our mission is to - bank abc€¦ · b.sc. in finance, m.b.a. university of west florida, u.s.a....

4 Board of Directors

6 Directors’ Report

9 Global Organisation

10 Global Network

11 Financial Highlights

12 Corporate Governance

18 Senior Management

20 Chief Executive’s Review of Operations

38 Financial Review

FABR 173

FINANCIAL STATEMENTS

41 Auditors’ Report

42 Consolidated Balance Sheet

43 Consolidated Statement of Income

44 Consolidated Statement of Cash Flows

45 Consolidated Statement of Changes in Equity

46 Notes to the Consolidated Financial Statements

66 ABC Directory

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

Contents

1www.arabbanking.com

Our vision is to be the premier andmost innovative international Arab financial group.

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our vision

2 Annual Report 2003

The measures taken in 2003 have created both opportunity and flexibility of action for the Group.

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BOARD OF DIRECTORS

Mr. Khalifa Mohammed Al-Kindi EC*

Chairman U.A.E. citizen

B.Sc. in Economics, East Michigan University, U.S.A.

Deputy Managing Director of Abu DhabiInvestment Authority and Director of Abu DhabiInvestment Company. Also Director of ABCInternational Bank plc, U.K. and Director ofInternational Bank of Asia Ltd., Hong Kong.He has been a Director of ABC since 1992 andhas over 15 years’ experience as an investmentbanker as well as holding a number of director-ships in various public corporations.

Mr. Farhat Omar Ekdara EC ✚

Deputy Chairman Libyan

B.A. in Economics, Garyounis University, Libya; Masterin Money, Banking and Finance, Sheffield University,U.K.

Deputy Governor, Central Bank of Libya; PastDeputy Chairman of Wahda Bank, Libya; DeputyChairman of Arab Banking Corporation – Egypt(S.A.E.) and Chairman of ABC International Bankplc, London. Mr. Ekdara has been a Director ofABC since 2001 and has over 15 years’ experi-ence in banking and other business sectors.

Mr. Hilal Mishari Al-Mutairi EC ✚

Deputy Chairman Kuwaiti

B.Sc. in Economics, Alexandria University, Egypt.

Second Vice Chairman, Kuwait Chamber ofCommerce & Industry and Director of KuwaitInvestment Authority. Past offices includeMinister of Trade and Industry of Kuwait;General Manager of Kuwait InvestmentCompany and of Kuwait Clearing Company,in addition to membership of various boards of domestic, regional and international invest-ment and financial institutions. Mr. Al-Mutairi isalso the Deputy Chairman of ABC InternationalBank plc, U.K. He has been a Director of ABCsince 2001 and has more than 35 years of commercial and financial industry experience.

Mr.Abdallah Saud Al Humaidhi EC CC

Director Kuwaiti

M.S.American University of Beirut.

Chairman and Managing Director, CommercialFacilities Company, Kuwait and Member of theBoard and the Executive Committee of KuwaitInvestment Authority. Mr. Al Humaidhi is also a Member of the Board of Kuwait Chamber ofCommerce & Industry, in addition to holdingseveral directorships of companies and publicauthorities in Kuwait. Also Chairman of theBoard of Directors of Banco Atlántico, S.A.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 EC CC

Director Saudi

Ph.D. in Agricultural Economics, Oklahoma StateUniversity, U.S.A.

General Manager, Arab Investment Company,Riyadh; Member of the Boards of SaudiInternational Petrochemical Company, Jubail andSaudi Investment Fund, London, U.K.; Chairman,Saudi Moroccan Development InvestmentCompany, Casablanca. Dr. Humaidan is also theDeputy Chairman of Arab Banking Corporation(Jordan). He has over 25 years of experience inthe economic and investment fields gainedthrough his work at the Saudi Arabian Ministryof Planning, the Saudi Development Fund, theArab Investment Company and his participationin many conferences and forums related toinvestment and developing capital markets inArab countries. He joined ABC as a Director in 2001.

Dr.Anwar Ali Al-Mudhaf AC

Director Kuwaiti

M.B.A. and Ph.D. in Finance, Peter F. DruckerGraduate School of Management, ClaremontGraduate University, California, U.S.A.

