Bank Audi Syria sa • Annual Report 2006
INDEX
BOARD OF DIRECTORS’ REPORT FOR 2006 ACTIVITIES 5 MAJOR SHAREHOLDING AND FOUNDING MEMBERS 7 BOARD OF DIRECTORS 8 MANAGEMENT 9 FUNCTIONAL ORGANIZATIONAL CHART OF THE HEAD OFFICE 10 BANK AUDI SYRIA sa ACTIVITIES IN 2006 13 1- EXPANSION PLAN 15 2- RETAIL STRATEGY 15 2.1. NEW RETAIL PROJECTS 16 2.2. THE BANK AUDI BRAND 16 3- HUMAN CAPITAL 16 4- INFORMATION TECHNOLOGY 17 5- FINANCIAL PERFORMANCE 18 5.1. ASSETS 18 5.2. LIABILITIES AND EQUITY 20 5.3. OFF-BALANCE SHEET COMMITMENTS 21 5.4. PROFITABILITY 21 6- NET INCOME ALLOCATION 22 INDEPENDENT AUDITORS’ REPORT 25 BANK AUDI SYRIA sa FINANCIAL STATEMENTS 27 - INCOME STATEMENT 29 - BALANCE SHEET 30 - STATEMENT OF CHANGES IN EQUITY 31 - STATEMENT OF CASH FLOWS 32 BANK AUDI SYRIA sa NOTES TO THE FINANCIAL STATEMENTS 33 HEAD OFFICE AND BRANCH NETWORK 59
3
BOARD OF DIRECTORS’ REPORT FOR 2006 ACTIVITIES
Submitted to Shareholders Regular General Assembly
Bank Audi Syria witnessed an exciting and successful first full-year where it was able to offer a wide range of products and services to achieve our vision of becoming a universal bank. The Bank invested in developing products and services in the Traditional, Retail, Trade finance, Corporate and Project Finance in order to cover the financial and economic needs of the Syrian market.
The year witnessed the opening of the Bank’s Head Office and main branch at Youssef Al-Azmeh Square, located in the center of Damascus. Concurrently, the Bank proceeded to structure a solid organization, staffed with highly educated professionals eager to further develop their skills and offer high quality service to the Bank’s customers. I personally consider this year’s performance as a benchmark for what the Bank is able to accomplish in the future. Bank Audi Syria developed and maintained its high quality of service, with our goal in mind to preserve and enhance clients’ and investors’ trust, by building solid and loyal partnerships.
In addition, the Bank’s branch network expanded to reach 5 branches, distributed as follows: 3 branches in Damascus, a regional branch in Aleppo to serve the Northern area, and one in Lattakia to cover the coastal side. The Bank plans to aggressively expand its presence into all governorates, to ensure serving its clients wherever they are located.
The year 2006 was characterized by major economic developments and a significant liberalization of the banking sector, both a response to the issuance of valiant regulations by specialized authorities. Consequently, banks were given the opportunity to play a bigger and more effective role in stimulating and enlivening economic activity. It is worth mentioning that other major advancements are underway which will enable banks to fully play their role in developing the Syrian economy.
On the other hand, Bank Audi sal - Audi Saradar Group, Bank Audi Syria’s major shareholder, moved a step ahead in its strategic regional expansion plan, adding in 2006 five new implementations, namely in Egypt, Sudan, Qatar, Saudi Arabia (through an investment company) and in the UAE, over and above its presence in Lebanon, France, Switzerland, Jordan and Syria. To support its expansion plan, the Group closed in April 2006 a US$ 600 million capital increase, raising its shareholders’ equity at end-2006 to US$ 1.7 billion, placing the Bank among the top 25 Arab banking groups in the Middle East.
As a matter of fact, I am pleased to inform you that our Bank began to generate a net positive income at the end of 2006 due to proper management, dedication and team work efforts which resulted in surpassing targeted objectives.
However, and as a result of new regulations issued by the Credit and Monetary Council during 2006 concerning setting a threshold for foreign exchange positions, Bank Audi Syria, along with the other Syrian Banks, had to liquidate a large portion of its structural position by conversion to Syrian Pounds, which resulted in significant losses. Despite that, the Bank’s operations during 2006 generated sufficient revenues to absorb the foreign exchange losses and resulted in a net after tax income amounting to SYP 452,873 and an overall positive bottom line for the second year in a row.
Finally, I would like to take this opportunity to express my gratitude to the Board of Directors, management and staff for the Bank’s achievements this year. Hoping that we will continue to add value to our community and to the Syrian economy as a whole.
Dr. Georges Achi Chairman - Bank Audi Syria sa
5
MAJOR SHAREHOLDING AND FOUNDING MEMBERS
Bank Audi sal - Audi Saradar Group 41% Audi Saradar Investment Bank sal 3% Lebanon Invest sal 3% Mr. Abdallah A. Al-Rajihi 2% Mrs. Houda I. Mhanna 5% Mrs. Hadia A. Debs 4% Mr. Bassel S. Hamwi 3% Mr. Adnan N. Takla 2% Dr. Georges A. Gedeon Achi 2% Dr. Ahmad M. Abboud 2% Mr. Mohamad Ayman M. Asfari 2% Mr. Hamad N. Atassi 1% Mr. Riad G. Zein 1% Mr. Imad G. Zein 1% Mrs. Nada N. Assaad 1% Mrs. Mayya N. Assaad 1% Mr. Mohamad Said Z. Zaim 1%
Total Number of Shares 75%
The remaining 25% shares of the capital were allocated to Initial Public Offering.
7 BOARD OF DIRECTORS
Chairman Dr. Georges A. Gedeon Achi
Deputy Chairman Mr. Bassel S. Hamwi (*)
Board Members Mr. Raymond W. Audi Mr. Samir N. Hanna Mr. Adnan N. Takla Dr. Ahmad M. Abboud Mr. Mohamad Said Z. Zaim Mrs. Rana T. Zein Dr. Freddie C. Baz
Advisors to the Board Mrs. Nada N. Assaad Mrs. Yasmina R. Azhari Mr. Abdulateef A. Al-Rajihi
Legal Advisors Sarkis Law Office
Auditors Ernst & Young
(*) General Manager
8 MANAGEMENT
Top Management Mr. Bassel S. Hamwi General Manager Mr. Antoine G. El-Zyr Deputy General Manager
Central Departments Mr. Mahmoud A. Al-Kurdy Chief Financial Officer Mr. Fady A. Obeid Head of Retail Banking Dpt. Mr. Jamil R. Choucair Head of Credit Dpt. Mr. Elie Y. Risha Head of Operations Dpt. Mr. Jihad R. Kosremelli Head of Human Resources Dpt. (on mission) Mr. Mohannad S. Kandil Head of Information Technology Dpt. Mr. Gilbert N. Ghosn Dealer and Treasurer
Branch Managers Mr. Bechara G. Charbel Main Branch Manager (Damascus - Muhafaza) Mr. Melhem J. Abou-Antoun Main Branch Manager (Aleppo - Aziziyah) Mr. Mohamad M. Sahyouni Main Branch Manager (Lattakia - Old Port Area) Ms. Samar M. Farha Branch Manager (Damascus - Abu-Rummaneh) Mr. Bechara G. Chalouhi Acting Branch Manager (Damascus - Mazzeh)
9 10 11
BANK AUDI SYRIA sa ACTIVITIES IN 2006
BANK AUDI SYRIA sa ACTIVITIES IN 2006
1. Expansion Plan
Starting with the ribbon cutting of its main branch and Head Office in January 2006, Bank Audi Syria achieved an aggressive expansion strategy throughout 2006 and shall extend its expansion plans into 2007. The Bank’s third branch in Damascus was opened soon after, early May 2006, in one of Damascus’ prime areas in terms of commercial and residential concentration: Abu-Rummaneh.
In line with the spread-out in Damascus, the Bank started up a branch in Aleppo in April 2006, celebrated by a major event held at the Blue Lagoon. The event was organized to reflect the importance of Aleppo as Syria’s major industrial city, gathering over 500 attendees representing the city’s traders, businesspersons and officials. Towards end 2006, the Bank ensured a presence, though minor, in Lattakia where the plan for the opening of the main branch in the governorate and the associated gala event are to be held during the first quarter of 2007 (*).
