Annual Report 2001 Arab Banking Corporation Group
The premier international Arab financial group
The new synergies of ABC Group ARAB BANKING CORPORATION Annual Report 2001 our vision 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 CREATE AND MAINTAIN:
❊ A strong presence in the Arab world and achieve optimal diversification of our earning stream
❊ A strong risk management process
❊ An effectively managed expense base focused on generating increasing shareholder value
❊ A strong and liquid financial institution with emphasis on asset quality
1 Annual Report 2001 ARAB BANKING CORPORATION
Financial Highlights moving forward by increasing shareholder value 2001 2000
EARNINGS Net interest income 469 433 Other operating income 293 280 (US$ MILLION) Gross operating income 762 713 Profit before provisions, tax and minority interests 288 262 Provisions for credit losses (128) (66) Profit before tax and minority interests 160 196 Net profit for the year 102 127
FINANCIAL POSITION Total assets 26,586 26,676 Loans and advances 14,225 14,039 (US$ MILLION) Placements with banks and other financial institutions 6,444 7,060 Trading securities 341 713 Non Trading securities 3,616 3,030 Shareholders’ funds 1,913 1,904
RATIOS Profitability Cost: Income ratio 62 63 (%) Net profit as % of average equity 5.4 6.8 Net profit as % of average assets 0.38 0.50 Dividend cover (times) 1.55 1.93
Capital Risk weighted assets (US$ million) 17,932 17,526 Risk asset ratio - Tier 1 11.8 11.8 Risk asset ratio – Total 13.5 13.5 Average shareholders’ funds as % of average total assets 7.2 7.4 Loans and advances as a multiple of shareholders’ funds (times) 7.4 7.4 Total debt as a multiple of shareholders’ funds (times) 12.7 12.8 Loans and advances as % of total assets 53.5 52.6 Securities as % of total assets 14.9 14.0 Non-accrual loans as % of gross loans 4.5 4.7 Loans loss provisions as % of non-accrual loans 94.8 89.3 Loan loss provisions as % of gross loans 4.3 4.2
Liquidity Liquid assets ratio 40.8 42.0 Deposits to loans cover (times) 1.5 1.5
SHARE INFORMATION Earnings per share $1.08 $1.35 Dividends paid per share (for previous year) $0.70 $0.60 Net asset value per share $20.32 $20.23
CAPITALISATION AND Authorised 1,500 PRINCIPAL SHAREHOLDERS Issued, Subscribed and fully paid-up 1,000 (US$ MILLION)
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, Kingdom of Bahrain Individual and Institutional Investors Publicly quoted company listed on Bahrain and Paris Stock Exchanges. (Commercial Registration Number 10299)
2 ARAB BANKING CORPORATION Annual Report 2001
Corporate Governance Global 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 Essam El Wakil, SVP Group Treasurer BANKING GROUP
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 Investment Coordinator ( Arab Banking Corporation - Egypt (S.A.E.)
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, Tehran & Tripoli (Libya) Banco Atlántico, S.A. Manuel Montecelos, Chief Executive Officer
International Division George K. Morton, SVP ( Banco Atlántico Panama, S.A. ( 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
Human Resources & Administration ( Arab Banking Corporation Daus & Co. GmbH Legal & Compliance ABC International Bank plc ( Operations ( London Branch Planning & Financial Controls Paris Branch Premises & Engineering ( Representative Offices: Houston & Los Angeles CREDIT & RISK GROUP Richard Cumberland, SVP Chief Credit & Risk Officer
Credit Department ( Economics Remedial Loans
Risk Management
3 Annual Report 2001 ARAB BANKING CORPORATION
Corporate Governance Global Network
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
Arab Banking Corporation – Arab Banking Corporation Arab Banking Corporation – Arab Banking Corporation – Algeria (Jordan) Tunisie, S.A. Daus & Co GmbH 2001 Highlights US$ millions 2001 Highlights US$ millions 2001 Highlights US$ millions 2001 Highlights US$ millions
Total Assets 361 Total Assets 435 Total Assets 123 Total Assets 538 Total Loans and Total Loans and Total Loans and Total Loans and Advances 72 Advances 171 Advances 75 Advances 45 Total Deposits 293 Total Deposits 367 Total Deposits 97 Total Deposits 473 Shareholders’ Funds 36 Shareholders’ Funds 39 Shareholders’ Funds 13 Shareholders’ Funds 60 Number of Branches 4 Number of Branches 17 Number of Branches 3 Number of Branches –
ABC Islamic Bank (E.C.) Arab Banking Corporation – ABC International Bank plc Egypt (S.A.E.) 2001 Highlights US$ millions 2001 Highlights US$ millions 2001 Highlights US$ millions Total Assets 185 Total Assets 2,052 Total Assets 468 Total Loans and Total Loans and Advances 135 Total Loans and Advances 1,172 Advances 245 Total Deposits 125 Total Deposits 1,108 Total Deposits 381 Shareholders’ Funds 59 Shareholders’ Funds 314 Shareholders’ Funds 45 Number of Branches – Number of Branches 2 Number of Branches 8
4 ARAB BANKING CORPORATION Annual Report 2001 moving forward through Group-wide synergy
INVESTMENT GROUP THE ABC GROUP
Banco ABC Brasil S.A. International Bank of ABC Parent (ABC BSC) Asia Limited 2001 Highlights US$ millions 2001 Highlights US$ millions 2001 Highlights US$ millions
Total Assets 1,534 Total Assets 3,669 Total Assets 11,446 Total Loans and Total Loans and Total Loans and Advances 4,402 Advances 1,174 Advances 2,101 Total Deposits 8,331 Total Deposits Total Deposits 1,265 2,902 Shareholders’ Funds 1,913 Shareholders’ Funds 193 Shareholders’ Funds 469 Number of Branches 5 Number of Branches 24
Banco Atlantico S.A. ABC Securities (Egypt) S.A.E ABC Group
2001 Highlights US$ millions 2001 Highlights US$ millions 2001 Highlights US$ millions
Total Assets 8,063 Total Assets 26 Total Assets 26,586 Total Loans and Total Loans and Total Loans and Advances 14,225 Advances 4,743 Advances – Total Deposits 21,465 Total Deposits 6,873 Total Deposits – Shareholders’ Funds 1,913 Shareholders’ Funds 479 Shareholders’ Funds 25 Number of Branches 284 Number of Branches –
5 Annual Report 2001 ARAB BANKING CORPORATION
Corporate Governance Board of Directors
The Board of Directors is responsible for the overall direction, supervision and control of the Group. 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 (usually eight times a year) 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 reviews the Group's strategy and financial plans, any significant changes in the Group's structure and organisation, reports provided to it on the operations of the Group (with a focus on risk management and exposure) and the performance of executive management. 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 responsible 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 responsibilities. Directors are appointed by the share- holders 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. Khalifa Mohammed Al-Kindi * 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 Director of International Bank of Asia Ltd., Hong Kong. Past Director of Banco Atlántico, S.A., Spain. He has been a Director of ABC since 1992 and has over 15 years' experience as an invest- ment banker as well as holding a number of directorships in various public corporations.
Mr. Farhat Omar Ekdara * Deputy Chairman Libyan. B.A. in Economics, Garyounis University, Libya; Master in Money, Banking and Finance, Sheffield University, U.K. Deputy Governor, Libyan Central Bank; Chairman and General Manager, Public Furniture Company, Libya; Deputy Chairman of Wahda Bank, Libya; Deputy Chairman of Arab Banking Corporation – Egypt (S.A.E.) and Chairman of ABC International Bank plc, London. Mr. Ekdara has been a Director of ABC since 2001 and has 18 years’ experience in banking and other business sectors.
Mr. Hilal Mishari Al-Mutairi * Deputy Chairman Kuwaiti. B.Sc. in Economics, Alexandria University, Egypt. Second Vice Chairman, Kuwait Chamber of Commerce & Industry and Director of Kuwait Investment Authority. Past offices include Minister of Trade and Industry of Kuwait; General Manager of Kuwait Investment Company and of Kuwait Clearance Company, in addition to membership of various boards of domestic, regional and international investment and financial institutions. Mr. Al-Mutairi is also the Deputy Chairman of ABC International Bank plc, U.K. He has been a Director of ABC since 2001 and has more than 35 years of commercial and financial industry experience.
Mr. Abdallah Saud Al Humaidhi * Director Kuwaiti. M.S. American University of Beirut. Chairman and Managing Director, Commercial Facilities Company, Kuwait and Member of the Board and the Executive Committee of Kuwait Investment Authority. Mr. Al Humaidhi is also a Member of the Board of Kuwait Chamber of Commerce & Industry, in addition to holding several directorships of companies and public authorities in Kuwait. He has been a Director of ABC since 2001 and has over 20 years’ experience in the banking and investment sectors.
Dr. Saleh Helwan Al Humaidan Director. Saudi. Ph.D. in Agricultural Economics, Oklahoma State University, U.S.A. General Manager, Arab Investment Company, Riyadh; Member of the Boards of Saudi International Petrochemical Company, Jubail and Saudi Shares Investment Fund, London, U.K.; Chairman, Saudi Moroccan Development Investment Company, Casablanca. Dr. Humaidan is also a Director of Arab Banking Corporation Jordan. He has over 25 years of experience in the economic and investment fields gained through his work at the Saudi Arabian Ministry of Planning, the Saudi Development Fund, the Arab Investment Company and his participation in many conferences and forums related to investment and developing capital markets in Arab countries. He joined ABC as a Director in 2001.
6 ARAB BANKING CORPORATION Annual Report 2001
Corporate Governance Board of Directors
Dr. Anwar Ali Al-Mudhaf ** Director Kuwaiti. B.A., Kuwait University; M.B.A. and Ph.D. in Finance, Peter F. Drucker Graduate School of Management, Claremont Graduate University, California, U.S.A. Dr. Al-Mudhaf is currently the General Manager of Kuwait Health Insurance Company and a lecturer in corporate finance, investment management 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 has also provided his expertise to the Kuwaiti Parliament’s Finance and Economic Committee and is on the Board of Governors of Oxford Institute for Energy Studies. Dr Al-Mudhaf is also the Chairman of International Bank of Asia Ltd., Hong Kong and Director of Arab Banking Corporation Egypt (S.A.E.). He joined ABC's Board in December 1999 with more than 10 years’ experience.
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 10 years’ experience in investment and commercial banking.
Mr. Eissa Mohammed Al Suwaidi * ** 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 Ltd., 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.
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 of Accounting and Investments at the Central Bank of Libya; former Undersecretary of the Ministry of Planning, Economy and Commerce, Libya. Also a Director of Banco Atlántico, S.A., Spain and Arab Banking Corporation (Tunisie). Dr. El-Arbah has been a Director of ABC since 1996 and has over 30 years' experience in central government. Dr. El-Arbah previously held a chair in MacroEconomics from the University of Gharian (Libya).
Mr. 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 ABC International Bank plc, U.K and ABC Securities (Egypt) S.A.E. Mr. Juma has been a Director of ABC since 1994. He has more than 25 years' experience as a senior commercial banker.
Mr. Mohammed Layas * Director Libyan. B.A. Accounting and Business Management, University of Benghazi, Libya; Diploma of the Institute of Economic Development, Washington, U.S.A. Chairman and General Manager, Libyan Arab Foreign Bank. Also Deputy Chairman, British Arab Commercial Bank, London, U.K.; Deputy Chairman, Banque Inter Continentale Arabe, Paris, France; Director of Arab International Bank, Cairo, Egypt in addition to membership of the boards of several other banks and investment companies. Mr. Layas, who is also Director of Banco Atlántico, S.A., joined the Board of ABC in 2001 with over 35 years' experience in international banking.
Mr. Adnan Ahmed Yousif ** Director Bahraini. M.B.A. in Business Administration, Hull University, U.K. Chief Executive Officer of Bahrain Islamic Bank, Bahrain, Chairman of AlBaraka Bank Lebanon and Banque Al Baraka D’Algerie. Mr. Yousif also sits on the boards of several other Middle East banks. He joined the Board of ABC in 2001 and has more than 25 years of experience as a senior international banker.
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.
* Member of the Executive Committee ** Member of the Audit Committee
7 Annual Report 2001 ARAB BANKING CORPORATION
Corporate Governance Board of Directors
Board Committees Specific responsibilities have been delegated to the Board committees. The two principal Board committees are:
Executive Committee Mr. Khalifa Mohammed Al-Kindi (Chairman) Mr. Farhat Omar Ekdara (Deputy Chairman) Mr. Hilal Mishari Al-Mutairi (Deputy Chairman) Mr. Abdallah Saud Al Humaidhi Mr. Eissa Mohammed Al Suwaidi Mr. Hassan A. Juma Mr. Mohammed Layas The Executive Committee exercises all of the responsibilities of the Board between its meetings.
Audit Committee Mr. Eissa Mohammed Al Suwaidi (Chairman) Dr. Saleh Lamin El-Arbah Dr. Anwar Ali Al-Mudhaf Mr. Adnan Ahmed Yousif
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. The Audit Committee achieves this by ensuring that there is a regular review of the adequacy and effectiveness of the internal control procedures. The Committee also monitors compliance with the requirements of the regulatory authorities in the various countries in which ABC Group operates. Audit Committee meetings are held at least four times a year (six meetings were held in 2001). Selected members of management are invited to meetings to discuss relevant issues. The Committee also meets regularly with the Internal and External Auditors. 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 various regulatory authorities, reports by External Auditors and other external consultants on specific investigative or advisory engagements, and all management letters from the External Auditors. The Committee also reviews the annual audit plans and makes recommendations to the Board regarding the appointment and retirement of External Auditors. The Committee is kept informed of legal, compliance and regulatory matters as they arise. The Committee also reviews the adequacy of loan loss provisions. The Group Internal Audit Department is responsible for providing an independent opinion on the quality of the assets booked in the various units of ABC. Group Internal Audit also has the responsibility to review all aspects of operations in the various offices of ABC. These objectives are achieved by it performing independent examinations of operations and lending activities in each of ABC’s operating units. The frequency and scope of reviews for any given business unit are determined by a number of factors including the level of financial, operational and credit risk associated with that unit, together with the previous rating assigned to that unit. Group Internal Audit reports directly to the Group Audit Committee. Separate Internal Audit departments have been created in major Group subsidiaries. These departments report to their boards through their respective audit committees.
Senior Management The direct responsibilities of the members of the Group's Senior Management, as briefly outlined in the chart on page three, 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 the Steering Committee of the Institute of International Finance Inc., Washington and the Steering Committee for the Gulf Executive Management Strategic Leadership Programme, Bahrain; Chairman of the Islamic Banking Consultative Committee, Bahrain and member of several other consultative or advisory committees. Also Vice Chairman of Banco Atlántico, S.A., Spain, Chairman of the Supervisory Board of Arab Banking Corporation – Daus & Co. GmbH, Germany, Chairman of Arab Banking Corporation (Jordan) and Chairman of Arab Financial Services Company, 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.
8 ARAB BANKING CORPORATION Annual Report 2001
Corporate Governance Senior 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 internation- al commercial and treasury banking. He is Deputy Chairman of Arab Banking Corporation (Jordan), Chairman of Arab Banking Corporation - Algeria and Director of both Arab Banking Corporation - Egypt (S.A.E.) and ABC Securities (Egypt) S.A.E. He has over 25 years’ experience in international commer- cial 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. Member of the Supervisory Board of Arab Banking Corporation – Daus GmbH, Germany, Director of Banco ABC Brasil, S.A. and Lamco E.C., Bahrain. Mr. Morton brings over 25 years’ experience in international commercial banking to the Group. He joined ABC in 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 9 years, earlier with The First Boston Corporation and Saloman Brothers. Director, ABC Securities (Egypt) S.A.E. and Banco Atlántico Monaco S.A.M. Joined ABC in 1998 and has over 30 years' experience in international and investment banking.
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. He is Deputy Chairman of ABC Islamic Bank, Bahrain, and serves on the boards of Arab Banking Corporation - Egypt (S.A.E.), Arab Banking Corporation - Tunisie and ABC Securities (Egypt) S.A.E., ABC Clearing Company, Bahrain and ABC Islamic Fund, Bahrain, in addition to several of the investment and audit committees of those entities. Mr El Wakil has over 25 years’ experience in Treasury Management.
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. 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. Director of Banco ABC Brasil, S.A., he assumed his present position in 1998, and has over 25 years' experience in finance and banking.
Mr. Mounir Ben Slimane Senior Vice President & Legal Counsel Tunisian. Diplômes d'Etudes Approfondies (post graduate degrees) in Law, University of Paris (Sorbonne), France. Avocat 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 appointed Legal Counsel and Head of Legal & Compliance Department in 1996.
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. Certified Information Systems Auditor. Formerly of Citibank N.A., Mr. Abraham joined ABC in 1983 and has over 25 years' experience in internal audit. In addition to his position as Secretary of the ABC Audit Committee he also represents the parent at the Audit Committees of ABC International Bank plc, U.K., Arab Banking Corporation - Daus & Co. GmbH, Germany and Banco Atlántico, S.A., Spain.
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 subsidiary and 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. 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.
Dr. Lulwa Mutlaq Rashid Mutlaq Senior Vice President, Head of Human Resources & Administration Bahraini. BSc in Medical Radiography and M.A. in Community College Education/Vocational Education, Northern Arizona University, PhD in Education and Human Development, Vanderbilt University, U.S.A. Fellow of the Chartered Institute of Personnel and Development (FCIPD), U.K. Also Member of the American Society for Training & Development and of the American Management Association. Dr. Mutlaq joined ABC to head the human resource development section of Human Resources & Administration Department in 1996 after a career in teaching and employee training in both the public and private sectors, in addition to past managerial roles. In January 2001 she assumed responsibility for the Personnel and Administration unit and was appointed head of Human Resources & Administration with effect from December 31, 2001. Dr. Mutlaq currently serves on the boards of several regional societies and associations concerned with human resources and management issues and has 20 years’ experience in her field.
9 Annual Report 2001 ARAB BANKING CORPORATION
Corporate Governance Senior Management
Main Operating Subsidiaries
Mr. Abdulmagid Breish Managing Director & 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., U.S.A. Member of the Guild of International Bankers, U.K. Mr. Breish joined ABC in 1980 and served as Head of Business Development until 1985 before transferring to Tokyo as Chief Representative. In 1988 he took over as Managing Director of ABC Investment & Services Co (E.C.) in Bahrain. In 1991 he assumed the position of General Manager, London Branch of ABC International Bank plc and was appointed the bank's Chief Executive Officer in 1993. He is also Deputy Chairman of the Supervisory Board of Arab Banking Corporation – Daus & Co. GmbH, Germany and of Arab Banking Corporation - Tunisie and a Director of ABC Islamic Bank, Bahrain. Mr. Breish's experience in commercial, investment and Islamic banking spans over 25 years.
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 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 served as Chief Operating Officer in Head Office between 1991 and 1995. He is also Chairman of Net Alliance Co. Ltd., Hong Kong, Member of the Board of Trustees, DePaul University, U.S.A. and Director, Arab Banking Corporation - Egypt (S.A.E.) and IBA Finance Corporation, Philippines.
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.
Control Environment ABC Group is committed to the maintenance and development of a culture of policy and procedural adherence appropriate 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. There are two main areas of business activity within the Group. 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, supervised, 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 under 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 directed 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’ relations, 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 advertising campaigns, occasional shareholders’ newsletters, management of the Group’s Internet website and participation in regional and international conferences and exhibitions, all contribute to informing shareholders
10 ARAB BANKING CORPORATION Annual Report 2001
Corporate Governance
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. It spearheads ABC’s commitment to the enhancement of social and environmental development through the sponsorship of local charitable, healthcare, archaeological and educational causes. Global Information Technology is responsible for global IT strategy and planning and related technical services throughout the Group, assessing the Group’s 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. Its aim is the homogenisation of Group HR strategy, suitably adjusted for local conditions and laws. ABC is cognisant of the ongoing contribution of its worldwide management and staff to its continuous development and progress and that the ultimate success of its strategy is dependent on the quality of its people and the opportunities provided for them for personal growth, so that they may meet the challenges that lay ahead. It is therefore committed to attracting and retaining the most qualified and effective staff, offering them – regardless of gender, ethnic or national origin, age, disability or political affiliation – equality of opportunity to progress and realise their full potential within a performance-based reward system, through planned career development and training in a stimulating and challenging working environment. 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, with the Chief Internal Auditor performing the liaison role of Group Compliance Officer vis-à-vis 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 budgeting process, and ensures that ABC Group fulfils the financial reporting requirements of the BMA. 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.