Dr. Al-Mudhaf is currently the General Managerof Kuwait Health Insurance Company and a lecturer in corporate finance, investment man-agement and financial institutions at KuwaitUniversity. He is also a Director and a Memberof the Board’s Investment Committee of the Kuwait Public Institute for Social Security;former Vice-Chairman of Al-Mal KuwaitiCompany (K.S.C.) and a former Director of Al-Ahli Bank of Kuwait. Dr. Al-Mudhaf worked as an advisor to the Finance and EconomicAffairs Committee at Kuwait’s Parliament.He is a Director of the Board of Governors in the Oxford Institute for Energy Studies.Dr. Al-Mudhaf is also the Chairman ofInternational Bank of Asia Ltd., Hong Kong and Director of Arab Banking Corporation – Egypt (S.A.E.). Dr. Al-Mudhaf joined ABC’s Board in December 1999 and has over 10 years’experience in banking and finance.

Mr. Mubarak R.Al-Mansouri Director U.A.E. citizen

B.Sc. in Finance, M.B.A. University of West Florida,U.S.A.

Director General, Abu Dhabi RetirementPensions 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 more than 10 years’ experience in invest-ment and commercial banking.

Mr. Khalifa Mohammed Al-Kindi

Chairman

Mr. Farhat Omar Ekdara

Deputy Chairman

Mr. Hilal Mishari Al-Mutairi

Deputy Chairman

Mr.Abdallah Saud Al Humaidhi

Director

Dr. Saleh Helwan Al Humaidan

Director

Dr.Anwar Ali Al-Mudhaf

Director


Mr. Eissa Mohammed Al Suwaidi EC AC*

Director U.A.E. citizen

B.Sc. in Economics, Northeastern University of Boston, U.S.A.

Executive Director of Abu Dhabi InvestmentAuthority and Director of Abu Dhabi NationalOil Company For Distribution (ADNOC-FOD).Also Director of International Bank of Asia Ltd., Hong Kong and Chairman of Arab BankingCorporation – Egypt (S.A.E.). He has been aDirector of ABC since 1995, with over 15 yearsin investment banking.

Dr. Saleh Lamin El-Arbah AC

Director Libyan

B.A. in Economics, University of Benghazi, Libya;M.B.A. University of Hartford, U.S.A.; Ph.D. inEconomics, Academy of Science, Hungary.

Director of Accounting and Investments at theCentral Bank of Libya; former Undersecretary of the Ministry of Planning, Economy andCommerce, Libya. Also a Director of BancoAtlántico, S.A., Spain and Arab BankingCorporation – 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 Macro-Economics from the University of Gharian(Libya).

Mr. Hassan A. Juma EC

Director Bahraini

Fellow of the Chartered Institute of ManagementAccountants (FCIMA), U.K.

Managing Director of National Bank of Bahrainas 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. Mr. Juma has been a Director of ABC since1994. He has more than 25 years’ experience as a senior commercial banker.

Mr. Mohammed H. Layas EC CC *

Director Libyan

B.A.Accounting and Business Management, Universityof Benghazi, Libya; Diploma of the Institute ofEconomic Development,Washington, U.S.A.

Chairman and General Manager, Libyan ArabForeign Bank. Also Deputy Chairman, BritishArab Commercial Bank, London, U.K.; DeputyChairman, Banque Intercontinentale 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 alsoDirector of Banco Atlántico, S.A., joined theBoard of ABC in 2001 with over 35 years’experience in international banking.

Mr.Adnan Ahmed Yousif AC

Director Bahraini

M.B.A. in Business Administration, Hull University, U.K.

Chief Executive Officer and Board member ofBahrain Islamic Bank (B.S.C.), Bahrain, Chairmanof AlBaraka Bank Lebanon and Banque Al BarakaD’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 internationalbanker.

Dr. Khaled S. Kawan Secretary to the Board Libyan

Ph.D. (Doctorat D’Etat) in Banking Laws,University of Paris (Sorbonne), France.

Dr. Kawan joined Legal & ComplianceDepartment of ABC in June 1991, having previously spent some time with a prime FrenchLaw firm in Paris. He was made Legal Counseland Head of Legal & Compliance in March 2004. Dr. Kawan serves also as Director in Arab Banking Corporation – Egypt (S.A.E.) andArab Banking Corporation (Jordan).

