Arab Banking Corporation Group Annual Report 2000

developing our business focus ABC’s Vision

Our vision is to be the premier and most innovative international Arab financial group.

Our mission is to: CONSISTENTLY GENERATE INCREASING VALUE FOR OUR SHAREHOLDERS.

SPECIALISE IN ARAB-RELATED ACTIVITIES ACROSS THE WORLD.

INVEST IN INTERNATIONAL FINANCIAL INSTITUTIONS THAT DIVERSIFY AND ENHANCE SHAREHOLDER VALUE.

ATTRACT AND RETAIN HIGH QUALITY EMPLOYEES BY PROVIDING REWARDING CAREERS.

Our key objectives are to: MAINTAIN A STRONG PRESENCE IN THE ARAB WORLD AND ACHIEVE OPTIMAL DIVERSIFICATION OF OUR EARNING STREAM.

MAINTAIN A STRONG RISK MANAGEMENT PROCESS.

MAINTAIN AN EFFECTIVELY MANAGED EXPENSE BASE FOCUSED ON GENERATING INCREASING SHAREHOLDER VALUE.

BUILD A STRONG AND LIQUID FINANCIAL INSTITUTION WITH EMPHASIS ON ASSET QUALITY.

Arab Banking Corporation Annual Report 2000 1 Global Network CONTINUED

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The business and geographic mix of the Group and the knowledge and experience that the Group’s management has of emerging markets around the world make ABC the leading Arab bank.

Arab World Division International Division Investment Group The ABC Group

Arab Banking Corporation ABC Banque Internationale Banco ABC Brasil S.A. – Algeria de Monaco S.A.M. 2000 Highlights US$ millions 2000 Highlights US$ millions 2000 Highlights US$ millions Total Assets 1,306 317 Total Assets 156 Total Assets Total Loans and Total Loans and Total Loans and Advances 763 76 Advances 37 Advances Total Deposits 1,019 294 Total Deposits 86 Total Deposits Shareholders’ Shareholders’ Shareholders’ Funds 164 18 Funds 35 Funds Number of Number of Number of Branches 4 Branches 4 Branches -

ABC Islamic Bank (E.C.) ABC International Bank plc Banco Atlantico S.A.

2000 Highlights US$ millions 2000 Highlights US$ millions 2000 Highlights US$ millions Total Assets 195 Total Assets 2,278 Total Assets 8,001 Total Loans and Total Loans and Total Loans and Advances 139 Advances 1,114 Advances 4,472 ABC Parent (ABC BSC) Total Deposits 135 Total Deposits 1,265 Total Deposits 6,875 2000 Highlights US$ millions Shareholders’ Shareholders’ Shareholders’ Funds 57 Funds 332 Funds 436 Total Assets 12,009 Number of Number of Number of Branches - Branches 2 Branches 274 Total Loans and Advances 4,659 Arab Banking Corporation Arab Banking Corporation – International Bank of (Jordan) Daus & Co GmbH Asia Limited Total Deposits 8,818 2000 Highlights US$ millions 2000 Highlights US$ millions 2000 Highlights US$ millions Shareholders’ Funds Total Assets 366 Total Assets 565 Total Assets 3,749 1,904 Total Loans and Total Loans and Total Loans and Advances 145 Advances 65 Advances 2,234 Total Deposits 309 Total Deposits 500 Total Deposits 3,000 ABC Group Shareholders’ Shareholders’ Shareholders’ 2000 Highlights US$ millions Funds 35 Funds 60 Funds 439 Number of Number of Number of Total Assets 26,676 Branches 20 Branches - Branches 27 Total Loans and Advances 14,039 Arab Banking Corporation ABC Securities (Egypt) S.A.E – Egypt (S.A.E.) Total Deposits 21,509 2000 Highlights US$ millions 2000 Highlights US$ millions Shareholders’ Total Assets 31 Total Assets 423 Funds 1,904 Total Loans and Total Loans and Advances - Advances 175 Total Deposits 1 Total Deposits 314 Shareholders’ Shareholders’ Funds 28 Funds 55 Number of Number of Branches - Branches 6

Arab Banking Corporation – Tunisie, S.A. 2000 Highlights US$ millions Total Assets 59 Total Loans and Advances 32 Total Deposits 42 Shareholders’ Funds 13 Number of Branches 1

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. . . . . Hong Kong .....Madrid ....Milan. ....Paris ....Sao Paulo Group Organisation

The ABC Group is organised into three business divisions and a central Group Head Office divided into several functional divisions, reflecting its key objectives as outlined on page one.

Board Secretary: Dr. Khaled S. Kawan Board of Directors Audit Committee

Ghazi M. Abdul-Jawad President & Chief Executive Internal Audit: Prasad Abraham

Treasury Group Banking Group Essam El Wakil, SVP Taher D. Makkiyah, EVP Group Treasurer Chief Banking Officer Group Treasury Unit Arab World Division George Karam, SVP FX, Precious Metals, Commodities & Sales } Money Market, Options, Derivatives & New Products Bahrain Business Unit Marketable Securities } Tunis Branch (OBU) } Other Treasury Units in the Group ABC Islamic Bank (E.C.)

Arab Banking Corporation - Algeria Investment Group Omar el-Abd, SVP } Arab Banking Corporation - Egypt (S.A.E.) Investment Coordinator Arab Banking Corporation (Jordan) ABC Securities (Egypt) S.A.E. Omar el-Abd, Chief Executive Officer Arab Banking Corporation - Tunisie, S.A. Banco ABC Brasil, S.A. Tito Enrique da Silva Neto, President } Representative Offices: Abu Dhabi, Casablanca, Tehran & Tripoli (Libya) } Banco Atlántico, S.A. Manuel Montecelos, Chief Executive Officer

International Division Banco Atlántico Panama, S.A. George K. Morton, SVP } International Bank of Asia Ltd } Mike M. Murad, Vice Chairman & Chief Executive Officer Grand Cayman Branch

Milan Branch Administration Group } New York Branch Corporate Communications Singapore Branch Global Information Technology

ABC Finanziaria S.p.A. Human Resources & Administration } Arab Banking Corporation Daus & Co. GmbH } Legal & Compliance ABC International Bank plc Operations

Planning & Financial Controls London Branch } Paris Branch Premises & Engineering

} Representative Offices: Credit & Risk Group Houston & Los Angeles Richard Cumberland, SVP Chief Credit & Risk Officer

Credit Department

Credit Risk Control & Policy } Economics Remedial Loans

Risk Managment

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Algiers ....Amman ....Bahrain ....Cairo ....London . . . . Frankfurt . . . Board of Directors

There are currently 12 Directors on the Board who have varied backgrounds and experience and who individually and collectively exercise independent and objective judgement. All Directors are non-executive. The Board of Directors meets regularly and has a formal schedule of matters reserved to it, considering key aspects of the Group’s affairs referred to it for decision. The Board and its Committees are supplied with full and timely information to enable them to discharge their responsibilities. All Directors have access to the advice and services of the Secretary who is respon- sible for ensuring that the Board procedures and applicable rules and regulations are observed; in addition, the Directors are able, if necessary, to take independent professional advice at the Group’s expense. The roles of Chairman and Chief Executive Officer are separate, with distinct responsibili- ties. Directors are appointed by the shareholders for a specific term and re-appointments are reviewed as each Director approaches the end of his term. None of the Directors had at any time during the year a direct or indirect material interest in any contract of significance with ABC or any of its subsidiaries.

Members of the Board of Directors and Secretary to the Board

Mr. Abdulmohsen Y. Al-Hunaif Chairman Kuwaiti. B.A. in Commerce, Ain Shams University, Egypt. Undersecretary of the Ministry of Finance in Kuwait. Chairman of ABC since 1994, Chairman of Banco Atlántico, S.A., Spain. Mr. Al-Hunaif has more than 30 years’ experience as a banker and senior government official. He sits on the boards of various Middle East and European banks as well as serving with a number of government organisations.

Mr. Ageli Abdulssalam Breni Deputy Chairman Libyan. B.Sc. in Economics, Benghazi University, Libya; M.S. in Economics, Oklahoma State University, U.S.A. Deputy Governor of Central Bank of Libya. Director of African Development Bank, Ivory Coast. Also Director of ABC International Bank plc, U.K., and Chairman of Arab Banking Corporation - Tunisie, S.A. He was appointed Director of ABC in 1996. Mr. Breni has more than 20 years’ experience as a banker. (Resigned 6 December 2000).

Mr. Khalifa M. Al-Kindi Deputy Chairman U.A.E. citizen. B.Sc. in Economics, East Michigan University, U.S.A. Deputy Managing Director of Abu Dhabi Investment Authority and Director of Abu Dhabi Investment Company. Also Director of ABC International Bank plc, U.K., and a past Director of International Bank of Asia Ltd., Hong Kong, and Banco Atlántico, S.A., Spain. He has been a Director of ABC since 1992 and has 15 years’ experience as an investment banker as well as holding a number of directorships in various public corporations.

Dr. Anwar Ali Al-Mudhaf Director Kuwaiti. B.A., Kuwait University; M.B.A. and Ph.D. in Finance, Peter Drucker Management Center, Claremont Graduate School, California, U.S.A. Dr. Al-Mudhaf is currently the General Manager of Kuwait Health Insurance Company and a lecturer in corporate finance, investment analysis and financial institutions at Kuwait University. He is also a Director and a Member of the Board’s Investment Committee of the Kuwait Public Institute for Social Security, Vice-Chairman of Al-Mal Kuwaiti Company (K.S.C.) and a past Director of Al-Ahli Bank of Kuwait. Dr. Al-Mudhaf joined ABC’s Board in December 1999.

Mr. Hassan A. Juma Director Bahraini. Fellow of the Chartered Institute of Management Accountants (FCIMA), U.K. Managing Director of National Bank of Bahrain as well as serving on the boards of a number of public and corporate bodies in Bahrain. Also Director of Banco Atlántico, S.A., Spain. Mr. Juma has been a Director of ABC Group since 1994. He has more than 25 years’ experience as a senior commercial banker.

Sheikh Khalid A. Al-Turki Director Saudi Arabian. B.A. in Political Science, M.A. in International Relations, American University, Washington D.C., U.S.A.; M.B.A. in Business Administration, Stanford University, U.S.A. Chairman, Advisory Council, Centre for Middle Eastern Studies, Harvard University. Chairman of Trading & Development Co. (TRADCO), Saudi Arabia. Also Chairman of ABC International Bank plc, U.K. Mr. Al-Turki has been a Director of ABC since 1992 and has spent over 30 years in both academic fields and banking and international trade.

Dr. Saleh Lamin El-Arbah Director Libyan. B.A. in Economics, University of Benghazi, Libya; M.B.A. University of Hartford, U.S.A.; Ph.D. in Economics, Academy of Science, Hungary. Director Accounting and Investments of the Central Bank of Libya; Director of Salima Holding Mabrouk, Casablanca, Morocco, and former Undersecretary of the Ministry of Planning, Economy and Commerce, Libya. Also a Director of Banco Atlántico, S.A., Spain. Dr. El-Arbah has been a Director of ABC since 1996 and has 30 years’ experience in central government. Dr. El-Arbah is currently on leave from the University of Gharian (Libya) where he holds a chair in MacroEconomics.

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. . . . . Hong Kong .....Madrid ....Milan. ....Paris ....Sao Paulo Board of Directors CONTINUED

Mr. Abdulwahab A. Al-Tammar Director Kuwaiti. B.A. in Social Sciences, Economics and Business Administration, American University of Cairo, Egypt. President of Altammar Economic Consultation and, among the many offices he has held in the past, Mr. Al-Tammar has been Governor of the Central Bank of Kuwait and Chairman and Chief Executive Officer of Arab Insurance Group, Bahrain. He has over 30 years’ banking experience and is a Member of both Kuwait Economic Society and of Kuwait Society for Special Studies. He has served as a Director of ABC since 1991 and is also a Director of ABC International Bank plc, U.K. Mr. Al-Tammar served as Chairman of ABC over the period 1980-1983 and Chairman of ABC and Arab Banking Corporation (Jordan) over the period 1992-1999.

Mr. Issa M. Al Sowaidi Director U.A.E. citizen. B.Sc. in Economics, Northeastern University of Boston, U.S.A. Executive Director of Abu Dhabi Investment Authority and Director of Abu Dhabi National Oil Company For Distribution (ADNOC- FOD). Also Director of International Bank of Asia Limited, Hong Kong, and Chairman of Arab Banking Corporation - Egypt (S.A.E.). He has been a Director of ABC since 1995, with over 15 years in investment banking.

Mr. Mubarak R. Al-Mansouri Director U.A.E. citizen. B.Sc. in Finance, M.B.A., University of West Florida, U.S.A. General Manager, Retirement Pensions and Benefits Fund, Abu Dhabi. Director of Arab International Bank, Egypt, also Director of Banco Atlántico, S.A., Spain. Director of ABC since 1997. Mr. Al-Mansouri has nine years’ experience in investment and commercial banking.

Sheikh Ali Jarrah Al Sabah Director Kuwaiti. B.A. in Economics and Political Science, University of Kuwait. Member of the Higher Planning Council for the State of Kuwait, Director of Bahrain Middle East Bank and Chairman of Burgan International Trading Co., W.L.L., Kuwait. Also Chairman of International Bank of Asia Ltd., Hong Kong. Sheikh Ali has been a Director of ABC since 1998 and his experience covers over 25 years in international and commercial banking, as well as international trading and public service.

Mr. Mohammed A. Al Mannai Director Bahraini. Chairman of Al-Mannai Group, Bahrain. Served as a Member of the Consultative Council for the State of Bahrain over a period of eight consecutive years. Member of the G.C.C. Commercial Arbitration Centre and Deputy Chairman of Al Ahli Commercial Bank, Bahrain. Mr. Al Mannai also serves as Chairman or member of the board of several other Bahraini and Egyptian companies. His more than 35 years’ experience in commerce and banking has been available to ABC since 1998.

Dr. Khaled S. Kawan Secretary to the Board Libyan. Ph.D. (Doctorat d’Etat) in Banking Laws, University of Paris (Sorbonne), France. Dr. Kawan has served as in-house counsel to, and Secretary to the Board of Directors of, ABC since 1991.

Board Committees Specific responsibilities have been delegated to the Board Committees. The two principal Board Committees, and their Board members, are:

Audit Committee Mr. Issa M. Al Sowaidi (Chairman) Mr. Saleh Lamin El-Arbah Dr. Anwar Ali Al-Mudhaf Mr. Abdulwahab A. Al-Tammar The Board of Directors has delegated to the Group Audit Committee the responsibility for ensuring the existence of an effective system of accounting and financial controls. Audit Committee meetings are held at least four times a year. The Committee also meets regularly with the Internal and External Auditors. Selected members of management are invited to meetings to discuss relevant issues. During its meetings, the Committee reviews, inter alia, the Group’s annual and interim financial statements, summaries of all internal audit reports, all reports issued by the Group’s various regulatory authorities, and all management letters from the External Auditors. The Committee also reviews the appointment and retirement of External Auditors. It is the responsibility of the Group Internal Audit Department to confirm the condition of ABC Group’s assets and to monitor its activities to ensure that its operations are properly controlled. Internal Audit reports directly to the Group Audit Committee. Internal Audit performs independent examinations of all ABC Group’s operations and lending activities. The frequency and scope of reviews for any given business unit are determined by the level of risk associated with that unit, and how that unit’s performance was rated at the previous audit. Separate internal audit departments have been created in major Group subsidiaries. These departments report to their boards through their respective audit committees.

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Algiers ....Amman ....Bahrain ....Cairo ....London . . . . Frankfurt . . . CONTINUED Board of Directors

Executive Committe Mr. Abdulmohsen Y. Al-Hunaif (Chairman) Mr. Khalifa M. Al-Kindi (Deputy Chairman) Mr. Ageli Abdulssalam Breni (Deputy Chairman) (Resigned 6 December 2000) Mr. Hassan A. Juma Mr. Abdulwahab A. Al-Tammar The Executive Committee exercises all of the responsibilities of the Board between its meetings. Senior Management The direct responsibilities of the members of the Group’s Senior Management, as briefly out- lined in the chart on page four, are shown below together with details of their background and experience. The exercise of Head Office control over subsidiaries is supported by the appointment of senior management to the boards of the subsidiaries.

Head Office Mr. Ghazi M. Abdul-Jawad President & Chief Executive Saudi Arabian. B.A. in Political Science, Lewis & Clark College, Oregon; M.A. in International Relations, Fletcher School of Law & Diplomacy, Tufts University, Mass., U.S.A.; Fellow of the Chartered Institute of Bankers, U.K. Member of Steering Committee of Institute of International Finance, Washington, and Steering Committee for the Gulf Executive Management Strategic Leadership Programme and several other consultative or advisory committees. Director of Al Lujain Corporation. Also Vice Chairman of Banco Atlántico, S.A., Spain, Chairman of Arab Banking Corporation – Daus & Co. GmbH and Chairman of Arab Financial Services (E.C.), Bahrain. Previously General Manager of Gulf International Bank (B.S.C.), Bahrain. Mr. Abdul-Jawad has over 25 years’ experience as a senior general and commercial banker and in government service and has held his present position with ABC Group since 1997.

Mr. Taher D. Makkiyah Executive Vice President & Chief Banking Officer U.S. citizen. B.B.A. (Accounting major), American University of Beirut; M.B.A. (Finance major), Tulane University, U.S.A.; Harvard Executive Program graduate. Previously Managing Director based in the U.K., in charge of Europe, Middle East and Africa, of Chase Manhattan Private Bank, a division of Chase Manhattan Bank N.A.. Earlier, Senior Managing Director in the Emerging Markets Group of Chemical Bank N.A. and a similar position at Manufacturers Hanover Corporation prior to its merger with Chemical Banking Corporation. During his career, Mr. Makkiyah has served as a member of the boards of The Far East Trust Bank, Philippines, and The Anglo Romanian Bank Ltd., U.K., and as a member of the Business Council for International Understanding, the Financial Services Volunteer Corps for Eastern Europe, Builders for Peace Group, the Philippine American Chamber of Commerce and the American University of Beirut Alumni Association of North America, and as President of the Arab Bankers Association of North America. He has had over 25 years’ experience in commercial, correspondent and private banking and has been ABC Group’s Chief Banking Officer since 1998.

Mr. Omar el-Abd Senior Vice President & Investment Coordinator U.S. citizen. Bachelor of Commerce, Alexandria University, Egypt. Previously General Manager of Crédit des Bergues, Geneva, for nine years, earlier with The First Boston Corporation and Saloman Brothers. Joined ABC in 1998 and has over 30 years of experience in international and investment banking.

Mr. Richard Cumberland Senior Vice President & Chief Credit & Risk Officer British. Associate of the Chartered Institute of Bankers, U.K. Mr. Cumberland joined ABC in 1999 after 23 years with Chase Manhattan Bank N.A. and has over 35 years’ experience in commercial banking and credit and risk management.

Mr. Essam El Wakil Senior Vice President & Group Treasurer Egyptian. B.A. in Business Administration, Cairo University, Egypt. Mr El Wakil has been with ABC since 1980 and served in both Bahrain’s and London’s Treasury Departments. He took over as Group Treasurer in 1999. Mr El Wakil has over 25 years’ experience in Treasury Management.

Mr. George Karam Senior Vice President & Division Head, Arab World U.S. citizen. B.A. in Economics and Public Administration, American University of Beirut; M.A. in Economics, New School for Social Research, New York; M.B.A. Finance, Fordham University, New York, U.S.A. Mr. Karam joined ABC in 1998 after 16 years with Manufacturers Hanover and Chemical Bank N.A. in international commercial and treasury banking.

Mr. George K. Morton Senior Vice President & Division Head, International Canadian and British. B.A. (Hons) in Modern History and M.A. in History (East Asia), University of Toronto, Canada. Formerly Vice President, Trade Finance & Correspondent Banking at Bank of Nova Scotia, Toronto, earlier with National Bank of Bahrain and Gulf International Bank. Mr. Morton brings over 25 years’ experience in international commercial banking to the Group. He joined ABC in 1998.

Mr. Asaf Mohyuddin Senior Vice President & Head of Planning & Financial Controls Pakistani. B.Com. (Hons) in Commerce, Punjab University, Pakistan; Fellow of the Institute of Chartered Accountants in England and Wales, U.K. Mr. Mohyuddin joined ABC in 1983 having formerly been General Manager (Finance) at Pak-Arab Fertilisers, Pakistan, and with Citibank, N.A. in the Middle East. He assumed his present position in 1998, and has over 25 years’ experience in finance and banking. Mr. Mohyuddin was promoted to the rank of SVP in 2000.

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. . . . . Hong Kong .....Madrid ....Milan. ....Paris ....Sao Paulo Board of Directors CONTINUED

Mr. Edward Watson Senior Vice President & Head of Human Resources & Administration British. Associate of the Chartered Institute of Bankers, U.K. Mr. Watson joined ABC in 1997 having previously spent 30 years with the Midland Bank PLC in the U.K. predominantly in the Human Resources arena. His extensive Human Resources experience was subsequently supplemented by spells with the National Bank of Abu Dhabi and Standard Chartered Bank in the Gulf and also by a consultancy assignment during 1995 with the National Bank of Malawi. Mr. Watson was promoted to the rank of SVP in 2000.

Mr. Sael Al Waary Senior Vice President & Head of Global Information Technology British. B.Sc. (Hons) Computer Science, University of Reading, U.K. Mr. Al Waary joined ABC Group in 1981, and from 1986 was General Manager & Director of ABC (IT) Services Ltd., the wholly-owned technology arm of ABC, located in London, U.K. In 1997 he relocated to the Head Office at Bahrain to head ABC’s Global Information Technology function. A board member of Arab Financial Services Company (Bahrain) and ABC (IT) Services Ltd. (U.K.), Mr. Al Waary has over 20 years’ experience in banking IT. Mr. Al Waary was promoted to the rank of SVP in 2000.

Mr. Mounir Ben Slimane Senior Vice President & Legal Counsel Tunisian. Diplômes d’Etudes Approfondies (post graduate degrees) in Law, Sorbonne University, Paris, France. Advocat since 1978, Mr. Ben Slimane is a member of the Tunis Bar, and of the Paris Bar. He is also a member of the International Bar Association. Immediately prior to joining ABC Mr. Ben Slimane was Head of the Legal department for the Central Province of Saudi French Bank, the affiliate of Banque Indosuez. He joined ABC as counsel in 1985, and was promoted to Legal Counsel and Head of Legal Affairs in 1996. Mr. Ben Slimane was promoted to the rank of SVP in 2000.

Mr. Alexander B. Richardson Senior Vice President & Head of Operations British. B.A. (Hons) and M.A. in Chemistry & Statistics, Cambridge University, U.K., Fellow of the Institute of Chartered Accountants in England and Wales, U.K. Mr. Richardson joined ABC in 1997 having previously held executive positions in offshore and investment banking in Europe, the Middle East and Far East with E. D. & F. Man Investment Products, Alubaf Arab International Bank and Ernst & Young Management Consultants. Mr. Richardson was promoted to the rank of SVP in 2000.

Mr. Prasad Abraham Senior Vice President & Chief Internal Auditor, Compliance Officer Indian. B.Sc. in Chemistry, University of Calicut; Diploma in Business Studies, Cochin, India. Formerly of Citibank N.A., Mr. Abraham joined ABC in 1983 and has over 25 years’ experience in internal audit. Mr. Abraham was promoted to the rank of SVP in 2000. Main Operating Subsidiaries Mr. Abdulmagid Breish Chief Executive Officer, ABC International Bank plc, U.K. Libyan. B.A. Political Sciences, American University of Beirut; Financial & Policy Diploma, IMF Washington D.C. Mr. Breish joined ABC in 1980, and served as Head of Business Development until 1985 before trans- ferring to Tokyo as Chief Representative. In 1988 he took over as Managing Director of ABC Investment & Services Co (EC) in Bahrain, and in 1991 he became General Manager of ABC International Bank plc in London. In 1993 he was made Chief Executive Officer of ABC International Bank plc. Mr. Breish has over 25 years’ experience in commercial, investment and Islamic banking.