Monitoring and Corrective Action The Board of Directors has overall responsibility for the Group’s system of internal control and for reviewing its effectiveness. There are well-established and ongoing procedures in place for identifying, evaluating and managing significant risks faced by the Group. These procedures are reviewed regularly by the Board. The system of internal control provides for a documented and auditable trail of account- ability and applies across the Group’s operations. It covers strategic, credit, operational and market risks. The system is designed to ensure effective and efficient operation and compliance with all applicable laws and regulations; to manage, rather than eliminate, risk; and to provide reasonable – although not absolute – assurance against loss or misstatement of financial results. The risk appetite of the Group is determined by the Board, who is responsible for setting acceptable levels of risks to which the Group may be exposed, ensuring that the necessary steps are taken by senior management to identify, measure, monitor and control these risks and for approving the strategy for the managing of risk formulated and submitted to the Board by senior management. Management has the prime responsibility for identifying and evaluating significant risks to the business of the Group and for the design and operation of appropriate internal controls. These risks are assessed on a continuous basis. 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 BMA, ABC has appointed a Compliance Officer and a Money Laundering Reporting Officer. The role of the Compliance Officer is to act as central coordinator for the Group in respect to all matters relating to BMA regulatory reporting and other requirements. This responsibility lies with the Chief Internal Auditor. The Chief Internal Auditor also performs the role of Group Compliance Officer. This compliance function covers the broad areas of corporate governance, adherence to best practices, code of conduct, conflict of interest, etc. The Money Laundering Reporting Officer’s duty is to ensure that sufficient evidence is obtained in all cases to enable the identity of every customer to be satisfactorily established, failing which monies cannot be transferred, and to report any suspicions concerning a customer or account to the BMA and senior management. The MLRO is also responsible for establishing and maintaining appropriate and effective systems, controls and records to ensure compliance with regulatory obligations in regard to money launder- ing. This responsibility lies with the Head of Operations in Head Office, who also performs the role of Group MLRO. 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.
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Risk Management The Group manages risk strategically to build shareholder value. The key to effective risk management is a strong and well-understood risk management culture, supported by ongoing strategy and policy development processes. The Board has delegated its authority for overall risk strategy to the Head Office Credit Committee (HOCC) and the Asset and Liability Committee (ALCO), who determine appropriate strategies and policies and ensure their adherence, and are in turn supported by dedicated Group support divisions. The ALCO sets policy for the management of the overall Group balance sheet in relation to capital ratios, structural hedging and liquidity. Supporting ALCO, Group Treasury is responsible for capital raising, liquidity and structural hedging policies. Operational responsibility for asset and liability management is, where appropriate, delegated to each major subsidiary.
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.
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 loans, contingent obligations, treasury and other activities undertaken by a bank. Direct loans, commitments to extend credit, treasury settlement exposures, derivatives and securities transactions and obligations are all sub- ject 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 counterparties, from sovereign states and central banks to other governmental and financial institutions, correspon- dent banks, multinational and other major corporates, medium-sized and small corporates to family-run businesses and individuals. The Group controls credit risk at transaction, counterparty and portfolio levels through the process of initial approval and granting of credit, subsequent monitoring of counterparty creditworthiness and the active management of credit exposures. 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 executive level, the HOCC must approve Group country, industry and customer credit and counterparty limits within the guidelines of the Group Credit Policy, including any parameters set by the Board. The HOCC must also approve the allocation of Group limits to subsidiaries of the Group, for credits to be extended out of those subsidiaries within those pre-set Group limits. The purpose of these Group limits is both to guard against undue concentrations of exposure in any area – geographical or sectoral – and 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 membership 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, are adjusted to suit local practices and regulatory requirements, and product and sectoral needs. Notwithstanding this, approval by Head Office is mandatory where exposures, individually or in aggregate, exceed the guidelines set out in Group Policies; furthermore, as implied above, exposures are required to adhere to 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 uniform 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 10-grade risk rating system intended ultimately to be eligible for the BIS 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). Below these ratings are ’watchlist’ and ’special mention’ rankings, to assist in the early identification and management of weak credits, followed by ’substandard’, ’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, this implies mandatory write-off of that asset, in all cases. The credit risk rating system is being extended throughout the Group whilst separate policies and procedures, encapsulating a product and portfolio segmentation approach, are being developed for the consumer credit and small and medium-sized enterprise components of the Group’s business. The above risk ratings approach represents a cornerstone in the Group’s credit risk management process and provides the frame- work for: (a) monitoring of portfolio quality and determination of credit risk portfolio management strategies; (b) linkage of credit quality assessment with associated pricing – and thereby the basis for estimation of credit loss provisioning and capital allocation; and (c) determination of the level of approval authorisation. The Group requires collateral to mitigate credit risk where unsecured, or ’clean’, facilities being sought are considered to be beyond prudential limits. This collateral may be in the form of cash, securities, legal charges over the customer’s assets or third-party guarantees. At the end of 2001 assets secured by collateral amounted to US$5,569 million, or 21 per cent of total assets.
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Corporate Governance
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 both 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. In addition, the business units of the Banking Group carry out a quarterly overall assessment of their loan portfolios in conjunction with their 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’ manage- ment being reported to the Head Office Remedial Loans Unit and the respective Division Head, 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 to be taken to reduce exposure and maximise recoveries. These criticised credits are also subjected to occasional 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. In each case, the 10-band in-house rating system is used in conjunction with external agency ratings to determine the Group country limit. The Head Office Credit Department provides senior management with consolidated information on Group exposures to counter- parties, customers, countries and industries. It is also responsible for coordinating credit risk management technology development within the Group, as well as for submitting Group credit policy and procedural amendments and innovations to the HOCC for approval and coordinating their introduction into the various policy manuals in place throughout the business units. The Group continues to follow with keen interest the latest developments in credit risk management and disclosure, in particular the current dialogue taking place between the Basel 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.
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 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, which assesses and manages the market risks arising in its business activities 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.
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Corporate Governance
Managing Market Risk continued The Group currently employs a mix of proprietary systems and purchased applications to quantify, monitor and control market risk. In 2001, ABC completed the acceptance testing of an externally sourced comprehensive market risk management application – RiskWatch by Algorithmics – designed to provide the Group with Value-at-Risk (VaR) computation. Parallel running of the system was begun in 2001 and continues as VaR is integrated into dealing limits and management processes. For the computation of market risk capital the Group presently utilises the standardised methodology, consistent with the Basel Accord and BMA regulations. VaR methodologies, when fully integrated with the risk management process, will permit 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. A liability (or negative) gap exists when liabilities reprice more quickly or in greater proportion than assets during a given period; this tends to benefit net interest income when rates are falling. An asset (or positive) gap exists when assets reprice more quickly or in greater proportion than liabilities during a given period; this tends to benefit net interest income when rates are rising. Interest rate sensitivity may vary during repricing periods and amongst the currencies in which the Group has positions. 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. The effect of interest rate movements is assessed using sensitivity analyses and other modelling techniques. The Group aims to reduce the volatility of net interest income, caused by interest rate fluctuations, by managing the structural balance sheet positions and by entering into derivative hedging transactions as appropriate. 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 2001. Such a low probability event could reduce the next 12 months’ Net Interest Income by US$6.7 million (2000: US$2.5 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 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 Group’s Trading Book Policy statements, foreign exchange rate risk is managed by appropriate limits and stop loss param- eters 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. 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.
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Corporate Governance
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 earnings 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 management 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 maintain- ing 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 a small group of customers. Liquidity management also recognises the impact of potential cash outflows arising from irrevocable commitments to fund new assets. Ultimately it is Group Treasury’s responsibility to oversee all subsidiaries to ensure that they maintain sufficient liquidity to meet their own needs. The overall Group approach to liquidity management is to project liquidity requirements based on both expected and stressed conditions, with the intention of ensuring sufficient funds availability to meet all financial needs, even in times of crisis. Head Office adheres to a formal minimum liquidity guideline of 31 days, which has been endorsed by ALCO and approved by the Board. Liquidity management reporting by ABC’s subsidiaries conforms to all local regulations. The liquidity reports of the major subsidiaries are reviewed daily by the responsible Treasurer. A report on the wholesale units is prepared by Risk Management Department on a weekly basis for presentation to the Head Office ALCO. 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. In the normal course 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 governmental institutions or major corpora- tions) 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. While operational risk can never by wholly eliminated, the Group endeavours to minimise it by ensuring that the appropriate infrastructure, controls, systems and trained and competent people are in place throughout the Group. Dedicated professionals are so placed as to be able to identify and implement best industry practices in the area of operational risk management. 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 reporting, exposures management and reporting, reconciliations and disaster recovery and business continuity planning. 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. Disaster recovery is an aspect of operational risk to which the Group pays close attention. Since the early 1990s, Head Office has ensured that essential operational data maintained centrally in Head Office are backed up in London for reasons of Group security. With the introduction of the new core systems, the backup discipline has been extensively expanded in that all data required for business continuity purposes are now backed up, on separate computers both within the Head Office building itself and elsewhere in Bahrain, in addition to being downloaded hourly to the Group’s computers maintained in London.
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Corporate Governance
Operational Risk continued 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 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 recommend- ing 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 that 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 unenforce- ability, 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 department. 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 BMA 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 who form the membership of the Basel 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’ banking 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 Basel 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 above, 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 has reviewed the second draft document on the New Capital Adequacy Framework released by the Basel Committee on Banking Supervision and provided its response via the BMA; it now awaits the Basel Committee’s release of the final draft document. 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 BIS 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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Group Financial Review
’In what was a difficult year for the global economy in general and several of the Group’s areas of operations in particular - principally the United States and Egypt among the core banking group - the net profit fell by 20 per cent to US$102 million. Nevertheless the Group is pleased to note that its underlying performance continues to deliver steady increases year-on-year in all areas of revenue generation, on a strictly controlled expense base, maintaining the healthy trend established over recent years.’
Income Statement ABC Group’s financial performance in 2001 maintained the trend of recent years, marking steady growth in earnings in almost all areas of business activity. Net interest income grew by 8 per cent, from US$433 million to US$469 million, while non-interest income rose by 4 per cent to US$293 million (2000: US$280 million) on the back of healthy increases in revenues from derivatives and foreign exchange operations. Total operating income rose by 7 per cent to US$762 million (2000: US$713 million). Provisions against loans and advances during 2001 amounted to US$193 million (2000: US$134 million). The net charge, after recoveries of US$65 million (2000: US$68 million), amounted to US$128 million (2000: US$66 million), reflecting the general deterioration of global economic conditions impacting on the Group’s credit exposures, chiefly in the United States, Hong Kong, Spain and Egypt. After accounting for these provisions, net operating income fell by two per cent to US$634 million (2000: US$647 million). Operating expenses rose by 5 per cent to US$474 million (2000: US$451 million). Staff expenses were slightly up by $10 million, mainly from early retirement charges at Banco Atlántico pursuant to its ongoing re-engineering project, personnel recruitment at International Bank of Asia and ABC Bahrain and salary adjustments in Brazil, New York and Jordan. Increased expenditure on new systems and property refurbishment in London and Hong Kong, and generally in the North African subsidiaries, was also evident. However, as a consequence of the greater increase in operating income, the overhead expense (cost: income) ratio reverted to the 62 per cent (2000: 63 per cent) seen in prior years. The share of profit attributable to minority interests in subsidiaries fell slightly to US$35 million (2000: US$36 million), mainly as a result of reduced profits at Banco Atlántico. Taxes on operations outside Bahrain fell to US$23 million (2000: US$33 million) for substantially the same reason, supplemented by a reduction in the tax charge at International Bank of Asia. Following these deductions, the net profit fell by 20 per cent to US$102 million (2000: US$127 million), in what was a difficult year for the global economy in general and several of the Group’s areas of operations in particular - principally the United States and Egypt among the core banking group. Nevertheless the Group is pleased to note that its underlying performance continues to deliver steady increases year-on-year in all areas of revenue generation, on a strictly controlled expense base, thus maintaining the healthy trend established over recent years.
Sources and Uses of Funds Total liquid assets, including marketable securities, together with placements and liquid funds, fell by 3 per cent to US$10,863 million (2000: US$11,212 million), largely the result of a 9 per cent decrease in money market placements, whilst deposits from the inter-bank market fell by 13 per cent. Customer deposits including CDs meanwhile, building on the 11 per cent expansion of 2000, were up a further 10 per cent or US$1,141 million, attributable to Bahrain and other Arab world and European business units. Total deposits included US$2,213 million (2000: US$2,865 million) relating to sale and repurchase agreements. Total placements, together with liquid funds of US$462 million (2000: US$409 million), represented 26 per cent (2000: 28 per cent) of total assets. Together with marketable securities, liquid assets represented 41 per cent (2000: 42 per cent) of total assets. The total assets of the Group in 2001 fell slightly to US$26,586 million (2000:US $26,676 million). Average assets were US$26,327 while average liabilities, excluding shareholders’ equity and minority interest, amounted to US$24,430 million.
Total Assets US$ millions Operating Profits US$ millions
97 98 99 00 01 97 98 99 00 01 23,582 26,064 24,358 26,676 26,586 338 322 261 262 288
23 Annual Report 2001 ARAB BANKING CORPORATION
Group Financial Review
The Group’s overall loan exposure grew marginally to US$14,225 million (2000: US$14,039 million) as significant portfolio expansion in the Arab world domestic subsidiaries and ABC Brasil was offset by somewhat reduced lending activity in the European wholesale banking units and Hong Kong. Deposits from customers including CDs grew by 10 per cent to US$12,841 million (2000: US$11,700 million). Deposits from banks and financial institutions, as mentioned above, declined to $8,703 million (2000: $10,058 million). As a result, the Group’s total loans to deposits ratio increased slightly from 65 per cent to 66 per cent. Term funding totalled US$1,817 million (2000: US$1,692 million), reflecting modest sums raised during the year by International Bank of Asia and Banco Atlántico, while the parent bank and other units adopted strategies aligned with declining global interest rates.
Commitments, Contingent Liabilities and Other Off-Balance Sheet Items At the end of 2001, ABC Group’s consolidated off-balance sheet items stood at US$24,011 million (2000: US$23,004 million). The total credit risk-weighted asset equivalent of commitments and contingent liabilities and derivatives was US$2,893 million (2000:US $2,591 million). The total volume of documentary credits, acceptances and guarantees undertaken during the year was US$7,460 million (2000: US$7,561 million), 49 per cent (2000: 48 per cent) of which related to the Arab world. The Group uses a range of derivative products for the purposes of hedging and servicing customer-related requirements, as well as for proprietary trading purposes. The total market risk-weighted equivalent of the exposures under these categories at the end of 2001 was US$621 million (2000: US$566 million).
Geographical and Maturity Distribution of the Balance Sheet In 2001, ABC Group’s total assets in the Arab world were stable, although the proportion of its liabilities there increased, mainly through increases in customer deposits taken. Its activities (through the subsidiaries in the Investment Group) in Latin America also increased, whilst those in Asia and Western Europe fell proportionately.
Assets Liabilities (per cent) 2001 2000 2001 2000 Arab world 17 18 42 39 Western Europe 39 39 32 33 Asia 17 17 12 14 North America 15 15 3 4 Latin America 11 9 9 8 Others 1 2 2 2 100 100 100 100
Earning Assets Loans and Advances (per cent) 2001 2000 2001 2000 Arab world 16 17 18 18 Western Europe 40 38 37 36 Asia 17 18 18 21 North America 16 16 12 12 Latin America 10 9 14 12 Others 1 2 1 1 100 100 100 100
An analysis of the maturity profiles of assets and liabilities shows that, at the end of 2001, 55 per cent (2000: 54 per cent) of assets and 81 per cent (2000: 80 per cent) of liabilities did not exceed one year’s maturity. Loans and advances maturing in less than one year amounted to 43 per cent (2000: 44 per cent) of all loans and advances.
24 ARAB BANKING CORPORATION Annual Report 2001
Group Financial Review
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 unpaid interest thereafter being excluded from income. 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. In 2001 ABC made further headway in reducing its earlier exposure to the countries most affected by the Asian crisis and its aftermath. The exposed business units, working under the coordination and guidance of the Head Office Remedial Loans Unit, have now reduced total Group exposure to China, Indonesia, Thailand, Pakistan and Russia from US$902 million in 1998 to US$160 million in 2001. A US$205 million reduction was achieved over the year, mainly through debt rescheduling and restructuring, asset sales or swaps, repayments and recoveries from bankruptcy proceedings where these were unavoidable. Significant write-offs from existing provisions were a natural but unavoidable by-product of this process. Over the last few years, the Group has taken action to limit its exposure to potentially troubled areas, through the strict application of country caps established at Head Office and allocated throughout the Group units under centralised control. In this manner the exposure to Turkey and Argentina, for example, has been maintained within prudential levels and under constant scrutiny. The events in Argentina in particular are being closely monitored, although the Group is comforted by the fact that its exposure is chiefly to the local branches of prime international banks. Nevertheless, concerns naturally remain in view of the government’s current freeze on foreign currency payments. The global downturn – stemming principally from that experienced in the United States – also took its toll on the Group, as indicat- ed in the Directors’ Report. The provisions taken against the accumulated exposures in the New York and London business units to Enron Corporation, though relatively small in total, when added to those taken against other corporates experiencing difficulties in the United States, Hong Kong, Egypt and Europe, clearly impacted on this year’s consolidated net profit. The total of all loans placed on non-accrual status at the end of 2001 decreased by 4 per cent to US$667 million over the year (2000: US$694 million). Aggregate provisions at the end of 2001 amounted to US$632 million (2000: US$620 million). They constituted 95 per cent (2000: 89 per cent) of all non-performing loans and 4.3 per cent (2000: 4.2 per cent) of all loans and advances. An ageing analysis is given below in respect of all loans and advances placed on non-accrual, together with their related provisions:
($ millions) Principal Provisions Book Value Less than 3 months 124 43 81 3 months to 1 year 74 30 44 1 to 3 years 99 57 42 Over 3 years 370 314 56 667 444 223
Group Capital Structure and Capital Adequacy Ratios ABC Group’s tier 1 capital rose by US$45 million or 2 per cent to US$2,110 million (2000: US$2,065 million); however, in light of the 2 per cent increase in total risk weighted assets over the year, the tier 1 capital ratio remained unchanged at 11.8 per cent. Tier 2 capital increased only marginally from US$302 million to US$304 million. Thus, the total capital base increased by US$47 million to US$2,414 million (2000: US$2,367 million), producing a consolidated capital ratio of 13.5 per cent, unchanged from 2000, well above the minimum requirements for international banks.
Non-Deposit Sources of Funds & Shareholders’ Funds US$ millions Breakdown of Earnings Assets by Region percent
Arab World 15.6% Asia 16.9% Latin America 10.3% North America 16.0% Europe 39.8% Others 1.4%
97 98 99 00 01 Certificate of Deposits 202 241 270 249 79 Shareholders’ Equity 1,721 1,740 1,857 1,904 1,913 Notes & Bonds 1,451 1,420 1,289 1,692 1,817 25 Annual Report 2001 ARAB BANKING CORPORATION
Group Financial Review
As mentioned above, risk-weighted assets increased in 2001, by US$406 million to US$17,932 million (2000: US$17,526 million), mainly on account of increased on-balance sheet credits at the Arab world domestic subsidiaries and ABC Brasil. All ABC Group subsidiaries meet the capital adequacy requirements of their respective regulatory authorities.
Shareholders’ Funds ABC shareholders’ funds as at 31 December 2001 stood at US$1,913 million (2000: US$1,904 million). Average shareholders’ funds amounted to US$1,897 million (2000: US$1,879 million).
Other Ratios At 31 December 2001 the ratio of the Group’s term financing to Shareholders’ Funds was 0.95:1 (2000: 0.89:1). Average Shareholders’ Funds expressed as a percentage of Average Total Assets was 7.2 per cent (2000: 7.4 per cent). Total Loans and Advances expressed as a multiple of Shareholders’ Funds was 7.4 times (2000: 7.4 times).
Factors Affecting Historical or Future Performance ABC Group’s strategy continues to be based on expansion in the Arab world, both through its domestic banking units in North Africa and Jordan and its increasing presence and position as a market leader in Middle Eastern project and structured loans, general loans syndications and a provider of innovative, targeted treasury products. The domestic banking subsidiaries are in several cases planning the expansion of their branch networks, or undergoing re-engineering and/or refurbishment of their existing networks in others. They are also continuously engaged in designing and introducing new products to their client base, installing new systems and implementing revised policies and procedures, all in preparation for the next phase of expansion. As a strategic aim, the ABC Group seeks greater diversification in its revenue base. It views expansion in the Arab world domestic markets and its chosen wholesale banking products targeted at clients operating within the region as both a means to that end and a more reliable and lower risk source of expanding revenues, in view of its familiarity with both the region and the potential client base. Nevertheless, it is clear, given the dependence of many countries in the region on revenues from oil and gas producing industries – and thus on world energy prices – and of other countries on international tourism, that the region’s fortunes are in turn tied to that of the major economies of the United States, Europe and the Far East with which it trades. This multi-dependency is the true inheritance of the globalisation of trade experienced in the 20th and 21st centuries. It is therefore appropriate that the Group should be positioned, through its unique combination of international and Arab platforms, to serve clients at both ends of the trade flows operating between the Arab countries and the rest of the world, whether it is to facil- itate imports of consumer and capital goods into the Arab countries or their exports of raw materials or services to the developed world. By adopting appropriate control systems, both within the operating units themselves and at Head Office level, backed by product and management support provided out of the centralised specialist departments in Bahrain, the Group anticipates a steady expansion of revenues without a concurrent expansion in risk factors.