Bank Audi Syria will continue its geographic spread, implementing its vertical and horizontal expansion plans to cover all major Syrian cities and prime locations, as new branches will be established in Harasta and Kafarsouseh (Damascus) and will reach new destinations such as Homs and Tartous.
2. Retail Strategy
The Bank’s strategy is based on serving the market with added value products and services, and building a long-term relationship with customers from all age groups. In a highly competitive and rapidly growing market, the Bank aims at differentiating itself by providing its customers with easy access to high quality, modern and highly innovative technological banking solutions.
As a building stone, a partnership was made in April 2006 with the first internet service provider in Syria, Aloola, to jointly provide Bank Audi Syria’s Net Account. The product, designed to be accessible to all customers falling under different age groups in an emerging market thirsty for technology, greatly contributed to the franchise building of the Bank’s customer base, as its holders represented a significant percentage of the Bank’s clients by end 2006. In line with the introduction of the Net Account, the Bank launched its first consumer lending product, the PC Loan, in alliance with Toshiba, enabling cutomers to own one of the highest technology portable computers at monthly installments as low as SYP 3,000. By mid 2006, the Bank had launched Visa Electron local and international debit cards, in association with VISA International. In a highly cash dependent market, Bank Audi Syria was the first to introduce the International Visa Electron debit card which granted the Bank’s clients access to their accounts at Bank Audi Syria from all over the world. By end 2006, the Bank successfully facilitated customers’ accessibility to ATMs by establishing a link with one of Syria’s largest ATM networks. The Bank’s cards thus became functional in over 200 ATMs in Syria and its ATMs were the exclusive dispensers of US Dollars.
In order to increase its retail franchise and to set the basis of its consumer lending portfolio, the Bank realized massive payroll acquisitions by presenting the Payroll Account, the most sophisticated payroll product to corporations of all sizes. The Payroll Account aims at encouraging the replacement of cash with a convenient e-transfer salary payment. It offers clients: • A revolving credit line of one month salary; • Free personal accident coverage reaching up to 10 times their monthly salaries, but not to exceed SYP 500,000; • Preferential access to personal loans for amounts reaching up to 10 times their monthly salaries.
(*) Lattakia main branch was officially inaugurated on February 11, 2007. 15 BANK AUDI SYRIA sa ACTIVITIES IN 2006
At the same time, the impact of payroll acquisition on the customer base growth became noticeable as the Bank witnessed a significant increase in new account openings on a monthly basis.
By the end of 2006, the Bank inaugurated its e-Banking interface, Audi On-line, which enables clients to access their accounts on the internet from anywhere in the world.
The perception of Bank Audi Syria as a secure and reliable institution induced the introduction of a number of safe deposit boxes in all its branches, offering clients a highly secure solution and enabling them to keep their valuable belongings available whenever needed.
2.1. New Retail Projects
Retail activities in 2006 also included preparations for new products which would enrich the Bank’s consumer lending services.
An early entrant by quarter I of 2007 will be the Special Car Deal offer, whereby the Bank, along with Syria’s top car dealers, jointly provide extra value to customers on specific car models.
With liberalization in the insurance sector, the Bank entered as a founding shareholder in the Syrian Arab Insurance, along with Audi Saradar Group. Once regulations will allow it, the Bank will develop the first range of Bancassurance products, in partnership with its sister company. This initiative is meant to stir up the market by serving and informing Syrian consumers on the benefits and advantages of insurance made easy.
2.2. The Bank Audi Brand
The highlight of all events organized by Bank Audi Syria in 2006 was the large-scale gala dinner held at the Four Seasons Hotel on the occasion of the opening of the Bank’s Headquarters, early 2006, as well as the massive outdoor campaign which accompanied it. The campaign introduced the slogan of Bank Audi sal – Audi Saradar Group, “Grow Beyond your Potential”, represented by its famous wheat feature. This campaign was by far the largest any financial institution had launched till date on the Syrian market.
This was followed by a highly visible Net Account campaign consolidating the technology edge of the Bank. Launched concurrently in Damascus and Aleppo, this campaign led to more awareness and positioned Bank Audi Syria as the first private-owned bank to introduce retail products.
Furthermore, Bank Audi Syria marked a noticeable presence in all exhibitions held in 2006 within varying areas of focus. These include “Shaam Expo” for Technology and Communications, “Buildex” for building tools and materials, and the “Schools and Exhibitions” exhibition.
Finally, Bank Audi Syria will conduct corporate image campaigns to capitalize on its goodwill and further promote its brand image, so as to become a reference for excellence in banking.
3. Human Capital
Investing in Human Capital is one of the essential components of success for Bank Audi Syria. Accordingly, the Bank aims at attracting highly qualified Syrian staff, from inside and outside the country. Once on board, these employees undergo extensive specialized trainings on modern banking practices, in addition to on-the-job trainings in all corresponding departments and branches.
16 BANK AUDI SYRIA sa ACTIVITIES IN 2006
In 2006, the number of employees reached 149, distributed among the Bank’s 5 branches and Headquarters. Bank policies and procedures were further upgraded and an Employee Performance Appraisal system was developed to ensure proper career planning and recognize employees’ performance.
Evolution of staff number Number of employees of Number
Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06
Percentage of trainees in Lebanon and Syria for 2006
■ Percentage of trainees in Bank Audi sal
■ Percentage of trainees in Bank Audi Syria
4. Information Technology
Bank Audi Syria heavily invested in its IT infrastructure, in line with the best international practices for modern banks. The Bank is continuously working on enhancing its IT capacity through building a solid IT infrastructure, while keeping up with international standards and developments in order to secure system reliability and flexibility.
The Bank has invested in state-of-the-art technology enabling real-time online connection between branches and Headquarters, and using thin client units instead of a PC network at the end user level. It has also opened a gateway to its banking system through the internet whereby the client uses a secured connection to access his accounts from anywhere in the world. In addition, the Bank has invested in IP Telephony technology where a single network (Data Network) is used to exchange voice and fax data among branches and Headquarters while maintaining secrecy and encryption provided by the VPN technology which enables a safe data transfer environment.
17 BANK AUDI SYRIA sa ACTIVITIES IN 2006
5. Financial Performance
Bank Audi Syria achieved substantial growth in its activity by the end of its first complete financial year. Indeed, the Bank’s balance sheet shows an increase of 257% in total assets, exceeding SYP 17.8 billion, while total deposits with margin accounts reached SYP 15 billion, marking an increase of 582% compared to 2005 figures. As for the loan portfolio, it revealed the promising potential of the Syrian market by reaching SYP 5 billion, in addition to SYP 2.2 billion of off-balance sheet commitments by end 2006.
Net income before tax and unrealized losses reached SYP 144.3 million as at December 31st, 2006. Net income reached SYP 452,873, after deducting the income tax of SYP 36.8 million, as well as unrealized losses due to the revaluation of structural position which amounted to SYP 107.5 million (not subject to tax).
Growth indicators
■ 2005
■ 2006
Total assets Deposits & margins Lending
5.1. Assets
The Bank’s total footings reached SYP 17,788 million in total assets as at December 31st, 2006, distributed as such: - Cash in safe and Central Bank current accounts of SYP 2,154 million; - Placements with correspondents of SYP 9,706 millions; - Loan portfolio extended to customers of SYP 4,858 million; - Fixed assets of SYP 547 million; - Other assets of SYP 523 million, of which SYP 240 million blocked deposit at Central Bank, representing 10% of paid-up capital.
Assets breakdown
■ Bank placements ■ Loan portfolio ■ Cash & Central Bank ■ Fixed assets ■ Other assets
18 BANK AUDI SYRIA sa ACTIVITIES IN 2006
5.1.1. Assets Growth The comparison of asset figures of Quarter IV 2005 with those at end 2006 shows that the Bank’s placement portfolio increased by 216%, while its loan volume improved significantly, as the loan portfolio at end 2005 was minor. Tangible fixed assets grew by 104%, which goes in parallel with the Bank’s expansion plan in Damascus and other major cities.
Assets growth In millions of SYP
■ 2005
■ 2006
Bank Loan Cash & Fixed Other placements portfolio Central Bank assets assets
5.1.2. Placements with Correspondent Banks The placements portfolio was managed in a way to optimize the return on investments while maintaining the total liquidity ratio above 50%, in compliance with circulars issued by the Central Bank of Syria requiring a minimum liquidity ratio of 20% in all currencies. The placement portfolio reached SYP 9.7 billion by end 2006, broken down as such: - SYP 6.8 billion in term deposits maturing in less than one year; - SYP 1.9 billion in certificates of deposit in local and foreign currencies; - SYP 1 billion in bank current accounts.
