlling interests in consolidated subsidiaries 390 - 390 Foreign currency translation adjustment (16) - (16) Unrealized net gains from fair value of equity securities - 1 1 Collective impairment provisions - 166 166 Subordinated term debt - 412 412 Tier 1 and Tier 2 capital before deductions 2,682 701 3,383 Significant minority investments in banking, securities and other financial entities (16) (16) (32) Other deductions – Unamortized IT costs (2) (2) (4) Tier 1 and Tier 2 capital base 2,664 683 3,347

Risk weighted assets (RWA) Credit risk 17,164 Market risk 1,511 Operational risk 1,188 19,863 Tier 1 ratio 13.4% Capital adequacy ratio 16.9%

CAPITAL ADEQUACY RATIOS (CAR)

The objective of capital management at the Group is to ensure the efﬁcient utilisation of capital in relation to business requirements and growth, risk proﬁle and shareholders’ returns and expectations.

The Group manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Group may issue capital/Tier 2 securities or adjust the amount of dividend payment to shareholders. No changes have been made in the objectives, policies and processes from the previous year.

54 ABC Group Annual Report 2009 In order to augment the Group’s capital resources, the Board of Directors at its meeting held on 23 December 2009 resolved to convene an Extraordinary General Meeting to increase the authorised, issued and paid up share capital of the Bank from US$2,000 million to US$3,110 million by way of a priority rights offer to existing shareholders. This was approved by the shareholders at an Extraordinary General Meeting held on 28 January 2010.

The Group’s total capital adequacy ratio as at 31 December 2009 was 16.9% compared with the minimum regulatory requirement of 12%. The Tier 1 ratio was 13.4% for the Group. The Group ensures adherence to the CBB’s requirements by monitoring its capital adequacy against higher internal limits.

Each banking subsidiary in the Group is directly regulated by its local banking supervisor which sets and monitors local capital adequacy requirements. ABC ensures that each subsidiary maintains sufﬁcient capital levels for legal and regulatory compliance purposes. There have been no instances of deﬁciencies in the banking subsidiaries’ local capital adequacy requirements.

The Tier 1 and total capital adequacy ratio of the signiﬁcant banking subsidiaries (those whose regulatory capital amounts to over 5% of the Group’s consolidated regulatory capital) under the local regulations were as follows:

Subsidiaries (over 5% of Group’s consolidated regulatory capital) Tier 1 ratio CAR (total) ABC Islamic Bank (E.C.) 23.0% 24.1% ABC International Bank plc* 14.3% 17.7% Banco ABC Brasil S.A.* 14.6% 14.6%

* CAR has been computed after mandatory deductions from the total of Tier 1 and Tier 2 capital.

Other than restrictions over transfers to ensure minimum regulatory capital requirements at the local level, management believes that there are no impediments on the transfer of funds or reallocation of regulatory capital within the Group.

CAPITAL MANAGEMENT

Internal Capital Adequacy Assessment Process (ICAAP) The Group’s capital management aims to maintain an optimum level of capital to enable it to pursue strategies that build long term shareholder value, whilst always meeting minimum regulatory ratio requirements.

Among the key principles driving capital management at the Group are:

• Adequate capital is maintained as a buffer for unexpected losses to protect stakeholders i.e. shareholders and depositors; • Maximise return on capital and generate sustainable return above the cost of capital.

The Group seeks to achieve the following goals by implementing an effective capital management framework:

• Maintain an effective internal capital adequacy; • Meet the regulatory capital adequacy ratios and maintain a prudent buffer; • Maintain a strong credit rating; • Generate sufﬁcient capital to support overall business strategy; • Integrate capital allocation decisions with the strategic and ﬁnancial planning process.

55 CORPORATE GOVERNANCE

CAPITAL MANAGEMENT (Continued)

In addition, as the Group prepares itself for compliance with the Foundation Internal Ratings Based (FIRB) requirements it has developed an ICAAP framework. The purpose of the ICAAP framework is to document the Group’s structured process for the ongoing assessment of its overall capital adequacy in relation to its risk proﬁle and a strategy for capital management as set out in Principle 1 of Basel II Pillar II.

This framework outlines the Group’s risk strategy, capital objectives, methodology used to measure internal capital, the related assumptions underpinning the methodologies and a set of processes for capital management such as reviewing, monitoring and controlling capital usage and allocation including:

• In January 2008 the CBB issued ICAAP guidelines for capital management. Within this framework the risk strategy as approved by the Board of Directors is incorporated, underscoring Board and senior management responsibility and oversight. The risk strategy document outlines the Group’s risk appetite, capital adequacy goals and risk targets;

• The Group has an integrated approach to risk strategy and business strategy which analyses current and future capital requirements in relation to strategic objectives as part of the annual business planning process. The Business Plan is used in estimating the economic capital projections. In addition, throughout the year, as part of the process, actual usage is monitored against the projections;

• Comprehensive assessment of economic capital, i.e. credit, market and operational risks, and processes relating to other risks such as liquidity, interest rate risk in the banking book, strategic and reputational risks;

• The processes in place for monitoring, reporting and internal audit review.

The methodologies for internally estimating capital for the Group’s key risks are as follows:

a. Credit Risk: Assessed on the basis of Foundation IRB Risk Weights (FIRB). This supports the internal estimation of Economic Capital per Business Segment, Business Unit and aggregated at the Group level.

b. Market Risk: Computed for both the Trading and the Banking books using the Internal Model approach.

VaR measures the worst expected loss over a given horizon under normal market conditions at a given conﬁdence interval. It provides an aggregate view of the portfolio’s risk that accounts for leverage, correlations, and current positions. The Group uses the historical simulation approach to measure VaR. The key model assumptions for the trading portfolio are:

• 2 year historical simulation • 1 day VaR • 99% (one tail) or 98% (two tail) conﬁdence interval

The historical simulation method provides a full valuation going back in time, such as over the last 500 days, by applying current weights to a time series of historical returns.

The Group uses the stress testing methodology to review its exposures against historical and Group-speciﬁc extreme scenarios.

c. Operational Risk: Applied on the Standardised Approach basis.

56 ABC Group Annual Report 2009 CAPITAL ALLOCATION

The output of the ICAAP gives senior management and the Board an improved view of the risks the Group faces and the impact of these risks. The Group’s ICAAP process computes the following metrics:

1) Expected Loss 2) Credit Risk Capital 3) Market Risk Capital 4) Operational Risk Capital 5) Total Economic Capital

Other risks such as Liquidity, Strategic and Reputational risks are currently captured by providing a capital buffer.

The results of the ICAAP are subject to stress testing to take account of the breakdown of the underlying assumptions. Speciﬁc stress tests for both credit and market risks have been developed to focus on the key risks the Group faces based on its risk exposure, portfolio and strategic objectives.

The Group currently conducts stress tests covering 14 stress cases, of which examples include:

• Investment grade / sub-investment grade ratings stressed; • Investment grade / sub-investment grade Probability of Default (PD) stressed; • Sub-investment stressed both for ratings and PD; • Total portfolio PD stressed; • Total portfolio ratings stressed; and • Total portfolio ratings and PD stressed.

The Group is in the process of designing and implementing an advanced tool for estimating economic capital under stress scenarios as follows:

1. Global Recession

• This scenario stresses the PDs and Loss Given Default (LGDs) by time period and distinguishes between on-and-off balance sheet exposures.

2. Escalated Regional Political Tension

• PDs and LGDs for entities in the region are stressed individually.

3. Middle East Recession

• As for Global Recession above but for Arab world exposures only.

4. European Recession

• As for Global Recession above but for Europe exposures only

57 CORPORATE GOVERNANCE

CAPITAL ALLOCATION (Continued)

The Group has also designed three broad families of STS for market risk:

1. Sensitivity STS: These STS are mostly applied as instantaneous, parallel and non-parallel shocks of ﬁxed, predetermined quanta to the current levels of market reference interest rates. Examples of these Sensitivity STS include:

• Parallel shocks for all market reference interest rates; and • Non-parallel shocks applied sequentially to the term structures of interest rates.

2. Hypothetical STS: This family of STS is designed to quantify the likely impact of unlikely but not improbable relevant events which have not been observed before in the ﬁnancial markets but which might materialize at short notice. Examples of the Hypothetical STS include:

• Revaluation or devaluation scenarios for currencies in which the Group has material, signiﬁcant open FX positions; and • Instantaneous shock scenarios designed to gauge the tilt / curvature / convexity impact of bar-bell and asymmetric movements in the levels of reference market interest rates.

3. Historical STS: These STS replicate the observed behaviour of reference market data across IR, FX and Equity classes of risk factors during particular historical periods of elevated market turbulence. Examples include the following:

• The US and European Bond markets crisis of 1994; • The Asian Crisis of 1997; • The LTCM and Russian Crisis of 1998; and • The Lehman default of 2008

In addition to the above STS, and with a view to correctly gauging the risk of non-linear positions in the Group’s Trading Book which might be sensitive to instantaneous, synchronous changes in the level of two or more classes of risk factors – such as interest rates and implied volatilities or of FX rates and implied volatilities – the MRM has created a particular subset of hypothetical STS, the so-called “Doomsday” STS, which are applied daily in the Group’s main trading and position-keeping systems to produce scenario-based revaluations and then compared against appropriate limits set by the bank’s senior management.

SUPERVISORY REVIEW AND EVALUATION PROCESS (SERP)

The CBB is the lead regulator for the Group and sets and monitors 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 CBB 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. However, under the SERP guidelines the CBB would also make an individual risk proﬁle assessment of all banks and, instead of applying a standard minimum capital adequacy requirement, the supervisor may allow a lower capital adequacy ratio (but in excess of 8%) for a bank with sound risk management capabilities. The CBB initiated this assessment process in ﬁrst quarter of 2008. The Group’s capital management strategy is currently to maintain a buffer over the 12% minimum regulatory capital requirement to account for liquidity, concentration, reputation, strategic, country and other risks while enhancing its risk management and risk control infrastructure.

58 ABC Group Annual Report 2009 This would ultimately allow the Group to achieve a successful assessment and pursue possible lower capital requirements from the CBB. At the same time, senior management strongly believes in the economic value of capital and is committed to maximising intrinsic value for all stakeholders. Details of risk weighted assets, capital base and the risk asset ratio are provided in Note 32 to the Financial Statements.

Related party transactions

Related parties represent associated companies, major shareholders, directors and key management personnel of the Group and entities controlled, jointly controlled or signiﬁcantly inﬂuenced by such parties. Pricing policies and terms of these transactions are approved by the Group's senior management and are based on arms length rationale. a. Exposures to related parties

$ million

Claims on shareholders - Claims on directors & senior management 3 Claims on staff 22 b. Liabilities to related parties

$ million

Connected deposits 1,579

Restructured facilities

Facilities restructured during the year ended 31 December 2009 amounted to $11 million. The carrying amount of restructured facilities amounted to $59 million as at 31 December 2009.

Assets sold under recourse agreements The Group has not entered into any recourse agreement during the year ended 31 December 2009.

Movement in speciﬁc and collective impairment provisions

Speciﬁc Provisions Collective Other assets and off- Impairment $ million Loans* Securities balance sheet items provision

At beginning of the year 213 1,178 17 162 Amounts written off (29) (610) - - Write backs / cancellation due to improvement (10) (23) (2) - Additional provisions made 127 17 - 4 Exchange adjustment and other movements 12 (6) (11) -

Balance at 31 December 2009 313 556 4 166

*In addition to the above, speciﬁc provision on loans include $52 million towards country exposures.

59 GROUP FINANCIAL REVIEW

(All ﬁgures stated in US dollars)

INCOME STATEMENT In 2009, the Group reported a net proﬁt for the year of $122 million compared with a net loss of $880 million in 2008.

Net interest income was 9% lower than 2008, at $391 million (2008: $431 million), while non-interest income rose by 42% to $250 million (2008: $176 million). Net impairment provisions amounted to $115 million, compared with $1,055 million put aside in 2008 mainly to cover deterioration in the market value of the Group’s holding of non-trading securities. The net operating income was $526 million, as against a net operating loss of $448 million in 2008.

Operating expenses decreased by 7% to $326 million (2008: $352 million). Proﬁt before taxation and income attributable to non-controlling interests was therefore $200 million, compared with a loss of $800 million in 2008. After taxation on operations outside Bahrain of $46 million (2008: $36 million) and income attributable to non-controlling interests of $32 million (2008: $44 million), the net proﬁt for the year was $122 million, compared with a net loss for 2008 of $880 million.

SOURCES AND USES OF FUNDS The Group’s asset proﬁle is predominantly made up of securities, loans and placements. Non-trading securities stood at $9,552 million (2008: $10,623 million), money market placements at $3,949 million (2008: $4,017 million) and liquid funds and trading securities at $781 million (2008: $949 million). The loans and advances portfolio stood at $10,949 million (2008: $11,931 million) while interest receivable, premises and equipment and other assets, in aggregate standing at $734 million (2008: $966 million), made up the remainder of total assets. Placements, together with liquid funds of $646 million (2008: $823 million), represented 17.7% (2008: 17.0%) of total assets.

These assets were funded by deposits from customers of $9,909 million (2008: $10,728 million), deposits from banks and other financial institutions totalling $10,303 million (2008: $12,024 million), term notes, bonds and other term financings of $2,344 million (2008: $2,498 million) and certificates of deposit of $34 million (2008: $38 million). Interest payable, taxation and other liabilities amounted in aggregate to $794 million (2008: $1,110 million). Total deposits included $4,079 million (2008: $5,814 million) relating to sale and repurchase agreements.