Financial Goals and Factors That May Affect Them ABC Group’s primary financial goal is consistent generation of value for shareholders, including sustainable growth in earnings and assets per share. The long-term revenue goal is for a 15 per cent annual post-tax return on equity. Other long-term goals include a productivity ratio of 2:1 and a capital adequacy ratio of 14 per cent. Based on its evaluation of the following factors, management is optimistic about the Group’s prospects for meeting these targets, once again over a reasonable period of time: Political stability – Instability in any of the regions of the Group’s activities may have an adverse impact on its earning potential. However, this is not axiomatic; for example, the Group’s domestic activities in Brazil have proven profitable in 2001 despite the unsettling events in Argentina, a close neighbour and major trading partner. On the whole, management believes that the Group’s activ- ities are sufficiently widely diversified such as to provide a cushion against major losses from isolated cases of political instability. Energy prices – The price of crude oil and gas on the world markets has a direct impact on the economic welfare of many of the countries in the Arab world, affecting their budgets and capability to introduce infrastructure improvements. This in turn affects the scale of contracts awarded to the Group’s OECD-based customers who rely on ABC to provide a range of financial services, from trade finance facilities to export credits, in support of their export and contracting businesses with the energy-exporting countries. It also affects the Group’s services to energy-exporting agencies themselves. The prognosis is for energy prices to increase steadily in real terms in the medium to long term. Foreign currency values – The Parent company’s equity and the Group’s reporting currency is US dollars. However, its subsidiaries are based in countries with different currencies and the Group is therefore exposed to fluctuations in the values of those currencies. The Group takes steps to hedge against the risk of such fluctuations where it considers the risk to be unacceptable to it. Volatility of currency markets – The degree of volatility in foreign exchange rates can affect the amount of foreign exchange trading revenues. In general, the Group benefits from currency volatility. Interest rates – Market interest rate levels, the shape of the yield curve and the direction of interest rate changes affect net interest revenue. The Group’s diversity among both wholesale and domestic banking entities tends to smooth out the effect of interest rates on its revenue streams.
26 Annual Report 2001 ARAB BANKING CORPORATION
Review of Operations
Ghazi M. Abdul -Jawad President & Chief Executive
Banking Group Arab World Division ’Despite a difficult year for several of the economies in which it operates, and the impact of heavy ongoing expenditure on outlet expansion and service and technology upgrading, the Division performed moderately well in 2001. It continued the development of its strategic concept, welding its existing and proven skills in the wholesale markets to the new products and services available out of its domestic business units.’
The Arab World Division is pivotal to the achievement of ABC’s Vision to be the premier and most innovative international Arab financial group, as well as to one of its most important missions, to specialise in Arab-related activities worldwide. It plays a key role in the development and expansion of the Group’s business in the Arab world, directly and indirectly contributing a significant portion of ABC Group’s revenues. The Division’s philosophy 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. In doing so it aims to achieve diversification and enhancement of revenues and funding sources while continuing to satisfy the needs of its key wholesale clients, the top tier regional corporates, multinationals, and governmental and financial institutions. The Division coordinates and directs the activities of all domestic units in the Arab world, encouraging business synergies amongst the branches, subsidiaries and representative offices of the ABC Group. In Bahrain the Commercial Banking Department, the largest unit in the Division in terms of both assets and revenues, and the Global Marketing Department – the product of a strategic alliance between Bahrain Treasury and Commercial Banking – are responsible for wholesale banking. Together they offer term loans, specialist project finance and trade-related products and services and a wide range of treasury products and treasury-related activities in the Arab world. Commercial Banking is made up of four complementary but distinct business teams: Government and Financial Institutions, Corporate Banking, Group Project & Structured Finance and Syndication. While each of these teams is responsible for business development in different market segments or products, they work together, as required, for a particular customer or on the development of a specific product or service. Relationship management is further served by the local domestic banking units and representative offices, which feed in market information from their own geographical perspectives to the Bahrain units. Similarly, clients based outside the region but with Arab world-related requirements are directed to the Division headquarters, from where they are routed to the most appropriate business unit in Bahrain or elsewhere in the Division, thus ensuring they receive the best possible service and advice from the Division’s specialist personnel. Following their expansion in 2000, the Global Project and Structured Finance (GP&SF) and Syndication teams were further strengthened during 2001, increasing the breadth of expertise that the two teams of professionals are able to offer in project-related or other specialised financing transactions and general fund raising. These teams work closely with both their own direct clients and their ABC counterparts elsewhere, to provide seamless service to Group clients regardless of location. In its first full year the expanded GP&SF team achieved premier position in the Arab world in its field, as it led the market in project/structured finance in terms of both transaction volume and aggregate value. GP&SF capped an excellent year with its Ras Laffan IWPP US$600 million project finance deal in Qatar which was award- ed ’Power Deal of the Year’ by the prestigious Project Finance International, who also ranked ABC among the top 30 Global Lead Arrangers in Project Finance. In 2001 ABC’s Syndication team was, for the third consecutive year, the most mandated loan syndicator in the Middle East as it masterminded, with the efficiency that has become its hallmark in the region, both GP&SF’s specialist loan syndications and the traditional fundraising for the Government & Financial Institutions team’s clients. In line with the Group’s objective to maintain an effective and consistently improving risk management process, during the year the Division initiated several steps aimed at portfolio quality enhancement in Bahrain and the Arab world units. Over time it had become clear that the Head Office policies (originally developed for the control of risk exposures to major corporate clients of the wholesale banking units) imposed on domestic retail units were unnecessarily cumbersome and restrictive when applied to retail and small to medium-sized corporate customers. The Division therefore joined with the Credit & Risk Group to develop core credit policies aimed at controlling, within reasonable parameters, exposures to such customers whilst maintaining the Group’s overall conservative stance. With the additional aid of external consultants, separate policies – more appropriate to these market segments – were designed, which the Division is confident will facilitate business expansion in the domestic banking units. The Division, meanwhile, continued its policy of rigorous evaluation of all corporate credit applications, to ensure adherence to both corporate earnings thresholds and credit and risk parameters. This continuing scrutiny also contributed to both monitoring and management of overall portfolio quality. General loan loss provisions were raised in the domestic units following an assessment of their risk profiles. The Algerian subsidiary substantially expanded its business activities and developed its technical infrastructure, whilst the Tunisian subsidiary expanded its delivery channels by opening new branches in major cities and other commercially important locations and introducing ATMs, Internet banking and call centres. Both ABC Algeria and ABC Tunisie are contributing satisfactorily to Group
28 moving forward througthteamwork earnings and the outlook is promising. Plans are on course in Tunisia to pursue retail banking business via a number of smaller retail- oriented branches spread throughout the country. In Egypt, the general economic downturn and pressure on the currency adversely affected business activity, negatively impacting on the Egyptian banking sector including ABC Egypt. The Division is, however, confident that this subsidiary is appropriately positioned and will return to profitability as the economic cycle moves on. ABC Egypt meanwhile expanded its branch network, completed the refurbishment of some of its existing offices, and introduced on-line ATM systems and new credit card services. Under new management, ABC Jordan is currently undergoing major changes and restructuring as it continues to operate in very difficult economic and political conditions. Despite Jordan’s continuing GDP growth, the events of the past year have led to a significant downturn in new investment, affecting real estate prices, capital markets and commercial banking activities generally. The bank’s provisioning levels were increased in line with Group and Central Bank of Jordan policies, dampening profitability. However, in anticipation of an improvement in the regional political scene and the Jordanian economy, projections for 2002 are positive. During the year the Division closed its Casablanca representative office, as it was shown that the European-based operating units manage the Group’s relationships in Morocco quite effectively on their own. Despite a difficult year for several of the economies in which it operates, and the impact of heavy ongoing expenditure on outlet expansion and service and technology upgrading, the Division performed moderately well in 2001. It continued the development of its strategic concept, welding its existing and proven skills in the wholesale markets to the new products and services available out of its domestic business units. Meanwhile it continued to enhance the product capability and deliverability of both areas, positioning itself to meet the anticipated needs of its growing client base.
Arab Banking Corporation - Egypt (S.A.E.) ABC Egypt is ABC’s 95.8 per cent owned subsidiary in Egypt. It is a combined corporate and retail bank with a target market of the upper quartiles of domestic and multinational corporates and medium and high net worth individuals. Leveraging on the strengths and backing of the ABC Group worldwide, it aims to provide its clients with innovative solutions to their needs. The effects of the 1999 downturn in the Egyptian economy continued to be felt through 2001: capital flight, falling exchange rates and a slump in share and property prices contributed to a halving of domestic asset values and a two-thirds reduction in net foreign assets. Additionally, the aftermath of the September 11 attacks led to a major downturn in global tourism that especially hit the Egyptian tourist industry and related industries. The overall result was a liquidity and foreign currency shortage that, despite an increased GDP for the country as a whole, imposed a strain on the corporate sector and the already high unemployment rate. The Egyptian banking market reacted with a rush to quality, shifting from domestic corporate risk towards strong multinationals and public sector and other infrastructure projects offering attractive loan syndication and fee earning opportunities, in the process further pushing down margins. 29 Annual Report 2001 ARAB BANKING CORPORATION
Review of Operations
Arab Banking Corporation - Egypt (S.A.E.) continued In this context, ABC Egypt’s Corporate Banking Division did well to achieve a net loan portfolio expansion, notwithstanding an intensive assessment of existing relationships during the year that resulted in a reduction or restructuring of a significant part of the legacy portfolio. It provided loans to several important Egyptian banks and public sector entities, including a number of syndicated transactions in which ABC Egypt took lead or co-lead manager positions. The bank also worked closely with several Arab development agencies and banks in expanding trade-related business. The Retail Banking Division, whose major goal is that the bank should establish a leadership position in the Egyptian retail banking industry, introduced unsecured Visa and MasterCard credit cards – a new phenomenon in Egypt – for selected clients and a series of sophisticated ATM cards giving customers more efficient access to the bank’s network and services. It also launched tailored personal instalment loans, targeted specifically at salaried employees, and local and foreign currency saving programmes that have already expanded the customer deposit base. Pursuing ABC Egypt’s outlet expansion strategy, it continued its branch opening and refurbish- ment programme and installed more ATMs in selected locations. ABC Egypt commenced a reengineering project in 2000 to introduce state-of-the-art technology and ’best practice’ international banking standards within the bank. The Reengineering Division seeks to raise the bank’s virtual infrastructure to the highest standards of international banking. It is in the process of introducing banking business software that manages core banking, retail and corporate front-end operations, trade finance, funds transfer and lending process workflow, simultaneously delivering advanced management information and decision support systems. During 2001 it introduced ABC Egypt’s new on-line service, available to customers through the ATM network, as well as credit card issuance and account management support technology. In a difficult year, ABC Egypt earned a total income of US$20.1 million, improving on 2000’s US$17.6 million. The bank took provisions of US$11.6 million, net of successful recoveries and settlements. Capital and administrative costs increased, partly reflecting the continuing expenditure on advanced information technology, new ATMs, the new headquarters building and the branch expansion and refurbishment programmes. After amortisation of goodwill at Head Office, ABC Egypt suffered a net loss of US$4.0 million, compared with 2000’s US$3.8 million profit. With the completion of its legacy portfolio review and with a good part of its reengineering programme now implemented, the bank will increasingly turn its attention to expanding its client base and product range. The move to the new Head Office and Main Branch in the prestigious area of Zamalek will be completed in 2002, as will the opening of new branches at 6th of October City and Heliopolis. Its plans opening several new branches and installing more ATM outlets in strategic locations as an integral part of its present expansion phase. As the anticipated upturn in the global economy gradually feeds through to the domestic scene, ABC Egypt foresees a quick return to healthy and increasing profit levels and, moreover, is confident that its investment in top quality product and service capability will ultimately assure the success of its aim – to be amongst Egypt’s premier banks.
Arab Banking Corporation (Jordan) In 2001, ABC Jordan continued to demonstrate its capacity for consistent performance allied with even, cautious expansion. In spite of the negative impact of the continuing Palestinian-Israeli conflict on several sectors of the Jordanian economy, particularly tourism, the Jordanian government continued to press forward with its programme of economic reform and liberalisation and to push for greater foreign and private investment. With more than 60 bilateral and regional trade agreements – including free trade agreements with the European Union and the United States – now in place, and momentum towards privatisation of state-owned enterprises building steadily, the government is emerging as a successful facilitator and promoter of industry. After four years of sluggish performance the Jordanian economy exhibited a healthy 3.9 per cent growth, whilst inflation and the public sector deficit remained under control. Although, mainly due to the generally higher oil prices, the current account moved into deficit following a healthy surplus the year before, this will narrow in 2002 should oil prices decline. ABC Jordan’s net interest margin increased by 6 per cent over the year, a direct result of improved portfolio lending margins. The bank was also successful in expanding the volume of documentary credits processed during the year, adding to the positive income
Project Name Qatar Fertiliser Company
Project Sponsor(s) Qatar Petroleum / Norsk Hydro Project Country Qatar Purpose “QAFCO 4” fertiliser plant expansion Industry Fertiliser
Deal Size US$400 million Financial Close Date July 2, 2001 ABC Role Mandated Lead Arranger, Regional Bookrunner ABC Underwriting US$75 million 30 moving forward with synergy from marketable securities investment and trading and an enhanced contribution from ACFICO, its broking subsidiary. An increase in overall employee levels and promotional and advertising activities, plus a write down in the value of repossessed assets held in the bank’s portfolio pending sale, led to a 20 per cent increase in total operating expenses. Net income before provisions and taxes was nevertheless 32 per cent higher than that for 2000. However, the impact of increased provisions, resulting in part from Central Bank policy compelling annual additional provisions on problem loans irrespective of collateral held (78 per cent of ABC Jordan’s loan loss provisions are backed by marketable collateral awaiting disposal) reduced the net profit to US$0.8 million equivalent, equal to that of 2000. The bank’s objectives remain focused on increasing market share and fee-based activities through the supply of premium services and the delivery of new and imaginative retail banking and consumer products to its customers. Whilst cognisant of the negative impact of continuing regional conflict, there is reason to hope that the Jordanian government’s strategy of privatisation of state enterprises and encouragement of inward investment will lead to a widening tax base and lower foreign debt burden. In an expanding economy, ABC Jordan’s efficient delivery of quality services should ensure continuing success.
Arab Banking Corporation - Algeria ABC Algeria, 70 per cent owned by ABC, began operations in December 1998 as the first foreign commercial bank to receive a licence to conduct business in Algeria. The balance of its share capital is held between International Finance Corporation (IFC), the subsidiary of the World Bank, The Arab Investment Company (TAIC) of Saudi Arabia and a group of Algerian investors. To date its main target market has been large corporates and state-owned enterprises and it is active in trade finance, commercial lending and the inter-bank money market. The bank has four branches, the head office main branch, a second in central Algiers and one each in Hassi Messaoud and Oran. This network will shortly be connected on-line. During the past year ABC Algeria, together with TAIC, Caisse Nationale d’Epargne et de Prevoyance, the IFC and other local shareholders, created Arab Leasing Corporation to introduce leasing to the Algerian market and act as an additional source of finance for the many investment projects presently at the planning stage in Algeria. In these benign circumstances, ABC Algeria’s total income grew by 29 per cent to US$9.7 million, benefiting from a 42 per cent increase in interest margin, as the loan portfolio expanded, whilst other income, mainly loans-related fees and commissions, improved by 15 per cent. However net income before provisions and taxes fell to US$4.0 million from 2000’s US$5.4 million, as expenses rose from US$2.1 million to US$5.7 million, primarily on account of a one-time write-off of pre-opening expenses plus the cost of premiums paid under the new deposit insurance scheme. After slightly increased loan loss provisions on the expanded loan portfolio, the bank made a net profit of US$2.4 million compared with 2000’s US$4.6 million.
31 Annual Report 2001 ARAB BANKING CORPORATION
Review of Operations
Arab Banking Corporation - Algeria continued Algeria’s foreign reserves increased to over US$15 billion in 2001 as the oil price increase in 2000 continued to benefit its oil and gas export revenues, enabling further reduction of the official debt and maintenance of strict control over public expenditure. The state-owned banks reduced their dependence on Central Bank refinancing, resulting in a reduction in average refinancing and discount rates and, thus, interest rates in general. GDP for the year was estimated at US$56 billion, or US$1,860 per capita. This healthy economic condition enabled the government to pursue its twin objectives of reinforcing the embryonic market economy through its ongoing reform programme and restructuring the economic environment to mobilise increased investment. In these benign circumstances, ABC Algeria’s total income grew by 29 per cent to US$9.7 million, benefiting from a 42 per cent increase in interest margin, as the loan portfolio expanded, whilst other income, mainly loans-related fees and commissions, improved by 15 per cent. However net income before provisions and taxes fell to US$4.0 million from 2000’s US$5.4 million, as expenses rose from US$2.1 million to US$5.7 million, primarily due to expenses connected with the expansion of the branch network, plus the cost of premiums of US$0.9 million paid under the new deposit insurance scheme. After slightly increased loan loss provisions on the expanded loan portfolio, the bank made a net profit of US$2.4 million compared with 2000’s US$4.6 million. Over the next few years, the government is intent on a series of positive steps: reforming the banking system and financial markets; deregulating import and exchange controls; overhauling the tax system; reorganising public sector companies and their operations; encouraging inward investment and modernising the infrastructure. As a result, ABC Algeria expects an influx of international banks into the market, seeking to service the newly privatised national companies and new entrant multinationals. Despite the resultant competition, it is confident that it will continue to provide its growing customer base with a superior and appropriate standard of service. It therefore intends to expand its branch network over the next few years as it gears itself up to providing a full retail banking service.
Arab Banking Corporation - Tunisie ABC Tunisie, a wholly-owned onshore banking subsidiary of ABC whose products and services are designed to complement those of ABC’s offshore branch, opened for business in mid-2000. Its debut was marked with instant success, as its wide range of products and focus on quality of customer service was rewarded by immediate and strong portfolio growth and it was profitable from inception. In 2001 Tunisia completed its ninth five-year economic and social development plan, basically in line with targets. The economy’s fundamentals continued to improve, evidenced by sustainable GDP growth of around 4.5 per cent, stable inflation of 3 per cent or less, increasing foreign exchange reserves and continued reduction of the debt ratio. In this positive environment, ABC Tunisie continued to widen and diversify its customer base, which includes top local private groups and financial institutions, and sound public sector entities. Both the bank and ABC’s branch continue to benefit from the synergy between their two discrete operations. During the year ABC Tunisie opened branches in Sfax and Sousse, the second and third largest cities in Tunisia; this expansion is already proving sufficiently successful that further branches are in the planning stages. The bank’s total operating income, comprising mainly interest income, was US$3.2 million. After taxes and operating expenses of US$1.8 million it returned a creditable US$0.9 million net profit in its first full year of operation. Tunisia’s current 5-year plan envisages annual economic growth of 5.7 per cent on the back of increased exports and a growing contribution from the private sector, with annual expansion in the services sector forecast at 7.5 per cent, the manufacturing sector at 5 per cent and the telecommunications industry at nearly 19 per cent. The plan anticipates a significant cut in foreign debt, a reduced budget deficit and the creation of 400,000 new jobs over the period. These improving fundamentals, combined with the positive risk perception engendered through stable and enlightened management – demonstrated by retention of the country’s investment grade sovereign debt rating – are naturally expected to result in greater competition and lower spreads in the banking sector, a challenge which ABC Tunisie is tackling with confidence. Although corporate banking remains its core business, the bank is working towards diversification through the development of retail and consumer banking. The new branches are therefore likely to be targeted at the retail sector and positioned in selected commercial and high net worth areas. To ensure a high standard of service to this market the bank is developing high technology-based products, including on-line Internet banking and credit card services. The performance of the Tunisian economy and the anticipated acceleration of the liberalisation programme offer a good basis for ABC Tunisie to achieve its ambitious programme.