Placements portfolio
■ Certificates of deposit ■ Term deposits ■ Current accounts
5.1.3. Loan Portfolio The loan portfolio witnessed a remarkable growth during 2006, compared to 2005, since the Bank’s management was keen on allocating these loans to various productive and performing economic sectors. As a result, both commercial and industrial sectors seized the largest share, which reached SYP 4,250 million of total facilities granted to customers, while the real estate sector share reached SYP 419 million and SYP 234 million constituted the amounts granted to the remaining sectors.
19 BANK AUDI SYRIA sa ACTIVITIES IN 2006
Loan portfolio breakdown by economic sector
■ Trade & Industry ■ Real-estate ■ Other
5.2. Liabilities and Equity
5.2.1. Customer Deposits The year 2006 witnessed an evident increase in customers’ deposits which grew from SYP 2,184 million in 2005 to SYP 13,451 million by end 2006, registering an increase of 516% without accounting for margin accounts. This is primarily due to customers’ confidence in the Bank. Further growth in the sources of funds is expected through an increase in the customer deposit base, as a result of the geographical expansion Bank Audi Syria plans to achieve in 2007, with a view to reaching all Syrian cities.
• Deposits at sight reached 38% of total deposits, compared to 46% in 2005; • Term deposits accounted for 62% of total deposits, compared to 54% in 2005; and • Syrian Pounds deposits reached 49% of total deposits, compared to 68% in 2005.
Deposits by currency
■ SYP deposits ■ Foreign currency deposits
20 BANK AUDI SYRIA sa ACTIVITIES IN 2006
Deposits by type
■ Sight deposits ■ Term deposits ■ Saving deposits
5.2.2. Equity Bank Audi Syria’s capital is SYP 2.5 billion, allocated to 2,500,000 shares with a nominal value of SYP 1000 per share. The Bank’s net equity increased from SYP 2,548,074,359 in 2005 to reach SYP 2,548,527,232 by end 2006, thus growing by SYP 452,873 representing the net profit for 2006.
5.3. Off-Balance Sheet Commitments
Bank Audi Syria has actively participated in financing Syrian foreign trade, which is made evident in the total volume of indirect facilities that the Bank offered its customers, in the form of letters of credit and letters of guarantees, which reached 45% of total direct facilities extended to customers. The total indirect facilities reached SYP 2,169 million, broken down as such:
• Letters of guarantees and letters of credits issued at the request of customers reached SYP 1,482 million;
• Letters of guarantees and letters of credits issued at the request of banks reached SYP 687 million.
5.4. Profitability
Bank Audi Syria registered a realized net income of SYP 107,992,873 for the year 2006, after deducting the income tax of SYP 36,350,459. The realized net income is decreased by the value of SYP 107,540,000, representing unrealized losses not subject to tax and not available for distribution, to reach a net income of SYP 452,873 as shown in the Bank’s income statement. As a result, the earnings per share reach SYP 0.1811 for the year ending December 31st, 2006.
5.4.1. Interest Margin The net interest margin for 2006 reached over SYP 266 million, coming from customers and banks, compared to SYP 19 million in 2005, knowing that the interest spread on the Syrian Pound and foreign currencies is subject to market conditions which were kept relatively stagnant since 2005. Growth in interest margin, compared to 2005 figures, is mainly due to growth in the Bank’s total assets, which is considered as a good and healthy growth indicator.
21 BANK AUDI SYRIA sa ACTIVITIES IN 2006
5.4.2. Commissions and Other Revenues Total non-interest income reached SYP 60.5 million, resulting from commissions on loans and commissions on trade finance operations. The profits arising from trading activity reached SYP 122.5 million, while other revenues reached SYP 3.8 million.
5.4.3. Operating Expenses The Bank’s operating expenses are distributed among staff expenses, general operating expenses and depreciation. Total staff expenses reached SYP 111.6 million for the year 2006, reflecting an increase of 203%, compared to 2005 figures. General operating expenses such as marketing, development, insurance, taxes, services and others, reached SYP 129.6 million, comprising 47% of total operating expenses, which reflects the Bank’s expansion plan across the Syrian territories.
Operating expenses
■ Staff expenses ■ General operating expenses ■ Depreciation
5.4.4. Foreign Exchange Positions The Bank liquidated part of its foreign exchange position, in compliance with the Credit and Monetary council circular 249 which limited retained structural positions to 60% of the Bank’s net equity. As a result, the Bank suffered losses due to operational position activity which amounted to SYP 32.5 million.
The result of revaluating the structural position is an unrealized loss of SYP 107,540,000 due to the appreciation of the Syrian Pound at end 2006, compared to 2005 figures. While the Bank retained unrealized gains of SYP 47,674,012 at end 2005, the result of revaluating the foreign exchange position showed unrealized losses of SYP 59,865,988 as at end 2006.
6. Net Income Allocation
The net income for the year 2006 (after deducting tax of SYP 36,350,459) reached realized profits of SYP 107,992,873, which led the Board of Directors to suggest not to distribute any dividends for the financial year 2006. Thus the allocation of net income is as follows:
22 BANK AUDI SYRIA sa ACTIVITIES IN 2006
• Income after Tax SYP 107,992,873
• Statutory Reserve: Not available for distribution for 10% of net income as stated in Central Bank regulations and article 242 of Trade Law SYP 10,799,287
• Special Reserve: Not available for distribution for 10% of net income as stated in Central Bank regulations and article 97/A of Law 23 for 2002 SYP 10,799,287
• Retained earnings SYP 86,394,300
As described above, net equity reached SYP 2,548,527,232, broken down as such:
• Share capital SYP 2,500,000,000 • Statutory Reserve SYP 10,839,322 • Special Reserve SYP 10,839,322 • (Accumulated losses) not available for distribution SYP 59,865,988
• Retained earnings SYP 86,714,576
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INDEPENDENT AUDITORS’ REPORT
25
BANK AUDI SYRIA sa FINANCIAL STATEMENTS
31 DECEMBER 2006
INCOME STATEMENT Year ended 31 December 2006
From 13 September 2005 till 2006 31 December 2005 In Syrian Pounds Notes
Interest and similar income 8 599,930,846 26,302,061 Interest and similar expenses 9 (333,310,363) (7,150,380)
Net interest income 266,620,483 19,151,681
Net fee and commission income 10 60,453,235 991,753 Unrealised net foreign exchange difference 29 (107,540,000) 47,674,012 Gains less losses arising from dealing in foreign currencies (32,523,920) (12,364) Gains arising from trading activities 32 122,520,000 - Other income 3,798,214 36,758,686
313,328,012 104,563,768
Personnel expenses 11 (111,622,527) (36,701,834) Depreciation and amortization 19 & 20 (35,255,922) - Other operating expenses 12 (129,646,231) (19,654,127)
(276,524,680) (56,355,961)
PROFIT BEFORE TAX 36,803,332 48,207,807
Income tax expense 13 (36,350,459) (133,448)
PROFIT FOR THE YEAR 452,873 48,074,359
Basic earnings per share 14 0.18 76.92 Diluted earnings per share 14 0.18 76.92
29 BALANCE SHEET 31 December 2006
2006 2005 In Syrian Pounds Notes
ASSETS
Cash and balances with the Central Bank 15 2,153,644,331 1,265,303,765 Due from banks 16 9,705,730,991 3,071,377,030 Loans and advances to customers 17 4,857,663,532 16,805,612 Available for sale investments 18 50,000,000 - Premises, equipment and projects under construction 19 436,188,291 213,452,006 Intangible assets 20 111,162,048 102,717,542 Other assets 21 233,696,061 56,300,864 Statutory blocked funds 22 239,523,878 255,772,557
TOTAL ASSETS 17,787,609,132 4,981,729,376
LIABILITIES AND EQUITY
LIABILITIES Due to banks 23 130,149,405 18,682,756 Margin Accounts 24 1,513,334,580 10,772,544 Customers’ deposits 25 13,451,086,984 2,184,367,462 Other liabilities 26 144,510,931 219,832,255
15,239,081,900 2,433,655,017
EQUITY Share capital 27 2,500,000,000 2,500,000,000 Statutory reserve 28 10,839,322 40,035 Special reserve 28 10,839,322 40,035 (Accumulated losses) Retained earnings not available for distribution 29 (59,865,988) 47,674,012 Retained earnings 29 86,714,576 320,277
2,548,527,232 2,548,074,359
TOTAL LIABILITIES AND EQUITY 17,787,609,132 4,981,729,376
The financial statements were authorised for issue in accordance with a resolution of the directors on 1 February 2007.