The total assets of the Group in 2009 amounted to $25,965 million (2008: $28,486 million). Average assets were $26,629 million (2008: $30,512 million) while average liabilities, excluding shareholders’ equity, amounted to $24,560 million (2008: $28,805 million).

60 ABC Group Annual Report 2009 In 2009, the Group reported a net proﬁt for the year of $122 million compared with a net loss of $880 million in 2008.

CREDIT COMMITMENTS, CONTINGENT ITEMS AND DERIVATIVES At the end of 2009, the Group’s consolidated off-balance sheet items stood at $18,778 million (2008: $22,637 million) including credit commitments and contingencies of $8,794 million (2008: $8,788 million). The total credit risk-weighted asset equivalent of commitments and contingent items and derivatives was $2,827 million (2008: $3,535 million).

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 total market risk-weighted equivalent of the exposures under these categories at the end of 2009 was $1,494 million (2008: $791 million).

No signiﬁcant credit derivative trading activities were undertaken during the year.

GEOGRAPHICAL AND MATURITY DISTRIBUTION OF THE BALANCE SHEET In 2009, while the proportion of ABC Group’s ﬁnancial assets in the Arab world and North America decreased from 42% to 39% and 27% to 24% respectively, the proportion of assets in Latin America increased from 11% to 16%, while that in Western Europe remained the same at 16%. The proportion of liabilities to the Arab world and Latin America increased from 64% to 65% and 8% to 12% respectively, and that to North America reduced from 19% to 14% whilst that to Western Europe remained the same at 8%.

Financial Assets Liabilities & Equity Loans & Advances (%) 2009 2008 2009 2008 2009 2008

Arab world 39 42 65 64 55 68 Western Europe 16 16 8 8 6 6 Asia 3 2 1 1 7 6 North America 24 27 14 19 1 1 Latin America 16 11 12 8 30 18 Others 2 2 - - 1 1 100 100 100 100 100 100

61 GROUP FINANCIAL REVIEW

GEOGRAPHICAL AND MATURITY DISTRIBUTION OF THE BALANCE SHEET - CONTINUED An analysis of the maturity proﬁle of ﬁnancial assets according to when they are expected to be recovered or settled or when they could be realised shows that, at the end of 2009, 72% (2008: 73%) did not exceed one year’s maturity. Loans and advances maturing within one year amounted to 50% (2008: 57%) of all loans and advances. The proportion of liabilities maturing within one year was 70% (2008: 73%) of all liabilities and equity.

Financial Assets Liabilities & Equity (%) 2009 2008 2009 2008

Within 1 month 50 49 39 37 1-3 months 7 8 21 24 3-6 months 9 10 3 8 6-12 months 6 6 7 4 Over 1 year 26 25 17 16 Undated 2 2 13 11 100 100 100 100

DISTRIBUTION OF CREDIT EXPOSURE ABC Group’s credit exposure (deﬁned as the gross credit risk to which the Group is potentially exposed) as at 31 December 2009 is given below.

Credit Commitments & $ million Funded Exposure Contingent Items Derivatives* 2009 2008 2009 2008 2009 2008 Customer type Banks 7,690 10,636 2,450 2,229 377 565 Non-banks 10,072 9,235 4,130 3,975 50 139 Sovereign 7,634 7,744 2,214 2,584 - - 25,396 27,615 8,794 8,788 427 704

Risk rating 1 = Exceptional 5,932 8,456 67 293 - - 2 = Excellent 1,026 2,561 612 513 129 296 3 = Superior 5,643 6,298 1,109 978 161 81 4 = Good 3,746 2,561 2,048 1,421 70 65 5 = Satisfactory 6,650 6,008 3,757 4,272 29 231 6 = Adequate 1,444 1,064 500 534 1 3 7 = Marginal 631 547 513 619 14 28 8 = Special Mention 134 59 4 10 - - 9 = Substandard 133 24 115 30 - - 10 = Doubtful 51 32 69 118 23 - 11 = Loss 6 5 - - - - 25,396 27,615 8,794 8,788 427 704

* Derivative exposures are computed as the cost of replacing derivative contracts represented by mark-to-market values where they are positive, and an estimate of the potential change in market values reﬂecting the volatilities that affect them.

62 ABC Group Annual Report 2009 CLASSIFIED EXPOSURES AND IMPAIRMENT PROVISIONS

Non-performing loans and off-balance sheet credits are formally deﬁned as those in default on contractual repayments of principal or on 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 default as so deﬁned, are treated as non-performing. Such credits are immediately placed on non-accrual status and all past due interest reversed, and any release of the accumulated unpaid interest thereafter is made only as permitted by International Financial Reporting Standards (IFRS).

The total of all loans on non-accrual as at the end of 2009 was $405 million (2008: $235 million). Aggregate provisions at the end of 2009 stood at $531 million (2008: $427 million) and constituted 131% (2008: 182%) of all non-performing loans and 4.6% (2008: 3.5%) of gross loans and advances.

The total of all impaired securities as at the end of 2009 was $608 million (2008: $1,254 million). Aggregate provisions at the end of 2009 stood at $556 million (2008: $1,178 million) and constituted 91% (2008: 94%) of all securities on non- accrual and 5.5% (2008: 10.0%) of gross non-trading securities.

An ageing analysis is given below in respect of all loans and advances and securities on non-accrual, together with their related provisions:

Loans

$ million Principal Provisions Net book value Less than 3 months 5 3 2 3 months to 1 year 195 105 90 1 to 3 years 119 71 48 Over 3 years 86 86 - 405 265 140

Securities

$ million Principal Provisions Net book value Less than 3 months 13 3 10 3 months to 1 year 31 12 19 1 to 3 years 540 521 19 Over 3 years 24 20 4 608 556 52

63 GROUP FINANCIAL REVIEW

GROUP CAPITAL STRUCTURE AND CAPITAL ADEQUACY RATIOS The Group’s capital base of $3,347 million comprises Tier 1 capital of $2,664 million (2008: $2,509 million) and Tier 2 capital of $683 million (2008: $650 million). The consolidated capital adequacy ratio as at 31 December 2009 was 16.9% (2008: 16.2%), well above the 12% minimum set by the Central Bank of Bahrain and the 8% guideline under the Basel II Accord for international banks.

All ABC Group subsidiaries meet the capital adequacy requirements of their respective regulatory authorities.

FACTORS AFFECTING HISTORICAL OR FUTURE PERFORMANCE The Group’s primary ﬁnancial goal is the delivery of consistent and rising value for its shareholders through sustainable earnings and assets growth. Despite recent market turbulence, management remains optimistic that the Group will be able to achieve this goal, based on its evaluation of the following factors which may have an impact on performance.

Political stability – 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 the Arab world, the USA, Brazil and Europe.

Energy prices – Global prices of hydrocarbons have had a direct impact on the economies of many of the countries in the Arab world, as well as on those of OECD countries. High hydrocarbon prices lead to an inflow of revenues to producing countries and an increase in their demand for capital equipment and construction services for infrastructure building and development projects, as well as for consumer goods. OECD-based capital exporters and project contractors likewise prosper. Lower energy prices benefit residents of developed countries, increasing demand for developing countries’ goods and tourism services. As its main activities are focused on the trade flows between MENA region and OECD countries, the Group’s revenues benefit from both scenarios. The prognosis is for hydrocarbon prices to remain unstable over the medium term, with periods of relative stability interspersed with spikes following periods of excessively cold winters, political instability in oil producing states or other eventualities leading to concerns over assurance of supply.

64 ABC Group Annual Report 2009 Volatility in securities markets – The global credit crunch in 2008 and the losses suffered by many international banks subsequently, together with the downturn experienced by all major economies, have severely impacted the market values of securities. Further worsening could negatively affect the value of the Group’s securities portfolios, although the Group has taken care to make adequate provisions against securities considered to be impaired.

Foreign currency values – Where its subsidiaries are capitalised with currencies other than the US dollar, ABC is exposed to ﬂuctuations in the values of those currencies. ABC takes all appropriate steps to hedge against such ﬂuctuations where deemed practicable and desirable.

Volatility of currency markets – Foreign exchange risk volatility can affect the Group’s foreign exchange trading revenues. The Group believes that, overall, it beneﬁts from currency volatility in view of the opportunities for proﬁtable proprietary trading thus generated.

Interest rates – Although the Group’s net interest revenue can be negatively affected by interest rate changes, the impact of such changes is mainly on its equity earnings, since its lending and marketable securities holdings are based predominantly on ﬂoating or short-term interest rates and therefore largely insulated from interest rate swings.

65 FINANCIAL STATEMENTS CONTENTS

Independent Auditors’ Report 67 Consolidated Statement of Financial Position 68 Consolidated Statement of Income 69 Consolidated Statement of Comprehensive Income 70 Consolidated Statement of Cash Flows 71 Consolidated Statement of Changes in Equity 72 Notes to the Consolidated Financial Statements 73

66 ABC Group Annual Report 2009 INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF ARAB BANKING CORPORATION (B.S.C.)

We have audited the accompanying consolidated financial statements of Arab Banking Corporation (B.S.C). [the Bank] and its subsidiaries [the Group] which comprise the consolidated statement of financial position as at 31 December 2009 and the consolidated statements of income, comprehensive income, cash flows and changes in equity for the year then ended, and a summary of significant accounting policies and other explanatory notes.

BOARD OF DIRECTORS’ RESPONSIBILITY FOR THE FINANCIAL STATEMENTS The Board of Directors is responsible for the preparation and fair presentation of these consolidated ﬁnancial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of consolidated ﬁnancial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

AUDITORS’ RESPONSIBILITY 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 comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated ﬁnancial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate for the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Board of Directors as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufﬁcient and appropriate to provide a basis for our audit opinion.

OPINION In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of 31 December 2009 and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

OTHER REGULATORY MATTERS We confirm that, in our opinion, proper accounting records have been kept by the Group and the consolidated financial statements, and the contents of the Board of 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 Central Bank of Bahrain and Financial Institutions Law, nor of the memorandum and articles of association of the Bank have occurred during the year ended 31 December 2009 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 license.

28 January 2010 Manama, Kingdom of Bahrain

67 CONSOLIDATED STATEMENT OF FINANCIAL POSITION 31 December 2009 (All ﬁgures in US$ Million)

Note 2009 2008 ASSETS

Liquid funds 646 823 Trading securities 6 135 126 Placements with banks and other ﬁnancial institutions 3,949 4,017 Non-trading securities 7 9,552 10,623 Loans and advances 9 10,949 11,931 Interest receivable 181 256 Other assets 11 430 596 Premises and equipment 123 114 TOTAL ASSETS 25,965 28,486

LIABILITIES

Deposits from customers 9,909 10,728 Deposits from banks and other ﬁnancial institutions 6,224 6,210 Certiﬁcates of deposit 34 38 Securities sold under repurchase agreements 26 4,079 5,814 Interest payable 139 213 Taxation 12 116 31 Other liabilities 13 539 866 TERM NOTES, BONDS AND OTHER TERM FINANCING 14 2,344 2,498

TOTAL LIABILITIES 23,384 26,398

EQUITY 15

Share capital 2,000 2,000 Reserves 191 (207) EQUITY ATTRIBUTABLE TO THE SHAREHOLDERS OF THE PARENT 2,191 1,793 Non-controlling interests 390 295 Total equity 2,581 2,088

TOTAL LIABILITIES AND EQUITY 25,965 28,486

These consolidated ﬁnancial statements were authorised for issue by the Board of Directors on 28 January 2010 and signed on their behalf by the Chairman and the President & Chief Executive.

Mohammed Layas Hassan Ali Juma Chairman President & Chief Executive

The attached notes 1 to 32 form part of these consolidated ﬁnancial statements.

68 ABC Group Annual Report 2009 CONSOLIDATED STATEMENT OF INCOME Year ended 31 December 2009 (All figures in US$ Million)

Note 2009 2008 OPERATING INCOME

Interest and similar income 16 1,105 1,816 Interest and similar expense 17 (714) (1,385)

Net interest income 391 431 Other operating income 18 250 176

Total operating income 641 607

Impairment provisions - net 10 (115) (1,055)

NET OPERATING INCOME (LOSS) AFTER PROVISIONS 526 (448)

OPERATING EXPENSES

Staff 216 235 Premises and equipment 31 29 Other 79 88 Total operating expenses 326 352

PROFIT (LOSS) BEFORE TAXATION 200 (800)

Taxation on foreign operations 12 (46) (36) PROFIT (LOSS) FOR THE YEAR 154 (836)

Income attributable to non-controlling interests (32) (44)

PROFIT (LOSS) ATTRIBUTABLE TO THE SHAREHOLDERS OF THE PARENT 122 (880)

BASIC AND DILUTED EARNINGS (LOSS) PER SHARE (EXPRESSED IN US$) 31 0.06 (0.57)

The attached notes 1 to 32 form part of these consolidated financial statements.

69 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Year ended 31 December 2009 (All ﬁgures in US$ Million)

Note 2009 2008

PROFIT (LOSS) FOR THE YEAR 154 (836)

Other Comprehensive Income (loss) Net fair value movements during the year after impairment effect 15 181 (219) Amortisation of fair value shortfall on reclassiﬁed securities 15 30 26 Unrealised gain (loss) on exchange translation in foreign subsidiaries 128 (177)

Total other comprehensive income (loss) for the year 339 (370)

TOTAL COMPREHENSIVE INCOME (LOSS) FOR THE YEAR 493 (1,206)

Comprehensive (income) loss attributable to non-controlling interests (95) 22

Comprehensive income (loss) attributable to shareholders of the parent 398 (1,184)

The attached notes 1 to 32 form part of these consolidated ﬁnancial statements.