EC Member of the Executive CommitteeAC Member of the Audit CommitteeCC Member of the Compensation Committee* Chairman✚ Deputy Chairman

Mr. Mubarak R.Al-Mansouri

Director

Mr. Eissa Mohammed Al Suwaidi

Director

Dr. Saleh Lamin El-Arbah

Director

Mr. Hassan A. Juma

Director

Mr. Mohammed Layas

Director

Mr.Adnan Ahmed Yousif

Director

Dr. Khaled S. Kawan

Secretary to the Board


Directors’ Report

‘A year of contradictions and immense change…’

If it is at all possible to encapsulate in a singlephrase the many and varied events of such a tumultuous year as 2003, one would haveto say it was a year of contradictions andimmense change. The world witnessed the invasion of Iraq and the overthrow ofSaddam Hussein, and also saw the failure of yet another attempt to find a peacefulsolution to the seemingly intractable prob-lems that exist between Israel and Palestine.The US economy showed positive, albeit faltering, signs of emerging from its flirtationwith recession, while that of the UK continued its pattern of steady, though largely consumer-led, growth. Although mosteuro zone countries continued to exhibitweak or negative performances, Spain wasone exception with a creditable, althoughunexceptional, 2.3% growth rate. Even Japan signalled that it might at last be begin-ning the slow upward climb from its 10-year deflationary adjustment, and China returnedto healthy growth, although amid muchuncertainty in the rest of the Far East.India’s economy continued to flower. Brazilprospered as the Lula government embracedfundamental values under its new economicpolicies, while Argentina remained over-whelmed by the consequences of its pastmismanagement.

For ABC, too, the year was marked byseismic shifts, but with mixed effect. Theimpending invasion of Iraq compelled theGroup early in the year to order an effectivestandstill of business – albeit with as little disruption to existing clients as possible –while it watched and waited on the out-come. Assets were allowed to run off with-out replacement whilst liquidity was built upto almost unprecedented levels in antici-pation of possible trying times ahead. At thesame time, the Group’s Disaster RecoveryProgram, entailing the transfer of liquidity and asset / liability management of the Groupon a temporary basis to a London branch of ABC specifically set up for this purpose with FSA authorisation, was tested to the full extent with eminently satisfactory results.

The way ahead remains challenging, but

we are confident that the Group is well on the

way to achieving its strategic aims.

Khalifa M.Al-KindiChairman


Relative normality returned in the second half of the year and the business unitsturned with a will to rebuilding their assetand trade finance portfolios, a task largelyaccomplished by many units, though notwithout cost.

In 2003 the Group reached an importantmilestone on its journey to position itself in accordance with its strategic vision.Despite ABC’s success in growing both thebusinesses and profitability of InternationalBank of Asia Limited in Hong Kong andBanco Atlántico, S.A. in Spain over the years,its aim had always been to dispose of theseinvestments if and when market conditionsfavoured it. That decision was now taken in light of the emerging opportunities forexpansion in the Arab world, particularly in the spheres of retail and consumer bank-ing and trade finance. Consequently, inSeptember, 2003, ABC announced the sale of International Bank of Asia to FubonFinancial Holding & Co., Limited, a leadingTaiwan group. After obtaining all regulatoryand other necessary approvals in the countries concerned, this sale was completedin February 2004. As for Banco Atlántico,following the assessment of a number of tenders submitted pursuant to an open invitation to all interested parties to submitoffers, ABC entered into an agreement with Banco de Sabadell of Spain inDecember, 2003, under which the lattercommitted to launching a public offer for alloutstanding ordinary shares in BancoAtlántico and ABC committed to acceptsuch an offer. It is anticipated that this salewill be culminated within the first quarter of 2004. These two disposals will, naturally,have a profound effect on both the make up and size of the Group.

ABC also decided in 2003 to opt forearly adoption of the revised version ofInternational Accounting Standard 39 (IAS39) – to which it already adheres – althoughthe deadline for implementation is actuallynot until January, 2005. One of the main revisions requires the restatement at market

value of originated loans that are quoted in an active market – previously these loanshad to be stated at amortised cost. It there-fore became necessary for what remained of ABC’s ‘Brady Bond’ portfolio – the resultof past sovereign debt reschedulings – be‘marked to market’ (that is, reflecting marketvalues as they change), with the market value shortfall as of 1 January 2002 beingrecognised as a “transitional adjustment”as required by the revised IAS 39.Consequently, the consolidated equity as at 1 January 2002 and 31 December 2002has been restated at $1,496 million and$1,371 million respectively (compared with$1,872 million and $1,766 million originally).ABC’s ‘Brady Bond’ portfolio was liquidated in February 2004.

Consolidated equity as of 31 December2003 stands at $1,585 million, and the consolidated capital adequacy ratios of theABC Group as at 31 December 2002,and 31 December 2003, were 13.1%, and14.7% respectively.

