Directors’ Report On behalf of the Board of Directors, I am pleased to present 65th Annual Report to the members together with Audited Financial Statements and Auditors’ Report for the year ended December 31, 2006. The Board is committed to ensure that requirements of the Code of Corporate Governance set by the Securities and Exchange Commission of Pakistan are fully met. The Bank has adopted corporate governance practice and the directors are pleased to inform that: • The financial statements prepared by the management of the Bank presents a true and fair view of the state of its affairs, operational results, cash flows and changes in equity. • Proper books of accounts of the company have been maintained. • Appropriate accounting policies have been consistently applied in preparation of financial statements, except for change in accounting policy as disclosed in note 4.14 of Group’s annual financial statements. This policy has been changed pursuant to a circular number 06-2006 dated June 19, 2006 issued by the Institute of Chartered Accountants of Pakistan which requires that all declarations of dividends to holders of equity instruments including declaration of bonus issues and other appropriations except appropriations which are required by law after the balance sheet date, should not be recognized as liabilities or change in reserves at the balance sheet date. Previously all declarations of dividend to holders of equity instruments and transfers to reserves relating to profit for the year although declared subsequent to year end, were accounted for in the year to which those related. This change has been applied retrospectively and comparatives have been restated. • The company has followed international accounting standards (as applicable to banks in Pakistan) in the preparation of accounts and there is no departure from the said standards. • As a continuous process, efforts have been made to effectively implement the internal control system. Issues identified during the review process are rectified through appropriate corrective actions and by further strengthening the internal control procedures. • There are no doubts whatsoever about the Banks’ ability to continue as a going concern. • There has been no material departure from the best practices of corporate governance as detailed in the regulations. • Risk Management, Human Resource and Audit Committees constituted by the Board are functioning efficiently to meet the desired objectives. Results for 2006 The Group’s pre tax profit for the year is Rs.18, 840 million registering an increase of 36 per cent over last year. The earning per share for the year is Rs. 18.30 registering an increase of 32 percent. An amount of Rs.1428 million has been transferred to statutory reserves. Financial highlights and summarized key operating and financial data of last ten years are annexed to the accounts. Risk Management Framework The Bank evaluates business opportunities in terms of the risk-reward relationship. The risks that Bank takes are reasonable, controlled, within its financial resources and credit competence. The diversity of our business requires us to identify, measure and manage our risks effectively .The risk is managed through a framework, organizational structure, risk management and monitoring processes that are closely aligned with the activities of the Bank and in line with the guidelines given by State Bank of Pakistan The following key principles forms part of the Bank’s approach to risk management: • The Board, through its subcommittee, oversees risk management, reviews and approves Risk policies and tolerance limits wherever required. Various committees at functional level oversee the implementation of risk management policies. • Market and Liquidity risk are managed by a well-represented ALCO, whose members are President and CEO, heads of Business groups, Chief Risk Officer, Chief Financial Officer and Head of Market risk. • Chief Risk Officer, who is the secretary of the Board subcommittee on risk management, heads Risk Management group. • Credit policy committee and Operational risk committee are responsible for defining and implementation of respective policies. • The Management Risk Committee represented by Heads of various risk groups allows the bank to manage Credit, Market and Operational risk on an integrated basis. • The structure of Risk Management group is closely aligned with the structure of bank’s business groups. • The risk management function is independent of business groups/divisions. • The Business Risk Review department operating under Internal Audit which reports directly to the Board audit committee conducts independent risk review function. Value of Investments in Employee