70 ABC Group Annual Report 2009 CONSOLIDATED STATEMENT OF CASH FLOWS Year ended 31 December 2009 (All ﬁgures in US$ Million)

Note 2009 2008

OPERATING ACTIVITIES Profit (loss) attributable to the shareholders of the parent 122 (880) Items not involving cash flow: Impairment provisions - net 10 115 1,055 Depreciation and amortisation 17 19 Amortisation of fair value shortfall on reclassified securities 15 30 26 Items considered separately: Losses on non-trading securities - net 18 - 20 Changes in operating assets and liabilities: Trading securities 21 598 Placements with banks and other financial institutions 285 751 Loans and advances 1,768 (965) Interest receivable and other assets 351 41 Deposits from customers (1,214) 535 Deposits from banks and other financial institutions (646) (1,684) Securities sold under repurchase agreements (1,735) (384) Interest payable and other liabilities (386) 154 Other non-cash movements (13) 162

Net cash used in operating activities (1,285) (552)

INVESTING ACTIVITIES Purchase of non-trading securities (1,005) (800) Sale and redemption of non-trading securities 2,309 1,936 Purchase of premises and equipment (38) (39) Sale of premises and equipment 1 6 Additional investment in an associate (16) - Controlling interest in an associate 19 - (6)

Net cash from investing activities 1,251 1,097

FINANCING ACTIVITIES Increase in share capital - rights issue 15 - 1,110 Redemption of certiﬁcates of deposit - net (3) (1,039) Repurchase of subordinated debt 14 (88) - Repayment of other term notes, bonds and other term ﬁnancing - net (72) (58)

Net cash (used in) from ﬁnancing activities (163) 13

(Decrease) increase in liquid funds (197) 558 Effect of exchange rate changes on liquid funds 20 (70)

Liquid funds at beginning of the year 823 335

LIQUID FUNDS AT THE END OF THE YEAR 646 823

The attached notes 1 to 32 form part of these consolidated ﬁnancial statements.

71 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Year ended 31 December 2009 (All ﬁgures in US$ Million)

Non- controlling Total Equity attributable to shareholders of the parent interests equity

Foreign Cumulative Share Share Statutory General Retained exchange changes in capital premium reserve reserve earnings* translation fair values Total

At 1 January 2008 1,000 - 309 150 619 30 (241) 1,867 290 2,157

Loss for the year - - - - (880) - - (880) 44 (836)

Other comprehensive loss for the year - - - - - (111) (193) (304) (66) (370)

Total comprehensive loss for the year - - - - (880) (111) (193) (1,184) (22) (1,206)

Issue of share capital (note 15) 1,000 110 - - - - - 1,110 - 1,110

Controlling interest acquired (note 19) ------27 27

AT 31 DECEMBER 2008 2,000 110 309 150 (261) (81) (434) 1,793 295 2,088

Proﬁt for the year - - - - 122 - - 122 32 154

Other comprehensive income for the year - - - - - 65 211 276 63 339

Total comprehensive income for the year - - - - 122 65 211 398 95 493

Transfers during the year - - 12 - (12) - - - -

AT 31 DECEMBER 2009 2,000 110 321 150 (151) (16) (223) 2,191 390 2,581

* Retained earnings include non-distributable reserves arising from consolidation of subsidiaries amounting to US$418 million (2008: US$389 million).

The attached notes 1 to 32 form part of these consolidated ﬁnancial statements.

72 ABC Group Annual Report 2009 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009

1 INCORPORATION AND ACTIVITIES

The parent bank, Arab Banking Corporation (B.S.C.), [the Bank] is incorporated in the Kingdom of Bahrain by an Amiri decree and operates under a wholesale banking licence issued by the Central Bank of Bahrain.

The Bank’s registered ofﬁce is at ABC Tower, Diplomatic Area, P.O. Box 5698, Manama, Kingdom of Bahrain. The shares of the Bank are listed on the Bahrain Stock Exchange.

2 BASIS OF PREPARATION

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, rounded to the nearest million unless otherwise stated, which is the functional currency of the Group.

Statement of compliance The consolidated ﬁnancial statements of Arab Banking Corporation (B.S.C.) and its subsidiaries together [the Group] are prepared in accordance with International Financial Reporting Standards [IFRS] issued by the International Accounting Standards Board [IASB] and the relevant provisions of the Bahrain Commercial Companies Law and the Central Bank of Bahrain and Financial Institutions Law.

Basis of consolidation The consolidated financial statements comprise the financial statements of the Group as at and for the year ended 31 December each year. The financial statements of the subsidiaries are prepared for the same reporting year as the Bank, using consistent accounting policies. All intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions are eliminated in full.

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.

Acquisition of non-controlling interests and partial/deemed disposals of subsidiaries are accounted for using the parent entity extension method, whereby: a) the difference between the consideration and the book value of the share of net assets is recognised as goodwill; b) in the case of partial disposals, the difference between the proceeds received and the book value of the share of net assets sold is recognised as proﬁt or loss in the consolidated statement of income; and c) in the case of deemed partial disposals resulting from a capital increase, the difference between the book value of the share of net assets in the subsidiary after and before the capital increase is recognised as proﬁt or loss in the consolidated statement of income.

Non-controlling interests represent the portion of proﬁt or loss and net assets not owned, directly or indirectly, by the Group and are presented separately in the consolidated statement of income and within equity in the consolidated statement of ﬁnancial position, separately from consolidated equity attributable to the shareholders of the Bank.

3 CHANGES IN ACCOUNTING POLICIES

The accounting policies are consistent with those used in the previous year except for the following accounting policies adopted during the year as noted below:

IAS 1 Presentation of Financial Statements (Revised) This standard requires an entity to present all owner changes in equity and all non-owner changes to be presented in either in one statement of comprehensive income or in two separate statements of income and comprehensive income. The revised standard also requires that the income tax effect of each component of comprehensive income be disclosed. In addition, it requires entities to present a comparative statement of ﬁnancial position as at the

73 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009

3 CHANGES IN ACCOUNTING POLICIES (Continued)

beginning of the earliest comparative period when the entity has applied an accounting policy retrospectively, makes a retrospective restatement, or reclassiﬁes items in the ﬁnancial statements.

The Group has elected to present comprehensive income in two separate consolidated statements of income and comprehensive income. Information about the individual components of comprehensive income as well as the tax effects have been disclosed in the notes to the consolidated financial statements. The Group has not provided a restated comparative set of financial position for the earliest comparative period, as it has not adopted any new accounting policy retrospectively, or has made a retrospective restatement, or retrospectively reclassified items in the consolidated financial statements.

IFRS 8 Operating Segments This standard requires disclosure of information about the Group’s operating segments and replaced the requirement to determine primary (business) and secondary (geographical) reporting segments of the Group. It requires a ‘management approach’ under which segment information is presented on the same basis as that used for internal reporting purposes. This has resulted in a change to the reportable segments presented. As a result, the operating segments are reported in a manner that is consistent with the internal reporting provided to the senior management and the Board of Directors and are set out in Note 25.

Amendments to IFRS 7 Financial Instruments: Disclosures - Improving Disclosures about Financial Instruments The amendments to IFRS 7 were issued in March 2009 to enhance fair value and liquidity disclosures. With respect to fair value, the amendments require disclosure of a three-level fair value hierarchy, by class, for all ﬁnancial instruments recognised at fair value and speciﬁc disclosures related to the transfers between levels in the hierarchy and detailed disclosures related to level 3 of the fair value hierarchy. In addition, the amendments modify the required liquidity disclosures with respect to derivative transactions and assets used for liquidity management. Comparative information has not been represented as this is not required by the transition provisions of the amendment.

The adoption of these standards and amendments did not have any effect on the ﬁnancial performance or position of the Group. They did, however, give rise to additional disclosures.

IFRS 9 Financial Instruments IFRS 9 was issued in November 2009 and replaces those parts of IAS 39 relating to the classiﬁcation and measurement of ﬁnancial assets. The standard is effective for the annual period beginning on or after 1 January 2013. The Group is considering the implications of the standard, the impact on the Group and the timing of its adoption by the Group.

4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Liquid funds Liquid funds comprise of cash, nostro balances and balances with central banks.

Trading securities Trading securities are initially recorded at fair value. Gains and losses arising from changes in fair values are included in the consolidated statement of income in the period in which they arise. Interest earned and dividends received are included in interest income and other operating income respectively.

Placements with banks and other ﬁnancial institutions Placements with banks and other ﬁnancial institutions are stated at amortised 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, with the resultant changes being recognised in the consolidated statement of income.

74 ABC Group Annual Report 2009 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009

4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Non-trading securities

These are classiﬁed as follows:

- Held to maturity - Available-for-sale - Other non-trading securities

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, ﬁxed maturities and are intended to be held to maturity, are subsequently measured at amortised cost, less provision for impairment in value.

Available-for-sale Available-for-sale investments are those which are designated as such or do not qualify to be classiﬁed as fair value through proﬁt or loss, held to maturity or loans and advances. They include equity instruments and other debt instruments.

After initial recognition, these are remeasured at fair value, unless fair value cannot be reliably determined in which case they are measured at cost less impairment. That portion of any fair value changes relating to an effective hedging relationship is recognised directly in the consolidated statement of income. Fair value changes which are not part of an effective hedging relationship, are reported under fair value movements during the year in the consolidated statement of comprehensive income 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 values” within equity, is included in consolidated statement of income for the year.

Other non-trading securities Other non-trading securities are financial assets with fixed or determinable payments and fixed maturities that are not quoted in the active market. These instruments are not being held with the intent of sale in the near term. These investments are valued at fair value as at 1 July 2008, in accordance with the amendments to IAS 39 ‘Reclassification of Financial Assets’. Through the effective interest method, the new cost is amortised to the security’s expected recoverable amount over the expected remaining life.

Derecognition of financial assets and financial liabilities A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised where the rights to receive cash flows from the asset have expired, or the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

A ﬁnancial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

Loans and advances Loans and advances are financial assets with fixed or determinable payments and fixed maturities that are not quoted in an active market. After initial measurement, the loans and advances are subsequantly measured at amortised cost using the effective interest rate method, adjusted for effective fair value hedge less any amounts written off and provision for impairment. The losses arising from impairment of such loans and advances are recognised in the consolidated statement of income in ‘impairment provisions - net’ and in an impairment allowance account in the consolidated statement of financial position. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. The amortisation is recognised as ‘interest and similar income’ in the consolidated statement of income.

75 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009

4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 Group exercises signiﬁcant inﬂuence but not control, 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 and uncollectability of financial assets An assessment is made at each statement of financial position date to determine whether there is objective evidence that a specific financial asset or group of financial assets may be impaired. If such evidence exists, an impairment loss is recognised in the consolidated statement of income.

Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

Financial assets carried at amortised cost and loans and receivables For financial assets carried at amortised cost (such as amounts due from banks, loans and advances as well as held-to-maturity investments), the Group first assesses individually whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash ﬂows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an ‘impairment provisions - net’ and the amount of the loss is recognised in the consolidated statement of income. Interest income continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash ﬂows for the purpose of measuring the impairment loss. The interest income is recorded as part of ‘interest and similar income’. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Group.

If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the ‘impairment provisions - net’ . If a future write-off is later recovered, the recovery is credited to the ‘impairments provision - net’.

The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. If the Group has reclassified trading assets to loans and advances, the discount rate for measuring any impairment loss is the new effective interest rate determined at the reclassification date. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

76 ABC Group Annual Report 2009 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009

4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Impairment and uncollectability of ﬁnancial assets (Continued)

For the purpose of a collective evaluation of impairment, ﬁnancial assets are grouped on the basis of the Group’s internal credit grading system, that considers credit risk characteristics such as asset type, industry, geographical location, collateral type, past-due status and other relevant factors.

Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable data from year to year (such as changes in unemployment rates, property prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.

Available-for-sale financial assets For available-for-sale financial assets, the Group assesses at each statement of financial position date whether there is an objective evidence that an investment is impaired.

In the case of debt instruments classified as available-for-sale, the Group assesses individually whether there is objective evidence of impairment based on the same criteria as financial assets carried at amortised cost. However, the amount recorded for impairment is the cumulative loss measured as the difference between the amortised cost and the current fair value, less any impairment loss on that asset previously recognised in the consolidated statement of income. Future interest income is based on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of ‘interest and similar income’. If, in a subsequent period, the fair value of a debt instrument increases and the increase can be objectively related to a credit event occurring after the impairment loss was recognised in the consolidated statement of income, the impairment loss is reversed through the consolidated statement of income.

In the case of equity investments classiﬁed as available-for-sale, objective evidence would also include a ‘signiﬁcant’ or ‘prolonged’ decline in the fair value of the investment below its cost. Where there is evidence of impairment, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the consolidated statement of income is removed from equity and recognised in the consolidated statement of income. Impairment losses on equity investments are not reversed through the consolidated statement of income. Increases in the fair value after impairment are recognised directly in equity.

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.

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 are shown as sale of securities under repurchase agreement in the consolidated statement of financial position. 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 consolidated statement of financial position, as the Group 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.

77 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009

4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Financial guarantees In the ordinary course of business, the Group gives financial guarantees, consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognised in the consolidated financial statements at fair value, in ‘other liabilities’, being the premium received. Subsequent to initial recognition, the Group’s liability under each guarantee is measured at the higher of the amortised premium and the best estimate of expenditure required to settle any financial obligation arising as a result of the guarantee.