ABC Islamic Bank (E.C.) ABC Islamic Bank was created in 1998 out of ABC’s Islamic Banking Division, to develop dedicated Islamic banking products and services for delivery to both its own Arab world clients and ABC Group customers generally. In addition to the usual trade and capital goods financing facilities offered by most Islamic banks, such as modaraba, murabaha, musharaka, ijara, Ijara Wa-Iktana, bai salam and Istissna, the bank’s product range has been steadily expanded to include sukook and other Islamic bonds, Islamic investment and leasing funds and a special-purpose vehicle, ABC Clearing Company, delivering a unique Shari’a-compliant overnight inter-bank money market capability to the Islamic banking community. In 2001 the bank concluded several important murabaha transactions in Saudi Arabia, Bahrain and Lebanon. It also successfully marketed Shares Murabaha, an innovatively structured mechanism providing clients with facilities equivalent to those available to traders on the London Metal Exchange to support Islamic inter-bank activities. ABC Islamic Bank was instrumental in the success of the Government of Bahrain’s first issue of Salam Sukook, undertaking the role of redemption agent for the entire issue of US$25 million. Bahrain Islamic Sukook, the government-sponsored entity, issues Salam Sukook paper to its participants, yielding good returns at low risk. This type of paper usually facilitates the financing of raw materials and was successfully employed in 2001 to finance Aluminium Bahrain’s aluminium bar production. The bank also invested
32 ARAB BANKING CORPORATION Annual Report 2001
Review of Operations
for its own account and on behalf of clients in the subsequent Ijara Sukook 4-year bonds, financing the purchase and leaseback of warehouse facilities, issued by the Bahrain Monetary Agency on behalf of the Bahrain Government. Having obtained relevant governmental and regulatory approvals for the establishment of the International Credit Company, a Bahrain-based credit card issuing company, the bank is in advanced negotiations with major international credit card companies prior to the expected launch of the world’s first Islamic credit card in 2002. The bank works closely with other ABC Group units in joint arrangement of, and/or participation in, Islamic facilities. Notable examples in 2001 include murabaha transactions structured jointly with ABC’s Corporate Banking Department and with ABC Brasil, aggregating over US$30 million, and operating leases coordinated by ABC International Bank (ABCIB) for certain US-based companies and worth over US$16 million. In 2002 it will also jointly market a new fund, established by ABCIB, tailored for investors in the US real estate market. In 2001 the bank’s revenues were impacted by the general economic downturn in most OECD countries, exacerbated by the events of September 11. In this context the results were moderate. Total assets, consisting mainly of murabaha, Ijara Wa-Iktana and investments, fell by 5 per cent to US$185 million. Murabaha transactions, as usual, dominated the income stream with a contribution of US$6 million, or over 62 per cent of gross operating income before distribution to investment holders, while Ijara Wa-Iktana contributed some 13 per cent. After allocation of profit to investment holders, total operating income was US$5.7 million, represent- ing a 17 per cent decline or US$1.2 million over 2000. Operating expenses at US$3.2 million were slightly lower than the previous year, leaving a net profit of US$2.5 million, US$1.1 million less than 2000.
Banking Group International Division ’In 2001, the International Division continued the rationalisation of its worldwide physical presence while its branches and subsidiaries maintained their focus on generating and supporting Arab world-related activities, especially in the areas of trade and project finance, and providing their multinational customers transacting business in the Arab world with a wide range of focused services, including specialist advisory services, treasury products and bonding lines.’
ABC Singapore branch’s remedial efforts were again very successful in 2001, thereby freeing up its resources and enabling it to focus on its role of marketing and servicing trade-related business emanating from the Middle East and North Africa (MENA) region. It concentrated on export and import documentary credits and bonding requirements for Far Eastern contractors, in support of their Arab world regional projects. ABC New York branch was, not surprisingly, affected by the downturn in the United States economy as well as the unexpected failure of Enron Corporation with whom it had maintained a modest exposure. Its loan loss provisions for the year, although partially compensated by enhancements in loan fee income from an increased turnover and interest margin generated in a falling interest rate environment, led it into a net loss. ABC Milan branch returned a net profit in excess of last year, on the back of increased marketable securities income and lower than anticipated costs. ABC International Bank and ABC Daus & Co. both turned in an increased total operating profit, reflecting expanded business lines, but suffered from unavoidable but necessary cost increases. ABC International Bank also suffered loan loss provisions resulting from the economic condition of its operating markets. Meanwhile, the Division continued the rationalisation of its worldwide physical presence. ABC Banque Internationale de Monaco was sold to Banco Atlántico in the early part of the year to access the greater synergistic value from insertion into Banco Atlántico’s network and its existing private banking business. Arrangements for the disposal of ABC Finanziaria, the Italian finance company subsidiary, were completed during the year, while ABC Milan branch sold its building as it re-located to more functional premises in central Milan. In 2002, the International Division intends to continue to add to its customer base of multinational corporations in the United States, Europe and, to a lesser extent, the Far East who have an existing or potential interest in doing business in the Arab world, and to build closer relationships with existing clients in order to provide them with a complete service tailored specifically to their needs. The Division will continue to manage its units through imposition of a number of financial hurdles, attainment of which will be achievable through delivery of greater value to clients. Further consolidation of the European operations – with appropriate changes in the European corporate structure – is also being studied, within the context of a pan-European strategic approach to targeted business lines and further cost containment.
33 moving forward throughdiversifying ABC International Bank plc ABC International Bank (ABCIB)’s prime objective continues to be the promotion of trade and business links between Europe and the Arab world, particularly in the areas of trade and commodity finance. The bank currently operates through a number of specialist units out of branches in London and Paris: Trade Finance and Financial Institutions has the principal strategic objective to finance trade flows between Europe and the Arab world. It offers documentary credits, forfaiting, contract bonding and financing of receivables as well as buyer-credit facilities guaranteed by export credit agencies such as ECGD and COFACE. Its ability to provide structured solutions to client needs has given ABCIB market recognition as one of the leading financial institutions for Euro-Arab world trade. During the year, the London team arranged and structured a US$40 million syndicated trade finance facility for Motorola GSM equipment for Jordan Mobile Telephone Services and a US$40 million Middle East Receivable Facility to discount receivables from Arab world telecommunications companies. Commodity Finance offers trade finance, documentary credit, guarantee and letter of indemnity facilities and maintains direct bilateral relationships with premier trading houses in Europe and the USA active in crude oil and non-ferrous metals and in coffee, cocoa and sugar. In 2001 London concluded several pre- and post-shipment financings, including transactions with South Africa, Thailand, Sri Lanka and Morocco. ABCIB also participated as a lead manager in a number of other short-term commodity export pre-payment transactions, including two facilities for Sonangol of Angola totalling US$1.1 billion, and completed a US$60 million medium-term trade facility for Petrobras, Brazil. ABCIB’s Paris branch was active financing North African trade transactions relating to agricultural products, oil and metals. Syndications participates in a variety of structured transactions and also works on behalf of other units of the bank, sourcing as well as advising on the arranging, structuring, pricing and distribution of transactions in the market. In July 2001 it also arranged and successfully completed ABCIB’s own US$150 million medium-term dual-tranche facility. Project Finance participates in energy-related projects in the Arab world and Europe. In 2001 the unit arranged finance for the development of an independent power project in Tunisia by private sector sponsors. As one of three mandated banks, ABCIB under- took extensive due diligence to structure the finance of a major government-to-government fertiliser project in Oman, supported by European export credit agencies and scheduled to close by July 2002. Paris arranged finance for an offshore drilling ship in the Gulf of Guinea and supported several transactions in North Africa, backed by export credit agencies, for oil production equipment, industrial machinery, telecommunication services, and security screening devices. Specialised Finance has gained considerable experience in supporting new cellular telecommunications operators in the Arab world and in establishing networks in Europe, to add to its expertise in airline and hotel financing. Last year it also co-arranged the US$52.5 million finance of a VLCC, reflecting its ongoing commitment to the financing of vessels for oil and gas transportation.
34 ARAB BANKING CORPORATION Annual Report 2001
Review of Operations
Islamic Asset Management offers asset-backed investments and finance through ABCIB Islamic Asset Management Limited. In 2001 it arranged finance for several pools of equipment leasing assets, primarily in North America, and set up a leveraged Multi-Family Apartment Development Fund, valued at US$150 million, to be launched early in 2002. New ground was broken in structuring two portfolios of leased real estate assets for securitisation in the fledgling Islamic capital market. Acquisition and development finance for clients’ real estate projects were also arranged, in an aggregate amount of £50 million. Treasury Operations, managed by the London Treasury Hub, centralises treasury operations for the ABCIB group. Value-at-Risk capital measurement and utilisation methodologies were introduced in 2001 to enhance risk control and profitability. Net interest income increased by 19 per cent to £26.3 million. Earnings from fees and commissions were stable in a competitive market, notwithstanding the increase in trade finance activity, however income from this and other sources registered an 8 per cent overall increase. Total operating income thus increased by 15 per cent. Staff costs declined marginally by 2 per cent to £12.6 million but administrative costs increased by £2.2 million or 28 per cent to £9.5 million, following the bank’s sale of its premises at the end of 2000 to its holding company, to whom it now pays rent. The cost: income ratio, however, improved to 57 per cent from 59 per cent in 2000. After net loan loss provisions – including a relatively small facility requiring provisioning following the sudden and unforeseen collapse of Enron Corporation – ABCIB’s net profit after tax fell by 12 per cent to £13.4 million. The Chairman of the Board, Sheikh Khalid Alturki, resigned with effect from December 31, 2001 after seven years of service to the bank. Mr. Farat Omar Ekdara was appointed the new Chairman of the Board on February 28, 2002. On December 21 Abdulmagid Breish, the Chief Executive Officer, was appointed to the Board. During 2002, ABCIB will continue to develop its core business activities and build long-term relationships with its expanding client base. In addition to the primary goal of enhancing revenues and managing the cost base the bank will finalise the implementation of its new core banking systems. The integration of additional branches and expansion of the bank’s operations in Europe will be closely coordinated with ABC Group Head Office.
Arab Banking Corporation - Daus & Co. GmbH Economic activity in Germany, already weakening since the autumn of 2000, ground to a halt in the second quarter of 2001, with average growth for the year of around 0.5 per cent. The global slowdown, and the continuation into 2001 of the previous year’s unex- pectedly strong increase in energy and food prices, were largely to blame as the hike in consumer prices dampened private consumption and neutralised the effects of the government’s tax reductions. The ongoing recession in the construction industry did not help. Amidst this somewhat gloomy background, ABC Daus continued to focus its business activities on the financing of German exports to the MENA region including Iran, as demand from those countries continued unabated. The bank’s spread of services – ranging from short-term trade facilities to multi-sourced, structured, project and capital goods financing schemes – provides a stable source of income as well as good growth opportunities. The former generate commission and fee income, principally from the importers, whilst the latter produce lucrative fees and interest income from both importers and exporters. Whilst only 35 per cent of the bank’s overall interest income comes from the importing countries (the balance emanating from customers in Germany and the rest of the European Union), fully 85 per cent of commission income stems from customers located in the MENA region. ABC Daus did well to increase its net interest income by 6 per cent on the back of higher inter-bank placements – which more than compensated for a reduction in total outstanding loans – and higher coupons on the marketable securities portfolio. This was offset by a slight decline in commission and fees, despite an increase in documentary credits, reflecting competitive market pressures. However the disposal of investments, including its managed investment portfolio, produced net additional income of around 2 million euros. Operating expenses rose by a net 6 per cent despite lower administration costs and premises expenses (the bank having sold its office building in 2000). ABC Daus’ net profit for the year was 3 million euros, demonstrating the underlying improvement in operating profit.
Project Name AES Barka
Project Sponsor(s) AES & Bahwan Project Country Oman Purpose Power and Water plant construction Industry Power Generation
Deal Size US$350 million Financial Close Date May 2, 2001 ABC Role Mandated Lead Arranger, Regional Bookrunner ABC Underwriting US$175 million
35 moving forward through integration Investment Group ’In a difficult year for all of their economies, the Investment Group’s constituent banks did well to return only a marginally reduced aggregate net profit and contribution to the ABC Group. Meanwhile they each continued their respective preparations to meet their ultimate objective – to be among the best in their areas of operations.’
The Investment Group is responsible for maintaining and enhancing shareholder value for ABC Group from its non-core banking operation investments, namely 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 introducing new capital market-related initiatives throughout the Group. The Investment Group’s continuing objective is to enable the ABC Group to diversify risk and enhance shareholder value through its non-core investments. In 2001, the combined operations of the Investment Group units contributed US$64.7 million in net profit to the ABC Group (2000: US$67.9 million). Banco Atlántico acquired ABC Banque Internationale de Monaco from ABC, to assist in the expansion of its private banking capabilities, and progressed with its reengineering programme. International Bank of Asia, faced with economic downturn in Hong Kong, focused on credit quality and customer service and in fact increased its contribution to Group net profit. Banco ABC Brasil managed to maintain healthy results in the face of difficult times in its local market, whilst ABC Securities Egypt completed its first financial year, also in a difficult environment, but ready to take advantage of the next upturn in the economic cycle.
Banco Atlántico, S.A. Spain was not excused the global economic slowdown and general contraction of business investment in 2001. The external sector’s resultant loss of dynamism, combined with deterioration in the labour market, negatively impacted on public spending, a major contributor to growth in recent times. Nevertheless, the advantages to Spain of its adoption of the euro were amply demonstrated in the aftermath of the September 11 shock, as the euro experienced considerably less volatility and instability than would previously have been the case. In 2001 Banco Atlántico concluded the first stage of the major process of change initiated at the end of 1999, with the implementation of five reengineering projects affecting its key processes and aimed at enhancing new business generating capacity and optimising costs. Specifically targeted were the reduction of administrative workload and labour costs, the enhancement of
36 ARAB BANKING CORPORATION Annual Report 2001
Review of Operations
commercial activities and the introduction of a new management information system. These projects have involved significant changes and efforts, including reduction or redeployment of some 450 staff equivalent, intensive training in new processes and the introduction of CRM (Customer Relationship Management), data-warehousing and data-mining tools. In this way Banco Atlántico is moving towards a more integrated, multidimensional information system, enabling intensive analysis by product, customer and business channel and creating the basis for more effective decision-making. Banco Atlántico’s ambition is to become a reference bank for medium-sized corporations and medium to high net worth individuals, focused on generating added value for its shareholders. The second stage of this ’Project of Change’ commenced at the end of 2001 with the creation of two new divisions in the organisation structure, aimed at adding shareholder value through greater focus on off-balance sheet business (by aggressive marketing of mutual fund/pension fund management and insurance services) and information technology, whilst continuing to emphasise the importance of global risk management. The year saw a marginal increase in Banco Atlántico’s assets over 2000. Given the business environment in which the bank operated during the year it was heartening that interest margin rose by over 6 per cent. Fees and commissions, including income from securities and sales of fixed assets, loan fees and foreign exchange, grew marginally. Consequently, gross operating income increased, by 3 per cent. However, as operating expenses grew by over 6 per cent, mainly as a result of early retirement costs arising from the change process, and automation expenses, operating profit (before provisions and taxes) declined by nearly 4 per cent to 76.3 million euros. After deducting loan loss provisions, which increased primarily due to the new statistical insolvency risk reserve introduced by Banco de España, the Central Bank, net profit fell by 24 per cent to 31.8 million euros.
International Bank of Asia Limited With an economy not yet recovered from the Asian financial crisis, Hong Kong was badly affected by the slowdown in the US in 2001 and its impact on global worldwide activity, particularly after September 11. GDP declined as exports fell by more than 5 per cent and domestic consumption proved unable to compensate for the external trade weakness. Property values declined by a further 13 per cent as unemployment rose to 6 per cent. Stagnant loan demand, coupled with the removal of controls over deposit rates and the impact of intense competition, reduced yields and led to a substantial slowdown in the banking industry. At International Bank of Asia (IBA), net interest income increased by 8 per cent partly as a result of the highly successful introduc- tion of a new combined current and savings account (Magic Money Manager, or MMM), reducing its cost of funds, and the bank recorded a net interest margin of 2.69 per cent, one of the highest among Hong Kong banks. Fee income, however, fell by 16 per cent, tracking the general economic decline, partially offset by income from the new investment products introduced by the bank and effective marketing of its insurance and unit trust products. Operating income therefore rose, by 13 per cent to HKUS$1,028 million. Operating expenses increased by 11 per cent, reflecting the costs of establishing the new Wealth Management and Consumer Finance Centres, increased marketing and depreciation of the hi-tech equipment installed in 2000. Specific loan loss provisions decreased by 9 per cent, but IBA adopted a conservative view of future economic prospects and increased its general provisions by HKUS$63 million to 1 per cent of the total loan portfolio. Through active portfolio investment over the year, IBA restructured the investment portfolio to crystallise gains and position it for the rise in interest rates expected in 2002. After accounting for net gains from securities holdings and a reduced taxation charge, the net profit was HK$296 million, a 21 per cent rise over 2000. Over the year the bank expanded its credit card, consumer loan and hire purchase portfolios, and increased its loans to medium and large corporations, as housing loans were de-emphasised in light of extreme pricing pressures. The result was an increasingly diversified asset portfolio that preserved net interest margins whilst other banks were suffering from a decline in margins. Liquidity remained high through judicious management of assets and liabilities and the loans to deposits ratio. IBA’s top priority is the delivery of shareholder value, which it aims to achieve through a combination of an expanding portfolio of higher-yield loans, funded by lower-cost consumer deposits; a wide array of fee-generating products and services; emphasis on credit quality to minimise loan loss provisions; strictly controlled operating costs and a determination to attract and retain high quality employees by offering challenging career opportunities and unique training programmes.
Project Name Sixteenth Waha Lease Limited
Project Sponsor(s) Oasis International Leasing Company Project Country UAE Purpose To finance the acquisition of a Boeing B777-200ER Industry Aircraft
Deal Size Aircraft Value US$112.5MM, Debt amount US$90MM Financial Close Date March 26, 2001 ABC Role Mandated Lead Arranger, Bookrunner ABC Underwriting US$45 million
37 Annual Report 2001 ARAB BANKING CORPORATION
Review of Operations
International Bank of Asia Limited continued It has merged smaller branches in selected localities into Superbranches – extra large branches with larger frontages and expanded services – adding three in 2001 to the first one opened in 2000. Again, with the declining importance of the real estate market as the popular avenue to wealth accumulation, the Wealth Management Centre (personal investment centre) concept, first successfully introduced in 2000, has been expanded both in terms of the number of locations (now six) and the range of products offered. In addition to stock brokerage, customers can access insurance products, unit trusts, bond purchases and equity-linked notes. In each case IBA acts as an agent only, generating increased fee income whilst avoiding assumption of market risk. Leveraging its consumer loan experience gained over 15 years in credit card operations and hire purchase finance, IBA has introduced new variations of well-established consumer branded products, and increased delivery channels by opening Consumer Finance Centres in suitable locations. Consumer loans are thus gradually replacing the residential mortgage portfolio, where pricing has declined. Internet banking has been upgraded through IBA’s participation in an emerging new sales channel: Net Alliance, a joint venture of four banks and a technology company. Other technology initiatives include the development of a telemarketing Call Centre; the creation of a data warehouse linked to customer relationship management software, permitting targeted marketing; greater MIS capabilities; enhanced portfolio management and an automated stock trading system for IBA Securities. IBA has focused particular attention on credit quality, increasing regular reviews of lending and other operations and rigorously adopting the recommendations of regulators, auditors and parent bank risk review specialists. The favourable results are reflected in the upgrade of the bank’s rating outlook by Standard & Poor’s, which has maintained its A-3, BBB ratings throughout the Asian financial crisis and its aftermath; the favourable rating of the HKMA; the upgraded credit process rating issued by ABC Head Office and the reduction of non-performing loans. Credit quality will remain a very high priority in the uncertain economic conditions that are unfolding. The major changes in the Hong Kong economy and the banking industry that have taken place over the last few years clearly warranted a thorough updating of bank strategy. In IBA’s case, that task has now been completed with the introduction of a rolling five-year plan. The progress in 2001 on new fee sources, the increase in the current and savings accounts and the ability to maintain profitability in the face of adverse conditions are all encouraging indications that IBA is on course in the conduct of its current strategy.