Mr. Manuel Montecelos Chief Executive Officer, Banco Atlántico, S.A., Spain Spanish. Degree in Industrial Engineering, High Technical School of Industrial Engineers, Madrid; Degree in Economics, I.C.A.D.E., Madrid. Formerly with ISOLUX, S.A., joined Banco Atlántico, S.A. in 1975, appointed Deputy General Manager, heading inter alia Strategic Planning and General Accounting, and Member of the Management Committee, in 1986. Appointed General Manager, Commercial Area, 1996 and to his current position of Chief Executive Officer in July 1999. Mr. Montecelos brings to ABC Group over 25 years’ experience in Spanish commercial banking.

Mr. Mike M. Murad Vice Chairman, Managing Director & Chief Executive Officer International Bank of Asia Ltd., Hong Kong U.S. citizen. B.A. in Business Administration, Cleary College, Michigan; M.A. in Business Administration, University of Miami; banking and management degrees from Stonier Graduate School of Banking at Rutgers University, the University of Michigan Graduate School of Banking, the University of Wisconsin and the Harvard Executive Management Program. Honorary Doctor of Humane Letters, DePaul University. Mr. Murad joined ABC in 1987 after 20 years in commercial and retail banking including several years in senior management positions with Sun Bank of Florida, Inc., U.S.A. and the Bahrain subsidiary of Arab African International Bank, Egypt. He has been the Vice Chairman, Managing Director and CEO of the Group’s subsidiary in Hong Kong since 1988 and was additionally the Asia Division Head from 1991 until the reorganisation of ABC Group in 1998. He also served as Chief Operating Officer in Head Office between 1991 and 1995.

Mr. Tito Enrique da Silva Neto President, Banco ABC Brasil S.A., Brazil Brazilian. Degree in Operational Engineering, University of Industrial Engineering, São Paulo. Mr. da Silva Neto’s experience spans over 30 years in Brazilian commercial and investment banking, including 15 years with Banco Finasa de Investimento S.A. and four years each with Banco do Estado de São Paulo S.A. and Banco Itamarati S.A., before joining Banco ABC Brasil S.A. in his present position of Director President in 1991.

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Algiers ....Amman ....Bahrain ....Cairo ....London . . . . Frankfurt . . . The New Synergies of ABC Group – The Way Forward

ABC’s Vision – to be the premier and most innovative international Arab financial group – reflects several separate, albeit closely interwoven, themes. Put simply, the Group aims to be the first amongst its peers – but who are its peers? Today, ABC sees itself as both a major regional player and an important international bank, so it must measure itself by these twin yardsticks. As an Arab bank it has an important role to play in servicing an increasingly sophisticated and demanding corporate, governmental and institutional client base in the Arabian Gulf, Levant and the Magreb countries.

Meeting the needs of its regional customers therefore requires it to produce innovative and progressive products geared to the region, with its varied economic and social developmental requirements, whilst maintaining and constantly refreshing its capability to deliver competitive international services and products. As an international bank, it must provide its multinational clients investing or trading in the Arab world with sound risk management systems and strategies that address the individual conditions inherent in a region containing many diverse political and economic structures, not to mention currencies and currency systems. It must also meet the highest international standards of asset, risk and liquidity management, internal control and the delivery of reliable, consistent and increasing shareholder value. The Group’s Mission and key medium-term objectives therefore seek to address these imperatives through: the continuous development and maintenance of its Arab-related business expertise; its diversi- fication of income and risk through judicious investments; its strong – and expanding – Arab world franchise; its determination to preserve and maintain its financial strength and its detailed attention to best practice risk and asset management. ABC’s strong presence in the Arab world has always given it a unique advantage among international banks. To capitalise on this and, furthermore, to benefit as much as possible from greater diversification of income sources and risk, ABC decided, as it approached the end of its second decade, to build up the regional side of its bridge between the international world and the Arab world. It therefore resolved to expand more aggressively into its natural geographical territory, through a combination of new subsidiaries and branches, organic growth and – only as and when necessary, and subject to ABC majority control – acquisitions of existing banks. These new domestic banking units have become platforms from which to launch an expanded range of products that can be offered within, and throughout, the Group – broadly concentrated on domestic and commercial banking, with strong emphasis on commercial banking. New products – in particular in the areas of Islamic, project and structured finance – specifically geared to the needs of the Group’s major multinational and regional clients have also been developed in Head Office and London for dissemination Group-wide. Meanwhile, a new Egyptian securities company, formed in 2000, marks the beginning of a cautious regional expansion into the capital markets field. Having laid the foundations for growth, the next stage of ABC’s development plan is to tap into the synergies available throughout the Group and thus to maximise the contribution of the most profitable units. The Arab world domestic banking platforms are expected to be among the most profitable in the Group, delivering high returns on equity. These domestic platforms also have the capability to contribute synergistic benefits globally. The new philosophy prevailing throughout the Group is to focus on building close relationships with multi-nationals in Europe and the USA have existing or potential interest in doing business in the Arab world. In the area of trade finance, the operating units there can source business directly, without the over-dependence on correspondent banking relationships experienced by ABC’s smaller regional competitors. In the case of major projects –the financing of which is fast becoming an ABC speciality – through its global network ABC effectively has two opportunities to play a part: working with, and providing facilities to multinationals (including export credit agency-linked and limited recourse facilities) out of its international units; and the provision of direct services and financing to Arab buyers and sponsors from the Head Office and the domestic platforms.

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. . . . . Hong Kong .....Madrid ....Milan. ....Paris ....Sao Paulo The New Synergies of ABC Group – The Way Forward CONTINUED

The synergies arising out of the widespread application of this philosophy are increasingly evident and producing real benefits for the Group:

✺ The international units seek out – and feed back to Arab world units – regional business opportunities from multinationals in their areas, whether they be the provision of local domestic or corporate banking services and finance to their regional subsidiaries, or trade and other finance facilities to the multinationals' customers.

✺ The regional domestic banking platforms, meanwhile, introduce the international units to the many supplier (and buyer) credit opportunities with exporters and contractors in their own region, of which they become aware through their own customer base and marketing.

✺ The capital markets and investment banking arms of the Group provide fee-earning advisory services such as project finance structuring and local securities issuance to both domestic and inter- national clients, introducing them to other parts of the Group for consideration of financing facilities as appropriate.

✺ Islamic, project and structured finance opportunities are fed into the specialised centres in Bahrain and London by both the international and domestic banking units.

✺ Bahrain Treasury products and other risk management facilities, specifically geared to those exposed to Arab world countries and currencies, are marketed throughout the Arab world both directly and via the domestic platforms, and through the international units.

✺ Islamic Banking in Bahrain meanwhile packages Arab -focused investment funds and introduces these to the retail domestic units, for distribution to their local clients.

✺ The loan underwriting, syndication, placement and distribution facilities of Bahrain and London are available to all parts of the Group.

Conclusion There is a growing realisation of the emergence of a Group -wide symbiosis in ABC. This process began with the creation of a wider regional network in the Arab world to complement that of the International Division. These developments were rapidly followed by the development and launching of sophisticated, targeted, products geared to both the Arab and international markets: Islamic facilities and services, Treasury products like the new Arab currency options and swaps; fund management services provided for institutional customers; risk and cash management services for the multinationals and major domestic corporates; tech-nological services developed in-house and provided to the domestic units for their own use, such as mobile telephony and Internet banking, credit card issuance, etc. and Project and Structured Finance. Today, the closer and ever-growing interaction between all operating entities in the ABC Group, whether they be units of the Arab World or the International Divisions, or playing their part as members of the Investment Group, is leveraging operating costs and maximising the contributions of every part of the Group, for the benefit of the whole. ABC looks forward to moving closer to achieving its ultimate aim: the welding together of a synchronous, inter-dependent and mutually symbiotic financial group dedicated to its global Vision – to be the premier international Arab financial group.

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Control Environment ABC Group is committed to the maintenance and development of a culture of policy and procedural adherence appro- priate to a major international banking group. This is achieved through a formal organisational structure with clearly demarcated lines of responsibility together with the issue and review of formal policies and procedures from the Board through the Chief Executive to the senior management of the Group. The Group has two main areas of business activity. The first is the ‘core bank’, comprising ABC’s branches and wholesale banking subsidiaries worldwide, and the Arab region’s retail banks. These business units are directed, super- vised, and supported within a matrix structure under which commercial banking activities are controlled by the Banking Group, through the Arab World and International Divisions; foreign exchange dealing, securities trading and related activities are controlled by the Treasury Group; credit and risk management matters are controlled by the Credit & Risk Group; and administrative matters are coordinated by the Administration Group. The activities of ABC’s other subsidiaries – Banco ABC Brasil, S.A., Banco Atlántico, S.A., International Bank of Asia Ltd. and ABC Securities (Egypt) S.A.E. – are coordinated by the Investment Group. These subsidiaries are considerably more autonomous than the ‘core bank’ units, because of the substantial difference in the nature of their business. Banco Atlántico, S.A. and International Bank of Asia Ltd. are largely domestic retail banks, whilst Banco ABC Brasil, S.A. is a domestic commercial bank with mainly corporate clients and ABC Securities (Egypt) S.A.E. provides asset management, corporate finance, sales and trading and advisory services. These subsidiaries each have their own Head Office structures covering their day-to-day activities, within ABC Group’s overall policy, planning and risk management framework. The assistance and advice of the Group Head Office in Bahrain is sought whenever necessary. The Administration Group provides operational, legal, accounting, communications, information technology, premises management and Human Resources support to the business units in pursuit of ABC Group’s main goal – shareholder value. The emphasis is on service and support, and all of the Administration Group’s activities are direct- ed to providing these in a timely, efficient and cost-effective manner. The Administration Group issues and administrates a number of policy and procedural manuals, aimed at providing the business units with a common platform for operational controls. Corporate Communications is responsible for public relations, media and employee relations, and shareholders’ rela- tions, its main role being to encourage effective internal and external communication in all matters related to ABC Group’s business objectives. The department uses its extensive contacts with local and international publications to disseminate information worldwide about the Group’s activities and achievements. Its effective advertising campaigns, on-going management of the Group’s Internet website, participation in regional and international conferences and exhibitions and sponsorship of charitable causes all contribute to informing shareholders and clients of the Group’s strategy and values. Internally, its employee newsletter ‘Al Masrafiyah’ keeps members of the Group informed on important developments and encourages interaction and exchange of views amongst employees. Global Information Technology is responsible for global IT strategy and planning and related technical services through- out the Group, assessing its future operational needs and developing and implementing IT systems to meet them. It is the focal point in ABC Group for the review and assessment of business requirements and the project proposals arising from them, matching these business needs with the Group’s technology strategy and primary concern of delivering efficient, cost-effective, systems. Human Resources & Administration establishes ABC Group’s overall Human Resources strategy and where appropriate provides direction and guidance to business units in best practice policies and procedures to meet business needs. ABC is cognisant of the contribution of its management and staff, throughout its worldwide network, to its development since its inception. It is conscious that its success will ultimately be determined by the quality of the people engaged in fulfilling its medium and long-term strategic aims. ABC Group is therefore committed to attracting and retaining the most qualified and effective executives and realising the full potential of all of its staff through career development and training, the provision of a stimulating and challenging working environment and a performance-based reward system. Legal & Compliance monitors the provision of legal services to the ABC Group as a whole, through a combination of in-house resources and outsourcing. The department is directly responsible for the provision of legal services to ABC’s Head Office, branches and certain of its subsidiaries in connection with all aspects of their business (including regulatory and reporting requirements) and is also responsible for the Group’s compliance with international regulatory and reporting requirements, although the Chief Internal Auditor performs the liaison role of Group Compliance Officer in relation to the Bahrain Monetary Agency (BMA). Legal & Compliance also collaborates with the in-house legal departments of those ABC Group subsidiaries large enough to maintain their own. Planning & Financial Controls provides corporate financial information, including quarterly and annual financial statements, management information for senior management and the business units, supervises the planning and budget- ing process, and ensures that ABC Group fulfils the financial reporting requirements of the Bahrain Monetary Agency. The department ensures that the Group’s accounting policies and reporting functions fully comply with international accounting standards and best practice in the international banking industry. The department also co-ordinates ABC Group’s tax matters.

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Monitoring and corrective action The Board of Directors is responsible for setting acceptable levels of risks to which the Group may be exposed, maintaining effective internal control within the Group and ensuring that the necessary steps are taken by senior management to identify, measure, monitor and control these risks. The various internal and financial controls are subject to independent review by Group Internal Audit and external Auditors and regulators as appropriate. The reports of all of these review bodies are received on behalf of the Board by the Group Audit Committee, which ensures that appropriate corrective action is taken where required. The Group Audit Committee is informed directly by Group Internal Audit’s reports to the Committee, and by discussions with external Auditors as required, of the work they have undertaken and the conclusions they have reached, respectively.

Compliance In accordance with the instructions of the Bahrain Monetary Agency, ABC has appointed a Compliance Officer to act as central coordinator for the Group in respect to all matters relating to BMA regulatory, reporting and other require- ments. This responsibility lies with the Chief Internal Auditor. The Chief Internal Auditor also performs the role of Group Compliance Officer. The compliance function covers the broad areas of corporate governance, adherence to best practices, anti-money laundering procedures, code of conduct, conflict of interest etc. The Legal & Compliance Department in Head Office is responsible for developing, implementing and monitoring programmes for ensuring that all business units in the Group adhere to laws and governmental regulations in their respective countries.

Risk Management The Board is responsible for establishing the Group’s long-term business strategy, including determining the degree of risk acceptable to it. The Board has delegated its authority for risk strategy to the Head Office Credit Committee (HOCC) and the Asset and Liability Committee (ALCO), each of which is supported by dedicated Group support divisions.

Overview Risk management involves the identification, assessment and ongoing control of material risks that could detrimentally impact on the organisation’s performance and achievement of its long-term objectives. In banking, the primary goal of risk management is not to avoid those risks that are inherent in the business, but to manage them consciously and with a view to ensuring the generation of income sufficient to reflect the degree of risk assumed. The major risks to which the Group is exposed are credit, market, liquidity, operational and legal risks. The Board of Directors delegates its responsibilities for overall risk management, through the President & Chief Executive, to several Head Office departments and committees, which determine appropriate strategies and policies and ensure their adherence.

Credit Risk Credit risk is the risk of financial loss arising from the inability or unwillingness of a customer or counterparty to meet an obligation entered into with the Group. It arises from the loan, contingent obligations, treasury and other activities under- taken by a bank. Direct loans, commitments to extend credit, treasury settlement exposures, derivatives and securities transactions and obligations are all subject to credit risk. In the normal course of business the Group, through the parent bank and its diverse subsidiaries, deals with all types of customers and counter-parties, from sovereign states and central banks to other governmental and financial institutions, correspondent banks, multinational and other major corporates, medium-sized and small corporates to family-run businesses and individuals. The primary means of avoidance of loss on credit risk is the initial decision as to whether or not to extend credit. Authority to approve credits is delegated by ABC’s Board of Directors under and subject to the conditions laid down in the Group Credit Policy. At the highest level, the Group Head Office Credit Committee (HOCC) must approve Group country, industry and customer credit and counterparty limits exceeding prudential Group pre-set guidelines laid down in the Group Credit Policy. Their purpose is both to guard against undue concentrations of exposure in any area, geographical or sectoral, as well as to ensure that exposure to individual customers or customer groupings is kept at prudential levels in relation to their capital and financial resources and commensurate with their ability to meet their obligations when due. The HOCC is chaired by the President & Chief Executive and includes the Chief Banking Officer, the Division Heads and the Chief Credit & Risk Officer. The parent bank and its banking subsidiaries are governed by specific credit policies that, whilst following closely Group policies, reflect local practices and regulatory requirements. Notwithstanding this, approval at Head Office is mandatory where exposure individually or in aggregate exceeds the guidelines set out in Group Policies and exposure is required to be contained within the country risk limits established Group-wide by the HOCC and ABC’s Board of Directors. ABC Group maintains a strong credit culture that places the responsibility for the credit firstly and primarily on the account officer and business unit head exercising delegated authority or recommending the credit to the next level of decision-making. Responsibility for day-to-day management of existing credit exposure is similarly delegated to the business unit officers who, in turn, must adhere to the detailed requirements for regular review of the customers and analysis of their financial and economic condition. The standardised credit risk rating system in use in the ‘core’ wholesale banking units assists in the assessment and gradation of risk on corporate and financial institution customers both at the obligor and facility levels. The system has been extensively modified to create a robust ten-grade risk rating

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system intended ultimately to be eligible for the Internal Ratings based (IRB) approach to meeting future regulatory capital requirements. It ranks customers under a series of six gradated ‘satisfactory’ ratings (which correspond to the rating bands used by the recognised rating agencies). These ratings are followed by ‘watchlist’ and ‘special mention’ rankings, to assist in the early identification and management of weak credits, in turn followed by ‘substandard’ and ‘doubtful’ and ‘loss’, against which minimum mandatory provisions are required in accordance with the Group Credit Policy. When an asset is considered uncollectable and therefore categorised as Loss, it implies mandatory write-off of that asset, in all cases. The credit risk rating system will be extended throughout the Group, with suitable adjustments to account for the strongly retail banking nature of some subsidiaries, where stronger emphasis will be on product and portfolio segmentation rather than the borrower. The above risk ratings approach represents a cornerstone in the Group’s credit risk management process and provides the framework for (i) monitoring of portfolio quality and determination of credit risk portfolio management strategies (ii) linkage of credit quality assessment with associated pricing, and thereby the basis for estimation of credit loss provisioning and capital allocation (iii) determination of approval authorisation. The Group requires collateral to mitigate credit risk where unsecured, or ‘clean’, facilities being sought are con- sidered to be beyond prudential limits. This collateral may be in the form of cash, securities, charges over the customer’s assets or third-party guarantees. At the end of 2000 assets secured by collateral amounted to US$5,292 million, or 20 per cent of total assets. Internal Audit is responsible for carrying out Risk Asset Reviews of business units to assess the quality of credit exposures booked in those units and the efficacy of, and adherence to, approval and analytical standards laid down in Group and individual subsidiaries’ credit policies and procedures. The parent bank and its banking subsidiaries also maintain their own head office credit departments, responsible for assessing credits prior to approval at a level higher than the business unit, when this is required, or post-fact following the business unit’s exercise of its delegated authority – as well as on a regular review basis. In addition, the Head Office Credit Department in Bahrain assesses the quality of Group common customers (both bank counterparties and corporate customers) and recommends appropriate Group limits to the HOCC for its consideration and approval. Portfolios are reviewed in detail at least annually and the weaker credits quarterly. The business units of the Banking Group carry out a quarterly overall assessment of their loan portfolio in conjunction with Division Heads. Additionally, all criticised credits are reviewed regularly by the respective business unit’s account officers and unit heads, with progress on the credits’ management being reported to ABC’s Remedial Loans Unit at the Head Office in Bahrain no less frequently than quarterly, and often monthly. Reports are in an ‘Action Plan’ format demanding firm undertakings from the responsible account officers as to actions being taken to reduce exposure and maximise recoveries. These reports are forwarded to both Division Heads and the Remedial Loans Unit at Head Office and in certain cases are also subjected to detailed in situ case-by-case reviews between the business units and the Head Office. Group country limits are reviewed regularly by the HOCC, taking into consideration in-house and external economic reviews and various quantitative and qualitative data, with particular emphasis on countries where credit risk may be concentrated or greater exposure is being targeted, or whose economies are evidencing deteriorating economic conditions, and within the context of overall business strategy, taking into account past utilisation and earnings, future business potential and anticipated yields. The modified ten-band in-house rating system is used in conjunction with external agency ratings to determine the Group country limit in each case, the maximum such limit being strictly constrained under a formula relating each country’s ratings and size of GDP to ABC’s consolidated assets and equity. The Head Office Credit Risk Control & Policy Unit provides senior management with consolidated information on Group exposures to counterparties, customers, countries and industries. The Unit is responsible for coordinating credit risk management technology development within the Group. It is also responsible for recommending Group credit policy and procedural amendments and innovations, and coordinating their introduction into the various policy manuals in place throughout the business units. The Group is following with interest the latest developments in credit risk management and disclosure, in particular the current dialogue taking place between the Basle Committee on Banking Supervision and the banking community. ABC supports the establishment of principles aimed at securing an appropriate environment to ensure the existence of sound processes for granting of credits, their administration, measurement, monitoring and control, and the development of guidance on uniform credit risk disclosures to ensure transparency in bank reporting.

Market Risk Market risk is the risk of financial loss to the Group resulting from adverse movements in the value of financial instruments, in turn arising from changes in the level or volatility of interest rates, foreign exchange rates or equity and other security or commodity prices, including derivatives. Market risk arises as a normal part of the Group’s activities and occurs as a result of both its asset and liability management (under ‘the banking book’) and its trading activities (‘the trading book’), although each has different accounting consequences. ABC Group is exposed to market risk in its treasury trading activities because the present value of its trading positions fluctuates with changes in market rates and prices. Additionally, the Group is exposed to market risk in its commercial banking activities and investment portfolios because the revenues from these activities are sensitive to changes in interest rates.

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Managing Market Risk The Group has established risk management policies and limits within which exposure to market risk is monitored and controlled. Strategic oversight is exercised by the Head Office Asset & Liability Committee (ALCO), which is chaired by the President & Chief Executive. Membership includes the Chief Banking Officer, Group Treasurer, Investment Coordinator, Chief Credit & Risk Officer and heads of the Risk Management, Marketable Securities and Planning & Financial Controls Departments. Each major subsidiary has its own ALCO that assesses and manages the market risks which arise in its business units under limits approved by its local Board. ABC Group manages its market risk on a diversified basis, with consolidation at Head Office for management and regulatory capital adequacy reporting. Market risk positions are managed within established limits by each subsidiary, business unit head and trading desk. The criteria for establishing market risk limits include the Group’s risk appetite, market volatility and liquidity, business strategy and Human Resources. At Head Office in Bahrain there is an independent Risk Management Department, reporting directly to the Chief Credit & Risk Officer and indirectly to the Group Treasurer. The Risk Management Department is responsible for: i. development of all policies related to market risk; ii. establishment of methodologies to measure and monitor established limits; iii. monitoring, in conjunction with Internal Control, of market risk limits; iv. review and recommendation to ALCO of new or additional trading limits; v. review of all new trading products; vi. independent testing of all trading models; vii. stress testing the portfolios to determine the effect of large unusual market movements.

The Group currently employs a mix of purchased applications and proprietary models developed in-house to quantify, monitor and control market risk. In addition, ABC is nearing completion of the implementation of an externally sourced comprehensive market risk management application. For the computation of market risk capital, the Group presently utilises the standardised methodology, consistent with the Basle Accord and BMA regulations. However, Value at Risk (VaR) methodologies, integrated with the risk management process, will support a future change to an internal management model for market risk capital calculation, subject to approval by the BMA.

Interest Rate Risk Interest rate risk is the risk of an adverse impact on the earnings of the Group or the economic value of its assets, liabilities and off-balance sheet positions arising, either in the banking or the trading book of the Group, from one of the following: Firstly, it arises from the timing differences in the maturity (or repricing) of assets and liabilities (‘mismatch risk’). Put another way, mismatch risk arises when there are mismatches or gaps in the amount of assets, liabilities and off-balance sheet instruments that mature or reprice in a given period. These risks can be due to customers’ differing term preferences or to conscious decisions by management to maintain gaps, under limits authorised to them. It also arises from changes in the slope and shape of the yield curve, differences in repricing references of two instruments or an imperfect correlation in the adjustment of rates earned and paid. Finally, it arises from the effect of interest rate movements and changes in volatilities on the market value of options held within the Group’s portfolio. In managing the interest rate risk resulting from its trading and banking activities, Head Office does not differentiate between the ways in which the exposure has arisen. For the core banking units both banking and trading gap positions are consolidated, by currency, in the reports by the business units. For purposes of illustration, we have calculated the impact on the Group’s operating profits before taxation and minority interest of an immediate, adverse, 100 basis point, parallel, all curve, interest rate shock as at 31 December 2000. Such a low probability event could reduce the next 12 months’ Net Interest Income by US$2.5 million (1999: US$17.7 million) if no remedial action were to be taken. There are established limits on individual business units’ aggregate maximum exposures and on an overall basis for the core banking units consistent with ABC Group strategy and financial plan targets. Limits are reviewed regularly by the Head Office ALCO, whose recommendations are submitted to the Board for its approval prior to implementation. Trading activities generating interest rate risk are concentrated largely in the Bahrain Treasury Department, from where it can be managed directly under the overall supervision of the Group Treasurer.