Any increase in the liability relating to ﬁnancial guarantees is taken to the consolidated statement of income in ‘impairment provision - net’. The premium received is recognised in the consolidated statement of income in ‘other income’ on a straight line basis over the life of the guarantee.

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.

Recognition of income and expenses For all financial instruments measured at amortised cost and interest bearing financial instruments classified as available-for-sale, interest income or expense is recorded at the effective interest rate, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Group revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in carrying amount is recorded as interest income or expense. Other fee income and expense are recognised when earned or incurred.

Once the recorded value of a ﬁnancial asset or a group of similar ﬁnancial assets has been reduced due to an impairment loss, interest income continues to be recognised using the original effective interest rate applied to the new carrying amount.

Where the Group 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.

Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission income and asset management, custody and other management and advisory fees. Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (together with any incremental costs) and recognised as an adjustment to the effective interest rate on the loan. When it is unlikely that a loan will be drawn down, the loan commitment fees are recognised over the commitment period on a straight line basis.

Fees arising from negotiating or participating in the negotiation of a transaction for a third party, such as the arrangement of the acquisition of shares or other securities are recognised on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognised after fulﬁlling the corresponding criteria.

Fair values The fair value for ﬁnancial instruments traded in active markets at the statement of ﬁnancial position date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs.

For all other ﬁnancial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models and other relevant valuation models.

For externally managed funds, the fair value is determined by reference to the net asset values provided by the fund administrators.

78 ABC Group Annual Report 2009 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009

4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Signiﬁcant accounting judgments and estimates

Judgments 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 consolidated ﬁnancial statements:

Classiﬁcation of securities Upon acquisition of a security, management decides whether it should be classiﬁed as held to maturity, held for trading or available-for-sale.

The Group classiﬁes securities investments as trading if they are acquired primarily for the purpose of making short term proﬁt.

Securities which are eligible for reclassiﬁcation per IAS 39 amendments and the Group has an intention and ability to hold for a foreseeable future are reclassiﬁed as other non-trading securities.

Securities which are not held with the intent of sale in the near term and are eligible per IAS 39 amendments are reclassiﬁed as other non-trading securities.

Estimation uncertainty The key assumptions concerning the future and other key sources of estimation at the statement of financial position 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:

Going concern The Bank’s management has made an assessment of the Group’s ability to continue as a going concern and is satisfied that the Group has the resources to continue in business for the foreseeable future. Furthermore, the management is not aware of any material uncertainties that may cast significant doubt upon the Group’s ability to continue as a going concern. Therefore, the financial statements continue to be prepared on the going concern basis.

Impairment losses on loans and advances The Group reviews its individually significant loans and advances at each statement of financial position date to assess whether an impairment loss should be recorded in the consolidated statement of income. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. In estimating these cash flows, the Group makes judgments about the borrower’s financial situation and the net realisable value of collateral. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance.

Loans and advances that have been assessed individually and found not to be impaired and all individually insigniﬁcant loans and advances are then assessed collectively, in groups of assets with similar risk characteristics, to determine whether provision should be made due to incurred loss events for which there is objective evidence but whose effects are not yet evident. The collective assessment takes account of data from the loan portfolio (such as credit quality, levels of arrears, credit utilisation, loan to collateral ratios etc.), concentrations of risks and economic data (including levels of unemployment, real estate prices indices, country risk and the performance of different individual groups).

The impairment loss on loans and advances is disclosed in more detail in note 9.

Impairment losses on available-for-sale investments The Group reviews its debt securities classiﬁed as available-for-sale investments at each statement of ﬁnancial position date to assess whether they are impaired. This requires similar judgment as applied to the individual assessment of loans and advances.

The internal grading process takes into consideration factors such as collateral held, deterioration in country risk, industry, technological obsolescence as well as identiﬁed structural weakness or deterioration in cash ﬂows.

79 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009

4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 the Group’s functional currency at the rates of exchange ruling at the date of the statement of ﬁnancial position. Any gains or losses are taken to the consolidated statement of income.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

The assets and liabilities of foreign operations are translated into the Group’s functional currency at rates of exchange ruling at the date of the statement of ﬁnancial position. 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 the subsidiaries into functional currency, being US dollars, are recorded directly in the consolidated statement of comprehensive income under unrealised gain (loss) on exchange translation in foreign subsidiaries.

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 Group commits to purchase or sell the asset.

Derivatives and hedge accounting 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 statement of ﬁnancial position.

Changes in the fair values of derivatives held for trading activities or to offset other trading positions or do not qualify for hedge accounting are included in other operating income in the consolidated statement of income.

For the purposes of hedge accounting, hedges are classified into three categories: (a) fair value hedges which hedge the exposure to changes in the fair value of a recognised asset or liability; (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; and (c) net investment hedges which hedge the exposure to net investment in foreign operation.

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 the statement of comprehensive income 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.

Change in fair value of derivative or non-derivatives that are designated and qualify, as net investment hedges and that prove to be highly effective in relation to the hedged risk are accounted for in a way similar to cash ﬂow hedges.

80 ABC Group Annual Report 2009 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009

4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Derivatives and hedge accounting (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 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.

- 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.

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 consolidated statement of income. These embedded derivatives are measured at fair value with the changes in fair value recognised in the consolidated statement of income.

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 statement of ﬁnancial position.

Offsetting Financial assets and financial liabilities are only offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts and the Group intends to settle on a net basis, or to realise the asset and settle the liability simultaneously. This is not generally the case with the master netting agreements, and the related assets and liabilities are presented gross in the statement of financial position.

Term notes, bonds and other term financing Issued financial instruments (or their components) are classified as liabilities under ‘Term notes, bonds and other term financing’, where the substance of the contractual arrangement results in the Group having an obligation either to deliver cash or another financial asset to the holder.

After initial measurement, the term notes, bonds and other term ﬁnancing are subsequently measured at amortised cost using the effective interest rate method. Amortised cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of the effective interest rate.

81 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009 (All ﬁgures in US$ Million)

5 CLASSIFICATION OF FINANCIAL INSTRUMENTS

As at 31 December 2009, ﬁnancial instruments have been classiﬁed for the purpose of measurement under International Accounting Standard 39 Financial Instruments: Recognition and Measurement as follows:

Amortised cost/ Held for Available-for- Loans and trading sale receivables Total ASSETS Liquid funds - - 646 646 Trading securities 135 - - 135 Placements with banks and other ﬁnancial institutions - - 3,949 3,949 Non-trading securities * - 5,632 3,920 9,552 Loans and advances - 8910,860 10,949 Interest receivable and other assets - - 590 590

135 5,721 19,965 25,821 Held for Available-for- trading sale Amortised cost Total LIABILITIES Deposits from customers - - 9,909 9,909 Deposits from banks and other ﬁnancial institutions - - 6,224 6,224 Certiﬁcates of deposit - - 34 34 Securities sold under repurchase agreements - - 4,079 4,079 Interest taxation other liabilities - - 794 794 TERM NOTES, BONDS AND OTHER TERM FINANCING - - 2,344 2,344

- - 23,384 23,384

As at 31 December 2008, ﬁnancial instruments have been classiﬁed for the purpose of measurement under International Accounting Standard 39 Financial Instruments: Recognition and Measurement as follows:

Amortised Held for Available-for- cost/ Loans and trading sale receivables Total ASSETS Liquid funds - - 823 823 Trading securities 126 - - 126 Placements with banks and other ﬁnancial institutions - - 4,017 4,017 Non-trading securities* - 6,504 4,119 10,623 Loans and advances - 105 11,826 11,931 Interest receivable and other assets - - 847 847

126 6,609 21,632 28,367

Held for Available-for- trading sale Amortised cost Total LIABILITIES Deposits from customers - - 10,728 10,728 Deposits from banks and other ﬁnancial institutions - - 6,210 6,210 Certiﬁcates of deposit - - 38 38 Securities sold under repurchase agreements - - 5,814 5,814 Interest taxation other liabilities - - 1,110 1,110 TERM NOTES, BONDS AND OTHER TERM FINANCING - - 2,498 2,498

- - 26,398 26,398

*Included in the above are other non-trading securities amounting to US$ 3,903 million (2008: US$ 4,087 million) which were reclassiﬁed, effective 1 July 2008. Refer note 8 for details.

82 ABC Group Annual Report 2009 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009 (All ﬁgures in US$ Million)

6 TRADING SECURITIES

2009 2008

Externally managed funds 6 31 Debt securities 129 81 Equities - 14

135 126

Externally managed funds represent investments in hedge funds (fund of funds) managed by internationally renowned asset managers. In 2007, the Group gave notice to the fund managers of the externally managed funds to exit the funds.

7 NON-TRADING SECURITIES

2009 2008 Quoted Unquoted Total Quoted Unquoted Total

Available-for-sale Debt securities 5,675 400 6,075 6,585 991 7,576 Equity securities * 34 79 113 25 81 106

Held to maturity Debt securities -1717 -3232

Other non-trading securities carried at amortised cost ** 3,903 - 3,903 4,087 - 4,087 9,612 496 10,108 10,697 1,104 11,801 Provision against non- trading securities (146) (410) (556) (161) (1,017) (1,178)

9,466 86 9,552 10,536 87 10,623

* Includes unquoted equity securities of US$ 55 million (2008: US$ 55 million) 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. There is no market for these investments and the Group intends to hold them for the long term.

All other available-for-sale securities and other non-trading securities have been valued using observable market inputs.

**As explained in note 8, the Group has identified assets, eligible under the amendment to IAS 39, for which it has a clear intent to hold for the foreseeable future and are no longer quoted in an active market. The assets were reclassified with retrospective effect as on 1 July 2008 in accordance with the amendment to IAS 39 and are reflected as other non-trading securities carried at amortised cost.

Provisions against non-trading securities are primarily on collateralized debt obligations and for failed banks on account of market dislocations, mainly in North America and Europe.

83 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009 (All ﬁgures in US$ Million)

7 NON-TRADING SECURITIES (Continued)

The ratings distribution of non-trading securities is given below: 2009 2008

AAA rated debt securities 4,727 5,826 AA to A rated debt securities 2,671 3,253 Other investment grade debt securities 1,198 687 Other non-investment grade debt securities 944 1,620 Unrated debt securities 455 309 Equity securities 113 106 10,108 11,801 Provisions against non-trading securities (556) (1,178)

9,552 10,623

The movements in provisions against non-trading securities during the year were as follows:

2009 2008

At 1 January 1,178 318 Charge for the year 17 899 Write backs / recoveries (23) - Write-offs (610) (28) Foreign exchange translation and other adjustments (6) (11)

At 31 December 556 1,178

Gross amount of non-trading securities individually determined to be impaired before deducting any individually assessed impairment losses was US$ 608 million (2008: US$ 1,254 million). Interest income received during the year on impaired securities was US$ 6 million (2008: US$ 9 million).

8 RECLASSIFICATION OF FINANCIAL ASSETS

In October 2008, the IASB issued amendments to IAS 39 “Financial Instruments: Recognition and Measurement” and IFRS 7 “Financial Instruments: Disclosures” titled “Reclassification of Financial Assets”. The amendments to IAS 39 permit reclassification of financial assets from the available-for-sale category to the other non-trading securities category in certain circumstances.

The amendments to IFRS 7 introduce additional disclosure requirements if an entity has reclassiﬁed ﬁnancial assets in accordance with the IAS 39 amendments. The amendments were effective retrospectively to 1 July 2008.

Per the amendments to IAS 39 and IFRS 7, “Reclassification of Financial Assets”, the Group reclassified certain available-for-sale securities assets to other non-trading securities carried at amortised cost. The Group identified assets, eligible under the amendments, for which it had a clear intent to hold for the foreseeable future. The assets were reclassified with retrospective effect as on 1 July 2008. The significant market dislocations witnessed in the financial sector in 2008 is considered as a rare event.

The carrying values and fair values of the assets reclassiﬁed are as follows: 2009 2008

Carrying value 3,903 4,087 Fair value 3,751 3,662

84 ABC Group Annual Report 2009 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009 (All ﬁgures in US$ Million)

8 RECLASSIFICATION OF FINANCIAL ASSETS (Continued)

Fair value gains that would have been recognised in other comprehensive income for the year ended 31 December 2009 had the other non-trading securities not been reclassiﬁed amounts to US$ 273 million (2008: loss of US$ 425 million).

The Group earns an effective interest rate of 1% to 8% (2008: 1% to 9%) on these investments and the carrying values reflect the cash flows expected to be recovered as of year end. Reclassified available-for-sale financial assets at cost include US$ 276 million (2008: US$ 316 million) which have been hedged for changes in fair value, on account of change in interest rates.

9 LOANS AND ADVANCES

2009 2008 i) By industrial sector Financial services 2,239 3,828 Other services 3,108 3,052 Manufacturing 3,702 2,990 Construction 624 660 Mining and quarrying 456 283 Personal 309 468 Trade 306 472 Agriculture, ﬁshing and forestry 299 148 Consumer 221 192 Government 216 265 11,480 12,358 Loan loss provisions (531) (427)

10,949 11,931

2009 2008 ii) Loan loss provisions by industrial sector Financial services 154 93 Other services 23 17 Manufacturing 70 47 Construction 2 3 Personal 2 3 Trade 42 32 Agriculture, ﬁshing and forestry 2 3 Consumer 7 5 Government 63 62 Collective impairment 166 162

531 427

85 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009 (All ﬁgures in US$ Million)

The movements in loan loss provisions during the year were as follows:

Speciﬁc Speciﬁc Collective Collective impairment impairment impairment impairment 2009 2008 2009 2008

At 1 January 265 206 162 113 Charge for the year 127 116 4 51 Write backs / recoveries (10) (10) - (1) Write-offs (29) (21) - - Foreign exchange translation and other adjustments 12 (26) - (1)

At 31 December 365 265 166 162

The gross amount of loans, individually determined to be impaired before deducting any individually assessed impairment allowance amounted to US$ 405 million (2008: US$ 235 million).