The measures taken in 2003 have createdboth opportunity and flexibility of action for the Group. Whereas the net effect of theseactions has been to reduce the equity of the Group, the sale of the two non-core subsidiaries will boost equity by over$400 million in 2004. At the same time,the consolidated capital adequacy ratio –already a strong 14.7% at the end of 2003 –will temporarily surge. Until these expandedresources are utilised the Group’s total assetswill reduce by the $17 billion comprising the combined assets of the two subsidiaries.

Your Board will be examining a number of options to expand its business in a number of countries in the Arab world, to furtherdevelop the strong and liquid financial institution that is one of our key objectives.

Meanwhile, the operations of all areas of the Group have remained under constantreview with an eye to achieving optimal efficiency. Following the closure in 2002 of the Los Angeles representative office,rationalisation of the Group’s US presence

was effectively completed with the closure of the Houston representative office andtransfer of its marketing responsibilities toABC’s New York branch. Likewise, a reviewof the business potential in South East Asia, given the Group’s increasing Arab worldemphasis, led to ABC’s Singapore branchbeing replaced by a representative office.Asian business (principally trade finance) willhenceforth be marketed and booked mainlyby Bahrain business units. Finally, arrange-ments were completed in respect of theintegration of the businesses of ABC’sFrankfurt subsidiary and Milan branch intonew branches of ABC International Bank plc,which was effected on 1 January 2004.

Although, as mentioned earlier, the internal embargo on new business dictatedby events in the early part of the year waslifted later in the year, despite their very hardwork the business units were unable torecover all the ground lost. Nevertheless,we are happy to report that through theirefforts the Group returned an enhanced net interest margin on the aggregate loanportfolio. The low interest environment negatively impacted the income on equityand investments. On the other hand, incomefrom commission, fees and other sourcesrecorded satisfactory increases, which,after applying the adjustments mentionedearlier, resulted in an overall increase in total income.

Operating expenses showed an increase of 11% over the previous year mainly due to the translation effect from the surge in the euro/dollar exchange rate on BancoAtlántico’s expenses incurred in euro andother non-recurring costs from staff redundancies in a few units. After reducedcharges for loan loss provisions, taxation andminority interest in subsidiaries, comparedwith the previous year, the net profit for 2003 was $120 million, a not unsatisfactoryresult considering the circumstances. Even so, the Group’s performance would havebeen considerably better but for the un-expected need for additional loan loss

Operating Profit US$ millions

2002 2003

354

230

400

300

200

100

0

Deposits US$ millions

2002 2003

24,789

23,159

25,000

20,000

15,000

10,000

5,000

0


Directors’ Report

provisions in the last quarter of the year onaccount of identified deterioration in certaincredits at some units, notably New York,Tunisia and Algeria. Parmalat and SK Globalfrauds affected Milan and Singapore units,respectively. However, it might be interestingto note that overall, of the total of $133 million provisions made, some 44% is attrib-utable to the Spanish and Hong Kong basednon-core subsidiaries whose impending disposal has already been addressed.

Overall, total assets increased $1.2 billionover the year to $30.1 billion mainly as aresult of an increase in loans at BancoAtlántico combined with the translationimpact of the weakening dollar against theeuro on the Group’s assets.

ABC Group’s business focus, as evidenced by the developments of 2003,affords us an even clearer vision of the future of the ABC Group. On both terri-torial and organisational grounds, the ABCGroup will be managed from two strategichubs – Bahrain and London. At the sametime it will continue to build on its MiddleEast franchise in the provision of StructuredLending, and Project Finance solutions,Islamic Banking products and Debt issuanceand Syndicated Lending to Governmentaland Financial Institutions regional customerbase. Group Treasury, also based in Bahrain,will continue the development and contin-uous rollout of new products already offeredto Middle Eastern and multi-national clients,in conjunction with the secondary Treasury hub being established out of the enlargedLondon subsidiary.

In Europe, meanwhile, all units previouslydirectly held by ABC Bahrain, were success-

fully integrated into our European flagship subsidiary in London, ABC International Bank plc, resulting in a branch presence inFrankfurt, Milan, Paris, and London. ABCInternational Bank plc will be responsible for offering its own wide range of specialistservices, complementing those of its parentbut individually tailored to its respective fieldof operations. These will initially be targetedat facilitating the trade and investment flows between the Arab world and Europe,but once ABC’s New York branch is foldedinto the London-based operation – an eventanticipated towards the end of 2004 or early 2005 – Arab /North American businessopportunities will be similarly pursued.