Foreign Exchange Rate Risk Foreign exchange rate risk is the risk of an adverse impact on the Group’s earnings or shareholders’ equity due to currency rate movements. The Group is exposed to foreign exchange rate risk through both its trading portfolios and its structural positions. Exposure management is divided accordingly. The Group’s trading portfolios are exposed to foreign exchange rate risk in both the spot and forward foreign exchange markets and in the options markets. Spot foreign exchange risk arises when the total present value of assets in any currency does not equal the total present value of liabilities in that currency. Forward foreign exchange risk arises when, for a given currency, the maturity profile of forward purchases differs from the maturity profile of forward

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sales. Options risk arises from the effect of interest rate and exchange rate movements and changes in volatilities on the market value of the options within the Group’s portfolios. Under the Trading Book Policy statements, foreign exchange rate risk is managed by appropriate limits and stop loss parameters determined by each subsidiary’s local ALCO and approved by the Board, in the same way as for interest rate risk-related limits. The Group’s structural positions relate to its net investment in its foreign subsidiaries and are included in the significant net foreign currency exposures detailed in note 12 to the Financial Statements. The structural positions are reviewed weekly by Head Office ALCO in accordance with the Group’s strategic plans and actively managed by Group Treasury based on the expected and projected changes in the underlying currencies, in order to provide protection against significant movements. The Group Treasury can employ foreign exchange forward contracts, options and other derivatives when executing ALCO’s strategic decisions in the management of the Group’s structural positions.

Equity, Debt Securities and Commodity Risk As a normal part of its treasury trading activities, ABC is exposed to the risk of an adverse impact on the Group’s earn- ings due to movements in the prices of individual equities or other securities or commodities, or generally in the value of their respective markets, or in either case their related derivatives. The Marketable Securities Department in Head Office buys and sells securities as part of its management of the Group’s capital as well as in the course of its fund man- agement activities. Group banking subsidiaries, particularly those engaged in retail banking, also manage their capital or provide client fund management services, in addition to buying and selling securities as part of their brokerage activities. Management of these risks is similar to that explained above in relation to foreign exchange risk, with Marketable Securities Department working within set limits and stop loss parameters.

Liquidity Risk ABC Group defines liquidity as the ability to meet its obligations as they fall due. A part of the ability to meet obligations is maintaining the capability to execute specific transactions at or near current market prices without unduly affecting those market prices. The Group deals with the latter by closely monitoring the depth and spreads in markets in which it transacts, as well as limiting activities in less liquid markets or products. ABC maintains liquid assets at prudential levels to ensure that cash can quickly be made available to honour its obligations. It has specific policies regarding liquid assets coverage of short-term wholesale deposits and the potential risk impact of large single depositors, ensuring that there is no reliance on one customer or small group of customers. Liquidity management also recognises the impact of potential cash outflows arising from irrevocable commitments to fund new assets. Liquidity management reporting by ABC’s subsidiaries conforms to all local regulations and is reviewed daily by the responsible Treasurer. A report is prepared for the wholesale units on a weekly basis by Risk Management Depart- ment for presentation to the Head Office ALCO, and on a monthly basis for the President & Chief Executive and Group Treasurer. ALCO reviews the consolidated liquidity profiles of relevant units and the top depositor and borrower concentrations by currency, region and entity.

Derivatives Derivatives are off-balance sheet financial instruments that derive their characteristics from those of underlying assets, interest rates, exchange rates or indices. These include futures, forwards, swap and options transactions in the foreign exchange, interest rate and equity markets. Transactions may take place via exchanges or directly with counterparties. As a normal part of business, ABC Group enters into many kinds of derivative activities in both its trading and banking books. In the trading book, the Group assists customers and counterparties (typically financial or govern- mental institutions or major corporations) to alter their risk profile in a particular area of risk by structuring deals to suit individual client needs. The positions accumulated from such activity are either passed on to others in the market or retained as open positions and managed for a profit. The Group’s trading activities are largely managed in Bahrain Treasury under overall supervision of Group Treasury, with appropriate limits and stop loss parameters in place as dictated by the Trading Book Policy. In addition to its role as a dealer, the Group also uses derivatives to manage its own asset and liability portfolios and structural positions. Such strategic transactions are always executed by Group Treasury under specific approval of Head Office ALCO.

Operational Risk Operational risk is the risk of financial loss or damage to the reputation of the Group arising from inadequate internal controls and procedures, breakdowns in processes, systems and technology, fraud or deliberate and malicious damage. Group policy dictates that the operational functions of booking, recording and monitoring of transactions should be carried out by staff who are independent of the individuals initiating the transactions. Each operating unit is guided by comprehensive manuals, which specify the policies, procedures, and controls that are relevant for each function. Internal control policies and procedures dictate the segregation of duties, delegation of authorities, exceptions report- ing, exposures management and reporting, reconciliations and disaster recovery and business continuity planning.

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Separate Internal Control units carry out ongoing monitoring of day-to-day procedures and ensure adherence to key control functions. With the improvement in the Group’s technology base, controls are frequently integrated into processing systems. The identification and assessment of all types of risk to which the Group may be subject, and the review of the efficacy of the procedures in place to control them are, of course, essential elements of the role of the Head Office Internal Audit Department. Internal Audit therefore functions as a second line of defence in regard to operational risk in ABC Group, via the Department’s periodic reviews of both business and support units. In Head Office, as well as in the head offices of Group subsidiaries, Internal Audit departments report to their respective Audit Committees, advising them of irregularities and procedural failures discovered or identified and recommending appropriate action. In certain specific cases, immediate responsibility for assessing and neutralising operational risk may be delegated to other, specialised, areas within the Group.

Legal Risk The legal consequence of actions, investments or situations which lead to material unexpected negative results is known as legal risk. Inadequate documentation, legal and regulatory incapacity or insufficient authority of a counterparty, contract invalidity or unenforceability, are all examples of legal risk. Management of this risk is through effective consultation with internal and external legal counsel. The provision of the highest level of integrated, cost-effective, legal advice, guidance and services to management and the business units is the responsibility of the Head Office Legal & Compliance Department. This requires detailed and up-to-date knowledge of international finance and corporate law and an understanding of its implications. All major Group subsidiaries have their own in-house legal departments, acting under the guidance of the Head Office depart- ment. The Legal & Compliance Department is also the focus for ABC’s ‘compliance’ activities within the Group, although the Chief Internal Auditor performs the role of Group Compliance Officer in matters in liaison with the BMA.

Capital Management The Bahrain Monetary Agency is the home supervisor for ABC and sets and monitors its capital requirements on both a consolidated basis and an unconsolidated basis. Individual banking subsidiaries are directly regulated by their local banking supervisors, who set and monitor their capital adequacy requirements. In 1988 the Group of Ten central banks that form the membership of the Basle Committee on Banking Supervision agreed guidelines for banks’ capital measurement and standards. Since then, the capital adequacy requirements of the different banking supervisors of the Group and its ‘core’ bank- ing subsidiaries have tended to converge, albeit with differences in the extent of capital adequacy required in the case of each. The BMA requires each Bahrain-based bank or banking group to maintain a minimum ratio of total capital to risk-weighted assets of 12 per cent, taking into account both balance sheet assets and off-balance sheet transactions. This is greater than the Basle Committee’s recommendation of a minimum 8 per cent ratio. ABC Group’s capital is divided into two tiers: tier 1, comprising shareholders’ funds and minority interests; and tier 2, comprising general loan loss provisions, property revaluation reserves, and the current year’s earnings. The amount of qualifying tier 2 capital cannot exceed that of tier 1 capital, and term subordinated loan capital cannot exceed 50 per cent of tier 1 capital. There are also limitations on the amount of general provisions which may be included in the tier 2 capital. Deductions are made from tier 1 capital in respect of goodwill and intangible assets. Total capital is also reduced by deducting investments in associates and treasury stock maintained in ABC’s own shares. As mentioned in the section on Risk Management, banking operations are divided between ‘trading book’ and ‘banking book’. Risk-weighted assets are computed according to the appropriate categorisation. ‘Banking book’ risk-weighted assets are measured by reference to a scale of risk weights, classified according to the nature of each asset and counterparty, taking into account any eligible collateral or guarantees. ‘Banking book’ off-balance sheet items giving rise to credit, foreign exchange or interest rate risk are assigned weights appropriate to the product and category of the counterparty, taking into account any eligible collateral or guarantees. ‘Trading book’ risk-weighted assets are determined by taking into account market-related risks, such as foreign exchange, interest rate and equity position risks, in addition to counterparty risk. The Group is reviewing the second and final draft document on the New Capital Adequacy Framework released by the Basle Committee on Banking Supervision, relating to future regulatory capital requirements on credit risk on the banking book and to operational risk. In this regard the Group is keen to prepare itself adequately and play a proactive role both within the region and vis-à-vis the regulatory authorities, for eligibility under the Internal Ratings based (IRB) approach to regulatory capital estimation. It also looks forward to an agreed approach for capital treatment of credit risk mitigation techniques such as credit derivatives, collateral, guarantees and on-balance sheet netting.

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2000 1999

Earnings Profit before provisions, tax and minority interests 262 261 (US$ million) Profit before tax and minority interests 196 164 Net profit for the year 127 112 Net interest revenue 433 434 Other operating income 280 256 Earnings per share (expressed in US dollars) $1.35 $1.19

Financial Position Total assets 26,676 24,358 (US$ million) Loans and advances 14,039 12,903 Placements with banks and other financial institutions 7,060 5,891 Trading securities 713 363 Investment securities 2,961 3,128 Shareholders’ funds 1,904 1,857

Ratios Profitability (%) Cost: Income ratio 63 62 Net profit as % of average equity 6.8 6.2 Net profit as % of average assets 0.50 0.46 Dividend cover (times) 1.93 1.98

Capital Risk weighted assets (US$ million) 17,526 15,767 Risk asset ratio - Tier 1 11.8 12.9 Risk asset ratio – Total 13.5 14.7 Average shareholders' funds as % of average total assets 7.4 7.4 Loans and advances as a multiple of shareholders’ funds (times) 7.4 6.9 Total debt as a multiple of equity (times) 12.8 11.9

Asset Quality Loans and advances as % of total assets 52.6 53.0 Securities as % of total assets 13.8 14.3 Net asset value per share $20.23 $19.73

Liquidity Liquid assets ratio 41.8 40.9 Deposits to loans cover (times) 1.5 1.5

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

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

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The Group’s business strategy is now well established: to redress the balance between its International“ and Arab elements, achieving diversification of income whilst optimising available synergies to leverage its global network and increase overall revenues without commensurate expansion of costs. The past year has been not without difficulties and disappointments but has also seen many achievements, not the least of which was the successful completion of this, another step on the road to ABC’s Vision – to be the premier and most innovative international Arab financial group.”

Economic Context The United States economy began to show signs of slower growth from the early summer of 2000. Nevertheless, inflation remained under control due to the continued robust trend in labour productivity as well as a flood of imported goods and services. The US dollar started to weaken towards the end of 2000 as the current account deficit exceeded 4.3 per cent of GDP. Euro-Zone economies were affected by the sharp increase in global energy prices. However, inflation was below that of the United States. Moreover, the Euro-Zone’s external current accounts were generally in balance. The Euro continued its downward trend and, with the 1,657 1,721 1,740 1,857 1,904 European Central Bank’s apparent earlier lack of concern over its level, together with the con- tinuing lure of a strong dollar, fell below 85 US cents by late September. This finally prompted significant intervention by the ECB and other major central banks, leading to the Euro’s partial recovery through the year end. The pound sterling, long considered to be overvalued, underwent a major correction during 2000, losing about 15 per cent of its value in terms of the dollar by late November before recovering some ground in the last month. Nevertheless, the United Kingdom economy experienced robust expansion during the year, well above the normal trend, accompanied by low inflation and an improvement in the rate of unemployment. The price of the expansion, however, was a widening current account deficit. Following very anaemic growth in 1999, the Japanese economy recovered some momentum in 2000. Nonetheless, weak domestic demand with a robust export expansion served to increase the country’s external surplus to nearly US$121 billion. The yen proved to be highly volatile during the year, but this did not disguise its weakening trend against the US dollar. The Asian 96 97 98 99 00 economic recovery that began in 1999 was sustained during 2000, but progress was uneven Shareholders’ Funds within the region. US$ millions In Latin America, Brazil fully recovered from 1999’s weak growth, but suffered nearly twice the level of inflation as a consequence. Argentina emerged from a deep recession with only a weak economic recovery. There were market concerns about the economy and the deflationary impact of the peso stabilisation system. Faced with Argentina’s hefty debt servicing obligations, later in the year the IMF provided several billion dollars of emergency funding. Mexico and Venezuela benefited from higher energy prices. 129 145 25 112 127 In the Arab world and Iran, the greatly improved revenues produced by the world energy price rise enabled the major oil-exporting countries to re-start their economic diversification and infrastructure improvement schemes and to recommence hydrocarbon resource development. Algeria was able to reduce its overall external debt level while Libya’s economic growth ranged between 5 and 6 per cent, reflecting a higher volume of crude oil output. Saudi Arabia’s economic expansion exceeded 3 per cent in 2000 and a surplus was realised on current account, the first since 1998. Other GCC states, too, experienced strong growth, with a significant turn- around in budgetary prospects in the wake of higher oil prices. Several other Arab countries such as Egypt, Morocco and Tunisia benefited from stronger growth in their main European markets. The Egyptian pound was under some pressure as the current account deficit widened, while economic growth approached 5 per cent. The Tunisian economy grew at about 5 per cent, but its external deficit widened despite stronger exports as imports rose. Morocco’s real GDP growth was virtually flat, its external gap also widening because of a surge in imports. The violence and turmoil in the Middle East impacted on the regional economies, notably 96 97 98 99 00 in Lebanon, Syria, Jordan and Palestine, with the failure to achieve a just peace in the region Net Income after Tax during 2000 badly affecting the social and economic progress of these countries. Jordan’s US$ millions economic activity rose by a modest 3.5 per cent with a relatively low inflation of about 1.5 per cent, but may have registered an increase in its current account deficit. Following a recession in 1999 Lebanon saw little growth in economic activity during 2000, but inflation was below 1 per cent.

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The trend toward a more manageable current account deficit may have continued last year as imports fell in 1999 and will not have grown significantly during 2000. Palestinian business was badly disrupted by blockages imposed by Israel on movements of goods, services, and tax revenues following the surge in hostilities during the last few months of 2000.

Performance Developments in ABC Group in 2000 reflected both a natural response to these economic twists and turns as well as a determination to proceed to the next stage in its long-term strategy. It reduced its exposure to the troubled Far Eastern economies, held steady in Latin America, boosted investment in North Africa and expanded business operations in the Arab world – with the exception of the Levant – achieving number one position as loan arranger in the Middle East in the process. The Group’s financial result was fair, with net profit increasing by 13.4 per cent over 1999 as it continued to build resources and capabilities in the Arab world to meet its objective of regional leadership. Despite a significant proportionate shift of assets from Asia to the Arab world, Group assets were permitted to expand only gradually. They increased by 9.2 per cent over 1999 levels, reflecting the Group’s continuing resolve to focus on asset quality and deliver a steadily increasing return to shareholders. New robust credit and country risk rating systems introduced in 2000 permitted tighter definition in identification of underlying credit risk, assisting in enhanced risk management and improving return vs. risk calculations. This shift of assets was reflected in the performance of the new units in Tunisia, Algeria and Egypt. Following the award of its new onshore banking licence in Tunisia, ABC Tunisie was launched in June 2000, complementing ABC’s offshore branch by providing domestic services to major corporates and groups involved in the export/import business. The new bank achieved full profitability by the end of the year, while the offshore branch continued its excellent record of increased profits every year. The Tunisian units expect a similar performance next year. ABC Algeria’s substantial first year’s profit in 1999 was repeated in 2000, as it expanded both balance sheet and turnover, and opened three branches during the year: at Hassi Messaoud, Oran and central Algiers, which will be fully operational early in 2001. ABC Egypt’s rationalisation of the offices and staff resources, inherited by ABC upon its acqui- Loans 52.6% sition in 1999, continued as it opened two branches and finalised the move of its head office into a Placements 26.5% prestigious new building in the modern Zamalek area of Cairo. To meet the demands of its new dis- Investmemt Securities 11.1% Trading Securities 2.7% criminating target customer base of multinationals, large corporates and medium/high net worth Liquid Assets 1.5% individuals it has introduced modern cash management services and an ATM network (a relatively Premises & equipment 1.6% new phenomenon in Egypt); a new telephone banking Call Centre will be installed in early 2001. Others 4.0% The Group’s strategy of expansion in the Arab world via a series of domestic banking platforms reaped early rewards: net income from these new business units – non-existent prior Assets Breakdown to 1999 – amounted to over US$11 million in 2000 - more than double the 1999 return. A further per cent 40 per cent increase is targeted for 2001. The new Egyptian capital markets subsidiary – ABC Securities (Egypt) – was launched during 2000. The synergistic benefits of the Group’s strategy became increasingly apparent as Head Office support teams focused on cross-selling between the Group’s business units worldwide, with increasing success. The International Division intensified its emphasis on Arab world-related activities, providing increasing levels of direct trade and project finance facilities to multinationals doing business in the Arab world, as well as marketing to them the sophisticated Arab-related treasury products of Group Treasury and the international and domestic services available out of the domestic platforms in North Africa. These domestic units in turn fed at a growing rate the business opportunities identified by them to ABC branches overseas and the wholesale banking units in Bahrain and London, as appropriate. ABC Islamic Bank and ABC’s Project and Structured Finance Department in Bahrain worked closely with the Islamic Asset Management, Project and Structured Finance teams in ABC International Bank in London, structuring trans- actions on behalf of clients in the Arab world as well as in Europe and North America, jointly or separately underwriting transactions and packaging, securitising and distributing them to clients worldwide, notably in telecommunications, power, oil and gas. Active remedial exposure management again successfully reduced total Group exposure to the troubled Asian economies and Russia. Following a reduction of over US$200 million in 1999 to the worst-hit countries – Thailand, Indonesia, China, Pakistan and Russia – in 2000 the combined effect of asset sales, workouts and write-offs achieved a further reduction of US$334 million with a virtual full exit from Russian debt. Total exposure to these countries now stands at US$365 million, or 0.7 per cent of total credit exposure.

Arab Banking Corporation Annual Report 2000 19

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Group Treasury proceeded with the implementation of its ‘hub and spoke’ strategy within the ABC Group, decentralising funding responsibilities to business units whilst retaining to itself overall exposure and liquidity management. It is planned that the two hubs – located in Bahrain and London – will in 2001 be linked on-line to each ABC Group business unit. Centralisation will be retained for specialist products such as options, but generic products such as foreign exchange and money markets will be driven by local markets, and controlled by consolidation. The Global Marketing department, reporting to the Arab World Division, now coordinates treasury marketing throughout the Division, obviating unnecessary duplication whilst delivering to customers globally all the various treasury products now available through its streamlined units. Group Treasury’s new departmental structure including, under individual senior managers, specialist units offering New Products, Precious Metals & Commodities, Foreign Exchange, Options, Derivatives and Marketable Securities services, are all coordinated to the benefit of the global client. The Group’s commitment to managing its expense base continued. The 5.1 per cent increase in Group expenses reflected the inclusion of ABC Egypt for its first full year, and of the start-up of ABC Tunisie and ABC Securities (Egypt). In addition, International Bank of Asia was

obliged to recruit additional staff during the year to cope with increased business volumes, and 8,426 10,395 8,868 10,483 11,208 10,649 9,643 10,245 10,058 11,451 ABC International Bank was also recruiting during the year to enhance its product range, which now includes Islamic banking services. Expenses at Banco ABC Brasil were affected by rising staff costs, and those of Banco Atlántico by their ongoing restructuring. Rationalisation of the Group structure, with cost savings as well as cross-selling synergies in mind, continued. The Rome and Cairo representative offices were closed and their global marketing functions assumed by the Milan branch and Egyptian domestic banking subsidiary respectively. ABC Finanziaria, the Rome-based finance subsidiary, was also relocated to Milan for the same reasons. The International Division continues to examine further consolidation in European operations with appropriate changes in corporate structure, both to control costs and to develop a pan-European strategic approach to chosen business lines. Last year we referred to the introduction of advanced Information Technology as not merely a contributory, but rather an essential and integral part, of our commitment of service to our customers and creation of value for our shareholders. In 2000 we made great strides towards extracting optimum value from our multi-faceted, complex banking group, with advances in both 96 97 98 99 00 operating unit support and risk exposure management. The customised upgrade of our core system – the common technology platform in use by Banks Customers all the core units of the Group – continued apace, with the first phase now complete. Extensive enhancement of our Credit Risk Management System has expanded its functionalities immensely. Trends in Deposits US$ millions Together with the introduction of new market risk management systems, these advances will enable precise measurement of ABC Group aggregated exposures across multi-product lines and allocation of Value-at-Risk (VaR) limits to treasury departments and traders as a first phase in 2001. A central data warehouse now allows on-line monitoring of treasury exposure across all core business units and, coupled with end-of-day exposure reports received from the non- core subsidiaries in Spain, Hong Kong, Brazil and Egypt, Group-wide credit exposure extraction. New advanced front office treasury and marketable securities systems have been implemented in Bahrain, London, New York and Paris, with Singapore, Frankfurt and Milan to follow in 2001.

Building for the Future Introduction of the new technology brings with it the benefits of advanced Enterprise-wide Risk Management and Management Information Systems. ABC Group is building an international standard risk management system which, when combined with its new robust risk rating systems, will be designed to meet all regulatory and international banking standards for capital allocation purposes. Head Office Global Information Technology department has created a separate team dedicated to the Arab world domestic business units, to ensure standardisation of technological infrastructure as well as to coordinate and support their ongoing development. A feasibility study has also been launched into the possible creation of an Internet bank designed to meet the needs of the mass affluent Arab in the Middle East and North Africa region. Global Information Technology continues its major task of utilising Internet technology to consolidate and deliver the immense informational resources and applications of the Group to each individual’s desktop with minimal cost, time and effort. Management will be able to access, at speed, all internal and external data necessary to research, analyse and make appro- priate decisions on every aspect of their activities.

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The banking industry will undoubtedly be facing many challenges in the years to come, from utilising to best advantage the technological developments of the twenty first century to managing risk to greatest effectiveness, meeting best international banking practices and adhering to regulatory imperatives and evolving accounting standards. The Group is cognisant of, and following closely, all these developments, particularly those relating to credit and market risk evaluation and disclosure and to international accounting standards. The Bahrain regu- latory authorities have been among the first in the world to recommend adherence to IAS39, the latest accounting standard that takes effect on January 1, 2001, and which closely mirrors the US accounting standards on the recognition and measurement of financial assets and financial liabilities. Most European and other countries with their own accounting standards have not yet adopted the principles of IAS39, but it is anticipated that convergence of standards will have been achieved by 2005 at the latest. ABC confirms that, with effect from January 1, 2001, it applies IAS39 to its own and its consolidated financial statements and in the conduct of its business. The changes involved are wide-ranging and the effects are potentially significant, but in ABC Group’s case are not deemed at this time to be material.

5,643 5,680 5,956 6,101 6,512 6,661 5,917 6,986 6,167 7,872 The Group’s business strategy is now well established: to redress the balance between its International and Arab elements, achieving diversification of income whilst optimising available synergies to leverage its global network and increase overall revenues without commensurate expansion of costs. The International network provides support and financial services –par- ticularly in trade finance – to multinationals doing business in the Arab world and Arab corp- orates and institutions importing goods and services from the developed countries. The Arab domestic platforms, in turn, provide trade finance facilities as well as local and cash management services to international corporate clients, whilst developing their own corporate, institutional and governmental client base and retail opportunities to the benefit of their revenue stream. In the middle stand the wholesale and specialist banking units in Bahrain and London which meet the needs of clients in both regions in project and structured financing, Islamic banking and asset management, syndicated loans and Arab-related treasury products. The strategy is ambitious, demanding commitment to change and to cooperation by senior management and staff alike. ABC Group is fortunate in the quality and dedication of its people and we are confident that they will meet the challenges ahead with enthusiasm and professionalism. 96 97 98 99 00 ABC, in turn, commits itself to the development of its human resources and to the maintenance Short Term Long Term of an environment that is both stimulating and rewarding. We thank all our management and staff, worldwide, for their efforts in the past year, one not without difficulties and disappointments Trends in Loans Portfolio but also one that has seen many achievements, not the least of which was the successful completion US$ millions of another step on the road to ABC’s Vision – to be the premier and most innovative international Arab financial group. As always, we acknowledge with gratitude the constructive advice and guidance of the Group’s diverse regulatory authorities in the jurisdictions in which we operate and, in particular, of the Bahrain Monetary Agency to which we are also indebted for its unswerving support.