The fair value of tangible collateral that the Group holds relating to loans individually determined to be impaired at 31 December 2009 amounts to US$ 20 million (2008: US$ 25 million).

At 31 December 2009, interest in suspense on past due loans amounted to US$ 205 million (2008: US$ 194 million).

10 IMPAIRMENT PROVISIONS - NET

During the year the Group has made the following provisions for impairment - net:

2009 2008

Non-trading securities (note 7) 6 (899) Loans and advances (note 9) (121) (156)

(115) (1,055)

11 OTHER ASSETS 2009 2008

Positive fair value of derivatives (note 20) 94 244 Margin dealing accounts 76 51 Bank owned life insurance 29 28 Staff loans 22 23 Investments in associates 21 5 Assets acquired on debt settlement 9 15 Securities sold awaiting value 5 55 Others 174 175

430 596

The negative fair value of derivatives amounting to US$ 122 million (2008: US$ 299 million) is included in other liabilities (note 13). Details of derivatives are given in note 20.

86 ABC Group Annual Report 2009 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009 (All ﬁgures in US$ Million)

12 TAXATION ON FOREIGN OPERATIONS 2009 2008 Consolidated statement of ﬁnancial position Current tax liability 102 28 Deferred tax liability 14 3

116 31

Consolidated statement of income Current tax on foreign operations 50 53 Deferred tax on foreign operations (4) (17)

46 36

Analysis of tax charge At Bahrain (income tax rate of nil) - - On proﬁts of subsidiaries operating in other jurisdictions 46 36

Income tax expense reported in the consolidated statement of income 46 36

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 the effective tax rates.

13 OTHER LIABILITIES

2009 2008

Negative fair value of derivatives (note 20) 122 299 Margin deposits including cash collateral 60 73 Cash export and credit assignment payables 58 131 Employee related payables 54 58 Deferred income 21 19 Cheques for collection 18 30 Non-corporate tax payable 8 9 Accrued charges and other payables 198 247

539 866

The positive fair value of derivatives amounting to US$ 94 million (2008: US$ 244 million) is included in other assets (note 11). Details of derivatives are given in note 20.

87 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009 (All ﬁgures in US$ Million)

14 TERM NOTES, BONDS AND OTHER TERM FINANCING

In the ordinary course of business, the Bank and certain subsidiaries raise term ﬁnancing through various capital markets at commercial rates.

Total obligations outstanding at 31 December 2009

Parent bank Subsidiaries Total Aggregate maturities 2010 384 - 384 2011 292 200 492 2012 1,000 - 1,000 2014 56 - 56 2017 412 - 412

2,144 200 2,344

Total obligations outstanding at 31 December 2008 2,239 259 2,498

All obligations bear ﬂoating rates of interest.

During the year, the Bank repurchased a portion of its subordinated liabilities with a nominal value of US$ 88 million (2008: nil). The resultant net gain on the repurchase amounting to US$ 34 million (2008: Nil) is included as a part of “other operating income” in the consolidated statement of income (note 18).

15 EQUITY

a) Share capital 2009 2008

Authorised – 2,500 million shares of US$ 1 each (2008: 2,500 million shares of US$ 1 each) 2,500 2,500

Issued, subscribed and fully paid – 2,000 million shares of US$ 1 each (2008: 2,000 million shares of US$ 1 each) 2,000 2,000

Rights issue The Board of Directors at its meeting held on 23 December 2009 resolved to convene an Extraordinary General Meeting to increase the authorised, issued and paid up share capital of the Bank from US$ 2,000 million to US$ 3,110 million by way of a priority rights offer to existing shareholders. This is subject to approval of the shareholders at an Extraordinary General Meeting to be held on 28 January 2010.

The Board of Directors at its meeting held on 25 March 2008 resolved to increase the authorised, issued and paid up capital of the Bank. The authorised share capital of the Bank was increased from US$ 1,500 million to US$ 2,500 million and the issued share capital from US$ 1,000 million to US$ 2,000 million through a priority rights offering of 1,000 million shares (nominal value US$ 1 per share) to existing shareholders. These shares were issued at a premium of US$ 0.11 per share and the allotment was completed on 18 June 2008.

The Board of Directors has not recommended a dividend relating to the year ended 31 December 2009 (2008: Nil)

88 ABC Group Annual Report 2009 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009 (All ﬁgures in US$ Million) b) Statutory reserve

As required by the Articles of Association of the Bank and the Bahrain Commercial Companies Law, 10% of the 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. No transfer was made in the previous year on account of the loss incurred. The reserve is not available except in such circumstances as stipulated in the Bahrain Commercial Companies Law and following the approval of the Central Bank of Bahrain. c) General reserve

The general reserve underlines the shareholders’ commitment to enhance the strong equity base of the Bank. There are no restrictions on the distribution of this reserve after obtaining CBB approval. d) Cumulative changes in fair values

2009 2008

At 1 January (434) (241) Transferred to consolidated statement of income on impairment 11 171 Transferred to consolidated statement of income on disposal - 2 Net movement in fair value during the year 170 (392) Amortisation of fair value short-fall on reclassiﬁed securities 30 26

At 31 December (223) (434)

16 INTEREST AND SIMILAR INCOME

2009 2008

Loans and advances 794 1,083 Securities 233 502 Placements with banks and other ﬁnancial institutions 59 200 Others 19 31

1,105 1,816

17 INTEREST AND SIMILAR EXPENSE

2009 2008

Deposits from banks and other financial institutions 482 934 Deposits from customers 174 314 Term notes, bonds and other term financing 52 119 Others 5 1 Certificates of deposit 1 17

714 1,385

89 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009 (All ﬁgures in US$ Million)

18 OTHER OPERATING INCOME

2009 2008

Fee and commission income 187 192 Fee and commission expense (30) (50) Losses on non-trading securities - net - (20) Gains on dealing in foreign currencies - net 20 26 Gains on dealing in derivatives - net 9 17 Gains (losses) on trading securities - net 1 (32) Gain on repurchase of subordinated debt (note 14) 34 - Other – net 29 43

250 176

Included in the fee and commission income is US$ 12 million (2008: US$ 11 million) is fee income relating to trust and other ﬁduciary activities.

19 SUBSIDIARIES

The principal subsidiaries, all of which have 31 December as their year end, are as follows:

Country of Interest % of Arab Banking incorporation Corporation (B.S.C.) 2009 2008 ABC International Bank plc United Kingdom 100 100 ABC Islamic Bank (E.C.) Bahrain 100 100 Arab Banking Corporation (ABC) - Jordan Jordan 87 87 Banco ABC Brasil S.A. Brazil 56 56 ABC Algeria* Algeria 88 70 Arab Banking Corporation - Egypt [S.A.E.] Egypt 98 98 ABC Tunisie Tunisia 100 100 Arab Financial Services Company B.S.C. (c)** Bahrain 55 55

* During the year, the Group increased its shareholding in ABC Algeria to 87.62% from 70% held previously through participation in a rights issue.

** In May 2008, the Group increased its shareholding in Arab Financial Services Company B.S.C. (c) [AFS] to 54.6% from 45.7% held previously, resulting in the Group acquiring a controlling interest in AFS at book value.

The ﬁnancial statements of AFS have been consolidated in the ﬁnancial statements of the Group from the date control was transferred to the Group.

90 ABC Group Annual Report 2009 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009 (All ﬁgures in US$ Million)

20 DERIVATIVES AND HEDGING

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.

2009 2008 Positive Negative Notional Positive fair Negative Notional fair value fair value amount value fair value amount

Derivatives held for trading Interest rate swaps 65 62 1,475 120 95 2,692 Currency swaps 1-1421 5 165 Forward foreign exchange contracts 7 6 3,144 39 13 2,907 Options 21 24 3,053 37 69 2,647 Futures - - 1,714 26 73 2,507

94 92 9,400 243 255 10,918

Derivatives held as hedges Interest rate swaps - 29 514 1 42 913 Currency swaps -126 -227 Forward foreign exchange contracts --44- - 491 Options ---- - 1,500 - 30 584 1 44 2,931 94 122 9,984 244 299 13,849

Risk weighted equivalents (credit and market risk) 1,596 1,006

Derivatives are carried at fair value using valuation techniques based on observable market inputs.

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.

For the year ended 31 December 2009, the Group recognised a net gain of US$ 12 million (2008: loss of US$ 53 million), on hedging instruments. The total loss on hedged items attributable to the hedged risk amounted to US$ 13 million. (2008: gain of US$ 55 million). b) Net investment hedges comprise forward foreign exchange contracts of US$ 15 million (2008: US$ 256 million). As at 31 December 2009, the fair value of the forward foreign exchange contracts was immaterial.

In addition to the forward foreign exchange contracts, the Group uses deposits which are accounted for as hedges of net investment in foreign operations. As at 31 December 2009, the Group had deposits amounting to US$ 298 million (2008: US$ 202 million) which were designated as net investment hedges.

91 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009

20 DERIVATIVES AND HEDGING (Continued)

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 cross-currency 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 favorable 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 date of the statement of financial position.

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 favorable 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.

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 of Directors.

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 instruments, forecasted transactions as well as strategic hedging against overall statement of financial position 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. 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.

92 ABC Group Annual Report 2009 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009 (All ﬁgures in US$ Million)

21 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 statement of ﬁnancial position date, the principal outstanding and the risk weighted equivalents were as follows:

2009 2008

Short-term self-liquidating trade and transaction-related contingent items 5,987 6,036 Direct credit substitutes, guarantees and acceptances 1,913 1,351 Undrawn loans and other commitments 894 1,401 8,794 8,788

Risk weighted equivalents 2,725 3,321

The table below shows the contractual expiry by maturity of the Group’s credit commitments and contingent items:

2009 2008

On demand 937 1,478 1 - 6 months 2,701 1,867 6 - 12 months 2,107 1,666 1 - 5 years 2,813 3,352 Over 5 years 236 425

8,794 8,788

The Group expects that not all of the contingent liabilities or commitments will be drawn before expiry of the commitments.

The Group is engaged in litigation in various jurisdictions. The litigation involves claims by and against the Group which have arisen in the ordinary course of business. The Directors of the Bank, after reviewing the claims pending against Group companies and based on the advice of relevant professional legal advisors, are satisﬁed that the outcome of these claims will not have a material adverse effect on the ﬁnancial position of the Group.

93 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009 (All ﬁgures in US$ Million)

22 SIGNIFICANT NET FOREIGN CURRENCY EXPOSURES

Signiﬁcant net foreign currency exposures, arising mainly from investments in subsidiaries, are as follows:

2009 2008 Long (short) Currency US$ equivalent Currency US$ equivalent

Brazilian Real 663 377 64 27 Egyptian Pound 808 147 640 116 Jordanian Dinar 85 120 78 110 Pound Sterling 107 174 29 42 Algerian Dinar 9,331 130 2,911 41 Saudi Riyal 4159 16 UAE Dirham 1,292 352 --

The UAE Dirham exposure arising from net trading position is entirely covered by currency options to minimise the risk of loss from adverse movements in the foreign currency rates.

23 FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is an amount for which an asset could be exchanged or a liability settled between knowledgable and willing parties in an arm’s length transaction. Consequently, differences can arise between carrying values and fair value estimates.

The fair values of ﬁnancial assets and ﬁnancial liabilities which are not carried at fair value are not materially different from their carrying value except for the following:

2009 2008 Carrying Fair Carrying Fair value value value Value

Other non-trading securities 3,903 3,751 4,087 3,662 Term notes, bonds and other term ﬁnancing 1,089 932 1,184 809

The Group uses the following hierarchy for determining and disclosing the fair value of ﬁnancial instruments by valuation technique:

Level 1 valuation: Directly observable quotes for the same instrument (market prices).

Level 2 valuation: Directly observable proxies for the same instrument acessible at valuation date (mark-to-model with market data).

Level 3 valuation: Derived proxies (interpolation of proxies) for similar instruments that have not been observed (mark-to-model with deducted proxies).

94 ABC Group Annual Report 2009 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009 (All ﬁgures in US$ Million)

As at 31 December 2009 the Group has used the following hierarchy for determining and disclosing the fair value of ﬁnancial instruments by valuation technique:

23 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Level 1 Level 2 Total

FINANCIAL ASSETS Trading securities Externally managed funds -66 Debt securities 123 6 129 123 12 135

NON-TRADING SECURITES Available-for-Sale Debt securities 1,039 4,512 5,551 Equity securities 26 55 81 1,065 4,567 5,632

Loans and advances - available-for-sale -8989

Derivatives held for trading -9494

Financial liabilities Derivatives held for trading -9292 Derivatives held as hedges -3030

Financial instruments recorded at fair value The description of the determination of fair value for ﬁnancial instruments recorded at fair value using valuation techniques is discussed in note 4, which incorporate the Group's estimate of assumptions that a market participant would make when valuing the instruments.