Dr. Georges Achi Mr. Bassel Hamwi Chairman Deputy Chairman & General Manager
The attached notes 1 to 34 form part of these financial statements.
30 Year ended31December2006 STATEMENT OFCHANGESINEQUITY
(Accumulated losses) Retained earnings not available Share capital Statutory reserve Special reserve for distribution Retained earnings Total In Syrian Pounds Notes
Balance at 1 January 2006 2,500,000,000 40,035 40,035 47,674,012 320,277 2,548,074,359 Net profit for the year - - - - 452,873 452,873 Transfer to retained earnings not available for distribution 29 - - - (107,540,000) 107,540,000 - Transfer to statutory reserve 28 - 10,799,287 - - (10,799,287) - Transfer to special reserve 28 - - 10,799,287 - (10,799,287) - 31 Balance at 31 December 2006 2,500,000,000 10,839,322 10,839,322 (59,865,988) 86,714,576 2,548,527,232
Balance at 13 September 2005 ------Capital Payment 27 2,500,000,000 - - - - 2,500,000,000 Profit for the period - - - - 48,074,359 48,074,359 Transfer to retained earnings not available for distribution 29 - - - 47,674,012 (47,674,012) - Transfer to statutory reserve 28 - 40,035 - - (40,035) - Transfer to special reserve 28 - - 40,035 - (40,035) -
Balance at 31 December 2005 2,500,000,000 40,035 40,035 47,674,012 320,277 2,548,074,359
The attached notes 1 to 34 form part of these financial statements. STATEMENT OF CASH FLOWS
From 13 September 2005 till 2006 31 December 2005 In Syrian Pounds Notes
OPERATING ACTIVITIES Profit before tax 36,803,332 48,207,807 Adjustments for: Depreciation & Amortisation 35,255,922 - Non-recurring income 30 - (36,749,500) Unrealised foreign exchange loss 16,248,679 10,051,558
Operating profit before changes in operating assets and liabilities 88,307,933 21,509,865 Due from banks (4,594,622,089) - Loans and advances to customers (4,840,857,920) (16,805,612) Other assets (177,395,197) (56,300,864) Margin accounts 1,502,562,036 10,772,544 Customers’ deposits 11,266,719,522 2,184,367,462 Other liabilities (111,538,335) 246,396,749
Net cash flows from operations 3,133,175,950 2,389,940,144
Income tax paid (133,448) -
Net cash flows from operating activities 3,133,042,502 2,389,940,144
INVESTING ACTIVITIES Purchase of premises, equipment and projects under construction (253,018,220) (213,452,006) Purchase of intangible assets (13,418,493) (102,717,542) Statutory blocked funds - (255,772,557) Purchase of non-trading investments (50,000,000) -
Net cash flows used in investing activities (316,436,713) (571,942,105)
FINANCING ACTIVITIES Capital payment - 2,500,000,000
Net cash flows from financing activities - 2,500,000,000
INCREASE IN CASH AND CASH EQUIVALENTS 2,816,605,789 4,317,998,039
Cash and cash equivalents at 1 January 4,317,998,039 -
CASH AND CASH EQUIVALENTS AT 31 DECEMBER 31 7,134,603,828 4,317,998,039
The attached notes 1 to 34 form part of these financial statements.
32 BANK AUDI SYRIA sa NOTES TO THE FINANCIAL STATEMENTS
31 DECEMBER 2006
NOTES TO THE FINANCIAL STATEMENTS
1. Corporate Information
Bank Audi Syria sa (the “Bank”) was established as a public shareholding company on 30 August 2005 under commercial registration number (14456), and based on the decree of the government banking control commission number 703/IA dated 13 September 2005 and in accordance with the banking law number 28 for the year 2001. The Bank was registered under number (12) as a private bank, with its Headquarters in Damascus - Syria. The Bank’s paid in capital is SYP 2,500,000,000 divided into 2,500,000 shares with a par value of SYP 1,000 per share. The Bank commenced its operations on 28 September 2005.
The Bank provides several banking activities through its Headquarters and its branches in Damascus, Aleppo and Lattakia.
The Bank is 47% owned by Bank Audi sal.
The First General Assembly of the Bank’s shareholders held on 20 August 2005 resolved to enter into a technical assistance agreement with Bank Audi sal to transfer some of Bank Audi sal’s know-how and management experience in banking activities to Bank Audi Syria sa.
Under the terms of this agreement, Bank Audi sal will provide the following services:
• Assisting in defining and implementing strategy for banking operations in Syria. • Operational assistance through recruiting, training, supervising and evaluating the performance of the Bank’s employees in addition to staff provisioning to the Bank. • Assisting in defining and implementing procedures for the operational risk management • Assisting in evaluating, developing and selecting the required information technology, management information systems and communication infrastructure necessary to carry out the Bank’s business. • Assisting in product development, through making available to the Bank a range of Bank Audi sal products that are appropriate for the Syrian market. • Assisting in research products, through making available Bank Audi sal research products to the Bank or conducting specific research.
2. Significant Accounting Policies
The significant accounting policies adopted in the preparation of the financial statements are set out below:
Basis of Preparation The financial statements are prepared under the historical cost convention as modified for the measurement at fair value of available for sale investments and trading investments.
The financial statements have been presented in Syrian Pound which is the functional and presentation currency of the Bank.
Statement of Compliance The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and Central Bank of Syria’s laws and regulations.
The accounting policies are consistent with those used in the previous year.
35 NOTES TO THE FINANCIAL STATEMENTS
New and Amended Standards and Interpretations Issued but not yet Effective
Amendments to IAS 1 – Capital Disclosures Amendments to IAS 1 Presentation of Financial Statements were issued by the IASB as Capital Disclosures in August 2005. They are required to be applied for periods beginning on or after 1 January 2007. When effective, these amendments will require disclosure of information enabling evaluation of the Bank’s objectives, policies and processes for managing capital.
IFRS 7 Financial Instruments: Disclosures IFRS 7 Financial Instruments: Disclosures was issued by the IASB in August 2005, becoming effective for periods beginning on or after 1 January 2007. The new standard will require additional disclosure of the significance of financial instruments for the Bank’s financial position and performance and information about exposure to risks arising from financial instruments.
Due from Banks and Other Money Market Placements These are stated at cost, less any amounts written off and provision for impairment.
Loans and Advances These are stated at cost, net of interest suspended, provisions for impairment and any amounts written off.
Trading Investments These are initially recognised at cost and subsequently remeasured at fair value. All related realised and unrealised gains or losses are included in gains less losses arising from trading activities. Interest earned or dividends received are included in interest and similar income and dividend income respectively.
Non-Trading Investments These are classified as follows:
• Held to maturity • Available for sale • Investments carried at fair value through income statement • Loans and advances
All investments are initially recognised at fair value, being the fair value of the consideration given including directly attributable transaction costs.
Premiums and discounts on non-trading investments (excluding those carried at fair value through income statement) are amortised using the effective interest rate method and taken to interest income.
Held to Maturity Investments classified as held to maturity have fixed or determinable payments and fixed maturity and are intended to be held to maturity. They are carried at amortised cost using the effective interest method, less provision for impairment.
Available for Sale After initial recognition, investments which are classified “available for sale” are normally remeasured at fair value, unless fair value cannot be reliably determined in which case they are measured at cost less impairment. Fair value changes which are not part of an effective hedging relationship are reported as a separate component of equity until the investment is derecognised or the investment is determined to be impaired. On derecognition or impairment the cumulative gain or loss previously reported as “cumulative changes in fair value” within equity, is included in the income statement for the period.
36 NOTES TO THE FINANCIAL STATEMENTS
Dividends earned on investments are recognised in the income statement as “Dividends received” when the right of payment has been established.
That portion of any fair value changes relating to an effective hedging relationship is recognised directly in the income statement.