Banco ABC Brasil S.A. Brazilian economic activity in 2001 was enormously affected by the Argentine financial and economic crisis. Reflecting the close ties between the two countries, instability was the dominant trait in the Brazilian financial markets throughout the year. A shortage in energy supplies, originating primarily from an extended drought exacerbated by the lack of investment in the energy sector, added to the general slowdown. It was fortunate that, through the united efforts of all economic sectors, the energy shortage did not worsen and the worst fears of a total shutdown of the country did not materialise. These factors negatively impacted the financial markets’ already low levels of confidence and led to strong and persistent pressure on the real throughout the year. Despite the authorities’ efforts to manage the devaluation smoothly, the third quarter saw a 16 per cent fall in the value of the real against the US dollar, in turn leading to dramatic falls in stock market and futures indices. Meanwhile, the fear of reappearance of inflationary pressure, combined with concerns over the Argentine crisis, compelled the authorities to maintain interest rates at 19 per cent levels throughout the third quarter. The impact on the corporate sector was grave. Rising capital costs, combined with falling credit availability, led to a tightening of margins and a reduction in economic demand. Although exporting companies benefited from the fall in the value of the real, others with high levels of US dollar debt were severely affected. Finally, in the latter months of the year, the economic perspectives began to improve. A more positive investor perception, both internally and externally, grew alongside a deepening appreciation of the fundamental differences between Brazil and Argentina. The exchange rate showed signs of stabilisation and the share indices regained momentum, offsetting at least partially the major losses of the earlier part of the year. Secondary market prices for fixed income instruments also rebounded and the futures markets began to show more stable patterns and increased transaction volumes. In this environment ABC Brasil maintained its conservative approach to its business dealings and avoided excessive risk exposure, continuing to focus on its core business of structured credit operations, trade finance and financial markets applications. For these operations, spreads and volumes were very stable during the year, producing a steady flow of income. At the same time, credit risk (whose monitoring has been enhanced by new software systems introduced during the year) was strictly controlled, with the avoidance of unpleasant surprises uppermost in mind; as a result no significant additional credit provisions were necessary. The improving economic scenario towards the end of the year was, however, fundamental in providing opportunities for profit across the financial markets, both domestic and international. ABC Brasil’s results were in fact much better in the final months of 2001 than the rest of the year, enabling it to achieve a net profit only slightly less than last year. Total assets increased by 18 per cent in US dollar terms, mainly in loans and advances. Net interest margin increased by 7 per cent to US$50.9 million; however, a drop in commission and fee income, as well as trading in derivatives, resulted in a 5 per cent reduction in total operating income to US$69.9 million. Despite salary adjustments in ABC Brasil, the devaluation of the real led to a drop in administrative and general expenses to US$30.2 million from US$35.5 million in 2000. The bank’s conservative approach and strict control over credit risk in a difficult envi- ronment resulted in only a relatively small increase in loan loss provisions to US$1.7 million, compared with US$0.6 million last year.
38 ARAB BANKING CORPORATION Annual Report 2001
Review of Operations
After taxation of US$6.1 million, ABC Brasil contributed US$31.8 million (before minority interests), down by only 3 per cent over 2000. ABC Brasil’s shareholders’ funds in US dollar terms registered an increase of US$28.3 million (after a dividend payment of US$6.2 million). As the real exposure was hedged, the devaluation during the year did not adversely impact ABC Brasil’s equity in US dollar terms. For the future, ABC Brasil will continue to monitor events in its markets closely and to build further on the risk control-related systems it has introduced – including a VaR-based market risk control system and internal credit risk rating methodologies recently implemented at the behest of the Central Bank of Brasil and the Group Head Office. Of greatest importance is its corporate goal: to deliver reliable and expanding profit through a combination of vigilant customer and risk monitoring, astute financial management and the continuation of strictly conservative policies.
ABC Securities (Egypt) S.A.E. ABC Securities (Egypt) commenced operations in 2000 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. In 2001, ABCSE was successful in generating investment banking fee income for the first time. However, the Egyptian capital market witnessed substantial price deterioration and reduced liquidity, evidenced by low volume and a marked reduction in new equity and fixed income issues. ABCSE therefore experienced a generally quiet year as its interest income, in a reduced rate environment, was less than expected and it suffered negative returns from its marketable securities investments, besides being burdened by the significant devaluation of the Egyptian pound. As it is currently working on a number of potentially lucrative investment banking transactions in North Africa, ABCSE is confident of achieving increased revenues in 2002 and, subject to an improvement in market conditions, a more than satisfactory rate of return for its parent bank.
Group Treasury Following September 11, Group Treasury took immediate steps to activate its Contingency Funding Plan to ensure that adequate liquidity was available to meet any contingent demands of ABC Group units worldwide. The smoothness of the ensuing operation highlighted the wisdom of the ’hub and spoke’ strategic concept introduced in 1999, under which funding responsibilities have been devolved mainly to the business units in line with their balance sheet activities, leaving market and liquidity risk management centralised for the benefit and security of the ABC Group as a whole. While business units market ABC Group’s treasury products within their respective geographic regions, product development, particularly in relation to Arab world currencies and options, is concentrated in the Bahrain hub, from where newly developed products are distributed to business units worldwide for introduction to their clients. Bahrain Treasury is one of the biggest and most active treasuries in the Middle East, offering a wide range of financial services, from simple forex and money market to the most sophisticated derivative and financially engineered products, to meet all ABC’s clients’ hedging and exposure management objectives. Bahrain Treasury is divided into three separate departments: Foreign Exchange, which includes the Middle East Currencies, Precious Metals & Commodities and Treasury Sales units, specialises in meeting all foreign exchange needs of a whole range of corporate, institutional and central bank customers. In addition to its active involvement in all the major international currencies, the FX desk is a major market maker in Middle Eastern, North African and Mediterranean currencies. Precious Metals & Commodities addresses the growing demands of its sophisticated clients, in addition to trading on its own account. It recently expanded into gold trading and gold loan services for regional corporates. Treasury Sales offers customers a friendly, prompt and efficient service, whether meeting their everyday requirements or structuring innovative financial solutions to their market exposures.
Project Name En-Naga Development
Project Sponsor(s) Lundin Oil Project Country Libya Purpose Oil exploration Industry Oil
Deal Size US$50 million Financial Close Date October 24, 2001 ABC Role Mandated Lead Arranger/Documentation Agent ABC Underwriting US$30 million
39 Annual Report 2001 ARAB BANKING CORPORATION
Review of Operations
Group Treasury continued Money Market, Options, Derivatives & New Products (including Islamic Murabaha Investments) has one of the most experienced teams in the region and is active in both currency and interest rate options. Its activities range from market-making for financial institutions to trading in ’plain vanilla’ and exotic options. Money Market desk plays a vital role in ensuring that ABC maintains adequate liquidity at all times, also managing interest rate risk for optimum returns. Derivatives desk offers customers a wide variety of interest rate products, including interest rate swaps, forward rate agreements, caps, collars and swaptions, to smooth out market volatility and reduce interest rate risk, together with various capital-guaranteed structured investment products for yield enhancement purposes. New Products concentrates on product development, in 2001 focusing on specialised treasury products to expand the Arab World Division’s retail units’ range. The Islamic Murabaha Investments unit offers clients the opportunity of investing in financial instruments that are based strictly on the principles of Islamic Shari’a. Marketable Securities includes Floating Rate Notes (FRNs), Fixed Income, Equities and Investment Management. The FRN and Fixed Income teams are involved in trading and investment in governmental and non-governmental bonds, and global equities and equity funds, respectively. The Investment Management team has recently begun investing in managed funds as part of a strategy to expand into ’fund of funds’ management. Fixed income securities portfolios managed on behalf of institutional clients reached just under US$3 billion. Despite the extremes seen in the financial markets in 2001, in general ABC Treasuries throughout the Group had a relatively good year. Bahrain Treasury did particularly well. The Foreign Exchange unit made more than double its target, mainly from increased customer-driven business. The Money Market team surpassed its set profit target by 70 per cent as the positions adopted benefited from the numerous Federal Reserve Bank interest rate cuts over the year. The Derivatives team also did well as, with ABC having positioned itself as one of the major currency options market makers in the region, currency derivatives’ profitability exceeded budget by 10 per cent and interest rate derivatives surpassed all expectations by exceeding profit targets by 93 per cent, distributed over interest rate swaps trading, swaptions, exchange traded interest rate futures and options, and some commodity and index options. The Marketable Securities unit successfully managed a sizeable portfolio of Middle Eastern and North African Bonds, also seeing substantial activity in repurchase and resale agreements, producing satisfactory returns in this area as well. With the expansion of the structured treasury product portfolio, the Global Marketing Department (which reports directly to Arab World Division and on a matrix basis to the Group Treasurer) plans to extend its marketing activities in 2002 to include the retail and institutional clients of ABC subsidiaries and branches in the MENA region, including all the Arabian Gulf countries. Meanwhile, Group Treasury will continue to develop new products geared for the Arab world. The developments in new systems, methodology and liquidity risk manage- ment referred to below, on which Group Treasury and Risk Management have worked jointly, will also continue into the new year.
Credit & Risk Group Credit & Risk Group (CRG) has overall responsibility for centralised credit policy and procedure formulation, country risk, 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 effective controls.
Credit Risk Management Emphasis in 2001 was on (a) maintaining momentum in respect of the anticipated introduction in 2005 by the Basel Committee on Banking Supervision of ’Basel Two’, the new Basel Capital Accord replacing the 1988 Accord and (b) implementing the more immediate requirements arising from the introduction by the Bahrain Monetary Agency in July 2001 of the BIS “Best Practice Principles relating to Credit Risk Management” as the basis for future regulatory supervision. The key areas of focus in the enhancement of
Project Name Ras Laffan Power
Project Sponsor(s) AES / QP/ QEWC / GIC Project Country Qatar Purpose Power and Water plant construction Industry Power
Deal Size US$572.25 million Financial Close Date November 20, 2001 ABC Role Mandated Lead Arranger, Regional Bookrunner ABC Underwriting US$57.2 million
40 moving forwardmomentum with ABC Group’s Credit Risk Management framework, requiring the initiation or development of policies, systems and risk data availability, were: Global Credit Exposures Aggregation and Control • Development of the RXM/RWS (Risk Management/Risk Weighting System) credit limit and exposure monitoring SunGard system with supporting data warehouse – collectively known as ABC’s Credit Risk Management System Project – commenced in 2000 and was completed, in terms of functionality developments, in early 2001. The system was then rolled out to the core banking wholesale units, a process involving extensive training and data cleansing, which is still continuing. Implementation of this system will provide enhanced exposure management capabilities. The key dimensions upon which the system is structured and configured are (a) a customer hierarchy – incorporating the prescribed regulatory and internal guidelines on exposure aggregation; (b) a product hierarchy – which sets standard nomenclature and hierarchy for a full range of products; and (c) a defined ABC group organisational hierarchy for exposure management control and reporting. Supplementing these key dimensions are additional elements covering industry, country/geography, risk ratings and maturity tenor bucket classi- fications. The system offers full flexibility in terms of exposure extraction involving a combination of these elements Improved Credit Risk Measurement Methodologies • The transition to a ’marked-to-market’ based exposure methodology for counterparty credit risk on treasury products was completed. The introduction of an industry-standard risk rating process, and progres- sive creation of a risk rating culture within the ABC Group, continues at an aggressive pace. The objective for 2001, to introduce ratings at the obligor level, was largely achieved; the principal objective for 2002 is the transition to individual credit facility ratings. The establishment and maintenance of a uniform risk ratings system represent the cornerstone of the credit risk management framework. As such, its increasing usage, adaptability to different businesses/transactions/risks, and integrity of application by the different users, remain central to the core risk management programme. Transparent Pricing Methodology (a capital allocation process) • The next stage of development, following the successful implemen- tation of a risk ratings system, is the creation of a database of default and loss statistics relative to each rating class and, secondly, a methodology for the estimation and internal allocation of operating costs. These components will underpin a pricing and economic capital allocation process. In this regard CRG is working with KMV (a San Francisco-based vendor providing software for actual and surrogate default probability estimates), utilising their suite of products to estimate default norms, where applicable, on the Group credit portfolio. Following the completion of this project in 2002, an internal database on default probabilities can be constructed. In addition, ABC Group continued to play a leading role in dialogue with other banks in the region, seeking to develop regional default and loss benchmarks. ABC actively participated in several regional conferences on ’Basel Two’, hosting a regional banks’ conference to discuss the challenges leading up to 2005.
41 moving forward through innovation Credit Risk Management continued Portfolio Risk Reviews and Control • On-site reviews of ABC unit portfolios, by senior credit and business management, are an ongoing process. Now, enhanced systems and data availability allow the production of exposure studies by unit, industry and country, highlighting key areas of concentrations, risk ratings and return on capital – at both portfolio and individual obligor levels. The primary purpose of these studies is threefold: to provide the credit approval process with empirical portfolio statistics, identify portfolio concentrations – as related to geographical region/country, industry, counterparty or banking product – and review dynamically the need for portfolio diversification. Development of this programme continues. Internal Credit Risk Re-organisation • During 2001 the Head Office Credit Department was restructured and merged with Credit Risk Control & Policy Unit. Synergies anticipated include a more streamlined credit process, more productive use of resources and greater focus on developing specific industry and product expertise. Policies • Revision of both the ABC Group and the parent bank Credit Policy Manuals was completed, incorporating the main elements of the Credit Risk Management framework outlined above. A key component is an approval structure based on risk ratings, tenor and other guidelines, including portfolio thresholds and concentrations. Implementation is expected in 2002. CRG is also assisting in the compilation/review of the Credit Policy Manuals of the domestic banking units specialising in the retail and small to medium-sized business markets, mainly the Arab World subsidiaries. This process, from a policy and future regulatory perspective, will provide the basis for business segmentation, and resultant synergies on risk control and credit processes, within the ABC Group. Procedures • Rationalisation of the credit process within the ABC Group, aimed at achieving a higher degree of efficiency and Group control, was completed. Significant enhancements included the streamlining of the processes for reviewing and setting Group country and Financial Institutions counterparty risk limits.
42 ARAB BANKING CORPORATION Annual Report 2001
Review of Operations
Market Risk Management Systems • Algorithmics’ RiskWatch, the market risk management system selected to help meet ABC Group’s needs and regulatory requirements, for the foreseeable future, in data capture and measurement of all types of market risk and efficient allocation of capital, completed user acceptance testing and went live in April 2001. It provides Historic, Monte Carlo and Variance/Covariance Value-at-Risk (VaR) calculation as well as marginal VaR and a suite of applications providing enhanced stress testing and modelling capabilities, including sensitivity calculations aggregated by, inter alia, location, risk and trading desk. Parallel running of the system commenced in Bahrain and London in 2001 and is continuing. The system will aid in the setting of capital-optimised limits through providing management with more accurate quantification of exposure risk. Risk Management Department (RMD) and Group Treasury are currently working on incorporating the new functionality into business models and limit structures. Methodology • Value-at-Risk – Historic VaR has been introduced and is being used by RMD. The process was initiated with 2 years’ historic data and augmented with daily market data capture since inception. RMD expects to extend the historic time series from 3 to 5 years in 2002 using an external data provider. VaR systems can now support all levels of activity in the core banking group, providing full statistical analysis of limit utilisation and risk, broken down by product and/or unit. The VaR is being calculated using a 98 per cent two-tail confidence, one-day horizon. Basis Point Value (BPV) – Selective use of BPV was introduced for certain specific trading limits in 2001 in the Bahrain Treasury. In 2002 this sensitivity measure will be rolled out for all interest rate risk products and positions in both the trading book and the banking book and offered to ABC branches and subsidiaries. Limit Setting -Trading – VaR guidelines have been established for treasury trading activities, with the intention of firming guidelines into limits in 2002 once management is comfortable with the parallel run results. Liquidity Risk Management (LRM) • LRM Policy was updated to replace the previous policy and to reflect the most recent Treasury Contingency Funding Plan approved by the Board. The extension of Group-wide liquidity consolidation initiatives continued.
Remedial Loans and Recovery The Remedial Loans Unit continues to pursue its primary objective of 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 seeks 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, which are evaluated by Head Office senior management to determine the adequacy of existing provisions. All units 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 2001. Exposure to the troubled countries of Thailand, Indonesia, China, Russia and Pakistan was reduced in 2000 by US$334 million, and by a further US$205 million in 2001 to a manageable total of US$160 million. This was achieved through a combination of repayments, debt rescheduling and restructuring, asset sales or swaps and bankruptcy proceedings where these were unavoidable.
Project Name Oman LNG
Project Sponsor(s) Government of Oman, Shell, TotalFinaElf + others. Project Country Oman Purpose LNG plant refinancing Industry LNG
Deal Size US$1,300 million Financial Close Date March 15, 2002 ABC Role Mandated Lead Arranger, Regional Bookrunner ABC Underwriting US$108 million
43 Annual Report 2001 ARAB BANKING CORPORATION
Review of Operations
2002 and Beyond For 2002, the CRG’s ambitious programme includes, in the systems area, further development and rollout of the RXM and the completion of the KMV pilot project to develop a surrogate default database. In the risk management area, once the parallel runs mentioned above have been accepted by senior management, treasury limits will be formalised based upon the new aggregated risk parameters and model validation and back testing results will be used to support an enhanced process for allocation of regulatory and economic capital. CRG anticipates that by the end of 2002 the VaR of every product offered by the core banking units will have been established. 2002 will also see the expansion of the credit risk rating methodology to individual credit facilities, the introduction of risk ratings- related approval authorities and an updated and revised Group Credit Policy. The introduction of separate product-based credit policies and procedures, tailored for the small business and retail customer segments of the Arab World subsidiaries, together with improved, better integrated, reporting systems will significantly enhance Head Office overview of these activities. Development of the risk-adjusted capital allocation process, begun in 2001, will be significantly progressed. The drive to improve the efficiency and cost effectiveness of the credit process will continue, with emphasis on the potential offered by electronic processing of credit applications to streamline the approval process.
Global Information Technology Head Office Global Information Technology Department is responsible for global IT strategy and planning, and all related technical services throughout the Group. The department fulfils an important 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 needs with the Group’s technology strategy and primary concern for delivering efficient, cost-effective, systems. The Group’s global technology upgrade and standardisation programme for the core bank units took a further step forward in October 2001 with the completion of the final phase of the new Core Banking System Project, when the state-of-the-art integrated back office system went live in Bahrain, effectively switching off the legacy systems. This was a significant achievement for ABC and one marking the start of a new era, with Head Office benefiting from: • Deployment of state of the art technology to streamline business processes and increase efficiency, using functionalities such as Straight Through Processing (STP); • Improved management control over technology; • Advanced reporting capabilities (exposure reporting, regulatory reporting and consolidated reports); • Improved product support for treasury and commercial banking activities (enhancing ABC’s capability to increase product offerings, volume and revenue); • Improved Management Information quality.
ABC’s new integrated banking systems will be rolled out in 2002 to its overseas units in parallel with the deployment of other components of the Core Banking Systems, including the real-time front office and trade finance systems. Meanwhile, ABC has completed the implementation of its Enterprise Risk Management Systems in the areas of credit and market risk providing, for Credit Risk Management, detailed Group-wide treasury and non-treasury activity and exposure information and, for Market Risk Management, support for advanced risk analytics such as VaR and simulation techniques. As part of its ’e-Enable the Enterprise’ initiative, since mid-2001 ABC has availed selected customers with its new in-house banking solution through the Group’s web portal (ABC On-Line). ABC On-Line provides customers with secure access to their portfolio information, statements, confirmations and advices and market prices on an on-line, real-time basis. Additional enhancements and features are in course of on-going implementation and in 2002 ABC is planning to extend its e-business services by offering ABC On-Line to an increasing number of customers. In its continuous effort to streamline efficiency and reduce costs, ABC has completed the implementation of a web-based Enterprise Document Management System that allows for business processes to be automated as part of an electronic workflow for Head Office departments, and will be seeking to deploy this technology in other areas such as in ’e-Procurement’. The Group has also made significant advances with key IT initiatives at ABC’s Arab World subsidiaries, launching mobile/phone banking services in Jordan and progressing the implementation of best-of-breed retail banking systems in ABC Egypt, including the latter’s new ATM on-line network and credit card processing services, now fully operational. Global Information Technology dubs 2002 ’the year of customer delivery’, where customers will be further empowered through instant access to account information and account management capabilities, delivered to their desktops through the Internet, protected by state-of-the-art security systems and firewalls.
44 ARAB BANKING CORPORATION Annual Report 2001
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 2001, 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 2001 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 2001 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.