Transfers between level 1 and level 2 None of the ﬁnancial instruments were transferred from level 1 to level 2 during the year ended 31 December 2009.

24 RISK MANAGEMENT

Introduction Risk is inherent in the Group’s activities and is managed through a process of ongoing identiﬁcation, measurement and monitoring, subject to risk limits and other controls. The Group is exposed to credit risk, liquidity risk, operational and market risk, legal risk and strategic risk as well as other forms of risk inherent in its ﬁnancial operations.

Over the last few years the Group has invested heavily into developing a comprehensive and robust risk management infrastructure. This includes risk identiﬁcation processes under credit, market and operational risk spectrums, risk measurement models and rating systems as well as a strong business process to monitor and control these risks.

Risk management structure

95 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009

24 RISK MANAGEMENT (Continued)

signiﬁcant risks to the business and the design and implementation of appropriate internal controls to minimise them. This is done through the following board committees, senior management committees and the Credit & Risk Group in Head Ofﬁce.

Within the broader governance infrastructure, the board committees carry the main responsibility of best practice management and risk oversight. At this level, the BRC oversees the deﬁnition of risk appetite, risk tolerance standards, and risk process standards to be kept in place. The BRC is also responsible to coordinate with other board committees for monitoring compliance with the requirements of the regulatory authorities in the various countries in which the Group operates.

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 and for monitoring compliance with the requirements of the regulatory authorities in the various countries in which the Group operates.

The Group’s Head Ofﬁce Credit Committee (HOCC) is responsible for credit decisions at the higher levels of Group’s lending portfolio, setting country and other high level Group limits, dealing with impaired assets and general credit policy matters.

Each subsidiary is responsible for managing its own risks and has its own Board Risk Committee, Credit Committee and (in the case of major subsidiaries) Asset and Liability Committee (ALCO), or equivalent, with responsibilities generally analogous to the Group committees.

The ALCO is chiefly responsible for defining long-term strategic plans and short-term tactical initiatives for directing asset and liability allocation prudently for the achievement of the Group’s strategic goals. ALCO monitors the Group’s liquidity and market risks and the Group’s risk profile in the context of economic developments and market fluctuations, to ensure that the Group’s ongoing activities are compatible with the risk/reward guidelines approved by the BRC. The above management structure, supported by teams or risk and credit analysts, as well as the IT systems provide a coherent infrastructure to carry credit and risk functions in a seamless manner.

The Operational Risk Management Committee (ORCO) is responsible for deﬁning long-term strategic plans and short-term tactical initiatives for operational risk. It also has the overall responsibility to monitor and prudently manage exposure to operational risks including strategic and reputation risks.

Risk measurement and reporting system

Risk mitigation As part of its overall risk management, the Group uses derivatives and other instruments to manage exposures resulting from changes in interest rates, foreign currencies, equity risks, credit risks, and exposures arising from forecast transactions.

The risk proﬁle is assessed before entering into hedge transactions, which are authorised by the appropriate level of seniority within the Group. The effectiveness of hedges is monitored monthly by the Group. In situations of ineffectiveness, the Group will enter into a new hedge relationship to mitigate risk on a continuous basis.

The Group actively uses collateral to reduce its credit risk (see below for details).

Excessive risk concentration Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the Group’s performance to developments affecting a particular industry or geographical location.

In order to avoid excessive concentrations of risk, the Group policies and procedures include specific guidelines to focus on country and counter party limits and maintaining a diversified portfolio. Identified concentrations of credit risks are controlled and managed accordingly.

96 ABC Group Annual Report 2009 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009 (All ﬁgures in US$ Million)

24 RISK MANAGEMENT (Continued)

Credit risk Credit risk is the risk that the Group will incur a loss because its customers, clients and counterparties failed to discharge their contractual obligations. The Group manages and controls credit risk by setting limits on the amount of risk it is willing to accept for individual counterparties and for geographical and industry concentration, and by monitoring exposures in relation to such limits.

The ﬁrst level of protection against undue credit risk is through 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 the Bank and its banking subsidiaries. Credit exposure to individual customers or customer groups is then controlled through a tiered hierarchy of delegated approval authorities based on the risk rating of the customer under the Group’s internal credit rating system. Where unsecured facilities sought are considered to be beyond prudential limits, Group policies require collateral to mitigate the credit risk in the form of cash, securities, legal charges over the customer’s assets or third-party guarantees. The Group also employs Risk Adjusted Return on Capital (RAROC) as a measure to evaluate the risk/reward relationship at the transaction approval stage. RAROC analysis is also conducted on a portfolio basis, aggregated for each business segment, business unit and for the whole Group.

Maximum exposure to credit risk without taking account of any collateral and other credit enhancements

The table below shows the maximum exposure to credit risk for the components of the balance sheet, including credit commitments and contingent items. The maximum exposure is shown gross, before the effect of mitigation through the use of master netting and collateral agreements.

Gross maximum exposure 2009 2008

Liquid funds 610 704 Trading debt securities 129 81 Placement with banks and other ﬁnancial institutions 3,949 4,017 Non-trading debt securities 9,471 10,543 Loans and advances 10,949 11,931 Other credit exposures 590 847 25,698 28,123 Credit commitments and contingent items (note 21) 8,794 8,788

Total 34,492 36,911

Where ﬁnancial instruments are recorded at fair value the amounts shown above represent the current credit risk exposure but not the maximum risk exposure that could arise in the future as a result of changes in values.

For more detail on the maximum exposure to credit risk for each class of ﬁnancial instrument, references should be made to the speciﬁc notes. The effect of collateral and other risk mitigation techniques is shown below.

97 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009 (All ﬁgures in US$ Million)

24 RISK MANAGEMENT (Continued)

Risk concentration of the maximum exposure to credit risk The Group’s assets (before taking into account any collateral held or other credit enhancements), liabilities and equity and commitments and contingencies can be analysed by the following geographical regions:

Credit commitment and Assets Liabilities and equity contingent items 2009 2008 2009 2008 2009 2008

Western Europe 4,077 4,496 2,020 2,421 1,746 1,467 Arab World 10,126 11,833 16,583 17,833 3,860 4,800 Asia 639 691 268 363 148 135 North America 6,248 7,488 3,609 5,300 1,015 1,194 Latin America 4,079 2,990 3,202 2,142 1,675 674 Other 529 625 16 64 350 518

Total 25,698 28,123 25,698 28,123 8,794 8,788

An industry sector analysis of the Group’s ﬁnancial assets, before and after taking into account collateral held or other credit enhancements, is as follows:

Gross maximum Net maximum Gross maximum Net maximum exposure exposure exposure exposure 2009 2009 2008 2008

Financial services 9,712 8,620 11,601 9,077 Other services 3,790 3,433 3,760 3,570 Manufacturing 3,693 3,283 2,987 2,755 Construction 693 548 719 608 Mining and quarrying 468 457 297 289 Agriculture, ﬁshing and forestry 300 300 151 151 Trade 269 206 454 339 Consumer 214 214 188 188 Government 6,231 6,214 7,483 7,465 Personal 328 158 483 357

Total 25,698 23,433 28,123 24,799

98 ABC Group Annual Report 2009 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009 (All ﬁgures in US$ Million)

An industry sector analysis of the Group’s credit commitments and contingent items, before and after taking into account collateral held or other credit enhancements, is as follows:

Gross maximum Net maximum Gross maximum Net maximum exposure exposure exposure exposure 2009 2009 2008 2008

Financial services 4,168 3,869 4,563 4,132 Other services 1,040 1,039 629 605 Manufacturing 1,983 1,961 2,176 2,162 Construction 795 793 572 571 Mining and quarrying 308 308 212 212 Agriculture, ﬁshing and forestry 30 30 13 13 Trade 413 412 442 442 Government 34 34 166 164 Other 23 20 15 15

Total 8,794 8,466 8,788 8,316

Credit quality per class of financial assets The credit quality of financial assets is managed by the Group using internal credit ratings. The table below shows the credit quality by class of financial asset, based on the Group’s credit rating system.

31 December 2009 Neither past due nor impaired Sub- Past due or Standard standard individually High grade grade grade impaired Total

Liquid funds 610 - - - 610 Trading securities 129 - - - 129 Placements with banks and other ﬁnancial institutions 2,948 994 7 - 3,949 Non-trading debt securities 8,358 1,090 - 23 9,471 Loans and advances 4,676 6,133 - 140 10,949 Other credit exposures 510 80 - - 590

17,231 8,297 7 163 25,698

31 December 2008 Neither past due nor impaired Past due or Standard Sub- standard individually High grade grade grade impaired Total

Liquid funds 704 - - - 704 Trading securities 81---81 Placements with banks and other ﬁnancial institutions 2,983 1,027 7 - 4,017 Non-trading debt securities 9,758 719 - 66 10,543 Loans and advances 6,746 5,113 - 72 11,931 Other credit exposures 772 75 - - 847

21,044 6,934 7 138 28,123

99 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009 (All ﬁgures in US$ Million)

24 RISK MANAGEMENT (Continued)

Credit quality per class of ﬁnancial assets (continued) As at 31 December 2009 and 2008, the total amount of past due but not impaired assets was immaterial.

It is the Group’s policy to maintain accurate and consistent risk ratings across the credit portfolio through risk rating system. This facilitated focused management of the applicable risks and the comparison of credit exposures across all lines of business, geographic regions and products. The rating is supported by a variety of ﬁnancial analytics, combined with the processed market information to provide the main inputs for the measurement of counterparty credit risk. All internal ratings are tailored to the various categories and are derived in accordance with Bank’s credit policy. The attributable risk ratings are assessed and updated regularly. Each risk rating class has grades equivalent to Moody’s, S&P and Fitch rating agencies.

Carrying amount per class of ﬁnancial assets whose terms have been renegotiated as at year end

2009 2008

Loans and advances 59 48

Collateral and other credit enhancements The amount and type of collateral depends on an assessment of the credit risk of the counterparty. The types of collateral mainly includes cash and guarantees from banks.

Management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance for impairment losses. The Group also makes use of master netting agreements with counterparties.

Settlement risk Settlement risk is the risk of loss due to the failure of a counterparty to honour its obligations to deliver cash, securities or other assets as contractually agreed. For certain types of transactions, the Group mitigates this risk through a settlement agent to ensure that a trade is settled only when both parties fulﬁll their settlement obligations. Settlement approvals form a part of credit approval and limit monitoring procedure.

Market risk Market risk is the risk that the Group’s earnings or capital, or its ability to support business strategy, will be impacted by the change in market rates or prices related to interest rates, equity prices, credit spreads, foreign exchange rates, and commodity prices.

The Group has established risk management policies and limits within which exposure to market risk is monitored, measured and controlled by the Risk Management Department (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 product limits prior to ALCO approval. MRM’s core responsibility is to measure and report market risk against limits throughout the Group.

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 Group is exposed to interest rate risk as a result of mismatches of interest rate re-pricing of assets and liabilities. The most prominent market risk factor for the Group is interest rates. This risk is minimized as the Group rate sensitive assets and liabilities are mostly floating rate, where the duration risk is lower. In general, the Group uses matched currency funding and translates fixed rate instruments to floating rate to better manage the duration in the asset book.

The following table demonstrates the sensitivity to a reasonable possible change in interest rates, with all other variables held constant, of the Group’s consolidated statement of income.

100 ABC Group Annual Report 2009 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009 (All ﬁgures in US$ Million)

24 RISK MANAGEMENT (Continued)

Interest rate risk (Continued) The sensitivity of the consolidated statement of income is the effect of the assumed changes in interest rates on the net interest income for one year, based on financial assets and financial liabilities held at 31 December 2009, including the effect of hedging instruments. The sensitivity of equity is calculated by revaluing fixed rate available- for-sale financial assets, including the effect of any associated hedges and swaps. Substantially all the available- for-sale non-trading securities held by the Group are floating rate assets. Hence, the sensitivity to changes in equity due to interest rate changes is insignificant.

Increase in Sensitivity Decrease in Sensitivity basis statement of basis statement of points income points income 2009 2009 2009 2009

USD 25 22 25 (22) Euro 25 1 25 (1) GBP 25 2 25 (2) BRL 25 2 25 (2) Others 25 3 25 (3)

Increase in Sensitivity Decrease in Sensitivity basis statement of basis statement of points income points income 2008 2008 2008 2008

USD 25 33 25 (33) Euro 25 - 25 - GBP 25 1 25 (1) Others 25 (2) 25 2

Currency risk Currency risk is the risk that the value of a ﬁnancial instrument will ﬂuctuate due to changes in foreign exchange rates.

The table on the next page indicates the currencies to which the Group had significant exposure at 31 December 2009 on its monetary assets and liabilities and its forecast cash flows. The analysis calculates the effect of a reasonably possible movement of the currency rate against the US$, with all other variables held constant on the consolidated statement of income (due to the fair value of currency sensitive trading and non-trading monetary assets and liabilities) and equity (due to the change in fair value of currency swaps and forward foreign exchange contracts used as cash flow hedges) and the effect of impact of foreign currency movements on the structured positions of the Bank in its subsidiaries. A negative amount in the table reflects a potential net reduction in the consolidated statement of income or equity, while a positive amount reflects a potential net increase.