Abdulmohsen Yousef Al-Hunaif Chairman

Note: In compliance with the Bahrain Monetary Agency Circular No. BMA/751/93 and EDBC/782/93, dated 8 July 1993 and 17 July 1993 respectively, set out below are the interests of Directors and Senior Managers in the shares of Arab Banking Corporation (B.S.C.) for the year ended 31 December 2000. 1/1/2000 31/12/2000

Directors’ Shares 60,000 60,000 Senior Managers’ Shares 19,829 17,829

Total 79,829 77,829

Note: Directors’ remuneration for 2000 amounted to US$ 655,000 (1999:US$ 655,000).

Arab Banking Corporation Annual Report 2000 21

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The net profit for the year was US$127 million, an increase of 13 per cent and a further sign of“ the steady progress being made towards achieving consistent, reliable and diversified revenues under the Group’s long-term strategic plan.” Income Statement ABC Group’s net interest income remained steady in 2000 at US$433 million (1999: US$434 million). Non-interest income however rose by 9 per cent to US$280 million (1999: US$256 million), mainly as a result of a three-fold improvement in net gains on trading and investment securities together with a 6 per cent increase in net fee and commission income, the latter in itself reflecting a 16 per cent increase in the overall volume of documentary credits, acceptances and guarantees processed during the year. Total operating income rose by 3 per cent to US$713 million (1999: US$690 million). Provisions against loans, advances and other impaired credits during 2000 amounted to US$134 million (1999: US$138 million). The net charge, after recoveries of US$68 million (1999: US$41 million), amounted to US$66 million (1999: US$97 million). No significant new country

provisions were required during the year. However, a net charge of US$20 million was taken 22,988 23,582 26,064 24,358 26,676 during the year to augment general provisions (1999: US$7 million). The significant improve- ment in the Group’s provisioning needs is a reflection of a much improved credit quality resulting from a relative improvement in market conditions and a much more rigorous internal risk management system. Most of the provisioning requirement was at the Hong Kong and Spanish retail banking subsidiaries in view of local business expansion. Some provisions also arose at certain other Group units on exposures in the United States and the Middle East. After accounting for these provisions, net operating income increased by 9 per cent to US$647 million (1999: US$593 million). Operating expenses rose by 5 per cent to US$451 million (1999: US$429 million), partly due to the inclusion in the consolidated accounts of Arab Banking Corporation - Egypt (S.A.E.) of its first full year of operations, and of Arab Banking Corporation - Tunisie and ABC Securities (Egypt) S.A.E., both formed during the year. In addition International Bank of Asia Limited and ABC International Bank plc both recruited additional staff during the year, the former to cope with increased business volumes in consequence of economic expansion and the latter to expand 96 97 98 99 00 its product range, notably its Islamic banking services. Expenses at Banco ABC Brasil S.A. were also affected by the general rise in staff costs, whilst Banco Atlántico incurred exceptional costs Total Assets due to its ongoing restructuring. As a result of these factors, the overhead expense (cost:income) US$ millions ratio increased to 63 per cent (1999: 62 per cent). Minority interests in subsidiaries amounted to US$36 million (1999: US$21 million), mainly reflecting increased profits reported by subsidiaries in which there are sizeable minority stakes. Taxes on operations outside Bahrain amounted to US$33 million (1999: US$31 million). Following these deductions the net profit for the year was US$127 million (1999: US$112 million), an increase of 13 per cent and a further sign of the steady progress being made towards achieving consistent, reliable and diversified revenues under the Group’s long-term strategic plan.

Factors Affecting Historical or Future Performance ABC Group continues to focus its current expansion on the Arab world. The North African subsidiaries, most of which are no more than two years old, have been performing well and producing an increasing contribution to Group revenues. Arab Banking Corporation - Algeria, Arab Banking Corporation - Egypt (S.A.E.), Arab Banking Corporation - Tunisie and ABC Securities (Egypt) S.A.E., a new capital markets-oriented subsidiary launched in 2000, all have plans to expand operations and make valuable contribution to Group revenues. The fortunes of the ABC Group in the future will, therefore, be more closely tied to those of the Arab world countries – and the corporations and institutions therein – in which the Group does business. In turn, these countries will depend to a greater or lesser degree on the performance of the major economies of the United States and Europe with which they trade, as economic growth boosts demand for the oil and other commodities produced by the Arab world. The Group is convinced that the unique symbiosis of its international units sourcing customers for its Arab world units, whilst simultaneously providing their own services and expertise to Arab world customers dealing internationally, is the right course for the future. The advanced risk management techniques and new systems that are being implemented are expected to contribute to significantly improved asset and revenue quality, with a positive impact on the Group’s profitability.

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Sources and Uses of Funds Total liquid assets, including trading and investment securities, placements and liquid funds, increased by 12 per cent to US$11,143 million (1999: US$9,969 million) as money market place- ments expanded by 20 per cent. This expansion in liquidity was, in turn, driven by an increase in deposits of US$1,621 million, or 8 per cent, the majority of which was attributable to the 12 per cent, or US$1,206 million, increase in deposits from customers. Total placements, together with liquid funds of US$409 million (1999: US$587 million), represented 28 per cent (1999: 27 per cent) of total assets. Total liquid assets represented 42 per cent (1999: 41 per cent) of total assets. The Group’s total assets increased by 10 per cent to US$26,676 million (1999: US$24,358 million), mainly due to this increase in liquid assets and the increase in the loan portfolio referred to below. The average assets of the Group in 2000 amounted to US$25,409, whilst its average liabilities, excluding shareholders’ equity and minority interest, totalled US$23,123 million. ABC Group’s overall loan exposure grew by 9 per cent to US$14,039 million (1999: US$12,903 million); however, its total loans to deposits ratio remained at 65 per cent in the light of the increase in deposits. Short-term lending – loans with a maturity of less than one year – as

242 338 322 261 262 a proportion of the total portfolio fell to 44 per cent (1999: 46 per cent). Deposits from customers and central banks grew to US$11,451 million (1999: US$10,245 million). Deposits from banks and financial institutions, as mentioned above, increased to US$10,058 million (1999: US$9,643 million). Deposits include US$2,865 million (1999: US$3,092 million) relating to sale and repurchase agreements. Term funding totalled US$1,692 million (1999: US$1,289 million). ABC Group raised a total of US$1,225 million (1999: US$297 million) on international capital markets during the year.

Commitments, Contingent Liabilities and Other Off-Balance Sheet Items At the end of 2000, the Group’s consolidated off-balance sheet items stood at US$23,004 million (1999: US$29,677 million). The total risk-weighted asset equivalent of commitments and contin- gent liabilities and other off-balance sheet items was US$2,591 million (1999: US$2,524 million). The total volume of documentary credits, acceptances and guarantees undertaken during the year was US$7,561 million (1999: US$6,511 million), 48 per cent (1999: 38 per cent) of which related

96 97 98 99 00 to the Arab world. The Group uses a range of derivative products for the purposes of hedging and servicing Operating Profits customer-related requirements, as well as for managing its own balance sheet. US$ millions Geographical and Maturity Distribution of the Balance Sheet In 2000, ABC’s operations in the Arab world increased, as did its activities – through the sub- sidiaries in the Investment Group – in Asia and Latin America. Those in North America and Western Europe fell in relative terms, but nevertheless rose in absolute values.

Assets Liabilities (per cent) 2000 1999 2000 1999

Arab world 18 17 39 37 Western Europe 39 41 33 35 Asia 17 15 14 12 North America 15 16 4 5 Latin America 9 8 8 8 Others 2 3 2 3 100 100 100 100

Arab Banking Corporation Annual Report 2000 23

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Total credit exposure (including off-balance sheet items) was geographically spread as follows: Arab world amounted to 18 per cent (1999: 20 per cent). Western Europe accounted for 47 per cent (1999: 45 per cent); Asia increased to 13 per cent (1999: 9 per cent); North America fell to 14 per cent (1999: 19 per cent) and Latin America remained at 7 per cent (1999: 6 per cent). The balance of 1 per cent (1999: 1 per cent) emanated from Africa, Eastern Europe and multi-country credits. Loans and advances were distributed as follows: the Arab world was stable at 18 per cent (1999: 18 per cent). Western Europe declined to 36 per cent (1999: 40 per cent), Asia was substantially higher at 21 per cent (1999: 18 per cent), and North America amounted to 12 per cent (1999: 13 per cent), while Latin America rose to 12 per cent (1999: 9 per cent). The balance of 1 per cent (1999: 2 per cent) emanated from Africa, Eastern Europe and multi- country credits. An analysis of the maturity profiles of assets and liabilities shows that, at the end of 2000, 54 per cent (1999: 55 per cent) of assets and 80 per cent (1999: 82 per cent) of liabilities did not exceed one year’s maturity. Loans and advances maturing in less than one year amounted to 44 per cent (1999: 46 per cent) of all loans and advances.

Classified Loans and Provisions Non-performing loans and off-balance sheet credits are defined as those in default on contractual repayments of principal or payment of interest in excess of 90 days. Such credits are immediately placed on non-accrual status, with all past due interest being reversed, accumulated interest there- after being excluded from income unless received in cash. In practice the Group adopts a highly conservative stance and places all such credits on non-accrual status as soon as there arises a reasonable doubt as to timely collection. Concentrated action at the level of the business units most affected by the problems in Thailand, Indonesia, China, Russia, and Pakistan, under the coordination and guidance of the Remedial Loans Unit at Head Office, helped to reduce ABC Group’s exposure to non- performing credits in these countries. Through a combination of debt rescheduling and restruc- turing, secondary market asset sales or swaps – and bankruptcy proceedings where these were unavoidable – the total such exposure, which fell by a total of US$203 million in 1999, was reduced by a further US$334 million in 2000. Significant write-offs from existing provisions Arab World 16.9% were a natural but unavoidable by-product of this process. Asia 18.2% Latin America 9.2% Exposure to the troubled countries mentioned above now stands at US$365 million, as North America 16.2% follows: Europe 38.0% Others 1.5% (US$ millions) 2000 1999 Breakdown of Earnings Assets by Region Thailand 30 76 per cent Indonesia 98 202 China 191 293 Russia 1 68 Pakistan 45 60 365 699

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Loans placed on non-accrual status at the end of 2000 decreased by 28 per cent to US$694 million (1999: US$960 million). After write-offs of US$298 million (1999: US$84 million) mainly relating to exposures in SE Asia and Europe, aggregate provisions at the end of 2000 amounted to US$620 million (1999: US$869 million). They constituted 89 per cent (1999: 91 per cent) of all non- performing loans and 4 per cent (1999: 7 per cent) of all loans and advances.

An ageing analysis is given below in respect of all loans and advances placed on non-accrual:

(US$ millions) Principal Provisions Book Value

Less than 3 months 186 69 117 3 months to 1 year 39 8 31 1 to 3 years 201 103 98 Over 3 years 268 259 9 694 439 255 1,657 188 1,299 1,721 202 1,451 1,740 241 1,420 1,857 270 1,289 1,904 249 1,692

Group Capital Structure and Capital Adequacy Ratios ABC Group’s tier 1 capital rose slightly by US$25 million to US$2,065 million; however, in light of the increase in total risk-weighted assets over the year, the tier 1 capital ratio declined to 12.2 per cent (1999: 13.4 per cent). Meanwhile, tier 2 capital increased from US$270 million to US$302 million. The total capital base increased by US$57 million to US$2,367 million (1999: US$2,310 million), producing a consolidated capital ratio of 13.5 per cent, compared with 14.7 per cent in 1999. Risk-weighted assets increased by US$1,717 million to US$17,526 million (1999: US$15,767 million), mainly on account of the expansion in the loan portfolio in the Arab world and Hong Kong, but also reflecting increases in placements to OECD banks and in market risk-weighted items. 96 97 98 99 00 All ABC Group subsidiaries meet the capital adequacy requirements of their respective regulatory authorities. Shareholders’ Certificate Notes & Equity of Deposits Bonds Shareholders’ Funds Non-Deposit Sources of Funds & Shareholders’ Funds ABC shareholders’ funds as at 31 December 2000 stood at US$1,904 million (1999: US$1,857 US$ millions million). Average shareholders’ funds amounted to US$1,879 million (1999: US$1,819 million).

Other Ratios At 31 December 2000, the ratio of the Group’s term financing to Shareholders’ Funds was 0.89:1 (1999: 0.69:1). Average Shareholders’ Funds expressed as a percentage of Average Total Assets was 7 per cent (1999: 7 per cent). Total Loans and Advances expressed as a multiple of Shareholders’ Funds was 7 times (1999: 7 times).

Arab Banking Corporation Annual Report 2000 25

. . . . . Hong Kong .....Madrid ....Milan. ....Paris ....Sao Paulo ABC’S SENIOR MANAGEMENT TEAM GATHERED FROM AROUND THE WORLD IN BAHRAIN IN JANUARY TO REVIEW THE YEAR’S PERFORMANCE AND DETERMINE OBJECTIVES FOR 2001.

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Banking Group Arab World Division

In 2000 the Arab World Division drew closer to the fulfilment of its mission - to establish ABC as“ the leader in the region and the banking group of choice for Arab and international corporates and institutions alike.” The philosophy of the Division is to combine the Group’s existing strengths in wholesale banking and sophisticated treasury products with those of the new domestic banking and capital market platforms, to offer its target market the widest possible range of services, achieving in doing so both diversification and enhancement of revenue for the Group as a whole. It aims to satisfy the needs of top tier corporates and multinationals, and governmental and financial institutions. The Bahrain-based Commercial Banking Department represents the largest unit in the Arab World Division, both in terms of assets and revenues. Commercial Banking has been organised along the lines of four complementary groups: Corporate Banking, Governments and Financial Institutions, Project & Structured Finance, and Syndication. The first three are profit centres, whereas the latter, as a support unit, is a cost centre. The department, working together with the Key banking products and Global Marketing Department (spun off last year from the Treasury Group to coordinate services“ are being developed treasury marketing worldwide), is responsible for relationship management throughout the to meet expanding customer Division, with the regional representative offices and domestic banking platforms, dedicated to requirements. New branches their specific geographical areas, feeding key market information and referring client needs to are planned in 2000 and beyond, account officers for individual attention. Similarly, client requirements relating specifically to the to provide the network to Arab world are identified by the ABC Group’s international offices and fed into the Bahrain enhance its delivery capabilities centre. Commercial Banking then structures optimum solutions to address the clients’ needs, and establish its presence. calling on the specialist support units’ expertise in Project & Structured finance and/or loan ” syndications, as and when required. Ghazi M. Abdul -Jawad Both ABC Islamic Bank and Project & Structured Finance work closely with their counter- President & Chief Executive parts in ABC International Bank in London, structuring transactions on behalf of Arab world and international clients, jointly or separately underwriting transactions, then packaging, securitising and distributing them to clients. During 2000, the Project and Structured Finance group was substantially strengthened with the appointment of a new team of professionals. The expanded unit will pursue major regional project, structured and asset-based finance transactions, supported by Syndication. Their combined efforts have already brought significant success as ABC had achieved the loan arranger leadership position in the Middle East by the end of the year. Developments continued apace in the domestic banking platforms of North Africa and the Middle East. ABC Egypt continued its re-engineering exercise to reposition itself toward its new target market, refurbishing and relocating its offices and introducing the modern technology required both to deliver its services to clients and to support Head Office and local manage- ment information needs. It built on its existing product range by successfully entering the major syndication and club loan market, participating in several significant transactions, as well as extending its trade finance and treasury product offerings. It also assumed, directly, the marketing role of the Cairo representative office, which was closed during the year. ABC Jordan, a more mature subsidiary working in a difficult economic environment, increased its profit through a combination of increased volumes of trade finance facilities offered and reduced provisions, and finalised plans to introduce mobile telephone and Internet banking to its clients in 2001. ABC Islamic Bank focused its marketing more closely on the Arab world and consolidated existing relationships in the GCC countries, whilst concentrating on specialist product develop- ment aimed at the Arab markets. It aims to capitalise on its expanded product range and pack- aging and distribution expertise, in conjunction with the London Islamic office, in the year to come. In the meantime, it returned a slightly reduced profit for 2000. The Group’s investment in ABC Algeria in late 1998, as the first -ever foreign-owned bank to set up operations there, was an immediate success and it continued to perform well in 2000. Expansion plans are underway, with several branches planned to be opened, backed by an increase of 125% in its share capital to be completed by the end of 2001. ABC Tunisie and ABC’s Tunis offshore branch also had a most successful year. The onshore bank broke even after its first six months of operation whilst the branch continued its six- year record of consecutive increased profits. Between the two units, which will be merged in two to three years’ time, the Group can provide a full range of retail commercial and import/export

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related banking services and products to top-tier corporate and consumer clients. The two business units have continued to introduce new products to their corporate and institutional clients to assist in their foreign exchange, interest rate risk and cash flow management, and these have been received with enthusiasm in the market. In summary, last year the Arab World Division drew closer to the fulfilment of its mission – to establish ABC as the leader in the region and the banking group of choice for Arab and international corporates and institutions alike. Pursuing the course of the greatest possible integration and cross-selling of services between business units, the Division recently set up a new coordination unit in Bahrain, consisting of dedicated senior officers from the New Products, Credit and Control areas of Head Office. The aim of the new unit is to act as a conduit for business in both directions and ensure that new products are offered to clients of the domestic platforms, whilst communicating the policies and credit and control culture of the Head Office to these units. Meanwhile, the Division continues to seek an appropriate medium for entry into the Levant and, given the right opportunities, other GCC countries.

Arab Banking Corporation - Egypt (S.A.E.) In pursuance of its strategy to build a diverse banking group delivering a steadily increasing return for its shareholders, the Group purchased a 95.8 per cent interest in Egypt Arab African Bank (S.A.E.) in November 1999, renaming it Arab Banking Corporation - Egypt (S.A.E.). ABC Egypt is a traditional commercial bank in transition, under guidance and direction from Head Office, towards a specialist retail and corporate bank providing a first-class and internationally oriented service to the top and medium tiers of domestic and multinational corporates and to medium and high net worth individuals. Its ability to call on the financial and product strengths of the ABC Group worldwide to provide its clients with innovative solutions is key to this strategy. In 2000, ABC Egypt expanded into the corporate syndicated and club loan market, acting US$ as lead and co-lead manager in several large transactions. It also benefited from Group synergies, extending an increased number of trade finance and export credit facilities (achieving 70 per cent increase in non-funded and 15 per cent in funded facilities in doing so) and introducing 400,000,000 ABC treasury products to its clients and overseas correspondent banks. In the retail market it Gulf International was actively engaged in designing value products appealing to its target market segment and Bank B.S.C. upgrading existing delivery channels to support new service capabilities. The restructuring of the bank proceeded during the year, with an initial 20 per cent reduc- tion of staff followed by the recruitment of 30 new professional managerial staff, supplemented ABC Group Co-Arranger by extensive training programmes for existing staff. It identified a new 3,300sqm building in July 2000 the prestigious area of Zamalek in Cairo, more in keeping with the bank’s change in focus and targeted client base, and will move the head office there in 2001. State-of-the-art technology is being introduced in support of its retail strategy, to be manifested through a new ATM network in service from February 2001 and the launching during the year of a telephone banking Call Centre, e-Banking services and new corporate and personal credit cards, with sophisticated cash management services to be offered to its multinational and major domestic corporate and individual clients. New products are also being introduced to support its corporate lending. Its branches are being refurbished to emphasise its commitment to quality and dedication to service. Local and Group head office management information requirements will be met by the imple- mentation of the new global Core Banking System, scheduled to go live towards the end of 2001. Despite the recent downturn in the Egyptian economy, the bank did well in 2000, increas- ing its net profit by 9 per cent to US$6.3 million equivalent in the first full year under ABC management. For 2001, four new branches are planned (three in Cairo including the new head office branch, the fourth in 6th of October City) and several new products are set to be introduced aimed at the retail market. The bank also anticipates further expansion in the range of services for the corporate and public sectors.

Arab Banking Corporation (Jordan) Since the launch of Arab Banking Corporation (Jordan) in 1991, out of the former National Securities Portfolio (PLC) acquired by ABC, its consistent performance and steady growth have served it well in supporting its gradual expansion. Its 20-branch network is spread throughout Jordan and it operates a profitable brokerage subsidiary. The bank’s joint venture, with seven other Jordanian banks and Visa International, in a nationwide Visa card company has also proved successful, with potential for considerable expansion. Its move to a new head office building, necessitated by expanding business operations, aptly demonstrated its success over its relatively short life.

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Despite the backdrop of Jordan’s sluggish economic growth over the past four years, the year 2000 evidenced some cause for cau- tious optimism. The rate of GDP growth increased to 3.4 per cent from 1.9 per cent in 1999, exports grew by 20 per cent and the trade deficit fell from 10.7 per cent of GDP to 7.7 per cent. Unemployment declined by 1.2 per cent to 13.2 per cent and the external public debt was reduced by 3.5 per cent. In accordance with the Paris Club agreement signed in May 1999, Jordan rescheduled its debt with its creditors, providing much-needed relief. ABC Jordan benefited from the albeit slight economic expan- sion, but particularly the growth in trade, its income from that source increasing by nearly 30 per cent as a result of greater volumes of letters of credit and guarantees issued. The bank also benefited from the Central Bank of Jordan’s reduction of obligatory reserve requirements for commercial banks, reducing its cost of funding. ABC Jordan increased its net interest margin by 9 per cent, but its increased holding of marketable securities produced a loss for the year compared with a profit in 1999. As a consequence, the total operating Project finance concentrated on several high profile oil and gas income declined by 2 per cent projects in the Middle East and North Africa (MENA) region. from the year before. Nevertheless, significantly reduced provisions served to produce a net profit of a healthy US$2.1 million, generating a return on shareholders’ equity of 6 per cent, compared with 2 per cent in 1999. The new cabinet, formed in June 2000 with a mandate to stimu- late the economy, is expected to focus on expanding trade with other Arab countries and establishing the Aqaba region as a Special Economic Zone. Free trade agreements were signed US$ m with the USA and the European Union which, together with Jordan’s 410 acceptance into the World Trade GAS PIPELINE PROJECT • OMAN GAS COMPANY SAOC Organisation in 1999, should help to encourage foreign trade expansion. ABC GROUP MANDATED ARRANGER • NOVEMBER 2000 Nevertheless, the continuation of the troubles in the region cannot but affect negatively Jordan’s economy.

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ABC Jordan intends to work actively to increase its share of the retail banking market, through the introduction of more and better retail products and high quality fee- based customer services in the local and international capital markets, at the same time remaining positioned to take full advantage of any upturn in the economy and external trade finance opportunities. More- over, as the bank provides against non-performing loans irrespective of collateral held against those loans, it is estimated that over 76 per cent of the provisions held against such loans will ultimately be recovered once collateral has been liquidated. The bank is well poised for profitable growth on the back of a solid and efficient infrastructure supporting a focused and extensive product range.

