ANNUAL REPORT 07 At BLOM BANK, our mission has always been to spread “Peace of Mind” in the region and all around the world through our international network. The universal banking services provided by our group and our concern to maximize customer satisfaction consti tute the key elements for the success of our mission. Dr. Naaman AZHARI - Chairman of BLOM BANK GROUP Mr. Saad AZHARI - Chairman and General Manager of BLOM BANK S.A.L SUMMARY CHAIRMAN’S LETTER 09 GROUP CHART 11 EVOLUTION OF MAIN INDICATORS 12 FINANCIAL RATIOS 13 BLOM BANK CUSTOMER DEPOSITS EVOLUTION 14 STRONG AND CONTINUOUS GROWTH FOR THE LAST 5 YEARS 15 BLOM BANK SAL BOARD OF DIRECTORS 18 BLOM BANK’S MAJOR SHAREHOLDERS AND GENERAL MANAGEMENT 19 BLOM BANK ORGANIZATIONAL CHART 21 MANAGEMENT DISCUSSION AND ANALYSIS 1. OPERATING ENVIRONMENT 25 2. OVERVIEW 30 3. EVOLUTION OF TOTAL ASSETS 31 4. SOURCES OF FUNDS 32 5. USES OF FUNDS 35 6. LIQUIDITY 46 7. PROFITABILITY 47 8. DIVIDEND DISTRIBUTION AND PREFERRED SHARES REVENUES 58 9. CAPITAL ADEQUACY RATIO 58 10. INTEREST RATE RISK 59 11. RISK MANAGEMENT AND BASEL II PREPARATIONS 59 12. UNIVERSAL BANKING SERVICES 61 13. INFORMATION SYSTEMS AND TECHNOLOGY 64 14. PEOPLE DEVELOPMENT 67 15. BANK’S OPERATIONAL EFFICIENCY 68 16. REGIONAL EXPANSION 68 INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF BLOM BANK SAL 74 CONSOLIDATED INCOME STATEMENT YEAR ENDED 31 DECEMBER 2007 75 CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2007 76 CONSOLIDATED CASH FLOWS STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2007 78 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2007 80 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 83 BLOM BANK’S WORLDWIDE CORRESPONDENT BANKS 164 BLOM BANK GROUP DIRECTORY 166 Mr. Saad AZHARI - Chairman and General Manager of BLOM BANK S.A.L 08 CHAIRMAN’S LETTER True to its record, BLOM BANK has remained at the forefront of the Lebanese banking system in 2007. It proved itself once again to be a solid and successful financial institution, earning the highest level of profits among Lebanese banks at $204.7 million. This was 13.53% higher than the 2006 level, and it was largely a product of its managerial and financial efficiency as reflected in an effective cost to income ratio of 34.6% -- the lowest among the leading banks. The banks’ consolidated balance sheet also saw a significant increase, rising by 17% each for assets and deposits to reach $16,628 million and $13,737 million respectively. Also significant was the increase in loans -- especially to service clients in regional markets -- to $2,772 million that lifted the loans to deposits ratio from 16.9% to 20.2%. All this has happened within an operating framework that maintained high levels of liquidity and strong asset quality to better manage risk and to ensure clients’ “peace of mind”. Thus immedi ate net liquidity in Lebanese Pounds and foreign currencies stood at a comfortable 105.9% and 63.2% respectively; whereas the ratios of gross non-performing loans and loan loss reserves were a respectable 7.9% and 95.55%. Also, in terms of capital adequacy and its new risk adjustments according to the standardized approach, BLOM Bank’s ratios reached healthy values of 29.05% and 14.6% according to Basel I and Basel II respectively. These achievements of BLOM BANK did not translate to the highest profitability in absolute meas ures only, but also included relative measures. In terms of returns on average assets and equity, BLOM retained the highest ratios among leading Lebanese banks at 1.33% and 15.65% respectively. This was reflected in financial markets, as the price of BLOM’s GDR (Global Depository Receipts) increased by 50.5% to close the year 2007 at $90.2. In addition, the Bank’s General Assembly of Shareholders on the 9th of April 2008 approved as follows the distribution of dividends for the finan cial year 2007: preferred shares 2002 issue received $15 each, and their corresponding 2004 and 2005 issues $8.5 and $9.5 respectively; whereas each of the listed common shares and GDRs got the equivalent of $3.65 per share. This commendable performance under difficult circumstances in the Lebanese economy attracted several awards and marks of excellence in 2007 from reputable ranking and rating institutions. The Bank was awarded “Best Bank in Lebanon” from Global Finance; “Highest Financial Strength Rating at BBB” from Capital Intelligence; “Highest National Rating at Aa1.lb” from Moody’s; “Best Trade Finance”, “Best Foreign Exchange”, and “Best Customer Internet” Bank from Global Finance; “Best Use of Technology in the Middle East” from The Banker Middle East; and “Best Deal of the Year” from the Banker. Despite the climate of political uncertainty, Lebanon’s economy managed to grow by 3% in real terms in 2007. Also