Investments Carried at Fair Value through Profit and Loss Investments are classified as fair value through profit and loss account if the fair value of the investment can be reliably measured and the classification as fair value through profit and loss account is as per the documented strategy of the Bank. Investments classified as “Investments at fair value through profit and loss” upon initial recognition are remeasured at fair value with all changes in fair value being recorded in the income statement.
Fair Values For investments and derivatives quoted in an active market, fair value is determined by reference to quoted market prices. Bid prices are used for assets and offer prices are used for liabilities.
For financial instruments where there is no active market fair value is normally based on one of the following: • recent transactions • brokers’ quotes • the expected cash flows discounted at current rates applicable for items with similar terms and risk characteristics • option pricing models.
The estimated fair value of deposits with no stated maturity, which includes non-interest bearing deposits, is the amount payable on demand.
Premises and Equipment All items of premises and equipment are initially recorded at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of all premises and equipment. Whenever the recoverable amount of an asset is impaired, the carrying value is reduced to the recoverable amount and the impairment loss is recorded in the statement of income.
Projects under construction are not depreciated until such time as the relevant assets are completed and put into operational use.
Deposits All money market and customer deposits are carried at cost less amounts repaid.
Taxation The Bank provides for income tax in accordance with the Banks Law no. (28) for the year 2001, and in accordance with IAS 12.
Deferred income taxation is provided using the liability method on all temporary differences at the balance sheet date. Deferred income tax liabilities are measured at the tax rates that are expected to apply to the period when the liability is settled, based on laws that have been enacted at the balance sheet date. The Bank does not recognise deferred income tax asset since it is not probable that deferred income tax asset will be utilised against taxable profits.
Provisions Provisions are recognised when the Bank has a present obligation (legal or constructive) arising from a past event and the costs to settle the obligation are both probable and able to be reliably measured.
37 NOTES TO THE FINANCIAL STATEMENTS
Offsetting Financial assets and financial liabilities are only offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and the Bank intends to either settle on a net basis, or to realise the asset and settle the liability simultaneously.
Revenue Recognition Interest income as well as fees which are considered an integral part of the effective yield of a financial asset, are recognised using the effective yield method, unless collectibility is in doubt. The recognition of interest income is suspended when loans become impaired, such as when overdue by more than 90 days.
Notional interest is recognised on impaired loans and other financial assets based on the rate used to discount future cash flows to their net present value. Other fees receivable are recognised as the services are provided. Dividend income is recognised when the right to receive payment is established.
Foreign Currencies
Translation of Foreign Currency Transactions Transactions in foreign currencies are initially recorded in the functional currency rate of exchange (published by the Central Bank of Syria) at the date of the transaction. Monetary assets and liabilities in foreign currencies are translated into SYP at rates of exchange prevailing at the balance sheet date (published by the Central Bank of Syria). Any gains or losses are taken to the income statement.
Cash and Cash Equivalents Cash and cash equivalents comprise cash and balances with Central Bank and deposits with banks and other financial institutions with original maturities of less than 90 days, less due to banks and other financial institutions with original maturities of less than 90 days.
Impairment of Financial Assets An assessment is made at each balance sheet date to determine whether there is objective evidence that a specific financial asset may be impaired. If such evidence exists, any impairment loss is recognised in the income statement.
Impairment is determined as follows:
(a) for assets carried at amortised cost, impairment is based on estimated cash flows, which are discounted at the original effective interest rate; (b) for assets carried at fair value, impairment is the difference between cost and fair value; (c) for assets carried at cost, impairment is present value of future cash flows discounted at the current market rate of return for a similar financial asset.
For available for sale equity investments reversal of impairment losses are recorded as increases in cumulative changes in fair value through equity.
Intangible Assets Intangible assets include the value of computer software and key money. Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life is reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic
38 NOTES TO THE FINANCIAL STATEMENTS
benefits embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the income statement in the expense category consistent.
Use of Estimates The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amount of financial assets and liabilities and disclosure of contingent liabilities. These estimates and assumptions also affect the revenues and expenses and the resultant provisions as well as fair value changes reported in equity. The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the financial year are discussed below:
Impairment Losses on Loans and Advances The Bank reviews its problem loans and advances on a quarterly basis to assess whether a provision for impairment should be recorded in the income statement. In particular, considerable judgement by management is required in the estimation of the amount and timing of future cash flows when determining the level of provisions required. Such estimates are necessarily based on assumptions about several factors involving varying degrees of judgment and uncertainty, and actual results may differ resulting in future changes to such provisions.
Fiduciary Assets Assets held in a fiduciary capacity are not reported in the financial statements, as they are not the assets of the Bank.
Dividends on Ordinary Shares Dividends on ordinary shares are recognized as liability and deducted from equity when they are approved by the Bank’s shareholders. Interim dividends are deducted from equity when paid.
3. Credit Risk and Concentration of Assets, Liabilities and Off-Balance Sheet Items
Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Bank manages credit risk by setting limits for individual borrowers and groups of borrowers and for geographical and industry segments. The Bank also monitors credit exposures, and continually assesses the creditworthiness of counterparties. In addition, the Bank obtains security where appropriate, enters into master netting agreements and collateral arrangements with counterparties, and limits the duration of exposures.
The maximum credit risk, without taking into account the fair value of any collateral and netting agreements, is limited to the amounts on the balance sheet plus commitments to customers disclosed in note 33.
Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the Bank’s performance to developments affecting a particular industry or geographic location.
39 NOTES TO THE FINANCIAL STATEMENTS
The distribution of assets, liabilities, and off-balance sheet items by geographic region and industry sector was as follows:
2006 2005 Credit Credit Assets Liabilities Commitments Assets Liabilities Commitments In thousands of Syrian Pounds
Geographic region: Domestic (Syria) 9,853,353 15,237,890 1,210,990 2,324,317 2,243,058 61,543 Other Middle East 2,719,013 1,192 853,458 2,070,478 190,597 2,700 Europe 5,215,243 - 104,500 586,934 - 47,919
17,787,609 15,239,082 2,168,948 4,981,729 2,433,655 112,162
Industry sector: Trading and manufacturing 3,907,298 1,553,415 1,101,817 - 2,183,221 63,478 Banks and financial institutions 12,148,900 130,149 687,108 4,438,965 190,597 - Construction and real estate 950,365 5,647 378,523 16,802 - - Other 781,046 13,549,871 1,500 525,962 59,837 48,684
17,787,609 15,239,082 2,168,948 4,981,729 2,433,655 112,162
4. Interest Rate Risk
Interest rate risk arises from the possibility that changes in interest rates will affect future profitability or the fair values of financial instruments. The Bank is exposed to interest rate risk as a result of mismatches of interest rate repricing of assets and liabilities. The Bank’s interest sensitivity position based on contractual repricing arrangements or maturity at 31 December 2006 has been shown in the table below. The expected repricing and maturity dates may differ significantly from the contractual dates particularly with regard to the maturity of customer demand deposits amounting to SYP 8,601,776,453 (2005: SYP 1,138,040,704).