ABC Islamic Bank (E.C.) ABC Islamic Bank (E.C.), a specialist offshoot of ABC through the incor- poration of its Islamic Banking Division in 1998, provides Sharia- compliant products and services for both its own and ABC Group clients alike. Its products include trade and capital goods financings such as modaraba, murabaha, musharaka, ijara, ijara wa iktana, bai salam and istissna transactions, and it also Financing private power and water developments in MENA is a major advises clients on, and structures on drive of the project finance business in the region. their behalf, equity-related invest- ments in accordance with Sharia. It co-launched with another Islamic institution the first Islamic Bond (sukook) in 1999. ABC Islamic Bank also manages two successful Islamic managed investment funds and offers overnight interbank money market investment capability to Islamic banks through an innovative mechanism linked to these managed funds. The bank is shortly to intro- duce a variety of other innovative Islamic products: the world’s first US$ m Islamic credit card; a leasing fund to assist clients to diversify their invest- TAWEELAH1015 A1/GULF TOTAL TRACTEBEL ments, focusing on equipment and real estate leasing in North America; POWER COMPANY (1350 MW POWER/84MIGD WATER) and an Islamic bond linked to ABC GROUP ARRANGER • DECEMBER 2000 strategic commodities to assist oil- producing Arab states to raise Sharia-compliant funds. Through its membership of the ABC Group the bank has the capability, depending on the needs

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of its client and the size of the transaction, to arrange a financing wholly in-house or, alternatively, to syndicate it widely among the Group’s correspondents. Moreover, it provides corporate clients worldwide with access to new sources of finance, often in highly tax-efficient ways. ABC Islamic Bank concentrates its marketing on the Arab world. In 2000 it established new relationships with several financial institutions in North Africa and the Levant, to add to those forged in 1999, and strengthened further the existing excellent relationships with clients and institutions in the GCC countries, particularly Saudi Arabia. The bank also worked closely with other ABC Group units – particularly with ABC International Bank’s London-based Islamic Asset Management unit, but also with the business units in the Magreb countries of North Africa as US$ well as Germany, France and Brazil – in structuring Islamic transactions and providing trade finance and leasing facilities to their clients. In 2000, the bank returned a total operating income of US$6.9 million, 15 per cent down 50,000,000 on 1999, still a good result in the context of the negative impact on the investment climate in the Lundin Oil Middle East of the prevailing regional tensions and the continuing difficult business environment in some Asian and African markets. After allowing for a proportionately greater profit allocation ABC Bahrain – Mandated to investment holders, however, the bank’s net profit for the year was US$3.6 million compared Arranger with 1999’s US$4.7 million. October 2000 Arab Banking Corporation - Algeria Arab Banking Corporation - Algeria opened for business in December 1998 under the first commercial banking licence to be issued to a foreign bank in Algeria. ABC holds 70 per cent of its share capital, the balance being spread between International Finance Corporation, the subsidiary of the US-based World Bank, The Arab Investment Company (TAIC) of Saudi Arabia and a group of Algerian investors. The investment has been an immediate success, providing a 26 per cent return on shareholders’ equity in its first full year of operations. ABC Algeria has primarily targeted the commercial market and was active in 2000 in the provision of trade-related facilities, such as letters of credit, surety bonds and guarantees, as well as direct credits to its corporate, industrial and governmental clients and participation in the local inter-bank money market. The bank is pleased to have thus contributed its part to the country’s continuing economic expansion, vindicating the government’s commitment to increasing liberalisation and privatisation and fostering a healthy market economy. ABC Algeria’s three new branches, inaugurated in October 2000 and located in Hassi Messaoud, Oran and central Algiers, will be fully operational from January 2001 and will enable the bank to expand its area of operations and increase market share. Like the main branch at head office, these branches will be connected on-line to the Head Office in Bahrain. In partnership with The Arab Investment Company, the IFC, Tunisie-Leasing and some local shareholders, ABC Algeria plans to launch a leasing company – a relatively new source of finance for Algeria – in the first quarter of the new year. The bank has made good progress since its formation, increasing its operating income during 2000. After accounting for increased staff costs due to the branch expansion, it equalled its first year’s satisfactory net result of US$4.6 million. In view of its early success, the shareholders decided to increase the bank’s paid in capital by the equivalent of US$20 million – approximately 50 per cent of which has already been effected, with the remainder due in 2001.

Arab Banking Corporation - Tunisie The Group’s newest offspring, ABC Tunisie, commenced operations on 22 June, 2000 as a Tunisian onshore bank with operations complementary to ABC’s offshore branch, ABC Tunis. By the end of the year it had exceeded breakeven point, returning a small profit, having taken full advantage of the important business opportunities available to it – which could not have been availed by ABC’s offshore branch – in the provision of finance and services to the corporate, institutional and retail banking fields. With Tunisia’s retention in 2000 of its international investment grade rating and the quick- ening pace of its economic liberalisation programme, the bank expects to benefit from the greater business opportunities emanating from increased foreign investment. The upsurge in overall trade volumes between Europe and Tunisia resulting from implementation of the 1995 Partnership Agreement with the European Union, together with the business opportunities available through Group synergies, also leaves the bank well placed with its existing expertise in trade finance and treasury products. ABC Tunisie is targeting Tunisian import/export groups and large companies in need of their range of sophisticated products in the area of foreign exchange and interest rate risk management and foreign currency financing as well as insurance

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and leasing services; it is also currently developing a range of retail banking products designed to appeal to higher net worth individuals as well as to middle income clients, including Internet and telephone banking and credit card services. As part of its drive towards expansion in the retail and commercial areas, two branches of the bank are scheduled to be opened in early 2001, at Sfax and Sousse, the second and third largest cities in Tunisia. It plans to be the first Tunisian bank with branches on-line, another step in meeting its ambitious objective of becoming one of Tunisia’s most respected banking institutions.

Banking Group International Division

In 2000, International Division again became a major contributor to the Group’s net profit, with “a 9 per cent Return on Equity. We are confident that this will be enhanced further in 2001 as the Division contributes to the achievement of the Group’s Mission of maximising shareholder value in our chosen international businesses, in which ABC will be the preferred counterparty of choice for governments and their agencies, financial institutions and multinational corporations active in the exchange of trade and investment with the Arab world.” This year, building on the basic strategies adopted since 1998 under the Group’s Mission and key objectives, International Division focused on four main themes: effective risk management to enhance portfolio quality; support for the Group’s core business in the Arab World; new product innovation leading to incremental revenue streams; and continuing expense control and rationalisation of under-productive businesses and offices. Portfolio quality: The significant remedial effort at Singapore Branch bore fruit in 2000 with a reduction of US$139 million in non-performing loans. We anticipate significant provision recoveries now that the negative aspects of the 1998 Asian crisis have been fully absorbed. The slowdown in the US economy, however, has led to a degree of loan asset deterioration in New York Branch. This was to be expected given the diversity of its portfolio, but New York nevertheless continued to operate profitably in 2000. Greater selectivity in, along with closer monitoring of, our assets continues to lower the number and absolute volume of non-performing credits and the extent of provisioning required against them. The continued application of strict country, regional and tenor caps, as well as continuing emphasis on short-term, trade-driven exposure to US$ first-class financial institutions in Latin America and East Asia, ensures a reliable and attractive revenue stream within prudent exposure limits. Core business: All International Division units are firmly focused on providing global reach 300,000,000 for the Group’s core Arab world business activities – the provision of trade, export and project ABSA Bank finance and Islamic or other structured finance by the Arab world operating units – and facilitat- ing multinational banking and investment into – or by –the Arab region. In addition, Divisional ABC Group Arranger units are developing expertise in selected industries with direct and strategic relevance to the August 2000 Group’s domestic markets: oil and gas, petrochemicals, power and water, telecommunications and transport. All units have augmented their skill base and marketing resources to deliver to their targeted client base efficient, cost effective transaction execution; they plan to build further on these successes during 2001. New Products: The Division’s business operations are now wholly strategically and financially driven, operating under a system of clear financial hurdles balanced by stringent credit quality criteria. Emphasis is on fee generation to optimise returns on balance sheet utilisation. The Islamic and Structured Trade Finance groups in ABC International Bank plc, London are creating enhanced Group synergies in the origination and distribution of assets, not for holding on the Group’s own books but for warehousing and on-selling to enhance yields. Singapore Branch is making progress entering the Arab world-related trade finance arena and in financing the Asian- based offices of major international commodity houses. The European wholesale banking offices have intensified their marketing of major multinational vendors of capital goods and services to the Arab world, aiming to capture an increasing share of the end-buyer financing, ancillary bonding and documentary credit business as well as the lucrative project advisory roles. These efforts will be intensified in the coming year in coordination with the expanded project finance capabilities in Bahrain. Rationalisation: Our strong business focus has led to reduction of personnel costs in non- core areas as well as to elimination of non-productive offices. In Rome our Representative Office was closed in 2000. ABC Banque Internationale de Monaco was sold early in 2001 to our Spanish

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subsidiary, Banco Atlántico S.A., where greater direct synergies are apparent. We continue to review actively further rationalisation opportunities in our European wholesale banking operations, particularly in operational and systems centralisation, common management and business platforms and a more integrated corporate structure. In 2000, International Division again became a major contributor to the Group’s net profit, with a 9 per cent return on equity. We are confident that this will be enhanced further in 2001 as the Division contributes to the achievement of the Group’s Mission of maximising shareholder value in our chosen international businesses, in which ABC will be the preferred counterparty of choice for governments and their agencies, financial institutions and multi- national corporations active in the exchange of trade and investment with the Arab world.

ABC International Bank plc In its tenth anniversary year, ABC International Bank plc (ABCIB) posted pre-tax profits of £16.2 million, a 27 per cent increase over 1999. Provisioning for specific exposures and a general provision were made in line with the bank’s conservative policy towards its credit risk profile. Net profit after tax rose by 19 per cent to £15.2 million. ABCIB’s prime objective is to promote trade and business links between Europe and the Arab world. Its strategy is to source, repackage and distribute transactions into the market, particularly in the areas of trade and commodity finance. Over the year it has steadily diversified its product base and enhanced the quality of its earnings, increasing its fee income primarily from structured financings in the energy and telecommunications sectors. As a result ABCIB improved its annual return on capital by 19 per cent over the previous year, to 7 per cent in 2000. ABCIB operates out of its branches in London and Paris, through several specialist depart- ments, cooperating closely with ABC’s Head Office in Bahrain to source and book business. In January 2000 the General Manager of the London Branch was also appointed Deputy Chief Executive of the bank and in the second half of 2000 a new Treasurer was appointed in London and a new General Manager to Paris Branch. Expansion possibilities in Europe are currently being considered. In London Structured Trade Finance and Correspondent Banking successes included a three - year financing for the supply of GSM equipment from Motorola to Jordan Mobile Telephone Services. Paris generated US$1.3 billion of documentary letter of credit business and arranged several COFACE -guaranteed buyer credits for Algeria. London’s Commodity Finance group, working with three other banks, arranged a US$250 million medium-term prepayment facility in favour of Qatar Petroleum on behalf of a major oil-trading client. Paris focused mainly on soft commodities, especially agricultural products. Project Finance concentrated on the energy sector, arranging and lead-managing, with the support of the Syndications group, several high profile projects in the Middle East and North Africa (MENA) region, including the US$410 million gas pipeline project for Oman Gas Company and an independent power project in Tunisia for which it won the mandate at year- end. Paris supported major projects in the MENA region including a desalination plant in the UAE, and participated in the financing of an offshore rig and the acquisition of an oil refinery in Morocco. It is also acting on a number of transactions on a build-own-operate-transfer (BOOT) basis for wastewater treatment in Tunisia and Jordan and the energy sector in Egypt. Specialised Finance focused on the financing of cellular telecommunication networks in the MENA region and Turkey; fibre-optic networks for competitive local exchange carriers; and mergers and acquisitions in the European cable television industry. It also demonstrated its expertise in asset-backed finance transactions. The Islamic Asset Management (IAM) team, since its establishment at the end of 1999, has structured equipment leasing and real estate assets, sourced primarily from North America, for distribution to investors in the Arab world. In November 2000, ABCIB Islamic Asset Management Limited was established to segregate ABCIB’s Islamic and conventional banking products and provide advisory services. IAM works closely with ABC Islamic Bank in Bahrain. At the end of 2000, ABCIB’s short-term facilities (those repayable within two years) stood at 72 per cent of the total loan portfolio. Long-term borrowings stood at 32 per cent of total deposits. The ratio of fees and trading income to total income increased to 33 per cent in 2000 from 27 per cent in 1999, while the ratio of non-interest income to total expenses increased to 68 per cent from 59 per cent. The bank’s aggregate volume of letters of credit, acceptances and guarantees during 2000 amounted to US$2.3 billion, slightly higher than 1999. ABCIB’s portfolio of loans and advances to customers maturing between one and five years amounted to £198 million at the end of 2000, an increase in volume of 185 per cent over 1999. Its total loan portfolio, net of provisions, ended the year at £748 million or 5 per cent higher than 1999.

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ABCIB’s Risk Asset Ratio was 19.7 per cent at year-end, comfortably above the minimum standards set by the U.K. Financial Services Authority. Based on tier I Capital alone (less deduc- tions) the Ratio stood at 12.7 per cent. The bank’s principal thrust for 2001 is to take full advantage of the favourable economic climate created by the increased price of oil to finance a higher volume of trade and infra- structure projects in the Arab world. The introduction of ABC Group’s new core computer system will significantly improve management information and risk control as well as providing the tools for a more active Treasury operation. ABCIB will continue to play a leading role within the ABC Group to achieve its objectives.

Arab Banking Corporation - Daus & Co. GmbH In seeking to harness the benefits of ABC Group synergy, Arab Banking Corporation - Daus GmbH has focused its core business clearly on commercial banking and the long-term financing of exports from Germany to the MENA region, including Iran. The bank has steadily built up its commercial export and project finance activities, including structured finance, enabling it now to offer exporter clients up to 100 per cent financing of export credit guaranteed projects. Its decision to present itself as a niche bank in a largely over-banked country has enabled it, through innovative structures and new products, both to strengthen its profile towards its client base and to expand its credit portfolio. As ABC Daus’ reputation for efficient and innovative service has spread, it has benefited from increasing volumes of business brought to it from German exporters. For example, ABC Daus is now the major bank address for the financing of German exports to Libya and, with the cooperation of ABC’s Algerian subsidiary in routing business originating in that country, is steadily increasing volumes from that source also. The bank has also expanded its relationships in Eastern Europe, adding clients in Slovenia and Hungary to its existing portfolio in the Czech Republic and Poland. In 2000, ABC Daus’ net interest income was reduced by approximately a third, despite an increase in money market activities, as loan volumes were reduced in favour of off-balance sheet business opportunities. Commission and fee income held steady, notwithstanding reduced yields arising from increasingly competitive pressures, as the bank was able to increase overall turnover of contingent liabilities, whilst the costs of restructuring its managed bond portfolio to alter the maturity profile and interest sensitivity were more than balanced by its income from this area. In addition, ABC Daus’ externally managed securities portfolio produced an excellent contribution to its earnings. The bank’s total operating income for the year was consequently higher at Euro 19.2 million compared with Euro 11.2 million for 1999. ABC Daus decided to apply its total profit for the year to achieve full provisioning of its non-performing loan book, releasing the parent bank from its historical guarantee issued in lieu. Due to prudent management of its loan portfolio, the bank has not suffered a single loan loss since 1992. The resultant saving of the old non-performing portfolio’s refinancing costs, together with anticipated savings in premises cost arising from the sale of its Frankfurt office building (which it only partially occupies), should further improve the bank’s performance.

Investment Group

The objective of the Investment Group remains that of enabling the ABC Group as a whole to“ diversify risk and enhance shareholder value through its non-core investments. In the year 2000, the combined operations of the Investment Group banking units contributed a total of US$67.9 million in net profit for the ABC Group. The re-engineering of Banco Atlántico is proceeding smoothly and the bank is well positioned to meet the challenges of the current competitive banking environment in Spain. International Bank of Asia has benefited from the economic recovery in Hong Kong, whilst Banco ABC Brasil has maintained its contribution to Group net profits commensurate with its size.” The Investment Group is responsible for maintaining and enhancing shareholder value for ABC Group from its non-core banking operation investments, particularly Banco Atlántico, S.A., International Bank of Asia Limited and Banco ABC Brasil, S.A. It works closely with these banks, helping them to introduce and market new investment products and increase fee-generating business. It is also responsible for the introduction of new capital market-related initiatives throughout the Group.

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Having been granted an investment banking licence in Egypt in June 2000, the Investment Group completed the establishment of its wholly-owned investment company, ABC Securities (Egypt) S.A.E., with an authorised capital of LE500 million of which LE100 million was paid in initially. The company provides asset management services to high net worth individuals and institutional investors, advising public corporations on privatisation and arranging private and public bond and equity issues.

Banco Atlántico, S.A. The Spanish economy again expanded in 2000. GDP grew by 4 per cent, stronger in the first half but with some slackening in the second half as a consequence of lower private consumption following a rise in interest rates and a slowdown in employment creation. External demand played an important part in overall GDP growth, reflecting the increase in global trade generally, and more particularly the expansion of the European economies, in addition to the competitive advantages brought to Spanish exporters on account of the Euro’s depreciation against other major currencies. With inflation reaching 4 per cent, however, short-term official interest rates had to rise, which naturally impacted on banking rates, in turn, curtailing private sector expenditure – and thus short-term borrowing – whilst simultaneously encouraging a trend towards term deposits as long term rates were unaffected. This left the Spanish banking sector struggling to contain operating expenses as the only effective way to combat the resultant low interest margins. In 1999, Banco Atlántico S.A. commenced a process of change, spanning both tangible and intangible aspects of the organisation, by the simultaneous introduction of a global re-eng- ineering project and a number of human resources initiatives, including management and performance evaluation by competencies and greatly increased man-hours devoted to training US$ personnel in the new processes. To reduce costs, the bank opened new administrative centres in Andalusia, Madrid and Barcelona to concentrate transaction processing, as well as introducing 77,500,000 simplified and automated credit granting and monitoring processes and more focused recovery procedures on doubtful loans. This has succeeded in generating personnel cost savings – freeing Al Shira Marine up human resources for more profitable activities – whilst simultaneously raising the quality of Investments Co. decision-making. The bank is in the final stages of phasing in a new and fully integrated Management ABC Group Arranger Information System, allowing cost allocation on a product, customer or business unit basis. A new July 2000 auditing process has also been implemented, emphasising remote auditing, with corresponding personnel savings and improvement in internal control. The application of new sales techniques allied with the introduction of new technology, bringing with it new competencies in data warehousing, data mining and information-based marketing, began in earnest in early 2000 and should be complete by March, 2001. The nature of marketing itself is evolving in Banco Atlántico, from the mass marketing concepts of the past to an environment that focuses the intensive and intelligent use of data to develop individually targeted sales media and design, enabling the bank to market customised products and services to individual customers. As part of the marketing drive, the bank is developing an agent network and by the end of 2000 had appointed 450 agents who had introduced some 1,200 clients with a business volume of over 8,000 million pesetas. The bank’s Capital Market Unit was expanded and reinforced to provide its private and personal banking customers with access to its specialised products through all its branches. In addition, early in 2001 it acquired Banque Internationale de Monaco from its parent, ABC, to spearhead the expansion of its Private Banking Services into France and Italy. A series of new products were launched during the year, specifically designed to attract the bank’s target clients. Amongst these were six structured deposit schemes, eight new investment funds, three unit-linked funds, US dollar deposit accounts designed for non-residents and a series of new flexible deposit accounts for domestic clients. In addition two new types of mortgage were announced, as well as a new consumer credit with repayment terms of up to eight years, a pensioners’ Gold Account, a salary account for non-residents and a special investment fund for the Basque Country designed to take advantage of the different tax regulations affecting that region. A number of successful commercial paper and subordinated debt issues also took place during the year. Several new credit cards were offered, including affinity cards, as well as a number of insurance products relating to mortgage and consumer loans. Further new products are in the pipeline: an account for young people; a new structured deposit and a 26 month deposit for Internet users; a fixed income guaranteed fund; and two new credit cards for private banking clients.

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With regard to the application of Internet banking, Banco Atlántico has significantly expanded its capacity to service clients, both in terms of the number of users who can simulta- neously access its portal as well as the types of transactions on offer – including the new products specially designed for the Internet. Share dealing on-line has resulted in the opening of over 20,000 new accounts in a single year. An English language version of the bank’s website has been introduced to service non-resident and multinational clients. A Call Centre will shortly be available to clients for Telephone Banking services. ATM services have been expanded and income therefrom increased by 42 per cent during 2000. A life insurance company was launched at the beginning of the year, offering a wide range of own-design products distributed through the branch network. The company had reached breakeven by November 2000. For the reasons given above, 2000 witnessed an overall increase in Banco Atlántico’s total customer resources, which fed into an 18 per cent increase in its loans and advances to customers. Total operating income also rose, by 11 per cent, but net profit fell by 2 per cent to Pts. 7.0 billion as a result of general loan loss provisions imposed under conservative Bank of Spain regulations, resulting in a slight deterioration in the efficiency ratio to 75 per cent and a return on shareholders’ equity of 8 per cent.

International Bank of Asia Limited The Hong Kong economy moved upward in 2000, driven by external demand as exports increased by almost 17 per cent over 1999; GDP expanded by more than 10 per cent during the first three quarters. However, the impact of this trade growth did not filter down to the domestic economy and, although declining somewhat, unemployment remained high by Hong Kong standards at 4.6 per cent. Domestic demand was therefore very cautious, as reflected in the continuing decline in consumer prices and the low volume of property sales. In such an environment interest rates would normally be low but – because of the link between the Hong Kong dollar and the US dollar – the US Federal Reserve Bank’s efforts to slow the US economy likewise demanded higher interest rates in Hong Kong. Hence, loan demand was weak, with domestic loans growing by an anaemic 1.4 per cent. While economic trends were more encouraging than anytime since 1997, the recovery was still fragile. Against this mixed backdrop, International Bank of Asia achieved an enviable rate of growth. Loans rose by more than 28 per cent to HK$17.4 billion. Deposits rose in tandem with loan growth, maintaining IBA’s conservative loan-to-deposit benchmark of 75 per cent. Customer deposits increased to HK$23.4 billion, 24 per cent above the December 1999 level. IBA main- tained its high liquidity policy, increasing cash and interbank placings by 5 per cent. IBA also tested the newly revived FRCD market, inviting participation in a HK$500 million facility. The response was overwhelming, with 14 banks joining to provide HK$ 800 million in IBA’s second largest issue and its largest pure Hong Kong dollar FRCD. Standard & Poor’s reconfirmation of IBA’s A-3, BBB ratings, unchanged since their initial award in 1996, was a positive factor in the striking success of the FRCD issue. Net interest income rose by 6 per cent despite intense competition among banks which restrained loan pricing. The net interest margin of 2.93 per cent was up by seven basis points over the mid-year figure through a judicious mix of higher yielding loans and control of funding costs. Non-interest income jumped by 73 per cent, driven by credit card commissions, share brokerage, loans fees, letter of credit fees and insurance revenues. Operating expenses rose by 14 per cent as IBA expanded its range of services, installed new systems and resumed advertising. However, an improved cost:income ratio and strong increases in productivity, as measured by asset per employee and net income per employee ratios, demonstrated that IBA invested well to expand business. Total operating income was up by 19 per cent. Provisions for bad and doubtful debts fell 52 per cent in comparison with 1999, reflecting the general improved credit quality, and taxes incurred during the year, following a tax credit in 1999 when the Hong Kong government granted a tax rebate to stimulate the economy, were minimal. IBA’s net profit for the year was a very creditable HK$244 million, producing an improved return on assets of 0.93 per cent and return on equity of 7.3 per cent. IBA, anticipating economic recovery, chose to focus on growth during 2000, introducing a series of new products, attracting new customers, opening additional channels and exploiting technology to upgrade service. Beginning with the redesign of Mycard, IBA’s signature credit card product for women, and continuing with the introduction of Magicard, a new product which leverages on the forthcoming Disney theme park and is linked to a special Internet site, IBA demonstrated its ongoing leadership in the high yielding credit card business. As the need for personal finance revived, the bank launched a whole range of loans for individuals, providing

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US$ 600,000,000 Petrokemya

ABC Group Lead Manager May 2000

The NGL-4 project is designed to increase the recovery of natural gas liquids from Dukhan Arab ‘D’ reservoir and the North Field.