Retirement Benefit Fund The following is the value of investments of provident, gratuity, pension and benevolent funds maintained by the Bank, based on latest audited financial statements as at December 31, 2005. Amount in ‘000 Employees’ Provident Fund 6,635,911 Employees’ Pension Fund 8,998,939 Employees’ Gratuity Fund 600,755 Employees’ Benevolent Fund – Executive and Officers 861,480 Employees’ Benevolent Fund – Clerical and Non- Clerical 383,115 Dividend The Directors approved payment of Cash Dividend of 10 per cent (Re 1 per share) for payment to the shareholders entitled at close of business on December 08, 2006, as per the proviso to section 251 (1) of the Companies Ordinance, 1984. The directors further recommended payment of a final dividend of 20 per cent (Re. 2.00 per share) to Shareholders entitled at the close of business on March 10, 2007 subject to approval of the Shareholders at the Annual General Meeting. Meetings of the Board Six Board meetings were held during 2006 and were attended by the Directors as follows: Name Meetings during tenure Attendance Mr. Sultanali Allana 6 6 Mr. R. Zakir Mahmood 6 6 Mr. Iain Donald Cheyne 6 5 Mr. Sajid Zahid 6 4 Mr. Ahmad Waqar 1 - Mr. Muhammad Ismail Qureshi 6 4 Mr. Arif Mansur 6 5 Mr. Shaukat Hayat Durrani 6 5 Mr Ahmed Waqar, Secretary Ministry of Petroleum and Natural Resources, Government of Pakistan, ceased to be a Director of the bank from March 27, 2006. Pattern of Shareholding The pattern of shareholding as at December 31, 2006, as required by the code of Corporate Governance and Section 236 of the Companies Ordinance 1984 is given below: Shareholding % Shareholders Securities & Exchange Commission of Pakistan 1 - National Bank of Pakistan (Trustee Department) 105,924 0.015 Privatization Commission 1,886 - Islamic Republic of Pakistan 6,468,187 0.938 State Bank of Pakistan 331,524,002 48.047 Aga Khan Fund for Economic Development 351,900,000 51.000 Total 690,000,000 100.00 Auditors On the suggestion of the Audit committee, the Board of Directors recommends to appoint M/s KPMG Taseer Hadi & Co., Chartered Accountants for the next term. On behalf of the Board R. Zakir Mahmood President & Chief Executive Officer Karachi: February 13, 2007 AUDITORS REPORT TO THE MEMBERS We have audited the annexed consolidated financial statements comprising consolidated balance sheet of Habib Bank Limited as at December 31, 2006 and the related consolidated profit and loss account, consolidated cash flow statement and consolidated statement of changes in equity together with the notes forming part thereof, for the year then ended. These financial statements include unaudited certified returns from the branches, except for 82 branches, which have been audited by us and 40 branches audited by auditors abroad. The financial statements of subsidiary company First Habib Bank Modaraba were reviewed in accordance with the International Standard on Review Engagements 2400 by another firm of chartered accountants, whose report has been furnished to us and our opinion in so far as it relates to the amounts included for First Habib Bank Modaraba, is based solely on the report of other auditors. These financial statements are responsibility of the Bank’s management. Our responsibility is to express our opinion on these financial statements based on our audit. We conducted our audit in accordance with the auditing standards as applicable in Pakistan. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the above said statements are free of any material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the above said statements. An audit also includes assessing the accounting policies and significant estimates made by management, as well as, evaluating the overall presentation of the above said statements. We believe that our audit provides a reasonable basis for our opinion. In our opinion the consolidated financial statements present fairly the financial position of Habib Bank Limited as at December 31, 2006 and the results of its operations, its cash flows and changes in equity for the year then ended in accordance with the approved accounting standards as applicable in Pakistan. The corresponding figures presented are based on consolidated financial statements of the Bank as of December 31, 2005 which were audited by another auditor whose report dated March 28, 2006 expressed an unqualified opinion on those statements. Date: KPMG Taseer Hadi & Co. Chartered Accountants Karachi HABIB BANK LIMITED CONSOLIDATED BALANCE SHEET AS AT DECEMBER 31, 2006 2006 2005 Note 2006 2005 (US $ in '000) (Rupees in '000) Restated Restated ASSETS 760,310 542,621 Cash and balances with treasury banks 5 46,310,478 33,051,049 590,462 522,304 Balances