To complement this restructuring, a new business matrix is being implemented in both the European and Arab world platforms, to enhance origination and deliv-ery efficiencies, as a result of a centralisedmarketing, support and, Treasury functions.

The way ahead remains challenging,but we are confident that the Group is wellon the way to achieving its strategic aims.

In closing, we should like to thank our management and staff, in our business units everywhere, for their hard work and dedication in the achievement of our goals to date. We would also express our grati-tude to the regulatory authorities in the jurisdictions in which our various units operate, and most especially to the BahrainMonetary Agency, for their constant guidanceand support.

Finally, 2004 marks the end of your Board of Directors’ customary three-year tenor ofoffice as representatives of the shareholders of ABC. A new Board will be appointed –

perhaps reappointed in some individual members’ cases if appropriate – at the nextAnnual General Meeting. I should therefore like to take this opportunity on behalf of the Board, to say that it has been both animmense privilege and a pleasure to serve you, the shareholders, of ABC Group.

Khalifa M.Al-KindiChairman

Note: In compliance with the Bahrain MonetaryAgency Circular No. BMA/751/93 and EDBC/782/93,dated 8 July 1993 and 17 July 1993 respectively, set outbelow are the interests of Directors and SeniorManagers in the shares of Arab Banking Corporation(B.S.C.) for the year ended 31 December 2003.

1/1/2003 31/12/2003Directors’ Shares 11,000 11,000 Senior Managers’Shares 19,329 19,329 Total 30,329 30,329

Note: Directors remuneration, allowances andexpenses for attendance at Board meetings for 2003amounted to US$ 1,231,000 (2002: US$ 1,167,000).

Assets Breakdown Percentage

Arab World

17% 16% 7% 14% 44% 2%

17% 17% 6% 12% 46% 2%

2002

2003

Asia LatinAmerica

NorthAmerica

Europe Others

2002 2003

Shareholders’ Funds US$ millions

2002 2003

1,5851,371

2,000

1,500

1,000

500

0

Internal Audit: Prasad Abraham, SVP

AUDIT COMMITTEE

Board Secretary: Dr. Khaled S. Kawan

TREASURY GROUPEssam El Wakil, SVP Group Treasurer

BANKING GROUP

Arab World Division Nour Nahawi, SVP

International Division George K. Morton, SVP

Bahrain Business Unit

Other Treasury Units in the Group

Banco Atlántico, S.A. ** Manuel Montecelos, Chief Executive Officer

International Bank of Asia Ltd ** Mike M. Murad,Vice Chairman & Chief Executive Officer

Banco ABC Brasil, S.A.Tito Enrique da Silva Neto, President

ABC Securities (Egypt) S.A.E.

Grand Cayman Branch

Global Information Technology

Planning & Financial Controls

Legal & Compliance

Human Resources & Administration

Operations

Corporate Communications

Premises & Engineering

Credit Department

Economics

Remedial Loans

Risk Management

New York Branch

Milan Branch *

Arab Banking Corporation Daus & Co. GmbH *

ABC International Bank plc

Bahrain Treasury

Frankfurt Branch *Milan Branch *

Tunis Branch (OBU)

ABC Islamic Bank (E.C.)

Arab Banking Corporation - Algeria

Arab Banking Corporation - Tunisie, S.A.

Representative Offices:Abu Dhabi,Tehran & Tripoli (Libya)

Representative Office:Singapore

Arab Banking Corporation (Jordan)

Arab Banking Corporation - Egypt (S.A.E.)

ADMINISTRATION GROUPAsaf Mohyuddin, SVP Chief Administrative Officer

CREDIT & RISK GROUPRichard Cumberland, SVP Chief Credit & Risk Officer

London BranchParis Branch


Global Organisation

* The businesses of Milan Branch and Arab Banking Corporation Daus & Co. GmbH were transferred to ABC International Bank plc.as Milan and Frankfurt branches respectively with effect from January 2004.