US$400m QATAR NGL-4 ABC GROUP MANDATED ARRANGER • APRIL 2000

Arab Banking Corporation Annual Report 2000 37

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flexibility and convenience while generating attractive interest income. Ambassador Privileged Banking was expanded, taking advantage of the experience gained since it was first introduced in 1997. Featuring a sophisticated new logo, the Ambassador services aim at higher net worth clients, providing them with personalised attention for savings, investments and loans. Capitalising on the success of its two new investment centres opened in 1999, which quickly accounted for 40 per cent of its brokerage turnover, IBA opened two more centres, gaining new customers and increased market share, contributing to a 100 per cent increase in its total brokerage commission. IBA’s partnership with Winterthur Insurance, part of the Credit Suisse group, expanded the range of products available to customers, more than doubling commission revenue. As part of the Bank Consortium Group, an alliance of ten local banks, IBA was active in promoting Mandatory Provident Fund products. The alliance joined also in underwriting several very large loans to Hong Kong blue chip corporates. Based on consumer research, the bank began to strengthen its The Group’s structured finance team arranged and participated in several presence in selected neighbour- aviation finance facilities for some borrowers including Gulf Air, Egypt Air, Oasis and hoods. The research identified a other regional and international operators. customer preference for larger branches with more spacious service areas and conveying both solidity and friendliness. By merging two branches which had already reached full capacity into a single Causeway Bay Superbranch, a substantial increase in business was achieved, with deposits growing by more than one-third since its opening in July. This policy will be repeated in Tsuen Wan in the New Territories, where a new superbranch will be opened US$ m in 2001. Following the successful trans- 90 ition to the new millennium, IBA’s OASIS INTERNATIONAL LEASING COMPANY focus turned to new technology and commenced the building of its new ABC GROUP LEAD ARRANGER/UNDERWRITER • 2000-2001 e-Commerce structure. It launched a Virtual ATM in May, providing customers with the first stage of Internet banking. In July it signed a contract with Computer Science Corporation, one of the world’s

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largest data facilities management and computer consulting firms, to assume responsibility for overall management of information technology. IBA joined with three other banks to form a company to provide the basic platform for expanded Internet banking. In the aftermath of Hong Kong’s most severe recession since 1945, IBA’s objective in 2000 was to resume growth and increase the return to shareholders. In outpacing the industry as a whole, it has demonstrated that it can switch from meeting the challenges of economic crisis to exploiting the opportunities of economic recovery. Emphasis was placed on its strengths, with its strong positions in retail banking, credit card operations and hire purchase finance supple- mented by new inroads into personal investment through new insurance and investment products, an expanded network of investment centres and the upgraded Ambassador Privileged Banking. Diversity remains an overriding principle of IBA’s business as it expands its customer base and revenue sources. The bank places major emphasis on diversified risk, both in terms of industry and individual customer. The S&P rating recognises IBA’s ability to manage its risk. Substantial challenges face IBA in 2001. Further deregulation of interest rates and the increasing challenge of foreign banks, as well as technological changes, present both opportunity and threat. Economic growth has been driven by external trade which may slow as the US economy cools. The global trend of consolidation is approaching Hong Kong. IBA welcomes deregulation because it has won its position in Hong Kong by relying on innovation, listening to its customers and responding to market needs. It has expanded its capabilities through alliances with Winterthur and the Bank Consortium. By bringing in CSC as its strategic partner in technology it has armed itself with the tools to meet the challenges. IBA is positioned for strong growth in 2001.

Banco ABC Brasil S.A. In 2000 the Brazilian economy’s welcome stability, as evidenced particularly in long-term domestic interest rates, led to an expansion of credit as consumers exhibited greater confidence in the future and utilised more of the credit lines available to them. The growing market resulted in the banks increasing their leverage but, like the situation in Spain, relative stability produced decreased perceived risk and pushed down lenders’ spreads. Banco ABC Brasil was no exception and, convinced that these conditions were not temporary but rather of a structural nature on account of the improved economic framework, cautiously expanded its asset portfolio. US$ The continuing internationalisation of the Brazilian economy, with the consequential liberalisation of capital flows and easier entry of foreign banks into the market, also contributed to the lowering of spreads and widening of tenors generally, especially in the area of international 400,000,000 trade financing. The spreading liberalisation also enabled foreign banks to collateralise their Turkiye Garanti trade-related credits, allowing them to deal direct with end-clients and again imposing competitive Bankasi AS pressures on local banks. The low volatility of domestic interest and exchange rates also diminished demand for hedge ABC Group Co-Arranger instruments, one of ABC Brasil’s areas of expertise and traditionally an important source of revenue. On the other hand, the bank’s proprietary positions showed a much better performance July 2000 due to gap management and mismatched treasury positions. In addition, fees from structured operations, driving the issuance of credit instruments for distribution to capital market investors, presented profitable opportunities whilst some clients, in their search for better spreads and more volatile assets, increased their interest in equities and instruments with slightly higher credit risk or lower liquidity, also creating opportunities for fee revenue for the bank. Asset management also presented a challenging environment, as fees fell sharply in response to competitive pressures. Distribution was the key to the bank’s success in this area in 2000. As the financing of investments deriving from privatisations of public utilities picked up, ABC Brasil, well positioned in this segment of the market, benefited accordingly. This remains a promising avenue for the bank for the future. In a year where the prospect of major devaluation of the Brazilian currency was not a concern, ABC Brasil produced a strong result, increasing net profits by 47 per cent to US$32.7 million. This excellent performance amply demonstrated the soundness of its strategy to assure a continuous flow of operations and sustained profitability through imaginative and innovative solutions that add value for its clients. Following similar trends in other major economies, the Brazilian financial system is currently in a process of consolidation through which the national retail banks are expected eventually to dominate the collection and payment businesses, giving them a natural competitive edge.

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The obvious place for ABC Brasil under this scenario will be through its tight focus on specialised products and superior client services. The bank has positioned itself as an important provider of specialised and highly sophisticated credit operations to large Brazilian corporations, complemented by a range of financial services such as asset management, underwriting and treasury activities. To this end, its new Grand Cayman branch to be opened in 2001 is expected to contribute in business expansion to its multinational clientele. ABC Brasil is also studying ways of participating in both the middle corporate market and the consumer sector, whilst maintaining its traditional conservative stance on credit risk.

ABC Securities (Egypt) S.A.E. ABC Securities (Egypt) commenced operations during the second half of June 2000 under licence from the Capital Market Authority, with an authorised capital of LE500 million and initial paid up capital of LE100 million, to provide asset management services to high net worth individuals and institutional investors, advise public corporations on privatisation and arrange private and public bond and equity issues. The second half of the year, however, did not provide the ideal opportunities for the firm’s operations that had been hoped for. The country experienced a severe liquidity squeeze, govern- ment arrears to the private sector exceeding LE25 billion. Foreign reserves fell below US$15 billion, the lowest since 1994, causing a fall in the exchange rate against the US dollar from LE3.4 to LE3.9 in November. A parliamentary election took place in November that is likely to lead to a change in government in early 2001. An array of economic legislation that could impact significantly on government revenues, investment and the overall business climate is likely to follow, with the introduction of intellectual property rights legislation, a value -added tax system and a more flexible exchange rate regime being particularly on the cards. The performance of the government in tackling outstanding issues on several fronts over the first six months of 2001 will determine the extent of business confidence, investment levels and overall economic growth. The proposed legislation could be viewed as a positive development leading to a recovery in performance, which would no doubt assist in creating better business opportunities for the firm. ABC Securities (Egypt) is adopting a realistic approach in terms of projecting balance sheet and income growth, but anticipates that productivity and profitability ratios will continue to exceed Group-established targets in the near future.

Group Treasury

Group Treasury acts as a central coordinator and manager of the Group’s funding and liquidity profile. In 2000, it continued to work towards the Group-wide ‘hub and spoke’ concept introduced in 1999. Under this strategy, funding responsibilities are mainly to be devolved to the business units – the parent bank’s branches as well as the banking subsidiaries – in line with their on-balance sheet activities, whilst market and liquidity risk management remains centralised for the benefit and security of the ABC Group as a whole. Individual business units will continue to market their treasury products within their own geographic regions but duplication of relationship marketing and servicing of clients’ requirements by different ABC Group units will be eliminated. Product development, particularly in relation to Arab world currencies and options, will be concentrated in the Bahrain hub, represented by Group Treasury itself, and disseminated worldwide.

Group Treasury is divided into three separate departments, with the following responsibilities: Foreign Exchange, which includes the Middle East Currencies, Precious Metals & Commodities and Treasury Sales units, provides institutional clients and central banks in the region with a comprehensive service, in addition to handling proprietary trading on behalf of the parent bank. It covers all major Middle East currencies, to which it will be adding several North African and Mediterranean currencies in 2001. In response to identified client demand, the unit is also expanding into gold and other precious metal and commodity trading. Money Market, Options, Derivatives & New Products, which includes Islamic Murabaha Investments, plays a vital role in the management of ABC’s liquidity, assessing movements in interest rates and determining appropriate action through the use of derivative tools such as interest rate swaps, forward rate agreements, collars and swaptions to smooth out market volatility and reduce interest rate risk. The options team has become one of the largest and most professional in the region, with activities including pricing of both ‘plain vanilla’ and exotic

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currency and interest rate options for institutional clients. Employing its acknowledged expertise the team has successfully arranged a stream of attractive hedging and risk management solutions for clients and ABC Group. The New Products unit’s mandate is to structure alternative investment products, including structured notes and capital guaranteed funds, to be marketed throughout the Group’s retail units worldwide from 2001. Marketable Securities, includ- ing Fixed Income, Equities and Investment Management, manages portfolios of fixed income securities on behalf of institutional clients and ABC itself, in addition to its normal trading activities in bonds and equities. Total funds under management now exceed US$2.4 billion. The department played a major role during the year when ABC joined with a major US invest- ment bank as Co-Lead Manager and Placement Agent in a successful US$300 million Collateralised Bond Obligation transaction. It also began trading in stocks listed on the major international exchanges and, through ABC Securities W.L.L., ABC’s broking subsidiary active in Bahrain Stock Exchange securities, is expanding its portfolio manage- ment services to cover a wider The Group financed several telecommunications transactions range of Arab securities. Marketable including wireless and satellite communications. Securities also plans to increase selective investment in international managed funds both on behalf of its clients and for ABC’s own portfolios. A separate Global Marketing Department was set up in 1999, reporting directly to the Arab World Division but indirectly to Group Treasury, and is responsible for mar- keting of treasury services to new clients and coordination of existing relationship marketing throughout the Arab world. In time this respon- sibility will be extended to the whole US$ m ABC Group. During the year, Group 420 Treasury raised US$400 million THURAYA SATELLITE TELECOMS (increased from an original offering of US$300 million to meet investor ABC GROUP UNDERWRITER /ARRANGER • MAY 2000 demand) for the ABC Group, via a medium-term loan syndicated among a group of prime interna- tional banks.

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Credit & Risk Group The Credit & Risk Group (CRG) has overall responsibility within the ABC Group for centralised credit policy and procedure formulation, credit exposure reporting, control and risk-related regulatory compliance, remedial loans management and the provision of analytical resources to senior management. It is also responsible for identifying market risks arising from ABC Group activities, recommending to the relevant central committees appropriate policies and procedures for managing exposure to such risks and establishing the systems necessary to implement effec- tive controls. In 2000, CRG’s activities and progress covered the following areas:

Regulatory ABC has always paid close attention to, and carefully tracked developments in, evolving regu- latory standards and industry best practice, especially in the field of credit risk management. In recent times this interest has involved the CRG, both regionally in discussions with regional banks, and internationally through representations on steering committees and in working groups of the International Institute of Finance, in active deliberations on the Draft Capital Adequacy Accord and its implications for future credit risk management. As a consequence, there has been an early recognition of the potential challenges presented by changes to the BIS guidelines on capital adequacy and proactive efforts are under way within the ABC Group to enhance the existing credit risk management framework, with a view to augmenting and standardising the credit risk culture throughout the Group and creating the infrastructure for optimising the application of capital resources to credit risk.

Policy and Process ABC intends moving towards an environment where business strategies and decisions are based on capital usage optimisation. In the area of credit, the first stage is standardisation of risk meas- urement, which has two dimensions: amount and quality. To address the former, in the trading book an ‘add-on factor’, reflecting further potential downside risk, is to be introduced and added to the (marked-to-market) value of counterparty risk, whilst counterparty risk in the banking book will be weighted at par. Risk quality will be reflected through the risk rating process outlined below. With the progressive implementation of the Credit Risk Management (CRM) system during the end of 2000, and the introduction of the revised risk rating system through the coming year, this first stage will be reached by the wholesale banking units in 2001, with the retail banking subsidiaries to follow. Simultaneously, CRG is entering the next phase of development (policy, systems, internal data archiving and external data sources) for the estimation of capital required in support of specific credit exposures, entailing estimation of expected and unexpected loss relating to specific credit exposures. Whilst a specific time frame for the US$ completion of the latter is not attributable presently, the Group is moving forward expeditiously to create this framework which would meet both emerging regulatory requirements as well as 200,000,000 internal capital assessment needs. Focus has this year been mainly on the following areas: Arab Petroleum Risk Standardisation Investments A robust ten-grade risk rating system (related to both obligor and facility types) has been intro- duced to replace the less stratified system in operation earlier. The rating process is cumulative Corporation and rigorous, drawing on best practices for such systems as identified by both the Bank for International Settlements in its rating practices surveys as well as the CRG’s own independent ABC Group Mandated findings. The new system will lay the foundation for the possible ultimate adoption of the Internal Arranger Ratings Based (IRB) approach to meeting future regulatory capital demands as we move towards July 2000 2004. ABC’s in-house country rating system has also been similarly overhauled to produce an equivalent ten-grade structure.

Risk Measurement Methodology In line with international best practice, and in order to streamline and optimise the usage of credit lines to ABC’s counterparties, as stated above, credit risk in the Group’s trading book will henceforth carry, in addition to marked-to -market values, an ‘add-on factor’ to cover potential future exposure. This differs from the current methodology of applying set risk weights to the nominal amount of each exposure to approximate the amount of credit risk. Moreover, settle- ment risk in the trading book is now realistically measured on a multi-day basis. Credit risk in the banking book will continue to be carried at par. ABC also continues to seek bilateral and

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multilateral netting arrangements to reduce risk and enhance business potential - in support of this, limit structures have been reconfigured so that distinctive risk categories are measured as appropriate relative to their tenors. As presaged in last year’s annual report, a new market risk management system has been selected to meet the requirements of the regulators and best practice industry standards in the measurement of all types of market risk and the efficient allocation of capital to those risks. The system was due to complete user acceptance testing and go live in the first quarter of 2001. It will provide Historic, Monte Carlo and Variance/Covariance Value-at-Risk (VaR) calculations as well as marginal VaR and a suite of sensitivity calculations aggregated by, among others, location, risk and trading desk. This will aid in the setting of capital-optimised limits through providing management with more accurate quantification of exposure risk. Data capture capability, through upgraded systems’ introduction in ABC’s branches and certain wholesale banking units, when added to existing VaR reporting from non-core units engaging in trading activities, should enable Group VaR calculation by the end of 2001. The year is therefore seen as one of introduction and integration of VaR methodologies in both risk management and limit monitoring.

Credit Portfolio Risk Although overall portfolio statistics and parameters have always been a part of individual credit consideration and review, in future the Group intends to more proactively manage credit port- folios in terms of concentrations and desired diversification through new technology and products available to it. The frequency of portfolio reviews by Head Office in terms of geo- graphical/industrial/maturity analysis has increased. Policy prescriptions relating to portfolio exposure thresholds are being introduced. Products facilitating credit risk transferral away from the Group, such as credit derivatives, will enable a more dynamic management of the portfolio in the future.

Credit Process Following the implementation of the new Group Credit Policy the involvement and supervision by Head Office of the Group credit portfolio has significantly increased. This has been primarily through referral thresholds and through the rationalisation of Group credit lines to counter- parties. The result has been noticeable in efficiencies in the process itself together with enhanced information feedback to Head Office whilst maintaining the autonomy and decentralised credit processes at the business units in compliance with local statutory and regulatory requirements. With the introduction of risk ratings and an enhanced credit risk management technology platform, greater but safer devolution of credit authorities, with accompanying accountabilities and control, will be achieved, thereby rendering the credit approval process more efficient.

Credit Risk Management Technology Following an intensive search for the optimum credit risk management solution, ABC decided to address its requirements in stages. The first phase entailed an expansion of the functionalities of its existing treasury monitoring system to include all products, thereby facilitating the provision of Group aggregated exposures across all products, plus the creation of a central warehouse of present and historical credit risk information. This phase, entailing minimal implementation risks, meets ABC’s immediate requirements in the area of effective exposure management and control. The next phase will see the introduction of systems directed at optimising the credit approval process itself, via the Group’s Intranet-based delivery and decision-making technology; and of default probability estimation software calibrated to ABC’s own internal risk rating system, its country, industry and other exposure limits.

Data Standards and Quality A key integral in the area of modern effective risk management, and one which troubles most banks, is the availability and accuracy of relevant data. In ABC’s case, and in spite of the complexity introduced by a diversity of business units, uniform data description standards are of paramount importance and resources are therefore being deployed to ensure consistency of description and categorisation.

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Remedial Loans and Recovery The Remedial Loans Unit of CRG continues to pursue its primary objective of an ongoing reduction in the impaired or classified asset portfolio of ABC Group, through proactive asset management and disposals, practical workouts and debt restructuring exit strategies. It plans to maximise the net present value of recoveries whilst minimising the impact of credit losses, where appropriate, by employing credit derivatives and swaps to mitigate against identified but unrealised credit risks. ABC business units submit quarterly reports on non-performing credits, with provision forecasts, that are evaluated by Head Office senior management to determine the adequacy of existing provisions. Under the auspices of Remedial Loans, all units now submit their impaired asset credit reviews on a standardised ‘Action Plan’ format that analyses recovery potential under at least two alternative identifiable exit scenarios. This helps to focus account officers’ minds on the need to reduce non-performing credits within agreed deadlines. Remedial Loans is pleased with progress in 2000. Exposure to the troubled countries of Thailand, Indonesia, China, Russia and Pakistan was reduced in 1999 by US$203 million, and by a further US$334 million in 2000 to reach a total of US$365 million. This was achieved through a combination of debt rescheduling and restructuring, asset sales or swaps and bankruptcy proceedings where these were unavoidable. Significant write-offs from existing provisions were a natural but unavoidable by-product of this process.

Global Information Technology

The Global Information Technology Department is responsible for global IT strategy and planning as well as the provision of related technical services throughout the Group. The Department fulfils a significant role through its responsibility for assessment of future operational needs and development and implementation of new IT systems to meet them. It acts as the focal point in ABC Group for the review and assessment of business requirements and the project proposals arising from them, matching these business needs with the Group’s technology strategy and primary concern of delivering efficient, cost-effective, systems. In line with ABC’s global technology upgrade programme and IT standardisation strategy for the wholesale banking units, the Department continued to make significant progress during the year in the deployment of best-of-breed business applications and technical services. Having completed the implementation of real-time front office systems in Bahrain, London, New York and Paris, roll out is set to continue in 2001 in the remaining European units, as is deployment of the new back office system in Bahrain and London. All ABC’s branches and subsidiaries are now inter-connected through the Group’s new private global telecommunications network, providing enhanced services with seamless backup capabilities. Similarly, significant progress has been made with the ‘Enterprise Risk Management Systems’ project. For Credit Risk Management, the system capability upgrade now permits instant Group-wide credit exposure information retrieval for Treasury and non-Treasury activities alike. For Market Risk Management, ABC has implemented a state-of-the-art system that can support advanced risk analytics such as Value-at-Risk and simulation techniques. With the enhanced transaction processing foundation in place, an Executive Information System (EIS) development programme was launched to provide users with consolidated on-line Group-wide risk and exposure reports by customer or by country portfolio. Other reports assist in the accumulation and analysis of market data, enable cash flow or profit and loss analysis, or provide on-line updated Group policies. The EIS forms an integral part of the Group’s initiative to web-enable business applications via a true internally generated e -business portal - ABC Corporate Intranet. ABC Group has developed a comprehensive retail banking IT architecture for its retail banking units in the Arab world. Global Information Technology, in close collaboration with ABC’s subsidiary in Jordan, has introduced a project to provide mobile and Internet banking services which are expected to be launched early in 2001. In parallel, the Group is implementing best-of-breed IT solutions for its subsidiaries in Egypt. During the year, as part of its overall e-Business strategy, ABC launched an initiative to explore the possibility of establishing a separate entity to concentrate on the provision of a suite of on- line/Internet-based financial products and services, targeting a niche market in the global arena.

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AUDITORS REPORT TO THE SHAREHOLDERS OF ARAB BANKING CORPORATION (B.S.C.)

We have audited the accompanying consolidated balance sheet of Arab Banking Corporation (B.S.C.) [the bank] and its subsidiaries [the group] as of 31 December 2000, and the related consolidated statements of income, cash flows and the changes in equity for the year then ended. These consolidated financial statements are the responsibility of the bank’s Board of Directors. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the group as of 31 December 2000 and of the results of its operations and its cash flows for the year then ended in accordance with International Accounting Standards.

We confirm that, in our opinion, proper accounting records have been kept by the bank and the consolidated financial statements, and the contents of the directors’ statement relating to these consolidated financial statements, are in agreement therewith. We further report, to the best of our knowledge and belief, that no violations of the Bahrain Commercial Companies Law, nor of the Bahrain Monetary Agency Law, nor of the memorandum and articles of association of the bank have occurred during the year ended 31 December 2000 that might have had a material adverse effect on the business of the bank or on its consolidated financial position and that the bank has complied with the terms of its banking licence. We obtained all the information and explanations which we required for the purposes of our audit.

27 February 2001 Manama, State of Bahrain

Arab Banking Corporation Annual Report 2000 45 Consolidated Balance Sheet CONTINUED CONTINUED Consolidated Statement of Income 31 December 2000 Year ended 31 December 2000

2000 1999 2000 1999 Note (US$ million) (US$ million) Note (US$ million) (US$ million) OPERATING INCOME ASSETS Interest income 1,673 1,472 Liquid funds 409 587 Interest expense (1,240) (1,038) Trading securities 713 363 Investment securities 3 2,961 3,128 Net interest income 433 434 Placements with banks and other financial institutions 7,060 5,891 Other operating income 9 280 256 Loans and advances 4 14,039 12,903 Total operating income 713 690 Interest receivable 247 208 Investments in associates 41 52 Provision for losses on loans and advances, net of recoveries 4 (66) (97) Other investments 69 85 NET OPERATING INCOME AFTER PROVISIONS 647 593 Other assets 697 694 Premises and equipment 5 440 447

OPERATING EXPENSES TOTAL ASSETS 26,676 24,358 Staff 10 281 265 Premises and equipment 54 54 LIABILITIES Other 116 110 Deposits from customers 11,451 10,245 Deposits from banks and other financial institutions 10,058 9,643 Total operating expenses 451 429 Certificates of deposit 249 270 Interest payable 220 187 PROFIT BEFORE TAXATION AND MINORITY INTERESTS 196 164 Taxation 6 48 43 Other liabilities 637 423 Taxation on foreign operations 6 (33) (31) Minority interests in subsidiaries (36) (21) TERM NOTES, BONDS AND OTHER TERM FINANCING 7 1,692 1,289 NET PROFIT FOR THE YEAR 127 112 24,355 22,100 EARNINGS PER SHARE (expressed in US dollars) 24 1.35 1.19 MINORITY INTERESTS 417 401

EQUITY Share capital 1,000 1,000 Treasury stock (74) (74) Reserves 396 408 Retained earnings 582 523 1,904 1,857

TOTAL LIABILITIES, MINORITY INTERESTS AND EQUITY 26,676 24,358

Abdulmohsen Yousef Al-Hunaif Chairman

Ghazi Abdul-Jawad President & Chief Executive

The attached notes 1 to 27 form part of these consolidated financial statements The attached notes 1 to 27 form part of these consolidated financial statements

46 Arab Banking Corporation Annual Report 2000 Arab Banking Corporation Annual Report 2000 47 Consolidated Statement of Cash Flows CONTINUED CONTINUED Consolidated Statement of Changes in Equity Year ended 31 December 2000 Year ended 31 December 2000

2000 1999 Extra- Foreign (US$ million) (US$ million) ordinary exchange Share Treasury Statutory General financial Capital Revaluation Share translation Retained OPERATING ACTIVITES capital stock reserve reserve reserve reserve 2 reserve 2 premium 2 adjustments earnings 3 Total Net profit for the year 127 112 (US$ million) Items not involving cash flow: Provisions for losses on loans and advances 66 97 Balance at the end of the year 1998 1,000 (74) 159 140 10 11 42 71 (41) 422 1,740 Depreciation 26 25 Net profit for the year –1999 ------112 112 Item considered separately: Transfer from retained earnings - - 11 ------(11) - Gains less losses on investment securities (21) (7) Foreign exchange Changes in operating assets and liabilities: translation adjustments ------5-5 Trading securities (366) 266 Placements with banks and other financial institutions (1,095) 1,481 Balance at the end of the year 1999 1,000 (74) 170 140 10 11 42 71 (36) 523 1,857 Loans and advances (924) (386) Other assets (46) (1) Dividend ------(56) (56) Deposits from customers 853 327 Net profit for the year –2000 ------127 127 Deposits from banks and other financial institutions 343 (1,141) Transfer from retained earnings - - 13 - - - (1) - - (12) - Other liabilities 248 288 Foreign exchange Other non-cash movements 141 100 translation adjustments ------(24) - (24) Net cash (outflow) inflow from operating activities (648) 901 Balance at the end of the year 2000 1,000 (74) 183 140 10 11 41 71 (60) 582 1,904 INVESTING ACTIVITIES Purchase of investment securities (1,612) (1,574) Sale and redemption of investment securities 1,697 1,163 1. A dividend of US$ 0.70 per share (1999: US$ 0.60 per share) has been proposed for approval at the Annual Ordinary Purchase of investments (4) (33) General Meeting. As such, no liability has been recognised in these consolidated financial statements. Sale of investments 26 34 Acquisition of subsidiary - (47) 2. These reserves are not distributable. Purchase of premises and equipment (53) (33) Sale of premises and equipment 38 32 3. Retained earnings include non-distributable reserves amounting to US$ 77 million relating to subsidiaries Net cash inflow (outflow) from investing activities 92 (458) (1999: US$ 49 million).