101 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009 (All ﬁgures in US$ Million)

24 RISK MANAGEMENT (Continued)

Currency risk (Continued)

Change in Effect on Change in Effect on currency rate proﬁt Effect on currency rate proﬁt Effect on Currency in % before tax equity in % before tax equity 2009 2009 2009 2008 2008 2008

Brazilian Real +/- 5% +/-1 +/-18 +/- 5% - +/-1 GBP +/- 5% +/-1 +/-9 +/- 5% - +/-3 Egyptian Pound +/- 5% - +/-7 +/- 5% - +/-6 Jordanian Dinar +/- 5% - +/-6 +/- 5% - +/-5 Algerian Dinar +/- 5% - +/-6 +/- 5% - +/-2 Saudi Riyal +/- 5% - - +/- 5% +/-8 -

Equity price risk Equity price risk is the risk that the fair values of equities decrease as the result of changes in the levels of equity indices and the value of individual stocks. The non-trading equity price risk exposure arises from the Group’s securities portfolio.

The effect on equity (as a result of a change in the fair value of trading equity instruments and equity instruments held as available for sale) due to a reasonably possible change in equity indices or the net asset values, with all other variables held constant, is as follows:

Effect on Effect on % Change in statement of % Change in statement of equity price income/ equity equity price income/equity 2009 2009 2008 2008

Trading securities Change in NAVs of fund of funds in North America and Europe +/- 5% - +/- 5% +/-2 Other equities +/- 5% - +/- 5% +/-1

Available-for-sale equities +/- 5% +/-4 +/- 5% +/-4

Operational risk Operational risk is deﬁned as the risk of loss resulting from inadequate or failed internal processes or systems or from external events. Operational risk is inherent in all business activities and can never be eliminated entirely; however shareholder value can be preserved and enhanced by managing, mitigating and, in some cases, insuring against operational risk. To achieve this goal the Operational Risk Management Unit has developed an operational risk framework, which includes identiﬁcation, measurement, management, and monitoring and risk control/ mitigation elements. A variety of underlying processes are being deployed across the Group including risk and control self-assessments, Key Risk Indicators (KRI), event management, new product review and approval processes and business contingency plans.

The Group intends to make operational risk transparent throughout the enterprise, to which end processes are being developed to provide for regular reporting of relevant operational risk management information to business management, senior management, the ORCO, the BRC and the Board of Directors generally.

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. Each business line – including Operations, Information Technology, Human Resources, Legal & Compliance and Financial Control - is further responsible for employing the aforementioned framework processes and control programmes to manage its operational risk within the guidelines established by the Group’s policy and procedures. To ensure that all operational risks to which the Group is exposed are adequately managed, support functions are also involved in the identiﬁcation, measurement, management, monitoring and control/mitigation of operational risk, as appropriate.

102 ABC Group Annual Report 2009 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009 (All ﬁgures in US$ Million)

24 RISK MANAGEMENT (Continued)

The maturity analysis of assets and liabilities analysed according to when they are expected to be recovered or settled or when they could be realised.

Total Total Within 1 1 - 3 3 - 6 6 - 12 within 12 1 - 5 5 - 10 10 - 20 Over 20 over 12 At 31 December 2009 month months months months months years years years years Undated months Total ASSETS Liquid funds 407239--646------646 Trading securities --30105135------135 Placements with banks and other ﬁnancial institutions 3,457 64 428 - 3,949 3,949 Non-trading securities 7,339 65 722 167 8,293 1,038 125 14 1 81 1,259 9,552 Loans and advances 1,586 1,517 1,198 1,164 5,465 3,508 1,304 666 6 - 5,484 10,949 Others ------734734734

Total assets 12,789 1,885 2,378 1,436 18,488 4,546 1,429 680 7 815 7,477 25,965

LIABILITIES, SHAREHOLDERS’ EQUITY AND NON-CONTROLLING INTERESTS Deposits from customers 5,274 2,203 380 363 8,220 1,685 4---1,689 9,909 Deposits from banks and other financial institutions 3,098 1,328 475 392 5,293 914 17---9316,224 Certificates of deposit 7519 2212----1234 Securities sold under repurchase agreement 1,666 1,826 - 587 4,079------4,079 Term notes, bonds and other term financing - - - 384 384 1,548 412---1,960 2,344 Others ------794794794 Shareholders’ equity and minority interests ------2,581 2,581 2,581

Total liabilities, shareholders’ equity and non-controlling interests 10,045 5,362 856 1,735 17,998 4,159 433 - - 3,375 7,967 25,965

Net liquidity gap 2,744 (3,477) 1,522 (299) 490 387 996 680 7 (2,560) - -

Cumulative net liquidity gap 2,744 (733) 789 490 877 1,873 2,553 2,560 -

Within 1 month are primarily liquid securities that can be sold under repurchase agreements. Deposits are continuously replaced with other new deposits or rollover from the same or different counterparties, based on available lines of credit.

103 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009 (All ﬁgures in US$ Million)

24 RISK MANAGEMENT (Continued)

Total Total Within 1 1 - 3 3 - 6 6 - 12 within 12 1 - 5 5 - 10 10 - 20 Over 20 over 12 At 31 December 2008 month months months months months years years years years Undated months Total ASSETS Liquid funds 588 235 - - 823 ------823 Trading securities 8 - 38 80 126 ------126 Placements with banks and other ﬁnancial institutions 3,607 400 9 1 4,017 ------4,017 Non-trading securities 7,824 29 557 177 8,587 1,227 608 121 - 80 2,036 10,623 Loans and advances 1,664 1,646 2,104 1,344 6,758 3,324 1,161 674 14 - 5,173 11,931 Others ------966966966

Total assets 13,691 2,310 2,708 1,602 20,311 4,551 1,769 795 14 1,046 8,175 28,486

LIABILITIES, SHAREHOLDERS’ EQUITY AND NON-CONTROLLING INTERESTS Deposits from customers 3,788 3,700 909 284 8,681 2,044 3 - - - 2,047 10,728 Deposits from banks and other financial institutions 3,120 1,298 1,243 247 5,908 301 1 - - - 302 6,210 Certificates of deposit 4 - 34 - 38 ------38 Securities sold under repurchase agreement 3,600 1,661 - 553 5,814 ------5,814 Term notes, bonds and other term financing - 59 - - 59 1,884 555 - - - 2,439 2,498 Others ------1,110 1,110 1,110 Shareholders’ equity and minority interests ------2,088 2,088 2,088

Total liabilities, shareholders’ equity and non-controlling interests 10,512 6,718 2,186 1,084 20,500 4,229 559 - - 3,198 7,986 28,486

Net liquidity gap 3,179 (4,408) 522 518 (189) 322 1,210 795 14 (2,152) - -

Cumulative net liquidity gap 3,179 (1,229) (707) (189) 133 1,343 2,138 2,152 -

104 ABC Group Annual Report 2009 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009 (All ﬁgures in US$ Million)

24 RISK MANAGEMENT (Continued)

Liquidity risk Liquidity risk is the risk that the Group will be unable to meet its payment obligations when they fall due under normal and stress circumstances. To limit this risk, management has arranged diversified funding sources in addition to its core deposit base, manages assets with liquidity in mind, and monitors future cash flows and liquidity on a daily basis. This incorporates an assessment of expected cash flows and the availability of high grade collateral which could be used to secure additional funding if required.

The Group maintains liquid assets at prudential levels to ensure that cash can quickly be made available to honor 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. The Minimum Liquidity Guideline (MLG) is used to manage and monitor daily liquidity. The MLG represents the minimum number of days the Group can survive the combined outﬂow of all deposits and contractual drawdowns, under market value driven encashability scenarios.

In addition, the internal liquidity/maturity proﬁle is generated to summarize the actual liquidity gaps versus the revised gaps based on internal assumptions.

The table below summarises the maturity profile of the Group’s financial liabilities at 31 December 2009 based on contractual undiscounted repayment obligations. See the previous table for the expected maturities of these liabilities. Repayments which are subjected to notice are treated as if notice were to be given immediately. However, the Group expects that many customers will not request repayment on the earliest date the Group could be required to pay and the table does not reflect the expected cash flows indicated by the Group’s deposit retention history.

On 1 - 3 3 - 6 6 - 12 1 - 5 5-10 10 - 20 Over 20 At 31 December 2009 demand months months months years years years years Total Financial liabilities Deposits from customers 6,351 2,429 395 394 512 4 - - 10,085 Deposits from banks and other financial institutions 3,100 1,338 485 424 1,089 29 - - 6,465 Securities sold under repurchase agreements 1,666 1,828 - 589 - - - - 4,083 Certificates of deposits 741914- - -35 Term notes, bonds and other term financing - - - 395 1,583 443 - - 2,421

Total non-derivative undiscounted ﬁnancial liabilities on statement of ﬁnancial position 11,124 5,599 881 1,811 3,198 476 - - 23,089 ITEMS OFF STATEMENT OF FINANCIAL POSITION

Gross settled foreign currency derivatives 1,394 933 301 586 2 - 11 - 3,227

Guarantees 107 360 410 696 202 16 15 - 1,806

105 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009 (All ﬁgures in US$ Million)

24 RISK MANAGEMENT (Continued)

Liquidity risk (Continued)

On 1 - 3 3 - 6 6 - 12 1 - 5 5 - 10 10 - 20 Over 20 At 31 December 2008 demand months months months years years years years Total Financial liabilities Deposits from customers 4,801 4,336 1,007 304 380 3 - - 10,831 Deposits from banks and other financial institutions 3,123 1,307 1,278 265 388 1 - - 6,362 Securities sold under repurchase agreements 3,600 1,671 - 571 - - - - 5,842 Certificates of deposits 5 - 34 - - - - - 39 Term notes, bonds and other term financing - 64 - - 2,156 706 - - 2,926

Total non-derivative undiscounted ﬁnancial liabilities on statement of ﬁnancial position 11,529 7,378 2,319 1,140 2,924 710 - - 26,000 ITEMS OFF STATEMENT OF FINANCIAL POSITION

Gross settled foreign currency derivatives 2,043 710 312 393 121 - 11 - 3,590

Guarantees 336 230 121 325 132 47 46 - 1,237

25 OPERATING SEGMENTS

For management purposes, the Group is organised into four operating segments which are based on business units and their activities. The Group has accordingly been structured to place its activities under the distinct divisions which are as follows:

- Universal Banking covers Retail and SME banking activities of the Group in the Arab World; - International Wholesale Banking encompasses Project and Structured Finance, Trade Finance and Forfaiting, Islamic Financial Services, Corporate Banking & Financial Institutions, Syndications and Corporate Finance; - Treasury comprises the activities of Treasury in Bahrain Head Ofﬁce; and - Others include activities of Banco ABC Brasil S.A and Arab Financial Services Company B.S.C. (c).

106 ABC Group Annual Report 2009 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009 (All ﬁgures in US$ Million)

25 OPERATING SEGMENTS (Continued)

2009

International Universal Wholesale Banking Banking Treasury Other Total

Net interest income 77 75 73 166 391

Other operating income 44 104 22 80 250

Total operating income 121 179 95 246 641

Proﬁt before impairment provisions 54 91 84 146 375

Impairment provisions - net (4) (88) 6 (29) (115)

Proﬁt before taxation 50 3 90 117 260

Taxation on foreign operations (12) - - (34) (46)

Unallocated operating expenses (60)

Proﬁt for the year 154

Total Assets 2,460 9,769 8,851 4,885 25,965

2008

International Universal Wholesale Banking Banking Treasury Other Total

Net interest income 80 95 60 196 431

Other operating income 39 114 15 8 176

Total operating income 119 209 75 204 607

Proﬁt before impairment provisions 50 120 63 103 336

Impairment provisions - net 1 (135) (833) (88) (1,055)

Proﬁt (loss) before taxation 51 (15) (770) 15 (719)

Taxation on foreign operations (11) - - (25) (36)

Unallocated operating expenses (81)

Loss for the year (836)

Total Assets 2,369 12,177 9,914 4,026 28,486

107 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009

25 OPERATING SEGMENTS (Continued)

Geographical information The Group operates in six geographic markets: Middle East and North Africa, Western Europe, Asia, North America, Latin America and others. The following table show the external total operating income of the major units within the Group, based on the country of domicile of the entity for the years ended 31 December 2009 and 2008:

Banco ABC 2009 Bahrain ABCIB Brasil Other Total

Total operating income 145 100 194 202 641

2008

Total operating income 147 110 217 133 607

There were no revenues derived from transactions with a single external customer that amounted to 10% or more of the Group’s revenue.

Non-current assets consist of premises and equipment and are not material to the Group.

26 REPURCHASE AND RESALE AGREEMENTS

Proceeds from assets sold under repurchase agreements at the year end amounted to US$ 4,079 million (2008: US$ 5,814 million). The carrying value of securities sold under repurchase agreements at the year end amounted to US$ 4,358 million (2008: US$ 6,756 million).

Amounts paid for assets purchased under resale agreements at the year end amounted to US$ 64 million (2008: US$ 271 million) and relate to customer product and treasury activities. The market value of the securities purchased under resale agreements at the year end amounted to US$ 64 million (2008: US$ 272 million).

108 ABC Group Annual Report 2009 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009 (All ﬁgures in US$ Million)

27 TRANSACTIONS WITH RELATED PARTIES

Related parties represent major shareholders, associates, directors and key management personnel of the Group and entities controlled, jointly controlled or signiﬁcantly inﬂuenced by such parties. Pricing policies and terms of these transactions are approved by the Group’s management.

The year end balances in respect of related parties included in the consolidated ﬁnancial statements are as follows:

Major shareholders Directors 2009 2008

Deposits from customers 1,535 1 1,536 1,883

The expenses in respect of related parties included in the consolidated ﬁnancial statements are as follows:

Interest expense 3 9

Compensation of the key management personnel is as follows: 2009 2008

Short term employee beneﬁts 13 18 Post employment beneﬁts 8 10

21 28

28 FIDUCIARY ASSETS

Funds under management at the year end amounted to US$ 10,103 million (2008: US$ 5,324 million). These assets are held in a ﬁduciary capacity and are not included in the consolidated statement of ﬁnancial position.