14 February 2002 Manama, Kingdom of Bahrain
45 Annual Report 2001 ARAB BANKING CORPORATION
Consolidated Balance Sheet 31 December 2001
2001 2000 Note (US$ million) (US$ million) ASSETS
Liquid funds 462 409 Trading securities 341 713 Non-trading securities 3 3,616 3,030 Placements with banks and other financial institutions 6,444 7,060 Loans and advances 4 14,225 14,039 Interest receivable 175 247 Investments in associates 46 41 Other assets 830 697 Premises and equipment 5 447 440
TOTAL ASSETS 26,586 26,676
LIABILITIES
Deposits from customers 12,762 11,451 Deposits from banks and other financial institutions 8,703 10,058 Certificates of deposit 79 249 Interest payable 142 220 Taxation 6 49 48 Other liabilities 687 637
TERM NOTES, BONDS AND OTHER TERM FINANCING 7 1,817 1,692
24,239 24,355
MINORITY INTERESTS 434 417
EQUITY
Share capital 1,000 1,000 Treasury stock (74) (74) Reserves 463 456 Retained earnings 524 522
1,913 1,904
TOTAL LIABILITIES, MINORITY INTERESTS AND EQUITY 26,586 26,676
Khalifa Al-Kindi Chairman
Ghazi Abdul-Jawad President & Chief Executive
The attached notes 1 to 28 form part of these consolidated financial statements
46 ARAB BANKING CORPORATION Annual Report 2001
Consolidated Statement of Income Year ended 31 December 2001
2001 2000 Note (US$ million) (US$ million)
OPERATING INCOME
Interest income 1,524 1,673 Interest expense (1,055) (1,240)
Net interest income 469 433 Other operating income 9 293 280
Total operating income 762 713
Provision for losses on loans and advances, net of recoveries 4 (128) (66)
NET OPERATING INCOME AFTER PROVISIONS 634 647
OPERATING EXPENSES Staff 10 291 281 Premises and equipment 61 54 Other 122 116
Total operating expenses 474 451
PROFIT BEFORE TAXATION AND MINORITY INTERESTS 160 196
Taxation on foreign operations 6 (23) (33) Minority interests in subsidiaries (35) (36)
NET PROFIT FOR THE YEAR 102 127
EARNINGS PER SHARE (expressed in US dollars) 25 1.08 1.35
The attached notes 1 to 28 form part of these consolidated financial statements
47 Annual Report 2001 ARAB BANKING CORPORATION
Consolidated Statement of Cash Flows Year ended 31 December 2001
2001 2000 (US$ million) (US$ million) OPERATING ACTIVITIES Net profit for the year 102 127 Items not involving cash flow: Provisions for losses on loans and advances 128 66 Depreciation 27 26 Item considered separately: Gains less losses on non-trading securities (24) (21) Changes in operating assets and liabilities: Trading securities 308 (366) Placements with banks and other financial institutions 568 (1,095) Loans and advances (276) (924) Other assets (65) (46) Deposits from customers 1,200 853 Deposits from banks and other financial institutions (1,330) 343 Other liabilities (13) 248 Other non-cash movements (88) 141
Net cash inflow (outflow) from operating activities 537 (648)
INVESTING ACTIVITIES Purchase of non-trading securities (3,760) (1,616) Sale and redemption of non-trading securities 3,444 1,723 Purchase of premises and equipment (59) (53) Sale of premises and equipment 62 38
Net cash (outflow) inflow from investing activities (313) 92
FINANCING ACTIVITIES (Repayment) of certificates of deposit-net (171) (15) Issue of term notes, bonds and other term financing 1,812 1,225 Repayment of term notes, bonds and other term financing (1,744) (795) Dividend paid (66) (56)
Net cash (outflow) inflow from financing activities (169) 359
Increase (decrease) in liquid funds 55 (197) Effect of exchange rate changes on liquid funds (2) 19 Liquid funds at beginning of the year* 409 587
Liquid funds at end of the year* 462 409
* Liquid funds comprise cash, nostro balances and balances with central banks.
The attached notes 1 to 28 form part of these consolidated financial statements
48 ARAB BANKING CORPORATION Annual Report 2001
Consolidated Statement of Changes in Equity Year ended 31 December 2001
Extra- Cumulative ordinary changes Share Treasury Statutory General financial Capital Revaluation Share Retained in fair capital stock reserve reserve reserve reserve 2 reserve 2 premium 2 earnings 3 value Total (US$ million)
Balance at the end of the year 1999 1,000 (74) 170 140 10 11 42 71 487 - 1,857 Dividend ------(56) - (56) Net profit for the year – 2000 ------127- 127 Transfer from retained earnings - - 13 - - - (1) - (12) - - Foreign exchange translation adjustments ------(24) - (24)
Balance at the end of the year 2000 1,000 (74) 183 140 10 11 41 71 522 - 1,904
Restatement in accordance with IAS 39 ------(33) - (33) Dividend ------(66) - (66) Net profit for the year – 2001 ------102- 102 Transfer from retained earnings - - 10 - - (1) - - (9) - - Foreign exchange translation adjustments ------(14) - (14) Transfer to statement of income on disposal of available for sale securities (previously included in retained earnings on adoption of IAS 39) ------22- 22 Cumulative changes in fair values ------(2) (2)
Balance at the end of the year 2001 1,000 (74) 193 140 10 10 41 71 524 (2) 1,913
1. A dividend of US$0.70 per share (2000: US$0.70 per share) has been proposed for approval at the Annual Ordinary General Meeting.
2. These reserves are not distributable.
3. Retained earnings include: • non-distributable reserves amounting to US$111 million relating to subsidiaries (2000: US$77 million); and • negative balance of US$47 million (2000: US$60 million) representing net unrealised losses on translation of investments in foreign subsidiaries into US dollars. Out of the balance at 1 January 2001 of US$60 million, US$27 million related to ineffective hedges and was absorbed in retained earnings as part of IAS 39 transition adjustments.
4. Note 8 contains further details of equity.
The attached notes 1 to 28 form part of these consolidated financial statements
49 Annual Report 2001 ARAB BANKING CORPORATION
Notes to the Consolidated Financial Statements 31 December 2001
1 INCORPORATION AND ACTIVITIES The parent company, Arab Banking Corporation (B.S.C.), [the Bank] incorporated in the Kingdom of Bahrain by an Amiri decree, operates under an offshore banking licence issued by the Bahrain Monetary Agency.
2 SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of Arab Banking Corporation (B.S.C.) and its subsidiaries [the Group] are prepared in accordance with the Bahrain Commercial Companies Law and the Bahrain Monetary Agency Law and in conformity with International Accounting Standards, interpretations issued by the Standing Interpretation Committee and prevailing practices of the banking industry. The following is a summary of the significant accounting policies:
Accounting convention These consolidated financial statements are prepared under the historical cost convention, as modified by the revaluation of premises and the measurement at fair value of derivatives and trading and available-for-sale investment securities. In addition, as more fully discussed below, assets and liabilities that are hedged are carried at fair value to the extent of the risk being hedged.
Change in accounting policies The Group has adopted International Accounting Standard IAS 39 “Financial Instruments: Recognition and Measurement” for the year ended 31 December 2001. This has resulted in significant changes in the accounting policies of the Group in respect of recognition and measurement of derivatives, as well as the measurement of certain non-derivative financial instruments. In accordance with the transi- tional provisions of this standard, the Group has accounted for changes in policies with effect from 1 January 2001 and has not restated comparatives. The major changes are as follows: Derivatives As at the beginning of the financial year, the Group has recognised for the first time the fair value of all derivatives in its balance sheet as either assets or liabilities at their fair values. Prior to the adoption of IAS 39, only the fair values of derivative financial instruments entered into for trading activities were recognised in the consolidated balance sheet. Derivatives and other off-balance sheet instruments used to hedge exposures to fluctuation in interest and exchange rates in conjunction with asset and liability activity were recognised in a manner that would match the accounting treatment of assets and liabilities hedged. Gains or losses (net of adjustments to related assets or liabilities) on fair value hedges at 31 December 2000 were adjusted against the balance of retained earnings on 1 January 2001. Non-trading securities Previously, the Group valued all non-trading securities at amortised cost, less provision for impairment. Subsequent to the imple- mentation of IAS 39, the Group reclassified such investments as “held to maturity” and “available for sale” and remeasured those classified as available for sale to fair value. The gain or loss on remeasuring to fair value was taken to retained earnings on 1 January 2001. On sale the gain or loss is recycled through the statement of income. Loans and advances Loans originated by the Group by providing money directly to the borrower or to a sub-participation agent at the drawdown dates are classified as loans originated by the Group. Purchased loans are classified as held-to-maturity or available-for-sale depending on management's intent. Originated loans and purchased loans classified as held-to-maturity are stated at amortised cost less provision for impairment. Loans classified as available for sale are stated at fair value. The carrying values of loans and advances which are being effectively hedged for changes in fair value are adjusted to the extent of the changes in fair value being hedged. Prior to adoption of IAS 39, all loans and advances were stated at amortised cost less provision for impairment. Provision for impairment of financial assets The calculation of impairment for loans and advances and other financial assets is based on the net present value of anticipated futures cash flows discounted at original interest rates. Previously future recoveries were not discounted to present values. The difference arising from recalculating impairment based on the net present value of futures cash flows was taken to retained earnings on 1 January 2001. Effect of change in accounting policies The effect of the adoption of this standard is disclosed in the consolidated statement of changes in equity. Consolidation These consolidated financial statements include the financial statements of the parent company and its subsidiaries after adjustment for minority interests and elimination of inter-company transactions and balances. Goodwill arising on consolidation is amortised over the expected period of benefit (5 to 20 years) on a straight-line basis. Liquid funds Liquid funds comprise cash, nostro balances and balances with central banks. Placements with banks and other financial institutions and other money market placements Placements with banks and other financial institutions and other money market placements are stated at cost net of any amounts written off and provision for impairment. The carrying values of such assets which are being effectively hedged for changes in fair value are adjusted to the extent of the changes in fair value being hedged. Resultant gains or losses are recognised in the statement of income.
50 ARAB BANKING CORPORATION Annual Report 2001
Notes to the Consolidated Financial Statements 31 December 2001
Investments in associates Investments in associates owned between 20% and 50% are accounted for by the equity method. Trading securities Trading securities are carried at fair value with any gains and losses arising from a change in fair value being included in the statement of income in the period in which it arises. Non-trading securities These are classified as follows: • Held to maturity • Available for sale All non-trading securities are initially recognised at cost, being the fair value of the consideration given including acquisition charges associated with the security. Held to maturity Securities which have fixed or determinable payments and which are intended to be held to maturity, are subsequently measured at amortised cost, less provision for impairment in value. Amortised cost is calculated by taking into account any discount or premium on acquisition. Available for sale All securities intended to be held for an indefinite period of time and which may be sold in response to needs for liquidity, changes in interest rates or equity prices are classified as “available for sale”. They are remeasured at fair value based on quoted market prices or amounts derived from models as appropriate. Unless unrealised gains and losses on remeasurement to fair value are part of an effective hedging relationship, they are reported as a separate component of equity until the security is sold, collected or otherwise disposed of, or the security is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in the statement of income for the period. In relation to investments which are part of an effective hedging relationship any gain or loss arising from a change in fair value is recognised directly in the statement of income. Fair values For securities and investments traded in organised financial markets, fair value is determined by reference to quoted market bid prices. For securities and investments where there is no quoted market price, a reasonable estimate of the fair value is determined by reference to the current market value of another instrument which is substantially the same, or is based on the expected cash flows discounted at current rates applicable for items with similar risk characteristics. The fair value of unlisted options is determined by internal option pricing models. Premises and equipment Premises and equipment are stated at cost or as revalued to approximate market values in the case of freehold land and buildings based on valuations by independent firms of professional surveyors. The surplus, net of tax if any, on revaluation is directly credited to revaluation reserves in equity. Any decrease in revaluation is charged first against any previous surplus (held in revaluation reserve in respect of that asset) and where such surpluses are insufficient, the shortfall is charged to the statement of income. Freehold land is not depreciated. Depreciation on other premises and equipment is provided on a straight-line basis over their estimated useful lives. Revenue recognition Interest income and expense are recognised on a time proportion basis taking account of the principal outstanding and the rate applicable. Fee income and expense are recognised when earned or incurred. Premiums and discounts on originated loans as well as securities and loans designated as held to maturity or available for sale are amortised on a systematic basis to maturity using the effective interest method and taken to interest income. Offsetting Financial assets and financial liabilities are only offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and the bank intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Loans and advances Loans originated by the Group by providing money directly to the borrower or to a sub-participation agent at the drawdown dates are classified as loans originated by the Group. Purchased loans are classified as held-to-maturity or available-for-sale depending on management's intent. Originated loans and purchased loans classified as held-to-maturity are stated at amortised cost less provision for impairment. Loans classified as available for sale are stated at fair value. The carrying values of loans and advances which are being effectively hedged for changes in fair value are adjusted to the extent of the changes in fair value being hedged. Impairment and uncollectability of financial assets An assessment is made at each balance sheet date to determine whether there is objective evidence that a specific financial asset may be impaired. If such evidence exists, the estimated recoverable amount of that asset is determined and any impairment loss is recognised in the statement of income. The recoverable amount is based on the net present value of anticipated futures cash flows, discounted at the original interest rate. In addition to provisions for specific impaired loans and advances, a general provision is made for impairment against portfolios of loans and advances based on historical default rates.
51 Annual Report 2001 ARAB BANKING CORPORATION
Notes to the Consolidated Financial Statements 31 December 2001
2 SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign currencies Monetary assets and liabilities in foreign currencies are translated into US dollars at the market rates of exchange prevailing at the balance sheet date. The assets and liabilities of foreign subsidiaries are translated at rates of exchange ruling at the balance sheet date. Income and expense items are translated at average exchange rates for the period. Foreign exchange translation gains and losses arising from translating the financial statements of subsidiaries into US dollars are recorded directly in retained earnings. Deposits All money market and customer deposits are carried at amortised cost. An adjustment is made to these, where effective fair value hedges have been made, to adjust the value of the deposit for the fair value being hedged with the resultant gains or losses being recognised in the statement of income. Taxation on foreign operations There is no tax on corporate income in the Kingdom of Bahrain. Taxation on foreign operations is provided for in accordance with the fiscal regulations applicable in each location. No provision is made for any liability that may arise in the event of distribution of the reserves of subsidiaries. A substantial portion of such reserves is required to be retained to meet local regulatory requirements. Provisions Provisions are recognised when the bank has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Treasury stock Treasury stock is stated at cost adjusted for any gain or loss on subsequent sale. Treasury stock does not carry the right to dividends. Employee pension and other end of service benefits 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. Fiduciary assets Assets held in trust or in a fiduciary capacity are not treated as assets of the Group and, accordingly, are not included in the consoli- dated balance sheet. Repurchase and resale agreements Assets sold with a simultaneous commitment to repurchase at a specified future date (‘repos’) continue to be recognised in the balance sheet and are stated in accordance with accounting policies for non-trading securities and loans. The counterparty liability for amounts received under these agreements is included in deposits from banks and other financial institutions or deposits from customers, as appropriate. The difference between sale and repurchase price is treated as interest expense 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 assets. Amounts paid under these agreements are included in placements with banks and other financial institutions or loans and advances, as appropriate. The difference between purchase and resale price is treated as interest income and accrued over the life of the reverse repo agreement. Trade and settlement date accounting All ‘regular way’ purchases and sales of financial assets are recognised on the trade date, i.e. the date that the bank commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. Derivatives The Group enters into derivative instruments including forwards, futures, forward rate agreements, swaps and options in the foreign exchange, interest rate and capital markets. The fair value of a derivative is the equivalent of the unrealised gain or loss from marking to market the derivative using prevailing market rates or internal pricing models. Derivatives with positive market values (unrealised gains) are included in other assets, and derivatives with negative market values (unrealised losses) are included in other liabilities in the consolidated balance sheet. Changes in the fair values of derivatives held for trading activities or to hedge other trading positions are included in other operating income in the consolidated statement of income. For the purposes of hedge accounting, hedges are classified into two categories: (a) fair value hedges which hedge the exposure to changes in the fair value of a recognised asset or liability; and (b) cash flow hedges which hedge exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability or a forecasted transaction. Changes in the fair value of derivatives that are designated, and qualify, as fair value hedges and that prove to be highly effective in relation to the hedged risk, are included in other operating income along with the corresponding changes in the fair value of the hedged assets or liabilities which are attributable to the risk being hedged. If the hedge no longer meets the criteria for hedge accounting or is discontinued, an adjustment to the carrying amount of a hedged interest-bearing financial instrument is amortised to consolidated statement of income over the period of maturity. Changes in the fair value of derivatives that are designated, and qualify, as cash flow hedges and that prove to be highly effective in relation to the hedged risk, are recognised in a separate component of equity and the ineffective portion is recognised in the consolidated statement of income. The gains or losses on cash flow hedges recognised initially in equity are transferred to the consolidated statement of income in the period in which the hedged transaction impacts the consolidated statement of income.
52 ARAB BANKING CORPORATION Annual Report 2001
Notes to the Consolidated Financial Statements 31 December 2001
Where the hedged transaction results in the recognition of an asset or a liability, the associated gains or losses that had been initially recognised in equity are included in the initial measurement of the cost of the related asset or liability. Hedge accounting is discontinued when the derivative hedging instrument either expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. Upon such discontinuance: • in the case of cash flow hedges, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the forecasted transaction occurs. When such transaction occurs, the gain or loss retained in equity is recognised in the consolidated statement of income or included in the initial measurement of the cost of the related asset or liability, as appropriate. Where the hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the consolidated statement of income. • in the case of fair value hedges of interest-bearing financial instruments, any adjustment relating to the hedge is amortised over the remaining term to maturity.
Certain derivative transactions, while providing effective economic hedges under the Group‘s asset and liability management and risk management positions, do not qualify for hedge accounting under the specific rules in IAS 39 and are therefore treated as derivatives held for trading and the related fair value gains and losses reported in other operating income.
3 NON-TRADING SECURITIES 2001 (US$ million) Held to maturity 38 Available for sale 3,578 Balance at 31 December 3,616
The market value of held to maturity securities at the year-end amounted to US$41 million.
4 LOANS AND ADVANCES 2001 2000 i) By industrial sector (US$ million) (US$ million)
Financial 2,165 2,548 Manufacturing 2,335 2,079 Construction 1,069 1,030 Trade 1,233 1,125 Consumer and other services 5,984 5,802 Government 1,746 1,696 Other 325 379
14,857 14,659 Loan loss provisions (632) (620)
Balance at 31 December 14,225 14,039
2001 ii) By classification (US$ million)
Originated 14,623 Held to maturity 8 Available for sale 226
14,857 Loan loss provisions (632)
Balance at 31 December 14,225
53 Annual Report 2001 ARAB BANKING CORPORATION
Notes to the Consolidated Financial Statements 31 December 2001
4 LOANS AND ADVANCES (continued)
The movements in loan loss provisions during the year were as follows: 2001 2000 (US$ million) (US$ million) Provisions Interest in suspense Provisions Interest in suspense
At 1 January 620 242 869 270 Charge for the year 193 - 134 - Recoveries (65) (18) (68) (15) Suspended for the year -53 -90 Write-offs (103) (23) (298) (98) Foreign exchange translation and other adjustments (13) (1) (17) (5) Total 632 253 620 242
The gross carrying value of loans placed on a non-accrual basis amounted to US$667 million at the year-end (2000: US$694 million).
5 PREMISES AND EQUIPMENT Land and Equipment buildings and other assets Total (US$ million) (US$ million) (US$ million) Cost or valuation: At 1 January 2001 394 248 642 Additions 22 37 59 Disposals (10) (49) (59) Foreign exchange translation and other adjustments (7) (9) (16)
At 31 December 2001 399 227 626
Depreciation: At 1 January 2001 50 152 202 Provided during the year 72027 Disposals (2) (43) (45) Foreign exchange translation and other adjustments 1 (6) (5)
At 31 December 2001 56 123 179
Net book value: At 31 December 2001 343 104 447 At 31 December 2000 344 96 440
6 TAXATION ON FOREIGN OPERATIONS 2001 2000 (US$ million) (US$ million) Balance sheet: Current tax liability 25 27 Deferred tax liability 24 21 49 48
Income statement: Current tax on foreign operations 29 36 Deferred tax on foreign operations (6) (3) 23 33
In view of the operations of the Group being subject to various tax jurisdictions and regulations, it is not practical to provide a reconciliation between the accounting and taxable profits together with the details of effective tax rates.
54 ARAB BANKING CORPORATION Annual Report 2001
Notes to the Consolidated Financial Statements 31 December 2001
7 TERM NOTES, BONDS AND OTHER TERM FINANCING
In the ordinary course of business, the parent company and certain subsidiaries raise term financing through various capital markets at commercial rates.
Total obligations outstanding at 31 December 2001 Parent company Subsidiaries Total (US$ million) (US$ million) (US$ million) Aggregate maturities: 2002 330 346 676 2003 308 2 310 2004 - 352 352 2005 400 - 400 2008 -7979 1,038 779 1,817
Interest basis: Fixed - 185 185 Floating 1,038 594 1,632 1,038 779 1,817
Total obligations outstanding at 31 December 2000 1,038 654 1,692
8 EQUITY a) Share capital 2001 2000 (US$ million) (US$ million)
Authorised – 150 million shares of US$10 each 1,500 1,500
Issued, subscribed and fully paid – 100 million shares of US$10 each 1,000 1,000 b) Treasury stock Treasury stock represents the purchase by the Bank of its own shares. At the end of the year the Bank held 5,867,736 shares (2000: 5,867,736 shares). c) Statutory reserve As required by the Articles of Association of the Bank and the Bahrain Commercial Companies Law, 10% of the net profit for the year is transferred to the statutory reserve. Such annual transfers will cease when the reserve totals 50% of the paid up share capital. The reserve is not available for distribution except in circumstances as stipulated in the Bahrain Commercial Companies Law and following the approval of the Bahrain Monetary Agency. d) General reserve The general reserve underlines the shareholders’ commitment to enhance the strong equity base of the Bank. e) Extraordinary financial reserve The extraordinary financial reserve has been established to cover any possible future diminution in the carrying value of assets and is used at the discretion of the Board of Directors. f) Capital reserve The capital reserve arises on the consolidation of subsidiaries acquired at a discount and is not distributable. g) Revaluation reserve The revaluation reserve has been created by revaluation of properties in certain subsidiaries and is not distributable.