40 NOTES TO THE FINANCIAL STATEMENTS Average - 4,857,664 9.60% - - - 871,740 2,153,644 0.27% - - - 65,685 70 - 900,186 1,513,335 3.03% of December 2006 was as follows: st ------50,000 50,000 50,000 ------436,188 436,188 111,162 436,188 239,524 111,162 ------239,524 ------2,548,527 144,511 144,511 2,548,527 ------233,696 233,696 233,696 - - month months months to 1 year years years bearing items Total interest rate Up to 1 1 to 3 3 to 6 6 months 1 to 3 Over 3 Non interest 53,787 - - - - - 76,362 130,149 3.75% 130,149 76,362 - 53,787 - 158,411 58,573 1,140,433 2,338,780 1,061,484 99,983 132,107 415,287 (766,594) (3,661,772) 1,573,361 2,434,995 (766,594) (3,661,772) 1,908,282 1,573,361 317,588 2,434,995 (1,805,860) 1,908,282 317,588 (1,805,860) 4,735,537 5,701,645 2,008,897 646,755 278,132 1,537 13,451,087 78,584 4.10% 2,714,522 2,396,587 2,441,825 808,655 1,125,000 219,142 - 9,705,731 6.45% 4,154,837 2,455,160 3,582,258 3,147,435 2,186,484 17,787,609 319,125 1,942,310 fund investments funds equipment sale assets and blocked for banks assets liabilities to In thousands of Syrian Pounds Cash and balances with the Central Bank 1,281,904
Available Available Premises Intangible Other Statutory assets Total Due deposits Customers’ Other Shareholders’ liabilities and shareholders’ funds Total 4,921,431 On balance sheet gap 6,116,932 2,008,897 interest rate sensitivity gap Total 712,440 Cumulative interest rate sensitivity gap 278,202 (766,594) 1,537 (4,428,366) (2,855,005) 3,748,170 (420,010) 17,787,609 1,488,272 1,805,860 Margin accounts Due from banks from Due Loans and advances to Customers The Bank’s interest sensitivity position based on contractual repricing arrangements at 31
41 NOTES TO THE FINANCIAL STATEMENTS Average 255,772 213,452 102,717 2,548,074 - - 16,806 11% - 10,773 8.2% 56,301 56,301 56,301
- 783,388 3,071,377 4.35% - 2,676,934 4,981,729 - 2,184,367 3.62% - 81,567 - 81,567 - 81,567 - - 1,265,304 - - - 18,683 18,683 - - - 28,610 219,832 2% ------191,222 129,219 249,683 603 - 2,595,367 4,981,729 ------255,772 ------102,717 ------213,452 ------2,548,074 ------month months months to 1 year years years bearing items Total interest rate Up to 1 1 to 3 3 to 6 6 months 1 to 3 Over 3 Non interest 16,806 838,083 (540,145) (129,219) (249,683) (603) 838,083 (540,145) (129,219) (249,683) (603) 2,287,989 ------2,287,989 1,455,939 540,145 129,219 58,461 603 2,304,795 - 10,773 In thousands of Syrian Pounds Cash and balances with the Central Bank
The Bank’s interest sensitivity position based on contractual repricing arrangements at 31 December 2005 was as follows: Due to banks Other assets Statutory blocked fund assets Total Due from banks Loans and advances to Customers Intangible assets Premises Premises and equipment Margin accounts Total interest rate sensitivity gap Total Cumulative interest rate sensitivity gap 838,083 297,938 168,719 (80,964) (81,567) (81,567) Customers’ deposits liabilities and shareholders’ funds Total 1,466,712 On balance sheet gap 540,145 Other liabilities Shareholders’ funds
42 NOTES TO THE FINANCIAL STATEMENTS
5. Currency Risk
Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Bank views the Syrian Pound as its functional currency.
Breakdown of Assets and Liabilities by Currency
31 December 2006 31 December 2005 SYP USD Other SYP USD Other In thousands of Syrian Pounds
ASSETS Cash and balances with the Central Bank 1,732,345 362,337 58,962 1,153,823 98,732 12,749 Due from banks 2,272,627 6,802,542 630,563 337,815 2,664,352 69,210 Loans and advances to customers 3,927,184 802,031 128,448 16,806 - - Available for sale investments 50,000 - - - - - Premises and equipment 436,188 - - 213,452 - - Intangible assets 111,162 - - 102,717 - - Other assets 134,720 94,236 4,740 56,301 - - Statutory blocked funds 21,236 218,288 - 21,236 234,536 -
Total assets 8,685,462 8,279,434 822,713 1,902,150 2,997,620 81,959
LIABILITIES Due to banks and other financial Institutions 42,758 85,037 2,354 15,658 3,025 - Margin accounts 834,052 676,080 3,203 7,762 2,029 982 Customers’ deposits 6,649,153 6,322,790 479,143 1,493,986 612,126 78,255 Other liabilities 110,830 16,770 16,912 27,468 192,364 - Shareholders’ funds 2,548,527 - - 2,548,074 - -
Total liabilities and shareholders’ Equity 10,185,320 7,100,677 501,612 4,092,948 809,544 79,237
Net exposure (1,499,858) 1,178,757 321,101 (2,190,798) 2,188,076 2,722
6. Liquidity Risk
Liquidity risk is the risk that the Bank will be unable to meet its liabilities when they fall due. To limit this risk, management has arranged diversified funding sources, manages assets with liquidity in mind, and monitors liquidity on a daily basis. In addition, the Bank maintains a statutory deposit with the Central Bank of Syria equals to 5% of customer deposits and 10% of the Bank’s capital.
43 NOTES TO THE FINANCIAL STATEMENTS 130,149 17,787,609 436,188 111,162 - 9,705,731 - 4,857,664 - 13,451,087 50,000 50,000 50,000 maturity Total 194,452 233,696 436,188 111,162 239,524 908,173 15,239,082 994,894 2,548,527 - 871,741 2,153,644 - 900,186 1,513,335 - 7,987 144,511 - and does not take account of the effective maturities - rangements - -
------5,706 1,619 6,000 15,474 4,000 6,445 5,706 1,619 6,000 month months months to 1 year years years Up to 1 Up to 3 3 to 6 6 months 1 to 3 Over 3 No specific 37,969 39,066 50,046 7,813 1,630 158,411 58,573 1,140,433 2,338,780 1,061,484 99,983 130,149 - 132,107 415,287 - 65,685 70 (953,804) (3,699,219) 1,529,315 2,442,656 1,910,652 (953,804) 324,033 1,281,903 2,714,522 2,396,587 2,441,825 808,655 1,125,000 219,142 4,814,121 5,701,645 2,008,897 646,755 278,132 1,537 5,114,346 6,155,998 2,058,943 720,253 279,832 1,537 4,160,542 2,456,779 3,588,258 3,162,909 2,190,484 325,570 1,903,067
In thousands of Syrian Pounds
Cash and balances with the Central Bank Net liquidity gap
Intangible assets Other assets assets Total Due to banks Margin accounts Customers’ deposits Other liabilities liabilities Total Due from banks Premises and equipment Loans and advances to Customers Available for sale investments Statutory blocked funds The table below summarises the maturity profile of Bank’s assets and liabilities based on contractual repayment ar as indicated by the Bank’s deposit retention history. The maturity profile of the assets and liabilities at 31 December 2006 was as follows: The maturity profile of the assets and liabilities at 31 December 2006 was as indicated by the Bank’s deposit retention history.
44 NOTES TO THE FINANCIAL STATEMENTS 102,717 102,717 - 1,265,304 - 2,184,367 - 3,071,378 - - - - 28,610 219,832 - 28,610 - 2,433,655 599,632 2,548,074 ------191,222 - - - - - 628,242 4,981,729 4,981,729 628,242 ------16,805 16,805 ------10,773 10,773 ------2,287,990 18,683 ------213,452 213,452 213,452 ------255,772 255,772 255,772 ------102,717 ------56,301 56,301 56,301 56,301 - month months months to 1 year years years maturity Total Up to 1 Up to 3 3 to 6 6 months 1 to 3 Over 3 No specific 16,805 10,773 18,683 783,388 2,287,990 - 580,102 1,747,845 (129,219) (249,683) (603) 1,265,304 - 1,455,939 540,145 129,219 58,461 603 2,065,497 1,485,395 540,145 129,219 249,683 603 funds equipment
assets and blocked accounts banks assets to In thousands of Syrian Pounds Cash and balances with the Central Bank
Due from banks Loans and advances to Loans Customers Premises Intangible Other Statutory assets Total Due Margin Other liabilities Customers’ deposits Net liquidity gap Total liabilities Total The maturity profile of the assets and liabilities at 31 December 2005 was as follows:
45 NOTES TO THE FINANCIAL STATEMENTS
7. Fair Value of Financial Instruments
There are no material differences between carrying values and fair value of on and off-balance sheet financial instruments.
As explained in note 18, included under available for sale investments are unquoted equity investments with a value of SYP 50,000,000 for which fair value cannot be reliably determined due to non existence of an active securities market. There is no indication of impairment in the value of these investments as at the balance sheet date.