noteworthy was a solid fiscal performance that saw net debt – at $39.1 billion – fall as a ratio of Gross Domestic Product to 162% and primary surplus rise as a similar ratio to 3%, an outcome of improving tax revenues and Paris III donor support. And, true to its history, the Lebanese banking sector was the backbone of the economy in 2007, continuing undeterred its healthy domestic growth and foreign expansion. All the basic indicators from the financials of its domestic operations were up: assets increased by 10.6% to $82.2 billion; deposits by 11.4% to $67.5 billion; loans by 11.7% to $23.9 billion; and capital by 10.5% to $6.3 billion. And the banking system has crowned these accomplishments by continuing its sustained profitability, with net profits increasing by 11.8% to $850 million. But perhaps the current defining feature of the Lebanese banking sector is its foreign expansion. The result is that there are currently 17 Lebanese banks with presence in 20 foreign countries encompassing more than 150 banking units and corresponding to around 15% of banks’ total activities. Of course, the banking system’s performance was greatly facilitated by the supervisory oversight of Banque du Liban (BdL). Regulatory directives from BdL ensured that banks have remained well capitalized, at more than 12% according to Basel II; and also ensured that banks have stayed away from the asset classes that engendered the credit crises in the US and elsewhere in late 2007. In addition, BdL continued its sound monetary management of the economy, preserving the exchange rate peg and amassing more than $12 billion in foreign reserves, ensuring in the process both liquidity and stability in financial markets. 09 In this context, BLOM BANK’s success rests on a two-pronged strategy of geographical expansion and service diversification, so as to evolve the bank to a regional, universal Bank. BLOM BANK currently stands to be the Lebanese bank with the largest overseas activities, where overseas assets and profits represent 36% and 24% of total assets and profits respectively. It is pres ent in ten countries: Lebanon (BLOM BANK), Syria (Bank of Syria and Overseas, BSO), Jordan (BLOM BANK), Egypt (BLOM BANK EGYPT), UAE (BLOM BANK FRANCE), France, England, and Romania (BLOM BANK FRANCE), Cyprus (BLOM BANK), and Switzerland (BLOM BANK (SWITZERLAND)). The Bank also obtained a license to open a Representative Office in Abu Dhabi in 2007; and has been granted licenses to operate an investment company in Saudi Arabia, BLOMINVEST Saudi Arabia, in mid 2008, and to start a private and corporate bank in Qatar in late 2008. Also, in rela tion to expansion in individual countries, BSO opened a new branch in Aleppo in 2007 that increased the number of branches to 10, expected to increase to 20 in 2008; two new branches were opened in Jordan, and two more are planned to open in 2008, raising the total to 7. In addition, BLOM BANK EGYPT continued with its robust expansion, increasing its number of branches to 20 in 2007 and aiming to raise it to 30 in 2008. And not to forget Lebanon, four addition al branch es were inaugurated in 2007, and we look forward to add more new branches in 2008, mainly in the areas of Furn El Cheback, Dekwaneh, Sodeco, Choueifat, and Abbasya. As important, geographic diversification has been coupled with a process of product and services diversification to support the Bank’s universal banking model. BLOM BANK’s banking services now include retail, corporate, investment, asset management, Islamic, and private banking, in addition to insurance. This has also led to diversification in the sources of income, where fee income now con stitutes 24% of operating income, increasing in 2007 by 19.4% compared to an increase by 11.4% in net interest income. In turn, the sources of interest income have undergone diversification and more balance as well, comprising 42% from inter-bank deposits, 29% from government securities, and 29% from customer loans. In this respect also, the activities of BLOMINVEST BANK, the investment arm of BLOM BANK, have been upgraded and widened as a conduit to increase diversification of servic es and income. One prominent product of such widened specialization by BLOMINVEST has been in the area of asset management, where it established a balanced growth fund, the BLOM Cedars Balanced Fund, the first of its kind in Lebanon combining both fixed income assets and equities. And last but not least, a notable undertaking by the Bank has been the development of a corporate governance code in 2007, to be applied starting 2008. The Bank is fully aware of the importance of such a code, not only for the healthy functioning of the institution but also for the confidence and trust that it sheds to all stakeholders.