Arab Bank Group Annual Report 2010 T AB CHAIRMAN’S MESSAGE 4 L E BOARD OF DIRECTORS’ REPORT OF - MAIN BUSINESS ACTIVITIES OF ARAB BANK 8 C - GEOGRAPHICAL COVERAGE 12 O - BRANCHES & STAFF DISTRIBUTION AccORDING TO GOVERNORATES 13 N - ADDRESSES OF ARAB BANK BRANCHES AND OFFICES ABROAD 14 T EN - TOTAL EMPLOYEES OF ARAB BANK GROUP 18 T - CAPITAL INVESTMENT OF ARAB BANK 19 S - SUBSIDIARIES & SISTER COMPANY 20 - DETAILED INFORMATION ON THE BANK’S SUBSIDIARIES & SISTER COMPANY 34 - MEMBERS OF THE BOARD OF DIRECTORS 39 - SENIOR EXECUTIVES 50 - NUMBER OF SHARES OWNED BY MAJOR SHAREHOLDERS AS AT 31 DECEMBER 2010 & 2009 65 - COMPETITIVENESS AND MARKET SHARE 66 - PATENTS & GOVERNMENT PROTECTION 68 - MAJOR SUPPLIERS AND CLIENTS 69 - GOVERNMENT OR INTERNATIONAL ORGANIZATIONS REGULATIONS 70 - ARAB BANK ORGANIZATION CHART / HEAD OFFICE 71 - NUMBER OF STAFF AND ACADEMIC QUALIFCATIONS 72 - TRAINING COURSES vs. Trainees IN JORDAN & ARAB AREAS IN 2010 MATRIX 74 - RISK MANAGEMENT 76 - AccOMPLISHMENTS 2010 87 - FINANCIAL IMPacT OF NON-RECURRING OPERATIONS 90 - TIME SERIES DATA FOR MAJOR FINANCIAL INDICATORS (2006 – 2010) 91 2 T AB - FinanciaL PERFORMANCE 92 L - ARAB BANK SHARE CLOSING PRICE FOR THE LAST 10 YEARS 100 E OF - FUTURE OUTLOOK AND PLANS FOR 2011 101 - EXTERNAL AUDITORS’ COMPENSATION IN JORDAN AND ABROAD 105 C - NUMBER OF ARAB BANK SHARES OWNED BY MEMBERS OF THE BOARD 106 O N - NUMBER OF ARAB BANK SHARES OWNED BY SENIOR EXECUTIVES 108 T - NUMBER OF ARAB BANK SHARES OWNED BY THE RELATIVES OF THE BOARD MEMBERS 110 EN - NUMBER OF ARAB BANK SHARES OWNED BY THE RELATIVES OF THE SENIOR EXECUTIVES 114 T S - BOARD COMPENSATION AND BENEFITS IN 2010 118 - EXECUTIVE MANAGEMENT COMPENSATION AND BENEFITS IN 2010 120 - ARAB BANK’S DONATIONS DURING YEAR 2010 122 - TRANSACTIONS WITH RELATED PARTIES 123 - ENVIRONMENTAL PROTECTION 125 - CORPORATE SOCIAL RESPONSIBILITY 127 ARAB BANK GROUP 133 - CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR 2010 - INDEPENDENT AUDITOR’S REPORT 208 ARAB BANK PLC 211 - FINANCIAL STATEMENTS FOR THE YEAR 2010 - INDEPENDENT AUDITOR’S REPORT 280 ATTESTATION STATEMENTS 282 CORPORATE GOVERNANCE GUIDE 285 THE 81st ANNUAL ORDINARY GENERAL ASSEMBLY MEETING AGENDA 300 ADDRESSES OF ARAB BANK MAJOR BRANCHES, SUBSIDIARIES, AFFILIATES AND SISTER COMPANY 301 3 CHAIRMAN Distinguished Shareholders, The year 2010 witnessed a continuation of challenges brought on by the global financial crisis, which started more than two years ago at an unprecedented scale, with its prolonged , negative repercussions deeply impacting all S MESSAGE the world’s economies, affecting countries, institutions and individuals alike. Many countries around the world are still experiencing difficult economic conditions and the work and investment environments still need more time before emerging out of the current status. The consequences of the global financial crisis continue to have a negative impact on the various aspects of economic and financial environments in most parts of the world. In addition, the reach of the crisis continues to expand carrying increased losses for countries and institutions and threaten to further poverty and unemployment at an international level. Perhaps the most important, yet common, adverse effects that have emerged in 2010 among the various countries of the world include slowing economic growth rates, low purchasing powers of individuals, declining financial markets, worsening unemployment rates in addition to a noticeable slowdown in the flow of world trade, the decrease in global demand, shrinking investments and the growing financial burden for countries. Moreover, the sovereign debt crisis emerged during 2010 affecting a number of the European countries, in particular Ireland and Greece, reflecting the complexity and severity of the global crisis and its effects and consequences on all levels. The degree of seriousness and resolve with which the world has dealt with one of the toughest financial crises in economic history was clear and evident all throughout 2010. The global efforts put forward by governing bodies, institutions and governments at all levels combined together in order to find suitable solutions to this crisis in order to stimulate the global economy and reset it on the right track. Efforts were also advanced to implement corrective measures and address any deficiencies and imbalances to ensure the prevention of such a crisis in the future. Based on the important role that banks play in boosting business activities and pushing forward economic development, the banking industry has been at the core of the global corrective efforts with the aim of enhancing regulatory control, transparency, supervision and control over this sector. From another perspective, this crisis has forced the banks to return