FINANCING ACTIVITIES 4. Note 8 contains further details of equity. (Repayment) issue of certificates of deposit - net (15) 35 Issue of term notes, bonds and other term financing 1,225 297 Repayment of term notes, bonds and other term financing (795) (460) Dividend paid (56) - Net cash inflow (outflow) from financing activities 359 (128)

(Decrease) increase in liquid funds (197) 315 Foreign exchange translation differences 19 (23) Liquid funds at beginning of the year* 587 295 Liquid funds at end of the year* 409 587

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

The attached notes 1 to 27 form part of these consolidated financial statements The attached notes 1 to 27 form part of these consolidated financial statements

48 Arab Banking Corporation Annual Report 2000 Arab Banking Corporation Annual Report 2000 49 Notes to the Consolidated Financial Statements CONTINUED CONTINUED Notes to the Consolidated Financial Statements 31 December 2000 31 December 2000

1. Incorporation and Activities 2. Significant Accounting Policies continued The parent company, Arab Banking Corporation (B.S.C.), [the Bank] incorporated in the State of Bahrain by an Amiri decree, j) Taxation on foreign operations operates under an offshore banking licence issued by the Bahrain Monetary Agency. There is no tax on corporate income in the State 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 2. Significant Accounting Policies distribution of the reserves of subsidiaries. A substantial portion of such reserves is required to be retained to meet local The consolidated financial statements of Arab Banking Corporation (B.S.C.) and its subsidiaries [the Group] are prepared in regulatory requirements. accordance with the Bahrain Commercial Companies Law and the Bahrain Monetary Agency Law and in conformity with International Accounting Standards and prevailing practices of the banking industry. The following is a summary of the k) Employee pension and other end of service benefits significant accounting policies: Costs relating to employee pension and other end of service benefits are accrued in accordance with actuarial and other valuations as required by regulations applicable in each location.

a) Accounting convention l) Fiduciary assets These consolidated financial statements are prepared under the historical cost convention, as modified by the revaluation of Assets held in trust or in a fiduciary capacity are not treated as assets of the Group and accordingly, are not included in these premises in respect of certain subsidiaries and measurement at market value of derivatives and securities held for trading. consolidated financial statements.

b) Consolidation m) Off balance sheet financial instruments These consolidated financial statements include the financial statements of the parent company and its subsidiaries after Off balance sheet financial instruments arise from forwards, futures, forward rate agreements, swaps and options transactions adjustment for minority interests and elimination of inter-company transactions and balances. Goodwill arising on consolida- in the foreign exchange, interest rate and capital markets. Off balance sheet instruments used in trading activities and to hedge tion is amortised over the expected period of benefit (5 to 20 years) on a straight-line basis. other trading positions are marked to market and the resultant gains and losses are taken to the statement of income. Gains c) Investments and losses on instruments used to hedge exposures to fluctuations in interest and exchange rates in conjunction with asset and Investments in associates owned between 20% and 50% are accounted for by the equity method. Other investments, which are liability management activity are recognised in a manner that matches the accounting treatment of the assets and liabilities less than 20% owned, are stated at cost with provision for any decline, other than temporary, in value. hedged.

d) Securities n) Repurchase and resale agreements Trading securities are stated at market value. Gains and losses on trading and market value adjustments are taken to the state- Assets sold with a simultaneous commitment to repurchase at a specified future date (‘repos’) continue to be recognised in the ment of income. balance sheet and are measured in accordance with accounting policies for trading securities or investment securities. The Investment securities are acquired for the long term and are stated in the balance sheet at amortised cost with provision for counterparty liability for amounts received under these agreements is included in deposits from banks and other financial any decline, other than temporary, in value. Premiums and discounts on acquisition are amortised on a straight-line basis from institutions or deposits from customers, as appropriate. The difference between sale and repurchase price is treated as interest date of purchase to maturity. expense and accrued over the life of the repo agreement. Assets purchased with a corresponding commitment to resell at a specified future date (‘reverse repos’) are not recognised in the balance sheet, as the bank does not obtain control over the e) Premises and equipment assets. Amounts paid under these agreements are included in placements with banks and other financial institutions or loans Premises and equipment are stated at cost or as revalued to approximate market values in the case of freehold land and and advances, as appropriate. The difference between purchase and resale price is treated as interest income and accrued over buildings based on valuations by independent firms of professional surveyors. The surplus, net of tax if any, on revaluation is the life of the reverse repo agreement. directly credited to revaluation reserves in equity. Any decrease in revaluation is charged first against any previous surplus, in respect of that asset held in revaluation reserve, and where such surpluses are insufficient, the shortfall is charged to the 3. Investment Securities statement of income. The market value of investment securities at the year-end amounted to US$ 2,951 million (1999: US$ 3,054 million). Freehold land is not depreciated. Depreciation on other premises and equipment is provided on a straight-line basis over their estimated useful lives. 4. Loans and Advances f) Revenue recognition 2000 1999 Interest income and expense are recognised on a time proportion basis taking account of the principal outstanding and (US$ million) (US$ million) the rate applicable. Fee income and expense are recognised when earned or incurred. Premiums, discounts and initial issue expenses on dated securities are amortised on a straight-line basis to the date of Financial 2,548 2,299 maturity. Manufacturing 2,079 2,398 Construction 1,030 1,058 g) Offsetting Trade 1,125 1,166 Financial assets and financial liabilities are only offset and the net amount reported in the balance sheet when there is a Consumer and other services 5,802 4,629 legally enforceable right to offset the recognised amounts and the bank intends to either settle on a net basis, or to realise the Government 1,696 1,941 asset and settle the liability simultaneously. Other 379 281 h) Loans and advances Loans and advances are stated net of loan loss provisions. Loan loss provisions comprise both specific and general provisions. 14,659 13,772 Specific provisions are created where losses are expected to arise on problem loans and advances. Additionally, management Loan loss provisions (620) (869) considers it prudent to maintain a general provision which recognises the inherent risks associated with any lending portfolio. Loans and advances are written off when they are considered to be uncollectible. Balance at 31 December 14,039 12,903 Loans and advances are placed on a non-accrual basis when payment of interest or principal is contractually past due by 90 days or earlier when there is reasonable doubt as to ultimate collection. Interest accrued on these loans and advances is not recognised as income unless received in cash.

i) Foreign currencies Assets and liabilities in foreign currencies are translated into US dollars at the market rates of exchange prevailing at the balance sheet date. Foreign exchange translation gains and losses arising from translating the financial statements of subsidiaries into US dollars are recorded directly in equity. Forward exchange contracts are valued at market rates applicable to their respective maturities at the balance sheet date and the resulting gains and losses are taken to the statement of income. Gains and losses arising from the difference between spot and forward rates on forward exchange contracts, which are entered into in connection with loans and deposits, are amortised over the periods of the related contracts. All other translation gains and losses are taken to the statement of income.

50 Arab Banking Corporation Annual Report 2000 Arab Banking Corporation Annual Report 2000 51 Notes to the Consolidated Financial Statements CONTINUED CONTINUED Notes to the Consolidated Financial Statements 31 December 2000 31 December 2000

4. Loans and Advances continued 7. Term Notes, Bonds and Other Term Financing The movements in loan loss provisions during the year were as follows: In the ordinary course of business, the parent company and certain subsidiaries raise term financing through various capital markets at commercial rates. 2000 1999 Provisions Provisions Total obligations outstanding at 31 December 2000 Interest in Interest in Parent company Subsidiaries Total General Specific Total suspense General Specific Total suspense (US$ million) (US$ million) (US$ million) (US$ million) (US$ million) Aggregate maturities: 2001 8 360 368 At 1 January 117 752 869 270 118 772 890 237 2002 330 103 433 Charge for the year 25 109 134 - 16 122 138 - 2003 300 100 400 Recoveries (5) (63) (68) (15) (9) (32) (41) (26) 2005 400 - 400 Suspended for the year ---90---70 2007 -77 Write-offs - (298) (298) (98) - (84) (84) (8) 2008 -8484 Foreign exchange translation and other adjustments (3) (14) (17) (5) (8) (26) (34) (3) 1,038 654 1,692

At 31 December 134 486 620 242 117 752 869 270 Interest basis: Fixed - 143 143 The gross carrying value of loans placed on a non-accrual basis amounted to US$ 694 million at the year-end (1999: Floating 1,038 511 1,549 US$ 960 million). Specific provisions of US$ 486 million (1999: US$ 752 million) were held against impaired loans, including those on a non-accrual basis. 1,038 654 1,692 Obligations subject to investor put options prior to 5. Premises and Equipment stated maturities (included above) -22 Land and Equipment buildings and other assets Total (US$ million) (US$ million) (US$ million) Total obligations outstanding at 31 December 1999 849 440 1,289 Cost or valuation: At 1 January 2000 401 242 643 Additions 19 34 53 8. Equity Disposals (14) (17) (31) a) Share capital 2000 1999 Foreign exchange translation and other adjustments (12) (11) (23) (US$ million) (US$ million) At 31 December 2000 394 248 642 Authorised – 150 million shares of US$ 10 each 1,500 1,500 Depreciation: At 1 January 2000 48 148 196 Issued, subscribed and fully paid – 100 million shares of US$ 10 each 1,000 1,000 Provided during the year 5 21 26 Disposals (2) (9) (11) b) Treasury stock Foreign exchange translation and other adjustments (1) (8) (9) Treasury stock represents the purchase by the Bank of its own shares. At the end of the year the Bank held 5,867,736 shares (1999: 5,867,736 shares). The shares are carried at cost adjusted for any gain or loss on subsequent sale. At 31 December 2000 50 152 202 c) Statutory reserve Net book value: As required by the Articles of Association of the Bank and the Bahrain Commercial Companies Law, 10% of the net profit At 31 December 2000 344 96 440 for the year is transferred to the statutory reserve. Such annual transfers will cease when the reserve totals 50% of the paid up share capital. The reserve is not available for distribution except in circumstances as stipulated in the Bahrain At 31 December 1999 353 94 447 Commercial Companies Law and following the approval of the Bahrain Monetary Agency.

d) General reserve 6. Taxation on Foreign Operations The general reserve underlines the shareholders’ commitment to enhance the strong equity base of the Bank. 2000 1999 (US$ million) (US$ million) e) Extraordinary financial reserve Balance sheet: The extraordinary financial reserve has been established to cover any possible future diminution in the carrying value of Current tax liability 27 22 assets and is used at the discretion of the Board of Directors. Deferred tax liability 21 21 f) Capital reserve 48 43 The capital reserve arises on the consolidation of subsidiaries acquired at a discount and is not distributable. Income statement: g) Revaluation reserve Current tax on foreign operations 36 33 The revaluation reserve has been created by revaluation of properties in certain subsidiaries and is not distributable. Deferred tax on foreign operations (3) (2) 33 31 h) Foreign exchange translation adjustments The movements in foreign exchange translation adjustments represent the foreign exchange translation gains and losses In view of the operations of the Group being subject to various tax jurisdictions and regulations, it is not practical to arising from translating financial statements of foreign subsidiaries into US dollars. provide a reconciliation between the accounting and taxable profits together with the details of effective tax rates.

52 Arab Banking Corporation Annual Report 2000 Arab Banking Corporation Annual Report 2000 53 Notes to the Consolidated Financial Statements CONTINUED CONTINUED Notes to the Consolidated Financial Statements 31 December 2000 31 December 2000

9. Other Operating Income 13. Commitments, Contingent Liabilities and Other Off Balance Sheet Items continued 2000 1999 2000 1999 (US$ million) (US$ million) (US$ million) (US$ million) Fee and commission income 191 178 Fee and commission expense (19) (16) Direct credit substitutes, guarantees and acceptances 1,398 1,639 Gains less losses on trading securities 7 2 Forward asset purchase commitments 178 178 Gains less losses on investment securities 21 7 Short-term self-liquidating trade and transaction-related contingent items 2,103 1,454 Gains less losses on dealing in foreign currencies 27 23 Other commitments (including undrawn loans) 4,846 4,916 Credit card income - net 20 19 Other - net 33 43 8,525 8,187 280 256 Risk-weighted equivalents 2,560 2,457

10. Staff b) Other off balance sheet items The number of staff employed by the Group as of 31 December 2000 was 5,270 (1999: 5,209). In the ordinary course of business, various types of transactions are entered into involving foreign exchange contracts and derivative financial instruments. These financial instruments arise from forwards, futures, forward rate agreements, swaps 11. Investments in Subsidiaries and Associates and options transactions in the foreign exchange, interest rate and capital markets. The notional amounts indicate the The principal subsidiaries, all of which have 31 December as Interest of volume of these transactions outstanding at year-end. Significantly smaller amounts are subject to risk as a result of off- their year end, are as follows: Arab Banking setting positions. The credit risk for these instruments is normally the positive market value of the instruments, net of Corporation any legally enforceable right of set-off, which is usually significantly less than the notional amounts. The credit and market Country of (B.S.C.) risk pertaining to off balance sheet financial instruments are monitored and controlled in the same way as balance sheet incorporation (%) instruments. At the balance sheet date, the outstanding notional amounts and the risk weighted equivalents calculated in accordance Banco Atlantico S.A. Group companies Spain 67 with the capital adequacy guidelines established for the global banking industry were as follows: Banco de Iberoamerica Panama 67 International Bank of Asia Ltd. Hong Kong 55 2000 1999 ABC International Bank plc United Kingdom 100 (US$ million) (US$ million) Arab Banking Corporation – Daus & Co.GmbH Germany 99 Foreign exchange contracts 3,576 8,117 ABC Banque Internationale de Monaco S.A.M. Monaco 99 Interest rate and currency swaps 6,653 5,914 ABC Islamic Bank (E.C.) Bahrain 100 Interest rate futures 1,219 1,621 Arab Banking Corporation (ABC) – Jordan Jordan 87 Options 2,848 3,739 Banco ABC Brasil S.A. Brazil 79 Forward rate agreements - 2,028 ABC Algeria Algeria 70 Equity contracts 183 71 Arab Banking Corporation – Egypt [S.A.E.] Egypt 96 14,479 21,490 ABC Tunisie Tunis 100 ABC Securities [Egypt] S.A.E. Egypt 100 Risk-weighted equivalents 31 67

The principal associate is Arab Financial Services (E.C.), incorporated in Bahrain, with 36% ownership. 14. Maturities of Assets and Liabilities The maturity analysis of assets and liabilities based on remaining period to the contractual maturity date is as follows: 12. Significant Net Foreign Currency Exposures Significant net foreign currency exposures, arising mainly from investments in subsidiaries, are as follows: At 31 December 2000 Within one 1 – 3 3 – 6 6 – 12 1 – 5 Over month months months months years 5 years Undated Total 2000 1999 (US$ million) (US$ million) (US$ million) Assets Long Short Long Short Liquid funds 409 ------409 Brazilian real 47 - 22 - Trading securities 340 23 55 45 152 - 98 713 Egyptian pound 131 - 103 - Investment securities 217 73 101 54 976 1,481 59 2,961 Euro 76 - - (12) Placements with banks and Hong Kong dollar * 239 - 220 - other financial institutions 5,457 1,052 359 138 50 4 - 7,060 Jordanian dinar 40 - 50 - Loans and advances 1,216 1,787 1,569 1,595 3,946 3,918 8 14,039 Pound sterling 48 - 27 - Other ------1,494 1,494 Saudi riyal - (111) - (131) Total assets 7,639 2,935 2,084 1,832 5,124 5,403 1,659 26,676

*This foreign currency exposure is covered by currency options to minimise the risk of loss from adverse movements in the Liabilities, minority interests and equity foreign currency rates. Deposits from customers 7,733 2,043 585 441 571 78 - 11,451 Deposits from banks and 13. Commitments, Contingent Liabilities and Other Off Balance Sheet Items other financial institutions 6,311 2,618 593 402 57 77 - 10,058 a) Commitments and contingent liabilities Certificates of deposit 40 107 54 39 9 - - 249 Commitments and contingent liabilities include commitments to extend credit, standby letters of credit, acceptances and Term notes, bonds and other guarantees, which are structured to meet the various requirements of customers. At the balance sheet date, the principal term financing 80 21 77 106 1,323 85 - 1,692 outstanding and the risk - weighted equivalents calculated in accordance with the capital adequacy guidelines established Minority interests and other ------1,322 1,322 for the global banking industry were as follows: Equity ------1,904 1,904

Total liabilities, minority interests and equity 14,164 4,789 1,309 988 1,960 240 3,226 26,676

54 Arab Banking Corporation Annual Report 2000 Arab Banking Corporation Annual Report 2000 55 Notes to the Consolidated Financial Statements CONTINUED CONTINUED Notes to the Consolidated Financial Statements 31 December 2000 31 December 2000

14. Maturities of Assets and Liabilities continued 15. Interest Rate Exposure continued The maturity analysis of assets and liabilities based on remaining period to the contractual maturity date is as follows: Within Non- one 1 – 3 3 – 6 6 – 12 1 – 5 Over interest At 31 December 1999 Within month months months months years 5 years bearing Total one 1 – 3 3 – 6 6 – 12 1 – 5 Over (US$ million) month months months months years 5 years Undated Total Other currencies (US$ million) Assets 1,257 775 529 173 265 22 277 3,298 Assets Liabilities and minority interests (1,749) (624) (201) (158) (31) (80) (352) (3,195) Liquid funds 587 ------587 Off balance sheet items (341) (28) 19 6 (46) 10 (74) (454) Trading securities 96 5 9 28 106 35 84 363 Investment securities 510 61 135 156 1,021 1,205 40 3,128 (833) 123 347 21 188 (48) (149) (351) Placements with banks and other financial institutions 3,914 1,129 658 156 30 4 - 5,891 Gross Loans and advances 1,600 1,386 1,562 1,369 3,515 3,471 - 12,903 Assets 13,641 4,803 3,251 1,428 1,258 936 1,359 26,676 Other ------1,486 1,486 Liabilities, minority interests and equity (14,189) (4,509) (1,529) (1,057) (630) (197) (4,565) (26,676) Total assets 6,707 2,581 2,364 1,709 4,672 4,715 1,610 24,358 Off balance sheet items 1,256 (743) (100) (281) (100) 42 (74) - 708 (449) 1,622 90 528 781 (3,280) - Liabilities, minority interests and equity Deposits from customers 7,201 1,593 665 294 482 10 - 10,245 Deposits from banks and At 31 December 1999 Within Non- other financial institutions 6,071 2,153 1,047 304 46 22 - 9,643 one 1 – 3 3 – 6 6 – 12 1 – 5 Over interest Certificates of deposit 91 128 31 20 - - - 270 month months months months years 5 years bearing Total Term notes, bonds and other (US$ million) term financing - - 313 61 908 7 - 1,289 US dollars Minority interests and other ------1,054 1,054 Assets 6,756 1,946 1,976 470 391 971 292 12,802 Equity ------1,857 1,857 Liabilities and minority interests (6,742) (2,405) (696) (246) (11) (18) (239) (10,357) Equity ------(1,857) (1,857) Total liabilities, minority interests Off balance sheet items (621) 408 105 (102) 33 14 - (163) and equity 13,363 3,874 2,056 679 1,436 39 2,911 24,358 (607) (51) 1,385 122 413 967 (1,804) 425

15. Interest Rate Exposure Euros Interest rate exposure is the sensitivity of earnings to changes in interest rates. Such exposures arise in the ordinary course Assets 1,442 1,710 1,121 975 219 241 419 6,127 of business and are managed on a decentralised basis employing the use of off balance sheet interest rate products where Liabilities and minority interests (3,452) (616) (895) (51) (331) - (1,054) (6,399) appropriate. The respective Asset and Liability Committees of the Bank and its subsidiaries establish the maximum levels Off balance sheet items 174 (50) 4 3 148 19 - 298 of interest rate mismatch that are permitted, and regularly monitor the exposures. The repricing profile of assets, liabilities and off balance sheet financial instruments used to hedge exposures to interest (1,836) 1,044 230 927 36 260 (635) 26 rate risk based on the earlier of contractual maturity and the next interest repricing date is as follows: Hong Kong dollars At 31 December 2000 Within Non- Assets 1,676 115 130 70 141 - 383 2,515 one 1 – 3 3 – 6 6 – 12 1 – 5 Over interest Liabilities and minority interests (1,390) (408) (115) (28) (1) - (302) (2,244) month months months months years 5 years bearing Total Off balance sheet items ------(US$ million) US dollars 286 (293) 15 42 140 - 81 271 Assets 6,712 2,073 1,842 216 487 674 470 12,474 Liabilities and minority interests (6,486) (2,656) (945) (636) (71) (31) (647) (11,472) Other currencies Equity ------(1,904) (1,904) Assets 958 314 755 141 217 67 462 2,914 Off balance sheet items 1,138 (619) (62) (432) 7 14 - 46 Liabilities and minority interests (1,590) (608) (541) (260) (151) (14) (337) (3,501) Off balance sheet items 443 (85) (38) (53) (62) 7 (347) (135) 1,364 (1,202) 835 (852) 423 657 (2,081) (856) (189) (379) 176 (172) 4 60 (222) (722) Euro Assets 3,716 1,772 841 972 159 138 378 7,976 Gross Liabilities and minority interests (4,167) (778) (320) (228) (522) (86) (1,622) (7,723) Assets 10,832 4,085 3,982 1,656 968 1,279 1,556 24,358 Off balance sheet items 459 (96) (57) 145 (61) 18 - 408 Liabilities, minority interests and equity (13,174) (4,037) (2,247) (585) (494) (32) (3,789) (24,358) 8 898 464 889 (424) 70 (1,244) 661 Off balance sheet items (4) 273 71 (152) 119 40 (347) -

Hong Kong dollars (2,346) 321 1,806 919 593 1,287 (2,580) - Assets 1,956 183 39 67 347 102 234 2,928 Liabilities and minority interests (1,787) (451) (63) (35) (6) - (40) (2,382) Off balance sheet items ------169 (268) (24) 32 341 102 194 546

56 Arab Banking Corporation Annual Report 2000 Arab Banking Corporation Annual Report 2000 57 Notes to the Consolidated Financial Statements CONTINUED CONTINUED Notes to the Consolidated Financial Statements 31 December 2000 31 December 2000

15. Interest Rate Exposure continued 18. Segmental Information The effective interest rates of assets, liabilities and off balance sheet instruments in major currencies are as follows: For management purposes, the group is organised into two major business segments, namely, wholesale and retail. These segments are the basis on which the group reports its primary segment information. Secondary segment information At 31 December 2000 Within 1– 3 3– 6 6 –12 1 – 5 Over is based upon the location of the units responsible for recording the transaction. Transactions between segments are one month months months months years 5 years conducted at estimated market rates on an arm’s length basis. %%%%%% US dollars Assets 7.4 7.7 7.8 7.2 6.2 6.3 Primary segment information (US$ million) 2000 1999 Liabilities 6.8 7.1 7.7 6.7 3.9 6.3 Wholesale Retail Total Wholesale Retail Total Off balance sheet items 6.3 6.7 12.0 6.9 5.3 5.9 Euros Net interest income 120 313 433 139 295 434 Assets 5.5 5.9 4.1 6.4 5.4 4.4 Other operating income 86 194 280 72 184 256 Liabilities 4.0 5.0 4.7 4.7 2.4 5.2 Operating expenses (126) (325) (451) (120) (309) (429) Off balance sheet items 4.3 4.2 3.7 5.1 2.4 7.1 Loan loss provisions (16) (50) (66) (18) (79) (97)