55 Annual Report 2001 ARAB BANKING CORPORATION
Notes to the Consolidated Financial Statements 31 December 2001
9 OTHER OPERATING INCOME 2001 2000 (US$ million) (US$ million)
Fee and commission income 180 191 Fee and commission expense (14) (19) Gains less losses on trading securities 6 7 Gains less losses on non-trading securities 24 21 Gains less losses on dealing in foreign currencies 34 27 Credit card income -net 20 20 Gains less losses on dealing in derivatives 8 - Other - net 35 33 293 280
10 STAFF The number of staff employed by the Group as of 31 December 2001 was 5,309 (2000: 5,270).
11 INVESTMENTS IN SUBSIDIARIES AND ASSOCIATES The principal subsidiaries, all of which have 31 December as their year-end, are as follows: Interest of Arab Banking Country of Corporation (B.S.C.) Incorporation (%)
Banco Atlantico S.A. Group companies Spain 67 Banco de Iberoamerica Panama 67 ABC Banque Internationale de Monaco S.A.M. Monaco 67 International Bank of Asia Ltd. Hong Kong 55 ABC International Bank plc United Kingdom 100 Arab Banking Corporation – Daus & Co. GmbH Germany 99 ABC Islamic Bank (E.C.) Bahrain 100 Arab Banking Corporation (ABC) – Jordan Jordan 87 Banco ABC Brasil S.A. Brazil 79 ABC Algeria Algeria 70 Arab Banking Corporation – Egypt [S.A.E.] Egypt 96 ABC Tunisie Tunis 100 ABC Securities [Egypt] S.A.E. Egypt 100
The principal associate is Arab Financial Services (E.C.), incorporated in Bahrain, with 36% ownership.
12 SIGNIFICANT NET FOREIGN CURRENCY EXPOSURES Significant net foreign currency exposures, arising mainly from investments in subsidiaries, are as follows:
2001 2000 (in million) (in million) Long (short) Currency US$ Currency US$
Brazilian real 7392 47 Egyptian pound 439 96 511 131 Euro 121 107 82 76 Hong Kong dollar * 1,997 256 1,862 239 Jordanian dinar 14 20 28 40 Pound sterling 32 46 32 48 Saudi riyal (434) (116) (415) (111)
* The Hong Kong dollar exposure to the extent of US$241 million (2000: US$221 million) is covered by currency options to minimise the risk of loss from adverse movements in the foreign currency rates.
56 ARAB BANKING CORPORATION Annual Report 2001
Notes to the Consolidated Financial Statements 31 December 2001
13 DERIVATIVES In the ordinary course of business, the Group enters into various types of transactions that involve derivative financial instruments. A derivative financial instrument is a financial contract between two parties where payments are dependent upon movements in price in one or more underlying financial instrument, reference rate or index. Derivative financial instruments include forwards, futures, swaps and options. The table below shows the positive and negative fair values of derivative financial instruments, which are equivalent to the market values, together with the notional amounts analysed by the term to maturity. The notional amount is the amount of a derivative’s underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured. The notional amounts indicate the volume of transactions outstanding at year-end and are neither indicative of the market risk nor credit risk.
2001 2000 Positive Negative Notional Notional fair value fair value amount amountb (US$ million) (US$ million)
Derivatives held for trading: Interest rate and currency swaps 45 61 3,851 1,484 Forward foreign exchange contracts 10 6 5,931 2,669 Options 4 6 1,837 2,626 Futures 1 1 157 1,179 Equity contracts - - 703 183 60 74 12,479 8,141
Derivatives held as hedgesa Interest rate and currency swaps 33 10 2,477 5,169 Forward foreign exchange contracts --70907 Options - - 241 221 Futures - - 174 41 33 10 2,962 6,338 93 84 15,441 14,479 Risk weighted equivalents (credit and market risk) 673 597 a Derivatives held as hedges as of 31 December 2001 include: • cash flow hedges with a notional amount of US$162 million, mainly interest rate swaps of US$151 million, the fair value of which is immaterial; and • hedge of net investment in a foreign subsidiary of US$241 million through foreign currency options. b Derivatives held for hedging were fair valued and recognised as assets and liabilities from 1 January 2001. The loss of US$8 million arising on fair valuation of those derivatives together with the related gains on the underlying hedged items was recognised in retained earnings in accordance with IAS 39.
Derivative product types Forwards and futures are contractual agreements to either buy or sell a specified currency, commodity or financial instrument at a specific price and date in the future. Forwards are customised contracts transacted in the over-the-counter market. Foreign currency and interest rate futures are transacted in standardised amounts on regulated exchanges and are subject to daily cash margin require- ments. Forward rate agreements are effectively tailor-made interest rate futures which fix a forward rate of interest on a notional loan, for an agreed period of time starting on a specified future date. Swaps are contractual agreements between two parties to exchange interest or foreign currency differentials based on a specific notional amount. For interest rate swaps, counterparties generally exchange fixed and floating rate interest payments based on a notional value in a single currency. For cross-currency swaps, fixed interest payments and notional amounts are exchanged in different currencies. For cross-currency interest rate swaps, notional amounts and fixed and floating interest payments are exchanged in different currencies. Options are contractual agreements that convey the right, but not the obligation, to either buy or sell a specific amount of a commodity or financial instrument at a fixed price, either at a fixed future date or at any time within a specified period.
Derivative related credit risk Credit risk in respect of derivative financial instruments arises from the potential for a counterparty to default on its contractual obligations and is limited to the positive fair value of instruments that are favourable to the Group. The majority of the Group’s derivative contracts are entered into with other financial institutions and there is no significant concentration of credit risk in respect of contracts with positive fair value with any individual counterparty at the balance sheet date.
57 Annual Report 2001 ARAB BANKING CORPORATION
Notes to the Consolidated Financial Statements 31 December 2001
13 DERIVATIVES (continued) Derivatives held or issued for trading purposes Most of the Group’s derivative trading activities relate to sales, positioning and arbitrage. Sales activities involve offering products to customers. Positioning involves managing market risk positions with the expectation of profiting from favourable movements in prices, rates or indices. Arbitrage involves identifying and profiting from price differentials between markets or products.
Derivatives held or issued for hedging purposes The Group has adopted a comprehensive system for the measurement and management of risk. Part of the risk management process involves managing the Group’s exposure to fluctuations in foreign exchange rates (currency risk) and interest rates through asset and liability management activities. It is the Group’s policy to reduce its exposure to currency and interest rate risks to acceptable levels as determined by the Board of Directors. The Board has established levels of currency risk by setting limits on currency position exposures. Positions are monitored on a daily basis and hedging strategies used to ensure positions are maintained within established limits. The Board has established levels of interest rate risk by setting limits on the interest rate gaps for stipulated periods. Interest rate gaps are reviewed on a daily basis and hedging strategies used to reduce the interest rate gaps to within the limits established by the Board. As part of its asset and liability management, the Group uses derivatives for hedging purposes in order to reduce its own exposure to currency and interest rate risks. This is achieved by hedging specific transactions as well as strategic hedging against overall balance sheet exposures. For interest rate risk this is carried out by monitoring the duration of assets and liabilities using simulations to estimate the level of interest rate risk and entering into interest rate swaps and futures to hedge a proportion of the interest rate expo- sure. Since strategic hedging does not qualify for special hedge accounting, related derivatives are accounted for as trading instruments. The Group uses forward foreign exchange contracts and currency swaps to hedge against specifically identified currency risks. In addition, the Group uses interest rate swaps and interest rate futures to hedge against the interest rate risk arising from specifically identified fixed interest rate loans. The Group also uses interest rate swaps to hedge against the cash flow risks arising on certain floating rate loans. In all such cases the hedging relationship and objective, including details of the hedged item and hedging instrument, are formally documented and the transactions are accounted for as hedges. Derivatives held as hedges are predominantly used to hedge fair value changes arising from interest rate fluctuations in loans and advances, placements, deposits and available for sale debt securities.
14 COMMITMENTS AND CONTINGENT LIABILITIES Commitments and contingent liabilities include commitments to extend credit, standby letters of credit, acceptances and guarantees, which are structured to meet the various requirements of customers. At the balance sheet date, the principal outstanding and the risk-weighted equivalents calculated in accordance with the capital adequacy guidelines established for the global banking industry were as follows: 2001 2000 (US$ million) (US$ million) Direct credit substitutes, guarantees and acceptances 1,677 1,398 Forward asset purchase commitments 41 178 Short-term self-liquidating trade and transaction-related contingent items 2,154 2,103 Other commitments (including undrawn loans) 4,698 4,846 8,570 8,525 Risk-weighted equivalents 2,841 2,560
58 ARAB BANKING CORPORATION Annual Report 2001
Notes to the Consolidated Financial Statements 31 December 2001
15 MATURITIES OF ASSETS, LIABILITIES AND OFF BALANCE SHEET ITEMS The maturity analysis of assets, liabilities and off balance sheet items based on remaining period to the contractual maturity date is as follows:
At 31 December 2001 Within 1 – 3 3 – 6 6 – 12 1 – 5 Over one month months months months years 5 years Undated Total (US$ million) Assets Liquid funds 462 ------462 Trading securities 64 31 13 31 120 9 73 341 Non-trading securities 792 387 412 101 946 874 104 3,616 Placements with banks and other financial institutions 5,076 686 472 54 155 1 - 6,444 Loans and advances 2,115 1,424 1,170 1,405 3,375 4,736 - 14,225 Other ------1,498 1,498 Total assets 8,509 2,528 2,067 1,591 4,596 5,620 1,675 26,586
Liabilities, minority interests and equity Deposits from customers 9,343 1,756 637 570 397 59 - 12,762 Deposits from banks and other financial institutions 5,564 2,197 447 297 129 69 - 8,703 Certificates of deposit 18 32 21 7 1 - - 79 Term notes, bonds and other term financing 207 83 20 366 1,062 79 - 1,817 Minority interests and other ------1,312 1,312 Equity ------1,913 1,913 Total liabilities, minority interests and equity 15,132 4,068 1,125 1,240 1,589 207 3,225 26,586
Off balance sheet items Commitments and contingent liabilities 1,030 850 1,484 2,649 1,961 596 - 8,570 Foreign exchange contracts 2,760 2,647 1,179 1,280 78 17 - 7,961 Interest rate contracts 1,183 624 1,428 528 2,214 800 - 6,777 Equity and other contracts 3 - 221 277 202 - - 703 Total 4,976 4,121 4,312 4,734 4,455 1,413 - 24,011
59 Annual Report 2001 ARAB BANKING CORPORATION
Notes to the Consolidated Financial Statements 31 December 2001
The maturity analysis of assets, liabilities and off balance sheet items based on remaining period to the contractual maturity date is as follows:
At 31 December 2000 Within 1 – 3 3 – 6 6 – 12 1 – 5 Over one month months months months years 5 years Undated Total (US$ million) Assets Liquid funds 409 ------409 Trading securities 340 23 55 45 152 - 98 713 Non-trading securities 217 73 101 54 976 1,481 128 3,030 Placements with banks and other financial institutions 5,457 1,052 359 138 50 4 - 7,060 Loans and advances 1,216 1,787 1,569 1,595 3,946 3,918 8 14,039 Other ------1,425 1,425 Total assets 7,639 2,935 2,084 1,832 5,124 5,403 1,659 26,676
Liabilities, minority interests and equity Deposits from customers 7,733 2,043 585 441 571 78 - 11,451 Deposits from banks and other financial institutions 6,311 2,618 593 402 57 77 - 10,058 Certificates of deposit 40 107 54 39 9 - - 249 Term notes, bonds and other term financing 80 21 77 106 1,323 85 - 1,692 Minority interests and other ------1,322 1,322 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
Off balance sheet items Commitments and contingent liabilities 1,294 709 1,237 2,768 1,980 537 - 8,525 Foreign exchange contracts 2,250 1,549 976 996 69 - - 5,840 Interest rate contracts 1,400 2,123 815 1,106 2,622 390 - 8,456 Equity and other contracts - 7 - 13 163 - - 183 Total 4,944 4,388 3,028 4,883 4,834 927 - 23,004
16 INTEREST RATE EXPOSURE
Interest rate exposure is the sensitivity of earnings to changes in interest rates. Such exposures arise in the ordinary course of business and are managed on a decentralised basis employing the use of off-balance sheet interest rate products where appropriate. The respective Asset and Liability Committees of the Bank and its subsidiaries establish the maximum levels 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 rate risk based on the earlier of contractual maturity and the next interest repricing date is as follows:- Non Within 1-3 3-6 6-12 1-5 Over Interest one month months months months years 5 years bearing Total (US$ million) At 31 December 2001 US dollars Assets 4,898 2,694 2,462 424 448 529 434 11,889 Liabilities and minority interests (7,283) (2,098) (583) (376) (131) - (820) (11,291) Equity ------(1,913) (1,913) Off balance sheet items (468) 407 198 118 (286) - - (31) (2,853) 1,003 2,077 166 31 529 (2,299) (1,346) Euro Assets 2,198 2,269 969 1,164 387 81 619 7,687 Liabilities and minority interests (3,795) (897) (342) (375) (287) (3) (1,627) (7,326) Off balance sheet items (21) (41) 53 21 2 (9) - 5 (1,618) 1,331 680 810 102 69 (1,008) 366
60 ARAB BANKING CORPORATION Annual Report 2001
Notes to the Consolidated Financial Statements 31 December 2001
Non Within 1-3 3-6 6-12 1-5 Over Interest one month months months months years 5 years bearing Total At 31 December 2001 (US$ million)
Hong Kong dollars Assets 1,813 257 41 106 411 66 270 2,964 Liabilities and minority interests (1,612) (571) (116) (48) (3) - (291) (2,641) Off balance sheet items ------201 (314) (75) 58 408 66 (21) 323 Other currencies Assets 1,799 697 414 271 402 26 437 4,046 Liabilities and minority interests (1,786) (784) (193) (295) (131) (65) (161) (3,415) Off balance sheet items (72) 148 (15) (1) (5) (29) - 26 (59) 61 206 (25) 266 (68) 276 657 Gross Assets 10,708 5,917 3,886 1,965 1,648 702 1,760 26,586 Liabilities, minority interests and equity (14,476) (4,350) (1,234) (1,094) (552) (68) (4,812) (26,586) Off balance sheet items (561) 514 236 138 (289) (38) - - (4,329) 2,081 2,888 1,009 807 596 (3,052) -
Non Within 1-3 3-6 6-12 1-5 Over Interest one month months months months years 5 years bearing Total At 31 December 2000 (US$ million)
US dollars 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) Equity ------(1,904) (1,904) Off balance sheet items 1,138 (619) (62) (432) 7 14 - 46 1,364 (1,202) 835 (852) 423 657 (2,081) (856) Euro Assets 3,716 1,772 841 972 159 138 378 7,976 Liabilities and minority interests (4,167) (778) (320) (228) (522) (86) (1,622) (7,723) Off balance sheet items 459 (96) (57) 145 (61) 18 - 408 8 898 464 889 (424) 70 (1,244) 661 Hong Kong dollars 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 Other currencies Assets 1,257 775 529 173 265 22 277 3,298 Liabilities and minority interests (1,749) (624) (201) (158) (31) (80) (352) (3,195) Off balance sheet items (341) (28) 19 6 (46) 10 (74) (454) (833) 123 347 21 188 (48) (149) (351) Gross Assets 13,641 4,803 3,251 1,428 1,258 936 1,359 26,676 Liabilities, minority interests and equity (14,189) (4,509) (1,529) (1,057) (630) (197) (4,565)(26,676) Off balance sheet items 1,256 (743) (100) (281) (100) 42 (74) - 708 (449) 1,622 90 528 781 (3,280) -
61 Annual Report 2001 ARAB BANKING CORPORATION
Notes to the Consolidated Financial Statements 31 December 2001
16 INTEREST RATE EXPOSURE (continued) The effective interest rates of assets, liabilities and off balance sheet instruments in major currencies are as follows:
At 31 December 2001 Within 1-3 3-6 6-12 1-5 Over one month months months months years 5 years %%%%%% US dollars Assets 3.0 2.9 3.0 5.2 6.0 6.4 Liabilities 2.1 2.3 3.1 3.0 5.7 - Off balance sheet items 2.0 2.2 2.3 3.2 4.5 - Euros Assets 4.5 5.1 4.3 4.4 4.7 2.2 Liabilities 2.9 3.7 4.9 3.9 2.8 5.1 Off balance sheet items 2.6 4.0 5.3 3.9 5.2 8.3 Hong Kong dollars Assets 5.4 4.2 11.3 9.8 5.1 5.1 Liabilities 1.5 2.0 2.6 3.3 4.4 - Off balance sheet items ------
At 31 December 2000 Within 1-3 3-6 6-12 1-5 Over one month months months months years 5 years %%%%%% US dollars Assets 7.4 7.7 7.8 7.2 6.2 6.3 Liabilities 6.8 7.1 7.7 6.7 3.9 6.3 Off balance sheet items 6.3 6.7 12.0 6.9 5.3 5.9 Euros Assets 5.5 5.9 4.1 6.4 5.4 4.4 Liabilities 4.0 5.0 4.7 4.7 2.4 5.2 Off balance sheet items 4.3 4.2 3.7 5.1 2.4 7.1 Hong Kong dollars Assets 9.7 7.6 11.1 10.5 7.7 6.4 Liabilities 5.9 6.1 6.2 6.4 6.9 - Off balance sheet items ------
17 CREDIT RISK Credit risk is the risk that a customer or counterparty will fail to meet a commitment, resulting in financial loss to the Group. Such risk arises from lending, trade finance, treasury and other activities undertaken by the Group. Credit risk is actively monitored in accordance with the credit policies which clearly define delegated lending authorities, policies and procedures. The management of credit risk also involves the monitoring of risk concentrations by industrial sector as well as by geographic location. For details of composition of loans and advances portfolio refer note 4.
18 GEOGRAPHICAL DISTRIBUTION OF ASSETS, LIABILITIES AND OFF-BALANCE SHEET ITEMS
2001 2000 Off Off balance balance Liabilities sheet Liabilities sheet Assets and equity items Assets and equity items (US$ million) (US$ million) (US$ million) (US$ million) (US$ million) (US$ million)
Western Europe 10,421 8,433 12,237 10,304 8,897 13,089 Arab World 4,386 11,299 5,387 4,671 10,392 4,243 Asia 4,502 3,306 1,293 4,855 3,617 1,632 North America 4,000 675 3,803 4,060 1,045 2,909 Latin America 2,897 2,359 961 2,293 2,152 983 Other 380 514 330 493 573 148 26,586 26,586 24,011 26,676 26,676 23,004
62 ARAB BANKING CORPORATION Annual Report 2001
Notes to the Consolidated Financial Statements 31 December 2001
19 SEGMENTAL INFORMATION 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 is based upon the location of the units responsible for recording the transaction. Transactions between segments are conducted at estimated market rates on an arm’s length basis.
Primary segment information (US$ million) 2001 2000 Wholesale Retail Total Wholesale Retail Total
Net interest income 137 332 469 120 313 433 Other operating income 91 202 293 86 194 280 Operating expenses (131) (343) (474) (126) (325) (451) Loan loss provisions (57) (71) (128) (16) (50) (66)
Profit before taxation and minority interests 40 120 160 64 132 196
Total assets employed 12,565 14,108 26,673 13,313 13,572 26,885 Intra-group items (87) (209) 26,586 26,676
Segment liabilities, minority interests and equity 13,389 13,308 26,697 14,007 12,756 26,763
Intra-group items (111) (87) 26,586 26,676
Secondary segment information (US$ million) 2001 2000 Arab Europe & Arab Europe & world Asia Americas Total world Asia Americas Total
Segment profit before taxation and minority interests 34 42 84 160 43 42 111 196
Segment assets 8,901 3,835 13,850 26,586 8,799 3,985 13,892 26,676
20 REPURCHASE AND RESALE AGREEMENTS Proceeds from assets sold under repurchase agreements at the year-end amounted to US$2,213 million (2000: US$2,865 million) of which US$838 million (2000: US$1,154 million) relates to customer product and treasury activities in a major retail banking subsidiary. Amounts paid for assets purchased under resale agreements at the year-end amounted to US$433 million (2000: US$1,008 million) and relate to customer product and treasury activities in retail banking subsidiaries.