back to the fundamentals of the financial industry that are based on extending credit to customers in accordance with prudent lending policies and assessment methods suitable for measuring and managing risk. The banks have begun conducting extensive cleaning of their balance sheets by putting aside sufficient provisions against unforeseen risks and potential losses and hedging against them. In addition, banks have started to concentrate on enhancing their liquidity levels, maintaining a convenient capital adequacy ratio, undertaking a conservative approach to granting high- risk financing as well as to focus on corporate governance, disclosure and transparency in their dealings. It is also expected that banks behave differently 4 CHAIRMAN in regard to competitive strategies, relying more on their capabilities and core banking operations and avoiding high-risk activities. Arab Bank, which operates in 30 countries represents the largest Arab banking network in the world, was affected by the global financial crisis as a reflection of those countries’ reaction to the crisis. Despite the difficult challenges and changes experienced by the world as a result of that crisis, Arab Bank has continued to march, with confidence, down the path of outstanding work that it began more than , eighty years ago. The Bank was also able to continue growing under very difficult S MESSAGE circumstances, supported by a commitment to its values and historical principles, which enabled the Bank to excel and succeed. Arab Bank has continued to work within conservative policies that have been formulated based on the following: - Maintaining a high level of liquidity to support the Bank’s operations and to protect its shareholders and customers in all regions of presence, noting that the liquidity ratio at year-end 2010 reached 49%. In addition, the ratio of loans to deposits amounted to 63%, reflecting the high level of liquidity at the Bank, which is an important and vital element, especially in light of the prevailing global economic conditions, notwithstanding the high cost it entails. - Commitment to maintaining a high and comfortable capital adequacy ratio, which reached 15.1% by the year-end 2010, exceeding the limits required by the Committee on Basel II of 8% and the Central Bank of Jordan of 12% and the rest of the regulatory authorities. - Continuing to improve and streamline the processes and procedures for managing and measuring risk and developing appropriate lending and investment policies as well as advanced credit assessment methods. - Continuing to focus on the Bank’s stakeholders and enhance their level of satisfaction by providing customers with the best banking products and services, while improving rates of return to shareholders and continue to enhance operational efficiency. Moreover, and within the framework of the Bank’s conservative policy, the Board of Directors decided to set aside additional provisions against non-performing loans and those classified under ‘watch-list’, in amounts that exceed provisioning requirements of the regulatory authorities, which is a strategic decision aimed at maintaining the quality of the loans portfolio and hedging against unfavorable circumstances or economic changes that may materialize in the future. This step will contribute to maintaining a sound structure of the Bank’s loan portfolio in line with international best practices and consistent with the Bank’s principles of prudency. Nevertheless, the Bank will continue to vigorously pursue these loans in accordance with its prudent policies and legal actions needed to safeguard its rights and the rights of its shareholders. This move is the main reason for the decline in the Bank’s net profit for the year 2010 by approximately 46% compared to the previous year. This decline in net profit was mainly due to the fact that a limited number of the Bank’s affiliates have taken additional provisions more than required by the regulatory authorities of the countries in which they operate. However, it is worth noting that the net operating income for the Arab Bank Group, excluding the Bank’s share from its affiliates’ net profit, has grown by 3% in year 2010 to reach USD 1,525 million. 5 Despite the negative consequences of the global financial crisis, and albeit its clear impact on the Bank’s net profit, the provisioning decision has contributed to maintaining the Bank’s high credit rating. During December 2010, Standard & CHAIRMAN Poor’s reaffirmed its credit rating for Arab Bank Group at the level of A- with a stable outlook. This reaffirmation was based, among many other criteria, on the Bank’s distinguished reputation on both the local and regional levels, in addition to its conservative risk management policies, the high quality of its