29 ISLAMIC DEPOSITS AND ASSETS

Deposits from customers and banks and ﬁnancial institutions include Islamic deposits of US$ 741 million (2008: US$ 652 million). Loans and advances and non-trading securities include Islamic assets of US$ 894 million (2008: US$ 1,091 million) and US$ 401 million (2008: US$ 368 million).

30 ASSETS PLEDGED AS SECURITY

At the statement of ﬁnancial position date, in addition to the items mentioned in note 26, assets amounting to US$ 266 million (2008: US$ 313 million) have been pledged as security for borrowings and other banking operations.

31 BASIC AND DILUTED EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is calculated by dividing the proﬁt (loss) 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 (loss) per share, when exercised.

109 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2009 (All ﬁgures in US$ Million)

31 BASIC AND DILUTED EARNINGS (LOSS) PER SHARE (Continued)

The Group’s earnings (loss) for the year are as follows:

2009 2008

Proﬁt (loss) for the year 122 (880) Weighted average number of shares outstanding during the year (millions) 2,000 1,538 Basic and diluted earnings (loss) per share (US$) 0.06 (0.57)

32 CAPITAL ADEQUACY

The primary objectives of the Group’s capital management are to ensure that the Group complies with externally imposed capital requirements and that the Group maintains strong credit ratings and healthy capital ratios in order to support its business and to maximise shareholders’ value. The Group manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities. No changes were made in the objectives, policies and processes from the previous years.

The risk asset ratio calculations as at 31 December are based on standardised measurement methodology and in accordance with the CBB Basel II guidelines.

Basel II

CAPITAL BASE 2009 2008

Tier 1 capital 2,664 2,509 Tier 2 capital 683 650

Total capital base [a] 3,347 3,159

RISK WEIGHTED EXPOSURES

Credit risk weighted assets and off balance sheet items 17,164 17,625 Market risk weighted assets and off balance sheet items 1,511 882 Operational risk weighted assets 1,188 1,030

Total risk weighted assets [b] 19,863 19,537

Risk asset ratio [a/b*100] 16.9% 16.2%

Minimum Requirement 12.0% 12.0%

Regulatory capital consists of Tier 1 capital, which comprises share capital, retained earnings, statutory reserve, general reserve, minority interests, foreign currency translation adjustments in equity and Tier 2 capital, which includes subordinated long term debt and collective provisions.

The Group has complied with all the requirements as set by the Central Bank of Bahrain.

110 ABC Group Annual Report 2009 ABC GROUP DIRECTORY

Head Ofﬁce Directory 112 International Directory 113

111 HEAD OFFICE DIRECTORY

HEAD OFFICE GLOBAL FINANCIAL GROUP SUPPORT INSTITUTIONS ABC Tower, Diplomatic Area Global Corporate PO Box 5698, Manama Souheil Badro Communications Kingdom of Bahrain Tel: (973) 17 543 272 Nadia Mehdid Tel: (973) 17 543 000 Tel: (973) 17 543 204 Fax:(973) 17 533 163 / 17 533 062 GROUP RETAIL http://www.arabbanking.com Global Information Technology [email protected] R. Sethu Venkateswaran Stuart Rennie Tel: (973) 17 543 710 Tel: (973) 17 543 249 Hassan. A. Juma President & Chief Executive GROUP TREASURY Group Policies & Procedures K. Krithivasan Dr. Khaled Kawan Amr Gadallah Tel: (973) 17 543 382 Deputy Chief Executive Group Treasurer Tel: (973) 17 543 375 / 17 532 933 Group Legal Counsel Sael Al Waary Vernon Handley Group Chief Operating Officer Ali Mirza Tel: (973) 17 543 564 Assistant Group Treasurer Roy Gardner Tel: (973) 17 543 241 Group Compliance Group Chief Financial Officer Qutub Yousafali TREASURY & MARKETABLE Tel: (973) 17 543 273 SECURITIES INTERNATIONAL WHOLESALE Operations Andrew Wilson BANKING Bahrain Treasurer Tel: (973) 17 543 714 Kareem Dashti Global Products Tel: (973) 17 543 775 Premises & Engineering Samer Marouf Global Corporate & Structured Group Marketable Securities Tel: (973) 17 543 609 Finance Arif Mumtaz Graham Scopes Tel: (973) 17 533 169 Tel: (973) 17 543 622 Group Planning & Financial Controls Asset Management Dilip Kumar Project & Structured Finance Mahmoud Zewam Tel: (973) 17 543 320 Geoff Biron Tel: (973) 17 533 169 Tel: (973) 17 543 316 Human Resources CREDIT & RISK GROUP Global Trade Finance Adel Al Abbasi Tel: (973) 17 543 598 Paul Jennings Vijay Srivastava Global Head Acting Chief Credit & Risk Officer GROUP AUDIT Tel: (44) (20) 7776 4040 Tel: (973) 17 543 288 Jehangir Jawanmardi Amr El Ashmawi Risk Management Group Chief Auditor Tel: (973) 17 543 516 Meghnath Shaw Tel: (973) 17 543 387 Tel: (973) 17 543 396 Syndications John McWall Head Office Credit Dept. Tel: (973) 17 543 967 Gareth Jarvis Tel: (973) 17 543 228

Remedial Loans Unit Stephen Jenkins Tel: (973) 17 543 713

112 ABC Group Annual Report 2009 INTERNATIONAL DIRECTORY

MENA SUBSIDIARIES ABC Islamic Bank (E.C.) ABC Tower, Diplomatic Area Arab Banking Corporation - Algeria PO Box 2808, Manama PO Box 367, Kingdom of Bahrain 54 Avenue des Trois Freres Bouaddou Tel: (973) 17 543 342 Bir Mourad Rais, Algiers, Algeria Fax: (973) 17 536 379 / 17 533 972 Tel: (213) (21) 449 000 / 449 007 / 449 003 Fax: (213) (21) 541 122 Naveed Khan [email protected] Global Head of Islamic Banking & Managing Director Swift: ABCODZAL Arab Financial Services Company B.S.C. (c) Ahmed Redha Kara-Terki PO Box 2152, Manama Chief Executive Ofﬁcer Kingdom of Bahrain Tel: (973) 17 290 333 Arab Banking Corporation - Egypt (S.A.E.) Fax: (973) 17 291 122 (ABC Bank, Egypt) 1, El Saleh Ayoub St., Zamalek, Cairo, Egypt Shankar Sharma Tel: (202) 2736 2684 (10 lines)/ Chief Executive Ofﬁcer Fax: (202) 27363614 /43 [email protected] INTERNATIONAL SUBSIDIARIES

Mohamed Sherif Sharaf ABC International Bank plc Managing Director & CEO Head Ofﬁce and London Branch Arab Banking Corporation House ABC Securities (Egypt) S.A.E. 1-5 Moorgate, London EC2R 6AB, UK 1, El Saleh Ayoub St. Zamalek, Cairo, Egypt Tel: (44) (20) 7776 4000 (General) Tel: (202) 2736 2684 (10 lines)/ Fax: (44) (20) 7606 9987 (General) Fax: (202) 2736 3643 / 14 Treasury: Mohamed Sherif Sharaf Tel: (44) (20) 7726 4091 (Dealing Room) Chairman Fax: (44) (20) 7606 1710 (Dealing Room) Reuters Code: ABCL Arab Banking Corporation (Jordan) Swift: ABCE GB 2L P.O. Box 926691, Amman 11190, Jordan Tel: (962) (6)5664 183 (General) Nofal Barbar Tel: (962) (6)5692 713/(962) (6) 5692 723 (Dealing Room) CEO & Managing Director Fax: (962) (6) 5686291 [email protected] ABC International Bank plc (Paris Branch) Simona Sabella Bishouty 4 rue Auber General Manager 75009 Paris France Arab Banking Corporation Tunisie Tel: (33) (1) 4952 5400 ABC Building, Rue du Lac d’Annecy Fax: (33) (1) 4720 7469 Les Berges du Lac, 1053 Tunis, Tunisia Tlx: 648343 ABC F (General) Tel: (216) (71) 861 861 (216) (71) 861 110 (Treasury) Alexander Ashton Fax: (216) (71) 960 427 / 960 406 / 860 921 General Manager Tlx: 12505 ABCTU TN [email protected] ABC International Bank plc Direct Dealing Reuters Code: ABCT (Frankfurt Branch) Swift: ABCOTNTT 001 Neue Mainzer Strasse 75 60311 Frankfurt am Main Mohamed Ben Othman Germany Acting General Manager Tel: (49) (69) 7140 30 Fax: (49) (69) 7140 3240 Swift: ABCA DE FF [email protected]

Gerald Bumharter General Manager

113 INTERNATIONAL DIRECTORY

INTERNATIONAL SUBSIDIARIES (CONTINUED) Moscow - Representative Ofﬁce 4th ﬂoor, 10 block C ABC International Bank plc Presnenskaya naberezhnaya (Milan Branch) Moscow 123317, Russia Via Amedei, 8 Tel: (7) 495 651 6649 20123 Milan Fax: (7) 495 651 6696 Italy [email protected] Tel: (39) (02) 863 331 Fax: (39) (02) 8645 0117 Dmitry Kuryshev Swift: ABCO IT MM ABC (IT) Services Ltd. Paolo Provera Arab Banking Corporation House General Manager 1-5 Moorgate, London EC2R 6AB, UK Tel: (44) (20) 7776 4050 ABC INTERNATIONAL BANK PLC Fax: (44) (20) 7606 2708 MARKETING OFFICES [email protected]

UK & Ireland John Bates Station House, Station Court, Rawtenstall General Manager Rossendale Lancashire Banco ABC Brasil S.A. BB4 6AJ, UK Av. Pres. Juscelino Kubitschek, 1400 Tel: (44) (1706) 237 900 04543-000 Itaim Bibi Fax: (44) (1706) 237 909 São Paulo – SP, Brazil Tel: (55) (11) 317 02000 David Beeley Fax: (55) (11) 317 02001

Iberia – Representative Ofﬁce Tito Enrique da Silva Neto Paseo de la Castellana 153 President 2° Dcha, Madrid 28046, Spain Tel: (34) (91) 5672822 Fax: (34) (91) 5672829

Usama Zenaty

Nordic Region Stortorget 18-20 SE-111 29 Stockholm Sweden Tel: (46) 823 0450 Fax: (46) 823 0523

Klas Henrikson

Turkey – Representative Ofﬁce Eski Büyükdere Cad. Ayazaga Yolu Sk. Iz Plaza No: 9 Kat:19 D:69 34398 Maslak Istanbul Turkey Tel: (90) (212) 329 8000 Fax: (90) (212) 290 6891

Muzaffer Aksoy FABR 173 FABR

114 ABC Group Annual Report 2009 INTERNATIONAL DIRECTORY

BRANCHES REPRESENTATIVE OFFICES

Tunis (OBU) Abu Dhabi ABC Building, Rue du Lac d’Annecy 10th Floor, East Tower at the Trade Centre Les Berges du Lac, 1053 Tunis 2nd Street, Abu Dhabi Mall Tunisia PO Box 6689, Abu Dhabi, UAE Tel: (216) (71) 861 861 Tel: (971) (2) 644 7666 (216) (71) 861 110 (Treasury) Fax: (971) (2) 644 4429 Fax: (216) (71) 860 921/ 960 406/ 960 427 [email protected] Tlx: 12505 ABCTU TN [email protected] Mohamed El Calamawy Direct Dealing Reuters Code: ABCT Chief Representative Swift: ABCOTNTT Beirut Nour Nahawi Berytus Parks Resident Country Manager & General Manager Block B, 2nd Floor Minet El Hosn, Solidere Baghdad PO Box 11-5225 Al Saadon St., Al Firdaws Square Beirut, Lebanon National Bank of Iraq Building Tel: (961) (1) 970770 / 970432 Baghdad, Iraq Fax: (961) (1) 985809 Tel: (964) (1) 7173774 / Mobile: (961) (3) 724644 7173776/717 3779 [email protected] Ghina Haddad Chief Representative Mowafaq H. Mahmood General Manager Tehran Mobile: (964) 790 161 8048 4th Floor West No. 17 Haghani Expressway New York Tehran 15188, Iran 600 Third Avenue Tel: (98) (21) 8879 1105 / 8879 1106 New York, NY 10016, USA Fax: (98) (21) 8888 2198 Tel: (1) (212) 583 4720 [email protected] Fax: (1) (212) 583 0921 Tlx: 661978/427531 ABCNY (General); Aziz Farrashi 421911/661979 ABCFX (Dealing Room) Chief Representative Direct Dealing Reuters Code: ABCN Tripoli Robert Ivosevich That Emad Administrative Centre Tower 5, General Manager 16th Floor, PO Box 3578, Tripoli, Libya Tel: (1) (212) 583 4774 Tel: (218) (21) 335 0226/ 335 0227 / 335 0228 Grand Cayman Fax: (218) (21) 335 0229 c/o ABC New York Branch [email protected]

Saddek El Kaber 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 REGISTERED ADDRESS Arab Banking Corporation (B.S.C.) ABC Tower, Diplomatic Area PO Box 5698, Manama Kingdom of Bahrain

(Commercial Registration Number 10299) www.arabbanking.com