8. Interest and Similar Income
2006 2005 In Syrian Pounds
Overdrafts 124,930,394 135,669 Loans and advances to customers 64,362,867 - Discounted bills 18,872,685 - Due from banks 391,764,900 26,166,392
599,930,846 26,302,061
9. Interest and Similar Expenses
2006 2005 In Syrian Pounds
Due to banks 11,060,488 1,583 Customer deposits 306,909,457 7,142,270 Margin accounts 15,340,418 6,527
333,310,363 7,150,380
10. Net Fee and Commission Income
2006 2005 In Syrian Pounds
Fee and commission income 65,107,033 1,175,076 Fee and commission expense (4,653,798) (183,323)
60,453,235 991,753
46 NOTES TO THE FINANCIAL STATEMENTS
11. Personnel Expenses
2006 2005 In Syrian Pounds
Salaries and benefits 96,027,654 35,594,394 Social securities 5,123,112 1,107,440 Training and other expenses 10,471,761 -
111,622,527 36,701,834
12. Other Operating Expenses
2006 2005 In Syrian Pounds
Rental expenses 16,074,289 3,286,284 Advertising and marketing 31,581,890 2,792,546 Stationary and printing expenses 7,291,118 2,539,021 Post, telephone, telex and internet 8,593,539 2,216,619 Credit card expenses 1,615,955 2,200,000 Governmental fees 1,103,736 2,147,615 Consultation and legal fees 3,868,250 1,642,700 Swift expenses 1,297,093 12,096 Development expenses (note 32) 31,960,879 - Maintenance 4,208,212 - Travel and transportation 3,258,212 851,571 Utilities 3,211,890 - Insurance 4,841,510 - Interest expense on balance due to related parties (note 32) 1,246,316 624,945 Other 9,493,342 1,340,730
129,646,231 19,654,127
47 NOTES TO THE FINANCIAL STATEMENTS
13. Income Tax
The relationship between the tax expense and the accounting profit can be explained as follows:
2006 2005 In Syrian Pounds
Accounting profit before tax 36,803,332 48,207,807 Add (subtract) unrealised loss (gain) on difference of exchange (note 29) 107,540,000 (47,674,012) Add key money amortisation 1,058,502 -
145,401,834 533,795
Effective rate of income tax 25% 25%
Current income tax expense 36,350,459 133,448
14. Earnings Per Share
Basic earnings per share are calculated by dividing the net profit for the year by the weighted average number of shares outstanding during the year as follows:
2006 2005 In Syrian Pounds
Profit for the year 452,873 48,074,359
Weighted average number of shares outstanding during the year 2,500,000 625,000 Basic earnings per share 0.18 76.92
Diluted earnings per share have the same figure as the basic earnings per share since the Bank has not issued any instruments which would have an impact on earnings per share when exercised.
48 NOTES TO THE FINANCIAL STATEMENTS
15. Cash and Balances with the Central Bank
2006 2005 In Syrian Pounds
Cash 303,138,484 153,493,591 Current account with the Central Bank of Syria 1,278,996,944 1,068,382,824 Deposits with Central Bank of Syria Deposits reserve (*) 571,508,903 43,427,350
2,153,644,331 1,265,303,765
(*) According to banking laws and regulations, banks are required to maintain a cash compulsory reserve with the Central Bank of Syria in the form of non-interest bearing deposits. The cash compulsory reserve maintained at the Central Bank of Syria as at 31 December 2006 amounted to SYP 571,508,903 (2005:SYP 43,427,350), which represents 5% of total customers’ deposits as per decree number 72/MN/84 dated 9 December 2004.
16. Due from Banks
2006 2005 In Syrian Pounds
Current accounts 924,112,515 461,485,543 Checks under collection 97,532,352 321,902,894 Placements 6,764,943,789 2,287,988,593 Certificates of deposit - local banks (*) 1,700,000,000 - Certificates of deposit - foreign banks (*) 219,142,335 -
9,705,730,991 3,071,377,030
(*) Does not include accrued interest which is shown separately within other assets (note 21).
During 2006 the Bank purchased certificates of deposit issued by local banks. The certificates of deposit carry an annual interest rate ranging between 9% and 10% and have the following maturities as at 31 December 2006:
Maturing in Book Value In Syrian Pounds
2007 575,000,000 2008 625,000,000 2009 500,000,000
1,700,000,000
49 NOTES TO THE FINANCIAL STATEMENTS
Moreover, the Bank purchased through Bank Audi sal certificates of deposit (Euro CDs) issued by foreign banks. The certificates of deposit carry an annual interest rate 7.625% and have the following maturities as at 31 December 2006:
Maturing in Book Value In Syrian Pounds
2010 101,334,250 2012 117,808,085
219,142,335
17. Loans and Advances to Customers
2006 2005 In Syrian Pounds
Overdrafts 2,288,284,423 16,805,612 Loans 1,973,767,814 - Discounted bills 697,098,150 - Unearned revenue (101,486,855) -
4,857,663,532 16,805,612
The composition of the loans and advances portfolio is as follows:
2006 2005 In Syrian Pounds
Trading and manufacturing 4,205,370,240 - Private individuals 53,599,930 - Construction and real estate 418,641,238 16,805,612 Other 180,052,124 -
Total 4,857,663,532 16,805,612
All loans were granted to customers in the Syrian Arab Republic and secured by real estates and personal guarantees.
18. Available for Sale Investments
Available for sale investments represent 5% equity shares in the Syrian Arab Insurance Company sa purchased by the Bank during the year. The investment is stated at cost due to non-existence of an active securities market, unpredictable nature of cash flows and lacks of suitable other methods for arriving to a reliable fair value.
50 NOTES TO THE FINANCIAL STATEMENTS
19. Premises, Equipment and Projects under Construction
The estimated useful lives of the assets for the calculation of depreciation are as follows:
Premises and leasehold improvements 20 to 25 years Furniture and equipment 5 to 10 years
Projects under construction are not depreciated until the relevant assets are completed and put into operational use.
Premises & leasehold Furniture Projects under improvements equipment construction Total In Syrian Pounds
Cost At 1 January 2006 55,519,140 64,487,094 93,445,772 213,452,006 Additions 45,383,459 112,875,994 94,758,767 253,018,220 Transfers 146,309,325 - (146,309,325) -
At 31 December 2006 247,211,924 177,363,088 41,895,214 466,470,226
Depreciation: At 1 January 2006 - - - - Provided during the year 8,857,432 21,424,503 - 30,281,935 Disposals - - - -
At 31 December 2006 8,857,432 21,424,503 - 30,281,935
Net book value: At 31 December 2006 238,354,492 155,938,585 41,895,214 436,188,291
At 31 December 2005 55,519,140 64,487,094 93,445,772 213,452,006
51 NOTES TO THE FINANCIAL STATEMENTS
20. Intangible Assets
The estimated useful lives of the intangible assets for the calculation of amortisation are as follows:
Computer softwares 5 years Key money 70 years
Computer software Key money Total In Syrian Pounds Cost At 1 January 2006 13,803,356 88,914,186 102,717,542 Additions 13,418,493 - 13,418,493 Disposals - - -
At 31 December 2006 27,221,849 88,914,186 116,136,035
Amortisation: At 1 January 2006 - - - Provided during the year 3,915,485 1,058,502 4,973,987 Disposals - - -
At 31 December 2006 3,915,485 1,058,502 4,973,987
Net book value: At 31 December 2006 23,306,364 87,855,684 111,162,048
At 31 December 2005 13,803,356 88,914,186 102,717,542
21. Other Assets
2006 2005 In Syrian Pounds
Sundry debtors and prepayments 40,544,160 50,999,954 Interest receivable 192,071,630 4,965,130 Other 1,080,271 335,780
233,696,061 56,300,864
22. Statutory Blocked Funds
As per section B of article 12 of law number 28 for the year 2001, private sector banks should keep 10% of their capital as a legal blocked fund at the Central Bank of Syria. The fund is interest free rate.
As at 31 December 2006 blocked funds at the Central Bank of Syria were as follows:
52 NOTES TO THE FINANCIAL STATEMENTS
2006 2005 In Syrian Pounds
Funds in Syrian Pounds 21,235,700 21,235,700 Funds in United States Dollars 218,288,178 234,536,857
239,523,878 255,772,557
23. Due to Banks
2006 2005 In Syrian Pounds
Current account (*) Local banks 83,231,391 18,682,756 Foreign banks 46,918,014 -
130,149,405 18,682,756
(*) Does not include interest payable which is shown separately within other liabilities (note 26).
24. Margin Accounts
2006 2005 In Syrian Pounds
Direct credit facilities 11,836,327 - Indirect credit facilities 1,501,498,253 10,772,544
1,513,334,580 10,772,544
25. Customers’ Deposits
2006 2005 In Syrian Pounds
Current accounts 4,387,322,006 999,185,193 Time and demand deposits 8,601,776,453 1,138,040,704 Saving deposits 461,988,525 47,141,565
13,451,086,984 2,184,367,462
Amounts do not include interest payable which is included in note 26.