21 TRANSACTIONS WITH RELATED PARTIES In the ordinary course of business there are transactions with shareholders, associates and other related parties. Transactions with related parties are made on the same commercial terms as those applicable to comparable transactions with unrelated parties and do not involve more than a normal amount of risk. The year-end balances in respect of related parties included in the consolidated financial statements are as follows: 2001 2000 (US$ million) (US$ million) Deposits from customers 907 685 Term notes, bonds and other term financing 230 230 Irrevocable commitments and contingencies 3 19
The income and expenses in respect of related parties included in the consolidated financial statements are as follows: Interest expense 19 34
There were no loans and advances to related parties outstanding both at 31 December 2001 and 31 December 2000.
63 Annual Report 2001 ARAB BANKING CORPORATION
Notes to the Consolidated Financial Statements 31 December 2001
22 FIDUCIARY ASSETS
Funds under management at the year-end amounted to US$2,922 million (2000: US$2,434 million). These assets are held in a fiduciary capacity and are not included in these consolidated financial statements.
23 FAIR VALUE OF FINANCIAL INSTRUMENTS
“Fair value” is the amount at which an asset could be exchanged or a liability settled in a transaction between knowledgeable, willing parties in an arm’s length transaction. Underlying the definition of fair value is the presumption that the Group is a going concern without any intention or requirement to curtail materially the scale of its operation. The table below sets out the estimated carrying values and fair values of those on and off-balance sheet financial instruments that are not carried at fair value in the consolidated financial statements.
31 December 2001 31 December 2000 Carrying Fair Carrying Fair value value Difference value value Difference (US$ million) (US$ million) Financial assets Placements with banks and other financial institutions 6,444 6,444 - 7,060 7,058 (2) Loans and advances 14,225 14,075 (150) 14,039 13,918 (121) Non-trading securities 3,616 3,619 3 3,030 3,020 (10) (147) (133) Financial liabilities Deposits 21,465 21,455 10 21,509 21,500 9
Fair value effect of derivative instruments held for hedging purposes (8) Net difference between carrying value and fair value (137) (132)
It is expected that the carrying value of loans and advances which are held for the long term or to maturity, will be recovered, as adequate provisions have been made for any anticipated shortfalls in recovery.
24 ASSETS PLEDGED AS SECURITY
At the balance sheet date, in addition to the items mentioned in note 20, assets amounting to US$188 million (2000: US$125 million) have been pledged as security for borrowings and other banking operations.
25 EARNINGS PER SHARE
“Basic” earnings per share are calculated by dividing the net profit for the year by the number of shares outstanding at the end of the year. No figures for diluted earnings per share have been presented, as the bank has not issued any capital-based instruments which would have any impact on earnings per share, when exercised. 2001 2000
Net profit for the year (US$ million) 102 127 Number of shares outstanding as of 31 December 94,132,264 94,132,264 Basic earnings per share (US$) 1.08 1.35
64 ARAB BANKING CORPORATION Annual Report 2001
Notes to the Consolidated Financial Statements 31 December 2001
26 CAPITAL ADEQUACY
The risk asset ratio calculations, in accordance with the capital adequacy guidelines established for the global banking industry, are as follows: 2001 2000 CAPITAL BASE (US$ million) (US$ million) Tier 1 Capital 2,110 2,065 Tier 2 Capital 304 302
Total capital base (A) 2,414 2,367
RISK-WEIGHTED EXPOSURES Balance Risk-weighted Equivalents 2001 2000 2001 2000 (US$ million) (US$ million) (US$ million) (US$ million)
Assets Cash and claims on, guaranteed by or collateralised by securities of central governments and central banks of OECD countries 5,023 4,870 - -
Claims on banks and public sector companies incorporated in OECD countries and short-term claims on banks incorporated in non-OECD countries 7,661 8,394 1,532 1,679
Claims secured by mortgage of residential property 2,224 2,099 1,112 1,050
Claims on public sector entities, central governments, central banks and longer-term claims on banks incorporated in non-OECD countries and all other assets, including claims on private sector entities 11,405 11,145 11,405 11,145
Off-balance sheet items Commitments and contingent liabilities (note 14) 8,570 8,525 2,841 2,560
Derivatives (note 13) 15,441 14,479 52 31
Credit risk-weighted assets and off-balance sheet items 16,942 16,465 Market risk-weighted assets and off-balance sheet items * 990 1,061
Total risk-weighted assets (B) 17,932 17,526
Risk asset ratio (A/B) 13.5% 13.5%
* Market risk capital requirements are based on the standardised measurement methodology.
65 Annual Report 2001 ARAB BANKING CORPORATION
Notes to the Consolidated Financial Statements 31 December 2001
27 PARENT COMPANY The balance sheet of the parent company, Arab Banking Corporation (B.S.C.), is presented below:
2001 2000 (US$ million) (US$ million) ASSETS Liquid funds 47 30 Trading securities 63 305 Non-trading securities 2,431 2,148 Placements with banks and other financial institutions 2,723 3,154 Loans and advances 4,402 4,659 Interest receivable 77 158 Investments in subsidiaries 1,460 1,397 Investments in associates 26 26 Other assets 186 93 Premises and equipment 31 39
TOTAL ASSETS 11,446 12,009
LIABILITIES Deposits from customers 2,140 1,726 Deposits from banks and other financial institutions 6,191 7,092 Interest payable 47 137 Other liabilities
TERM NOTES, BONDS AND OTHER TERM FINANCING 117 112 1,038 1,038 9,533 10,105
EQUITY Share capital 1,000 1,000 Treasury stock (74) (74) Reserves and retained earnings 987 978 1,913 1,904
TOTAL LIABILITIES AND EQUITY 11,446 12,009
Included in the above assets and liabilities are balances due from and due to subsidiaries and associates as follows:
Placements with banks and other financial institutions 286 495 Loans and advances 300 291 Deposits from banks and other financial institutions 238 355
28 AUTHORISATION OF THE CONSOLIDATED FINANCIAL STATEMENTS These consolidated financial statements were authorised for issue by the Board of Directors on 14 February 2002 and signed on their behalf by the Chairman and President & Chief Executive.
66 ARAB BANKING CORPORATION Annual Report 2001
ABC Directory
• HEAD OFFICE •
ABC Tower, Diplomatic Area, TREASURY GROUP Branches ABC Tunisie PO Box 5698, Manama, ABC Building, Rue du Lac d'Annecy Kingdom of Bahrain Group Treasurer Tunis (OBU) Les Berges du Lac, 1053 Tunis, Tunisia Tel: (973) 543000 (General), Essam El Wakil ABC Building Tel: (216)(71) 861861; (973) 533144 (Money Market) Senior Vice President Rue du Lac d'Annecy, (216)(71) 861110 (Treasury) (973) 533155 (Options) Tel: (973) 543375 / 532933 Les Berges du Lac, Fax: (216)(71) 860921 (973) 533044 (Foreign Exchange), 1053 Tunis, Tunisia Assistant Treasurer, Group Tlx: 12505 ABCTU TN (973) 533163/533062 Tel: (216)(71) 861861; Fax: Operations e-mail: [email protected] Tlx: 9432 ABCBAH BN (General), (216)(71) 861110 (Treasury) Direct Dealing Reuters Code: ABCT Ali Mirza 9384 ABC DEP (Foreign Exchange) Fax: (216)(71) 860921 SWIFT: ABCOTNTT First Vice President & Assistant Treasurer Reuters Dealing Code: ABMM-ABCZ Tlx: 12505 ABCTU TN Tel: (973) 543241 Ageli Abdulsalam Breni (Monitor), ABCD (FX), ABCB (Options), e-mail: [email protected] ABDB (Money Market) Treasury & Marketable Securities Direct Dealing Reuters Code: ABCT Chairman ABCOTNTT Ezzedine Saidane Internet: http://www.arabbanking.com FX, Precious Metals, Commodities, SWIFT: [email protected] General Manager e-mail: M.E. Currencies & Sales Head Ezzedine Saidane Kareem Dashti General Manager Ghazi Abdul-Jawad Arab Banking Corporation (Jordan) First Vice President & Assistant Treasurer President & Chief Executive (16 Branches) Tel: (973) 533044 Representative Offices PO Box 926691, Amman 11190, Jordan Internal Audit Derivatives, MM, Islamic, New Tel: (962)(6) 5664183-5/5621801-7 Abu Dhabi (General) Prasad Abraham Products & Treasury Support Head The Falcon Tower, Al Nasr Street Senior Vice President Amr Gadallah Tel: (962)(6) 5692713/5692723 Office No. 602 (Dealing Room) Tel: (973) 543387 First Vice President & Assistant Treasurer PO Box 6689, Abu Dhabi, UAE Tel: (973) 533155 Tel: (962)(6) 5608312 Tel: (971)(2) 6344944 (Foreign Department) (971)(2) 6328002 ADMINISTRATION GROUP Marketable Securities & Asset Fax: Tel: (962)(6) 5623684 (Main Branch) Management e-mail: [email protected] Corporate Communications Fax: (962)(6) 5686291 Tel: (973) 533169 22258/21114 ABC JO; 23022 Dr. Sami Dannish Ahmed Ebrahim Al Moataz Tlx: ABCFX JO First Vice President Chief Representative e-mail: [email protected] Tel: (973) 543204 • ARAB WORLD DIVISION • Tehran Ghazi Abdul-Jawad Global Information Technology No. 114, 1st Floor (opposite 35th St.) Chairman Sael Al Waary Division Head Khaled Eslamboli Avenue George Karam Dr Ziad Fariz Senior Vice President Tehran 15167, Islamic Republic of Iran Senior Vice President Chief Executive Officer Tel: (973) 543707 Tel: (98)(21) 8798452/3 Tel: (973) 533056 Fax: (98)(21) 8774561 Human Resources & Administration Fax: (973) 533832 Arab Banking Corporation – Algeria Dr Lulwa Mutlaq Tlx: 216860 ABC IR PO Box 367 Senior Vice President Qutub Yousafali e-mail: [email protected] 54 Avenue des Trois Freres Bouaddou Tel: (973) 543308 First Vice President Mohammad Nasser Yousefi Bir Mourad Rais, Algiers, Algeria Tel: (973) 543273 Chief Representative Tel: (213)(21) 541537/ Legal & Compliance Fax: (973) 532248 541534/541600 Mounir Ben Slimane Tripoli Fax: (213)(21) 541604/541222 Legal Counsel Tlx: 62509 / 62510 ABC DZ Tel: (973) 543371 COMMERCIAL BANKING That Emad Administrative Centre Tower 5, 16th Floor e-mail: [email protected] Operations Corporate & Global Structured PO Box 3578, Tripoli, Libya George Karam Alex Richardson Finance Tel: (218)(21) 3350226/ 3350227/3350228 Chairman Senior Vice President Mark Yassin Fax: (218)(21) 3350229 Mustapha Achour (973) 543714 Tel: First Vice President & Head e-mail: [email protected] General Manager Planning & Financial Control Tel: (973) 543292 Mansour Abouen Arab Banking Corporation – Egypt (S.A.E.) Asaf Mohyuddin Corporate Banking Chief Representative 1, El Saleh Ayoub Street, Zamalek Senior Vice President Mohammed El Calamawy (973) 543274 Cairo, Egypt Tel: First Vice President & Head Tel: (202) 7362684 (10 lines) / (202) 6364254 Tel: (973) 543260 Subsidiaries Premises & Engineering Fax: (202) 7363643 Nawaf Beyhum Government & Financial Institutions ABC Islamic Bank (E.C.) e-mail: [email protected] First Vice President ABC Tower, Diplomatic Area Rashed Al Khalifa Issa Mohamed Al Sowaidi Tel: (973) 543307 PO Box 2808, Manama First Vice President & Head Chairman Tel: (973) 543314 Kingdom of Bahrain Tel: (973) 543000 Tarek Helmi CREDIT GROUP Syndication Fax: (973) 536379/533163 Acting Chief Executive Officer Jonathan Ward Tlx: 9432/9433 ABC BAH BN Hassan Serag El Din Chief Credit & Risk Officer First Vice President & Head FVP, Retail Banking Group Head Saleh M. Al-Yousef Richard Cumberland Tel: (973) 543331 Gamal Negm Chairman Senior Vice President Global Marketing & Asset Trading FVP, Credit Group Head Tel: (973) 543280 Mohamed A BuQais Yousif Al Dhaen Mohamed Abou Ward General Manager Head Office Credit Department First Vice President & Head VP, Human Resources Group Supervisor Abdulrahman Al Kooheji Abhijit Choudhury Tel: (973) 543203 Amr Bahaa Assistant General Manager, Marketing First Vice President VP, Treasury Head Tel: (973) 543288 ABC Securities W.L.L. Hanaa El Helaly Remedial Loans Office No 204, Building No 49 Human Resources & Corporate Communications Stephen Jenkins Al Hidaya Building No 2 Division Head First Vice President Government Road, Manama 305 Tel: (973) 543713 Kingdom of Bahrain Affiliate (973) 226087/226848 Risk Management Tel: Arab Financial Services Fax: (973) 241179 Peter G James Company (E.C.) Tlx: 9436/9437 ABCBAH BN First Vice President PO Box 2152, Manama Tel: (973) 543328 Abdul Hameed H Naqi Kingdom of Bahrain General Manager Tel: (973) 290333 Fax: (973) 291323/290050 Tlx: 7212 AFS BN Mahmood Al Koofi 67 Chief Executive Officer Annual Report 2001 ARAB BANKING CORPORATION
ABC Directory
• INTERNATIONAL DIVISION •
Division Head Treasury Subsidiaries Investment Group George Morton Investment Coordinator Robert Fitzsimons Senior Vice President ABC (IT) Services Ltd. Assistant General Manager & Treasurer Omar el-Abd Tel: (973) 543319 Arab Banking Corporation House Tel: (1)(212) 5834779 Senior Vice President Fax: (973) 535639 1-5 Moorgate, London EC2R 6AB, UK Tel: (973) 530776 Thomas J. Cahalane Tel: (44)(20) 77764050 Assistant General Manager, Operations Branches Fax: (44)(20) 76062708 Banco ABC Brasil S.A. Tel: (1)(212) 5834747 Tlx: 915687 ABC G Avenida Paulista 37, 14th/15th Floors Kenneth J Carroll e-mail: [email protected] Grand Cayman CEP 01311-902, Sao Paulo, SP. Brazil Assistant General Manager and Controller c/o ABC New York Branch Sael Al Waary Tel: (55)(11) 31702000 Tel: (1)(212) 5834761 32nd Floor, 277 Park Avenue Director Fax: (55)(11) 31702001 Barbara Sanderson New York, NY 10172-3299,USA Assistant General Manager, Credit Adroaldo Moura da Silva Tel: (1)(212) 5834720 Arab Banking Corporation – Tel: (1)(212) 5834752 Chairman Fax: (1)(212) 5830921 Daus & Co GmbH Tlx: 661978/427531 ABCNY Marianna Adamo Niedenau 13-19, Tito Enrique da Silva Neto Vice President /Human Resources D-60325 Frankfurt am Main, President Geoffrey Milton Tel: (1)(212) 5834737 PO Box 170218, First Vice President & General Manager 60076 Frankfurt am Main, Germany Banco Atlantico S.A. Singapore Tel: (49)(69) 714030 (285 Branches) Milan Arab Banking Corporation (B.S.C.) Fax: (49)(69) 71403240 (General) Gran Via 48, 28013 Madrid, Spain Via Turati 16/18, 20121 Milan, Italy 9 Raffles Place #35-01 Republic Plaza (49)(69) 71403299 (Corporate and Tel: (34)(91) 5389000 Tel: (39)(02) 863331 (General); Singapore 048619 Financial Institutions) Fax: (34)(91) 5415474 (39)(02) 861574 (Dealing Room) Tel: (65) 6535 9339 General (49)(69) 71403350 (Treasury) Tlx: 22009/22109 ATLCO E Fax: (39)(02) 86450117 (65) 6533 0629 Dealers Tlx: 414811 DAUS D Tlx: 322240 ABC Mil (General); Telex & Answerback: Abdulmohsen Yousef Al-Hunaif ABDF (FX + MM) 322080 ABC FX I RS 28989 ABCSNG General Direct Dealing Reuters Code: Chairman ABCADEFF (Dealing Room) RS 28991 ABCSNG Dealers SWIFT: Tel: (34)(91) 5389018 e-mail: [email protected] Direct Dealing Reuters Code: ABCX Fax: (65) 6532 6288/ Fax: (34)(91) 5423469 SWIFT: ABCOITMM 6532 3998 General Ghazi M. Abdul-Jawad Manuel Montecelos SWIFT: ABCOSGSG Chief Executive Officer Marco Simonelli Chairman of the Supervisory Board Reuters Dealing Code: ABCS Tel: (34)(91) 5389042 General Manager Graham Burtoft John P. Meads Chief Executive & General Manager Fax: (34)(91) 5413625 Sami Bengharsa [email protected] General Manager e-mail: Deputy General Manager Juergen Blumschein Andrew Ghim Angelo Fossati General Manager International Bank of Asia Ltd. VP & Deputy General Manager (24 Domestic Branches) Business Development Manager ABC International Bank plc Tan Boon Cheng International Bank of Asia Bldg. Maurizio Testori (Head Office) AVP & Head of Operations and Financial Control 38 Des Voeux Road, Central Operations Manager Arab Banking Corporation House Cecilia Lai, Senior Manager, Corporate Finance Hong Kong Luca Gajani 1-5 Moorgate, London EC2R 6AB, UK Foo Mui Lian Tel: (852) 28426222 Head of Credit Tel: (44)(20) 7776 4000 (General) Manager and Branch Credit Officer Fax: (852) 28101483 Guido Bacci Fax: (44)(20) 7606 9987 Rose Lim Tlx: 63394 IBA HX Chief Dealer Tlx: 893748 ABC GEN G Acting Head, Trade Finance Support Direct Dealing Reuters Code: IBAX [email protected] New York Vivien Ng, Gregory Lim, Dealers (Treasury) Farhat Ekdara e-mail: Chairman 32nd Floor, 277 Park Avenue Dr. Anwar Ali Al Mudhaf New York, NY 10172-3299, USA Representative Offices Stanislas M. Yassukovich Chairman Deputy Chairman Tel: (1)(212) 5834720 Mike Murad Fax: (1)(212) 5830921 Houston Abdulmagid A. Breish Vice Chairman, Managing Director & Tlx: 661978/427531 ABCNY 600 Travis Street, Suite 1900 Managing Director & Chief Executive Officer Chief Executive Officer (General); 421911/661979 ABCFX Houston, Texas 77002, USA Michael Duval Michael Ipson (Dealing Room) Tel: (1)(713) 2278444 Deputy Chief Executive Officer Executive Vice President, Corporate and ABCN Direct Dealing Reuters Code: Fax: (1)(713) 2276507 Investment Banking Group ABC International Bank plc, London Geoffrey Milton Harold Dietler Bashar Samra (Branch) First Vice President & General Manager Chief Representative Executive Vice President, Consumer Banking Group Arab Banking Corporation House Tel: (1)(212) 5834863 David Chan Los Angeles 1-5 Moorgate, London EC2R 6AB, UK Tel: (44)(20) 7776 4000 (General) Executive Vice President, 555 South Flower Street, 46th Floor Financial Control & Support Group Corporate Banking Los Angeles, CA 90071, USA (44)(20) 7726 4091 (Dealing Room) Fax: (44)(20) 7606 9987 Robert Ivosevich Tel: (1)(213) 6890121 ABC Securities (Egypt) S.A.E Fax: (1)(213) 6891048 Tlx: 893748 ABC GEN G (General) Deputy General Manager, Head of North America 892171 ABC FXL G 1191 Corniche El Nile Street Corporate Banking Tarek Sherlala (Dealing Room) World Trade Center (1)(212) 5834774 Tel: Representative Direct Dealing Reuters Code: ABCL Offices Building, 6th Floor Latin America Group PO Box 781, Ataba, 11511 Cairo, Egypt Michael Duval Tel: (20)(2) 5745488/5745366/5745935 Derek Hudson General Manager Fax: (20)(2) 5780416/5780417 Assistant General Manager, Latin America Group Ageli Abdulsalam Breni Tel: (1)(212) 5834876 ABC International Bank plc, Paris (Branch) Chairman Omar el-Abd Middle East and North Africa Group 49/51 Avenue George V 75008 Paris, France Managing Director & Chief Executive Lamine Djilani Tel: (33)(1) 49525400 Assistant General Manager, Middle East & Fax: (33)(1) 47207469 North Africa Group Tlx: 648343 ABC F (General); 648483 Tel: (1)(212) 5834872 ABCORP F (Dealing Room) Direct Dealing Reuters Code: ABCP Jean-Marie Zambelli General Manager
68