Hong Kong dollars Profit before taxation and Assets 9.7 7.6 11.1 10.5 7.7 6.4 minority interests 64 132 196 73 91 164 Liabilities 5.9 6.1 6.2 6.4 6.9 - Off balance sheet items ------Total assets employed 13,313 13,572 26,885 12,075 12,406 24,481 At 31 December 1999 Within 1– 3 3– 6 6 – 12 1– 5 Over Intra-group items (209) (123) one month months months months years 5 years %%%%%% 26,676 24,358 US dollars Assets 6.8 6.9 7.1 8.5 8.1 6.7 Segment liabilities, minority interests Liabilities 5.7 6.1 6.5 9.6 5.4 8.4 and equity 14,007 12,756 26,763 12,801 11,661 24,462 Off balance sheet items 6.0 7.3 8.9 4.2 7.4 5.9 Intra-group items (87) (104) Euros Assets 4.6 4.2 3.3 4.9 5.6 5.2 26,676 24,358 Liabilities 2.7 3.2 1.4 2.6 2.4 - Off balance sheet items 2.7 2.9 3.6 4.0 5.7 7.0 Secondary segment information (US$ million) Hong Kong dollars 2000 1999 Assets 9.5 8.2 7.6 9.0 9.3 - Arab Europe & Arab Europe & Liabilities 5.9 6.3 6.6 6.8 6.9 - world Asia Americas Total world Asia Americas Total Off balance sheet items ------Segment profit before taxation 16. Credit Exposure and minority interests 43 42 111 196 62 - 102 164 Credit risk is the risk that a customer or counterparty will fail to meet a commitment, resulting in financial loss to the Segment assets 8,799 3,985 13,892 26,676 7,467 3,408 13,483 24,358 Group. Such risk arises from lending, trade finance, treasury and other activities undertaken by the Group. Credit risk is actively monitored in accordance with the credit policies which clearly define delegated lending authorities, policies and procedures. The management of credit risk also involves the monitoring of risk concentrations by industrial sector as well 19. Repurchase and Resale Agreements as by geographic location. Proceeds from assets sold under repurchase agreements at the year-end amounted to US$ 2,865 million (1999: US$ 3,092 million) of which US$ 1,154 million (1999: US$ 1,463 million) relates to customer product and treasury activities in a major 17. Geographical Distribution of Assets, Liabilities and Off Balance Sheet Items retail banking subsidiary. 2000 1999 Amounts paid for assets purchased under resale agreements at the year-end amounted to US$ 1,008 million (1999: Off Off US$ 911 million) and relate to customer product and treasury activities in retail banking subsidiaries. balance balance Liabilities sheet Liabilities sheet 20. Transactions with Related Parties Assets and equity items Assets and equity items In the ordinary course of business there are transactions with shareholders, associates and other related parties. Trans- (US$ million) (US$ million) actions with related parties are made on the same commercial terms as those applicable to comparable transactions with unrelated parties and do not involve more than a normal amount of risk. All the loans and advances to related parties are Western Europe 10,304 8,897 13,089 10,093 8,529 14,391 performing advances and are free of any provision for possible loan losses. The year-end balances in respect of related Arab World 4,671 10,392 4,243 4,059 9,077 6,903 parties included in the consolidated financial statements are as follows: Asia 4,855 3,617 1,632 3,590 2,916 1,127 2000 1999 North America 4,060 1,045 2,909 3,916 1,214 6,151 (US$ million) (US$ million) Latin America 2,293 2,152 983 2,031 1,968 969 Loans and advances - - Other 493 573 148 669 654 136 Deposits from customers 685 462 26,676 26,676 23,004 24,358 24,358 29,677 Term notes, bonds and other term financing 230 230 Irrevocable commitments and contingencies 19 17

The income and expenses in respect of related parties included in the consolidated financial statements are as follows:

Interest income - - Interest expense 34 7

58 Arab Banking Corporation Annual Report 2000 Arab Banking Corporation Annual Report 2000 59 Notes to the Consolidated Financial Statements CONTINUED CONTINUED Notes to the Consolidated Financial Statements 31 December 2000 31 December 2000

21. Fiduciary Assets 25. Capital Adequacy Funds under management at the year-end amounted to US$ 2,434 million (1999: US$ 2,936 million). These assets are held The risk asset ratio calculations, in accordance with the capital adequacy guidelines established for the global banking in a fiduciary capacity and are not included in these consolidated financial statements. industry, are as follows: 2000 1999 22. Fair Value of Financial Instruments Capital Base (US$ million) (US$ million) ‘Fair value’ is the amount at which an asset could be exchanged or a liability settled in a transaction between know- ledgeable, willing parties in an arm’s length transaction.Underlying the definition of fair value is the presumption that Tier 1 Capital 2,065 2,040 the Group is a going concern without any intention or requirement to curtail materially the scale of its operation or to Tier 2 Capital 302 270 undertake a transaction on adverse terms. The values at which the financial instruments are stated in these consolidated Total capital base (A) 2,367 2,310 financial statements (‘book values’) are based principally on historical cost and could therefore differ from fair values. Fair values are estimated based on generally accepted methods which include quoted market prices or, where appropriate, quoted market prices of similar financial instruments with appropriate adjustments and the use of discounted cash flow Risk-Weighted Exposures Balance Risk-weighted equivalents analysis. Market prices have been used wherever possible. However, in certain cases, including loans and advances, no ready 2000 1999 2000 1999 markets exist wherein exchanges between willing parties can take place. In these cases, estimates which involve subjective (US$ million) (US$ million) (US$ million) (US$ million) assessments, and which are regarded as reasonable, have been made. Assets Cash and claims on, guaranteed by or 2000 1999 Excess Excess collateralised by securities of central (shortfall) (shortfall) governments and central banks of of fair of fair OECD countries 4,870 5,034 - - Book Fair value over Book Fair value over value value book value value value book value Claims on banks and public sector (US$ million) (US$ million) companies incorporated in OECD countries and short -term claims on FINANCIAL ASSETS banks incorporated in non-OECD Liquid funds 409 409 - 587 587 - countries 8,394 6,871 1,679 1,374 Trading securities 713 713 - 363 363 - Investment securities 2,961 2,951 (10) 3,128 3,054 (74) Claims secured by mortgage of Placements with banks and residential property 2,099 2,164 1,050 1,082 other financial institutions 7,060 7,058 (2) 5,891 5,891 - Loans and advances 14,039 13,918 (121) 12,903 12,731 (172) Claims on public sector entities, central Investments 110 110 - 137 137 - governments, central banks and longer- Other 1,384 1,384 - 902 902 - term claims on banks incorporated in non-OECD countries and all other assets, FINANCIAL LIABILITIES including claims on private sector entities 11,145 9,978 11,145 9,978 Deposits 21,509 21,500 9 19,888 19,871 17 Certificates of deposit 249 249 - 270 270 - Off balance sheet items Term notes, bonds and other term financing 1,692 1,692 - 1,289 1,289 - Commitments and contingent liabilities 8,525 8,187 2,560 2,457 Other 905 905 - 1,054 1,054 - Foreign exchange and interest rate (124) (229) related contracts 14,479 21,490 31 67

It is expected that the book value of loans and advances and investment securities, both of which are held for the long term Credit risk-weighted assets and off balance sheet items 16,465 14,958 or to maturity, will be recovered as adequate provisions have been made for any anticipated shortfalls in recovery. Market risk-weighted assets and off balance sheet items * 1,061 809

23. Assets Pledged as Security Total risk-weighted assets (B) 17,526 15,767 At the balance sheet date, assets amounting to US$ 125 million (1999: US$ 68 million) have been pledged as security for borrowings and other banking operations. Risk asset ratio (A/B) 13.5% 14.7%

24. Earnings per Share * Market risk capital requirements are based on the standardised measurement methodology. ‘Basic’ earnings per share are calculated by dividing the net profit for the year by the number of shares outstanding at the end of the year. No figures for diluted earnings per share have been presented, as the bank has not issued any capital based instruments which would have any impact on earnings per share, when exercised.

2000 1999

Net profit for the year (US$ million) 127 112 Number of shares outstanding as of 31 December 94,132,264 94,132,264 Basic earnings per share (US$) 1.35 1.19

60 Arab Banking Corporation Annual Report 2000 Arab Banking Corporation Annual Report 2000 61 Notes to the Consolidated Financial Statements CONTINUED ABC Directory 31 December 2000

26. Parent Company Head Office Treasury Group Representative Offices The balance sheet of the parent company, Arab Banking Corporation (B.S.C.), is presented below: ABC Tower, Diplomatic Area, Group Treasurer Abu Dhabi Arab Banking Corporation (Jordan) PO Box 5698, Manama, Bahrain Essam El Wakil, Senior Vice President The Falcon Tower, (22 Branches) 2000 1999 Tel: (973) 543000 (General), Tel: (973) 543375 / 532933 Al Nasr Street, Office No. 602 PO Box 926691, Amman 11190, (US$ million) (US$ million) (973) 533144/533155 PO Box 6689, Abu Dhabi, UAE Jordan (Foreign Exchange), FX, Precious Metals, Commodities Tel: (971)(2) 6344944 Tel: (962)(6) 5664183-5/5621801-7 ASSETS & Sales Liquid funds 30 29 Fax: (973) 533163/533062 Fax: (971)(2) 6328002 (General) Tlx: 9432 ABCBAH BN (General), Karim Dashti, First Vice President E-mail: [email protected] Tel: (962)(6) 5692713/5692723 Trading securities 305 143 9384 ABC DEP & Assistant Treasurer (Dealing Room) Tel: (973) 533144 / 533155 Ahmed Ebrahim Al Moataz, Investment securities 2,135 1,858 (Foreign Exchange & Deposits), Chief Representative Tel: (962)(6) 5695084 Placements with banks and other financial institutions 3,154 2,471 Direct Dealing Reuters Code: Options, New Products & (Foreign Department) Loans and advances 4,659 4,294 ABCB, ABDB Treasury Support Casablanca Tel: (962)(6) 5623684 Reuters Monitor: ABCU- ABCZ Amr Gadallah, First Vice President 201 Boulevard Mohamed Zerktouni, (Main Branch) Interest receivable 158 98 Internet: Casablanca 20100, Morocco Fax: (962)(6) 5686291 Investments in subsidiaries 1,397 1,340 & Assistant Treasurer http://www.arabbanking.com Tel: (973) 533155 Tel: (212)(22) 393260/393270 Tlx: 22258/21114 ABC JO; 23022 Investments in associates 26 33 Ghazi Abdul-Jawad Fax: (212)(22) 393274 ABCFX JO Other investments 13 17 President & Chief Executive Fixed Income, Equities E-mail: [email protected] E-mail: [email protected] Other assets 93 115 & Investment Management Milad Larady, First Vice President Mohammad Abdullah Al-Mannai, Mohammed Tariq, First Vice President Premises and equipment 39 38 & Chief Representative Chairman Internal Audit & Assistant Treasurer Dr Ziad Fariz, Chief Executive Officer Tel: (973) 543441 / 535760 Tehran TOTAL ASSETS 12,009 10,436 Prasad Abraham, Senior Vice President No. 114, 1st Floor (opposite 35th St.) Arab Banking Corporation - Algeria Tel: (973) 543387 Banking Group Khaled Eslamboli Avenue PO Box 367 Tehran 15167, 54 Avenue des Trois Freres Taher D Makkiyah, Executive Vice Islamic Republic of Iran Bouaddou, Bir Mourad Rais LIABILITIES Administration Group President & Chief Banking Officer Tel: (98)(21) 8798452/3 Algiers, Algeria Deposits from customers 1,726 990 Corporate Communications Tel: (973) 543232 Fax: (98)(21) 8774561 Tel: (213)(21) Deposits from banks and other financial institutions 7,092 6,523 Dr. Sami Dannish, First Vice President Tlx: 216860 ABC IR 541537/541534/541600 E-mail: [email protected] Fax: (213)(21) 541604/541222 Certificates of deposit - 30 Tel: (973) 543204 ARAB WORLD DIVISION Interest payable 137 106 Mohammad Nasser Yousefi, Tlx: 62509 / 62510 ABC DZ Global Information Technology Chief Representative E-mail: [email protected] Other liabilities 112 81 Sael Al Waary, Senior Vice President Division Head Mustapha Achour, General Manager Tel: (973) 543707 George Karam, Senior Vice President Tripoli TERM, NOTES, BONDS AND OTHER TERM FINANCING 1,038 849 Tel: (973) 533056 That Emad Administrative Centre Arab Banking Corporation – Egypt Human Resources & Administration Fax: (973) 533832 Tower 5, 16th Floor (S.A.E.) Edward Watson, Senior Vice President PO Box 3578, Tripoli, Libya 10,105 8,579 Global Marketing Unit 5 Midan Al Saray Al Koubra Tel: (973) 543347 Tel: (218)(21) 3350226/ Garden City Yousif Al Dhaen, 3350227/3350228 Cairo, Egypt EQUITY Legal & Compliance First Vice President & Head Fax: (218)(21) 3350229 Tel: (973) 543203 Tel: (202) 7951513 / 7956236 Share capital 1,000 1,000 Mounir Ben Slimane, Legal Counsel E-mail: [email protected] Fax: (202) 7956239 Tel: (973) 543371 Treasury stock (74) (74) Mansour Abouen, Chief Representative Email: [email protected] Reserves and retained earnings 978 931 Operations Corporate Banking Omar el-Adb, Alex Richardson, Senior Vice President Subsidiaries Managing Director and Chief Executive Tel: (973) 543714 Govt & Financial Institutions 1,904 1,857 Sheikh Rashid Al Khalifa, ABC Islamic Bank (E.C.) Hani Seif El Nasr, Chief Executive Officer Planning & Financial Control First Vice President ABC Tower, Diplomatic Area TOTAL LIABILITIES AND EQUITY 12,009 10,436 Asaf Mohyuddin, Senior Vice President Tel: (973) 543314 PO Box 2808, Manama, Bahrain Tarek Helmy, FVP, Tel: (973) 543274 Tel: (973) 543000 Corporate Group Head Gulf & Levant Fax: (973) 536379/533163 Hassan Serag, FVP, Included in the above assets and liabilities are balances due from and due to subsidiaries and associates as follows: Premises & Engineering Mohamed El Calamawy, Tlx: 9432/9433 ABC BAH BN Head of Retail Banking Nawaf Beyhum, First Vice President First Vice President Saleh M. Al-Yousef, Chairman Gamal Negm, FVP, Head of Credit Tel: (973) 543307 Tel: (973) 543260 Placements with banks and other financial institutions 495 634 Mohamed A BuQais, First Vice Hana El Helaly, AVP, Loans and advances 291 30 Credit Group Saudi Arabia President & Deputy General Manager Head of Marketing & Corporate Deposits from banks and other financial institutions 355 233 Chief Credit & Risk Officer Faisal Hammadi,Vice President Communications Tel: (973) 543268 ABC Securities W.L.L. Richard Cumberland, Senior Vice Office No 204, Building No 49, President Affiliate Syndications Al Hidaya Building No 2, Tel: (973) 543280 27. Authorisation of the Consolidated Financial Statements Jonathan Ward, First Vice President Government Road, Arab Financial Services Company These consolidated financial statements were authorised for issue by the Board of Directors on 27 February 2001 and signed Risk Management Tel: (973) 543331 Manama 305, Bahrain (E.C.) Tel: (973) 226087/226848 PO Box 2152, Manama, Bahrain on their behalf by the Chairman and President & Chief Executive. Peter G James, First Vice President Project Finance Tel: (973) 543328 Fax: (973) 241179 Tel: (973) 290333 Mark Yassin, First Vice President Tlx: 9436/9437 ABCBAH BN Fax: (973) 291323/290050 Credit Risk Control & Policy Tel: (973) 543292 Abdul Hameed H Naqi, Tlx: 7212 AFS BN Abhijit Choudhury, First Vice President General Manager Mahmood Al Koofi, General Manager Tel: (973) 543288 Branches Fax: (973) 291122 ABC Tunisie Remedial Loans Tunis (OBU) ABC Building Stephen Jenkins, Vice President ABC Building,Les Berges du Lac, Les Berges du Lac, Tel: (973) 543713 2045 Tunis, Tunisia 2045 Tunis, Tunisia Tel: (216)(1) 861861; Tel: (216)(1) 861861; (216)(1) 861110 (Treasury) (216)(1) 861110 (Treasury) Fax: (216)(1) 860921 Fax: (216)(1) 860921 Tlx: 12505 ABCTU TN Tlx: 12505 ABCTU TN E-mail: [email protected] E-mail: [email protected] Direct Dealing Reuters Code: ABCT Direct Dealing Reuters Code: ABCT Swift: ABCOTNTT Swift: ABCOTNTT Ezzedine Saidane, General Manager Ezzedine Saidane, General Manager

62 Arab Banking Corporation Annual Report 2000 Arab Banking Corporation Annual Report 2000 63 ABC Directory CONTINUED

INTERNATIONAL DIVISION Investment Group

Division Head Singapore Arab Banking Corporation - Investment Coordinator George Morton, Senior Vice President Arab Banking Corporation (B.S.C.) Daus & Co GmbH Omar el-Abd, Senior Vice President Tel: (973) 543319 9 Raffles Place #35-01 Republic Plaza Niedenau 13-19, Tel: (973) 530776 Fax: (973) 535639 Singapore 048619 D-60325 Frankfurt am Main, Tel: (65) 5359339 General PO Box 170218, Banco ABC Brasil S.A. Branches (65) 533 0629 Dealers 60076 Frankfurt am Main, Germany Avenida Paulista 37, 14th/15th Floors Telex & Answerback:RS 28989 Tel: (49)(69) 714030 CEP 01311-902, São Paulo, SP. Brazil Grand Cayman ABCSNG General Fax: (49)(69) 71403240 (General); Tel: (55)(11) 31702000 c/o ABC New York Branch RS 28991 ABCSNG Dealers (49)(69) 71403299 (Corporate Fax: (55)(11) 31702001 32nd Floor, 277 Park Avenue Fax: (65) 532 6288 / 532 3998 and Financial Institutions); Tito Enrique da Silva Neto, President New York, NY 10172-3299,USA General (49)(69) 71403350 (Treasury) Tel: (1)(212) 5834720 Cable: ABCBANK Tlx: 414811 DAUS D Banco Atlantico S.A. Fax: (1)(212) 5830921 SWIFT: ABCOSGSG Direct Dealing Reuters Code: ABDF (274 Branches) Tlx: 661978/427531 ABCNY Reuters Dealing Code: ABCS (FX + MM) Gran Via 48, 28013 Madrid, Spain Geoffrey Milton, First Vice President John P. Meads, General Manager: Swift: ABCADEFF Tel: (34)(91) 5389000 & General Manager George Yee, VP & Deputy Branch E-mail: [email protected] Fax: (34)(91) 5415474 Tlx: 22009/22109 ATLCO E Milan Manager Ghazi M. Abdul-Jawad, Abdulmohsen Yousef Al-Hunaif, Via Santa Maria Fulcorina 6 Tan Boon Cheng, Head, Operations Chairman of the Supervisory Board Chairman 20123 Milan, Italy and Financial Control Jens-Ove Stier, General Manager Tel: (34)(91) 5389018 Tel: (39)(02) 863331 (General); Cecilia Lai, Corporate Finance Manager Juergen Blumschein, General Manager Foo Mui Lian, Branch Credit Officer Fax: (34)(91) 5423469 (39)(02) 861574 (Dealing Room) ABC International Bank plc Fax: (39)(02) 86450117 Rose Lim, Acting Head, Trade Finance Manuel Montecelos, (Head Office) Chief Executive Officer Tlx: 322240 ABC Mil (General); Support Arab Banking Corporation House 322080 ABC FX I Vivien Ng, Gregory Lim, Tel: (34)(91) 5389042 1-5 Moorgate, London Fax: (34)(91) 5413625 (Dealing Room) Dealers (Treasury) EC2R 6AB, UK Direct Dealing Reuters Code: ABCX E-mail: manuelmontecelos@ Tel: (44)(20) 77764000 (General) batlantico.es SWIFT: ABCOITMM Representative Offices Fax: (44)(20) 76069987 Marco Simonelli, General Manager Houston Tlx: 893748 ABC GEN G International Bank of Asia Ltd. Sami Bengharsa, Sheikh Khalid Ali Alturki, Chairman (27 Domestic Branches) Deputy General Manager 600 Travis Street, Suite 1900 Houston, Texas 77002, USA Stanislas M. Yassukovich, International Bank of Asia Bldg. Angelo Fossati, Tel: (1)(713) 2278444 Deputy Chairman & Executive Director 38 Des Voeux Road, Business Development Manager Fax: (1)(713) 2276507 Abdulmagid A. Breish, Central, Hong Kong Maurizio Testori, Operations Manager Tel: (852) 28426222 Wahid O. Bugaighis, First Vice Chief Executive Officer Luca Gajani, Head of Credit Fax: (852) 28101483 President & Chief Representative Tlx: 63394 IBA HX Guido Bacci, Chief Dealer ABC International Bank plc, Los Angeles Direct Dealing Reuters Code: IBAX New York London (Branch) E-mail: [email protected] 555 South Flower Street, 46th Floor Arab Banking Corporation House 32nd Floor, 277 Park Avenue Los Angeles, CA 90071, USA 1-5 Moorgate, Sheikh Ali Jarrah Al-Sabah, Chairman New York, NY 10172-3299, USA Tel: (1)(213) 6890121 London EC2R 6AB, UK Mike Murad, Vice Chairman, Tel: (1)(212) 5834720 Fax: (1)(213) 6891048 Tel: (44)(20) 77764000 (General); Managing Director & Fax: (1)(212) 5830921 (44)(20) 77264091 (Dealing Room) Chief Executive Officer Tlx: 661978/427531 ABCNY Richard Whelan, Chief Representative Fax: (44)(20) 76069987 Michael Ipson, Executive Vice President, (General); 421911/661979 ABCFX Tlx: 893748 ABC GEN G (General); Corporate and Investment Banking Group (Dealing Room) Subsidiaries 892171 ABC FXL G Bashar Samra, Executive Vice President, Direct Dealing Reuters Code: ABCN ABC Finanziaria S.p.A. (Dealing Room) Consumer Banking Group Geoffrey Milton, First Vice President Via Santa Maria Fulcorina 6 Direct Dealing Reuters Code: ABCL David Chan, Executive Vice President, & General Manager 20123 Milan, Italy Michael Duval, General Manager Financial Control & Support Group Tel: (1)(212) 5834863 Tel: (39)(02) 863331 Robert Fitzsimons, Assistant General Fax: (39)(02) 86450117 ABC International Bank plc, ABC Securities (Egypt) S.A.E Manager & Treasurer Marco Simonelli, General Manager Paris (Branch) 1191 Corniche El Nile Street, Tel: (1)(212) 5834779 Tel: (39)(02) 86333229 49/51 Avenue George V World Trade Center Derek Hudson, Assistant General Fax: (39)(02) 86333285 75008 Paris, France Offices Building, 6th Floor, Manager, Latin America Group Walter Trovo, Director Tel: (33)(1) 49525400 PO Box 781, Ataba 11511, Tel: (1)(212) 5834876 Tel: (39)(02) 86333214 Fax: (33)(1) 47207469 Cairo, Egypt Thomas J. Cahalane, Assistant General Fax: (39)(02) 86333285 Tlx: 648343 ABC F (General); Tel: (20)(2) 5745488/5745366 Manager, Operations 648483 ABCORP F (Dealing Room) Fax: (20)(2) 5780416/5780417 Tel: (1)(212) 5834747 ABC (IT) Services Ltd. Direct Dealing Reuters Code: ABCP Omar el-Abd, Managing Director & Arab Banking Corporation House Barbara Sanderson, Jean-Marie Zambelli, General Manager Chief Executive Vice President/Senior Credit Officer, 1-5 Moorgate, Credit Department London EC2R 6AB, UK Tel: (1)(212) 5834752 Tel: (44)(20) 77764050 Fax: (44)(20) 76062708 Grant McDonald, Vice President/Senior Tlx: 915687 ABC G Lending Officer, Corporate Banking E-mail: [email protected] Tel: (1)(212) 5834759 Louise Bilbro, Assistant General Sael Al Waary, Director Manager, NY Corporate Group Tel: (1)(212) 5834758 Glenn Corrales, Vice President/Lending Officer, Latin America Tel: (1)(212) 5834873 Kenneth J Carroll, Assistant General Manager and Controller Tel: (1)(212) 5834761 Charles Azzara, Vice President, Corporate Lending Tel: (1)(212) 5834753

64 Arab Banking Corporation Annual Report 2000