53 NOTES TO THE FINANCIAL STATEMENTS
26. Other Liabilities
2006 2005 In Syrian Pounds
Unearned revenue 4,022,221 - Interest payable 70,840,329 5,905,308 Staff related provisions 8,199,521 3,243,525 Accrued expenses 7,777, 11,937,136 Income tax withheld 10,562,413 533,037 Due to related parties (note 32) - 190,597,168 Current income tax payable (note 13) 36,350,459 133,448 Accounts payable and sundry creditors 6,758,362 7,482,633
144,510,931 219,832,255
27. Share Capital
The authorised, issued and fully paid share capital as at 31 December 2006 comprised 2,500,000 shares of SYP 1,000 par value each.
The authorised, issued and fully paid share capital is divided into two categories:
1- Category A: These are the stocks that shall be owned by Syrian individuals or Syrian companies and are paid in Syrian Pounds, except for non-resident Syrian individuals who shall pay the value of shares in foreign currency at neighbouring countries free rate of exchange. These shares amount to 51% of the Bank’s share capital.
2- Category B: These are the stocks that can be owned by foreign individuals or companies based on the parliament decision, the value of these shares shall be paid in foreign currencies. These shares amount to 49% of the Bank’s share capital.
Bank Audi sal shares are from category B and represent 47% of the Bank’s share capital.
28. Reserves
- Statutory Reserve The statutory reserve was computed as 10% of the profit for the year after unrealised gain or loss on difference of exchange. The Bank may resolve to discontinue such annual transfer when the statutory reserve becomes equal to 50% of the Bank’s capital. This reserve is not available for distribution to the shareholders.
- Special Reserve Special reserve was computed as 10% of profit for the year after unrealised gain or loss on difference of exchange. The Bank may resolve to discontinue such annual transfer when the special reserve becomes equal to 100% of the Bank’s capital. This reserve is not available for distribution to the shareholders.
54 NOTES TO THE FINANCIAL STATEMENTS
Statutory and special reserves for the year were computed as follows:
2006 2005 In Syrian Pounds
Profit before tax 36,803,332 48,207,807 Add (subtract) unrealised foreign exchange loss (gain) 107,540,000 (47,674,012) Less current income tax expense (36,350,459) (133,448)
107,992,873 400,347
Statutory reserve 10% 10,799,287 40,035
Special reserve 10% 10,799,287 40,035
29. (Accumulated Losses) Retained Earnings not Available for Distribution
In accordance with resolutions of the Monetary and Credit Council number (182/MN/B4) and (249/MN/B1) dated 23 January 2006 and 26 December 2006 respectively, unrealised gains and losses on difference of exchange are not subject to income tax until they are realised, in addition such gains and losses shall be retained and are not available for distribution to shareholders as dividends until they are realised.
30. Non-Recurring Income
Amount represents reimbursement of costs incurred by the Bank from Bank Audi sal. The transaction was executed in foreign currency with an amount of US$ 670,000 on 31 December 2005.
31. Cash and Cash Equivalents
Cash and cash equivalents included in the statement of cash flows comprise the following balance sheet amounts:
2006 2005 In Syrian Pounds
Cash and balances with the Central Bank 2,153,644,331 1,265,303,765 Due from banks with an original maturity of less than ninety days 5,111,108,902 3,071,377,030 Due to banks with an original maturity of less than ninety days (130,149,405) (18,682,756)
7,134,603,828 4,317,998,039
55 NOTES TO THE FINANCIAL STATEMENTS
32. Related Party Transactions
The Bank enters into transactions with major shareholders, directors, senior management and their related concerns in the ordinary course of business at commercial interest and commission rates.
The year end balances in respect of related parties included in the financial statements are as follows:
2006 2005 In Syrian Pounds
Due to Bank Audi sal - 190,597,168 Bank Audi sal current account at Bank Audi Syria sa 286,869 - Current accounts at Bank Audi sal 392,949,353 290,406,635 Placements at Bank Audi sal 2,048,220,848 1,780,071,513 Interest payable on balance due to Bank Audi sal 846 624,945 Investment at the Syrian Arab Insurance company 50,000,000 - Balances for the Syrian Arab Insurance company at Bank Audi Syria sa 585,269,818 -
The income and expenses in respect of related parties included in the financial statements are as follows:
2006 2005 In Syrian Pounds
Interest income on placements at Bank Audi sal 171,668,061 21,241,520 Interest expense on amounts due to Bank Audi sal 1,246,316 624,945 Reimbursements of costs by Bank Audi sal - 36,749,500 Gain arising from trading activities (*) 122,520,000 - Development expenses (**) 31,960,879 -
(*) During December 2006 the Bank purchased from Bank Audi sal certificates of deposit (Euro CDs) and held them for trading. The Bank sold back to Bank Audi sal these Euro CDs. (**) Amount represents cost incurred by the Bank and fully paid by Bank Audi sal on behalf of the Bank, in accordance with the technical assistance agreement, which is explained in note (1) to the financial statements.
Compensation of key management personnel is as follows:
2006 2005 In Syrian Pounds
Basic salaries 7,757,260 6,407,499 Other short-term benefits 8,476,223 4,892,249
Total compensation paid to key management personnel 16,233,483 11,299,748
56 NOTES TO THE FINANCIAL STATEMENTS
33. Commitments and Contingent Liabilities
Credit-related commitments Credit-related commitments include commitments to extend credit, standby letters of credit, guarantees and acceptances which are designed to meet the requirements of the Bank’s customers.
Letters of credit, guarantees (including standby letter of credit) and acceptances commit the Bank to make payments on behalf of customers contingent upon the failure of the customer to perform under the terms of the contract.
Commitments to extend credit represent contractual commitments to make loans and revolving credits. Commitments generally have fixed expiration dates, or other termination clauses. Since commitments may expire without being drawn upon, the total contract amounts do not necessarily represent future cash requirements.
The Bank has the following credit related commitments:
2006 2005 In Syrian Pounds
Commitments on behalf of customers: Letters of credit 595,447,285 1,935,152 Guarantees 523,297,637 110,226,356 Acceptances 363,095,394 - Commitments on behalf of banks: Letters of credit 165,549,822 - Guarantees 521,558,052 -
2,168,948,190 112,161,508
Irrevocable commitments to extend credit: Original term to maturity of one year or less 1,395,253,929 183,000,000
3,564,202,119 295,161,508
34. Reclassifications
Some of 2005 balances were reclassified to correspond with 2006 presentation; such reclassifications do not affect previously reported profit or shareholders’ equity.
57
HEAD OFFICE
Bank Audi Syria sa Headquarters, Muhafaza Bldg., Youssef Al-Azmeh Square, Damascus. P.O. Box: 6228 Tel: (963-11) 23 888 000 - Fax: (963-11) 224 85 10 E-mail: [email protected]
BRANCH NETWORK
Muhafaza (Main Branch) Muhafaza Bldg., Youssef Al-Azmeh Square, Damascus. Tel: (963-11) 23 888 000 - Fax: (963-11) 224 77 82 Manager: Mr. Bechara Charbel
Abu Rummaneh Kanawati Bldg., 7 Al-Jalaa Street, Damascus. Tel: (963-11) 334 64 04/6/7 - Fax: (963-11) 334 64 10 Manager: Ms. Samar Farha
Mazzeh Al-Muhandes Al-Arabi Bldg., Mazzeh Highway, Damascus. Tel: (963-11) 662 66 12/3/4/5/6/7 - Fax: (963-11) 662 66 19 Acting Manager: Mr. Bechara Chalouhi
Aleppo (Aziziyah temporary branch) Amin Al-Rihani Street (near Shabab Al Ourouba Club), Aziziyah, Aleppo. Tel: (963-21) 227 98 01/2/3/4/5/6 - Fax: (963-21) 227 98 09 Manager: Mr. Melhem Abou-Antoun
Lattakia Bldg. 896/1, Al-Jazair Street, Old Port Area, Slaybeh, Lattakia. Tel: (963-41) 486023 - Fax: (963-41) 486024 Manager: Mr. Mohamad Sahyouni
59