** Investments in Banco Atlantico, S.A. and International Bank of Asia Limited were sold effective 2004.

INVESTMENT GROUP

Board of Directors

Ghazi M.Abdul-Jawad President & Chief Executive

Abdulmagid Breish Deputy Chief Executive

2003 2002 2001 2000 1999Restated

Net interest income 437 464 469 433 434Other operating income 461 257 293 280 256Total operating income 898 721 762 713 690Profit before provisions, tax and minority interests 354 230 288 262 261Provisions for credit losses (133) (204) (128) (66) (97)Profit before tax and minority interests 179 26 160 196 164Net profit (loss) for the year 120 (41) 102 127 112

Total assets 30,068 28,915 26,545 26,676 24,358Loans and advances 15,921 14,981 14,225 14,039 12,903Placements with banks and other financial institutions 6,651 6,802 6,444 7,060 5,891Trading securities 86 373 341 713 363Non Trading securities 5,204 4,632 3,616Investment securities 2,961 3,128Shareholders' funds 1,585 1,371 1,872 1,904 1,857

ProfitabilityCost: Income ratio (costs as % of gross operating income) 61 68 62 63 62Net profit (loss) as % of average shareholders funds 8.1 (2.8) 5.4 6.8 6.2Net profit (loss) as % of average assets 0.42 (0.15) 0.38 0.50 0.46Dividend cover (times) 1.81 0.00 1.54 1.93 1.98

CapitalRisk weighted assets (US$ million) 18,051 19,015 17,891 17,526 15,767Capital base (US$ million) 2,661 2,495 2,373 2,367 2,310Risk asset ratio - Tier 1 12.0 11.5 11.8 11.8 12.9Risk asset ratio - Total 14.7 13.1 13.3 13.5 14.7Average shareholders' funds as % of average total assets 5.1 5.2 7.2 7.4 7.4Loans and advances as a multiple of shareholders' funds (times) 10.0 10.9 7.6 7.4 6.9Total debt as a multiple of shareholders' funds (times) 17.6 19.8 12.9 12.8 11.9Term financing as multiple of shareholders' funds (times) 1.17 1.59 0.97 0.89 0.69

Asset QualityLoans and advances as % of total assets 52.9 51.8 53.6 52.6 53.0Securities as % of total assets 17.6 17.3 14.9 13.8 14.3Non-accrual loans as % of gross loans 4.5 4.9 4.5 4.7 7.0Loans loss provisions as % of non-accrual loans 102.0 94.7 94.8 89.3 90.5Loan loss provisions as % of gross loans 4.6 4.6 4.3 4.2 6.3

LiquidityLiquid assets ratio 42.1 43.1 40.9 41.8 40.9Deposits to loans cover (times) 1.6 1.5 1.5 1.5 1.6

Basic Earnings per share $1.27 ($0.44) $1.08 $1.35 $1.19Dividends per share $0.70 $0.00 $0.70 $0.70 $0.60Net asset value per share $16.84 $14.57 $19.89 $20.23 $19.73

Authorised 1,500 1,500 1,500 1,500 1,500Issued, Subscribed and fully paid-up 1,000 1,000 1,000 1,000 1,000

Capitalisation (US$ million)

Ratios (%)

FinancialPosition(US$ million)

Earnings(US$ million)

ShareInformation

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Financial Highlights

Principal shareholders Registered addressKuwait Investment Authority (Kuwait) Arab Banking Corporation (B.S.C.)Central Bank of Libya (Libya) ABC Tower, Diplomatic AreaAbu Dhabi Investment Authority (Abu Dhabi) P.O. Box 5698, Manama, Kingdom of Bahrain Individual and Institutional Investors Publicly quoted company listed on Bahrain Stock Exchange.

(Commercial Registration Number 10299)


Corporate Governance

BOARD OF DIRECTORSThe Board of Directors is responsible for theoverall direction, supervision and control of the Group. There are currently 12 Directors on the Board, all non-executive, with variedbackgrounds and experience, who individuallyand collectively exercise independent and objective judgement.

The roles of Chairman and Chief ExecutiveOfficer are separate, with distinct responsibili-ties. The shareholders appoint the Board for a period of three years and reappointments of retiring Directors are considered as theBoard approaches the end of its term. TheBoard meets regularly (usually 8 times a year)and has a formal schedule of matters reserved to it, considering key aspects of the Group’saffairs referred to it for decision. It reviews the Group’s strategy and financial plans, materialchanges to the Group’s policies, structure andorganisation, reports provided to it on the operations of the Group and the performanceof executive management. The Board and itsCommittees are supplied with full and timelyinformation to enable them to discharge theirresponsibilities. All Directors have access to the advice and services of the Secretary whois responsible for ensuring that the Board procedures and applicable rules and regula-tions are observed. Individual Directors mayalso take independent professional advice atthe Group’s expense. In general Directors donot have, and in 2003 no Director had at any time during the year, any direct or indirectmaterial interest in any contract of significancewith ABC or any of its subsidiaries.

The Board has overall responsibility for the Group’s system of internal control and its effectiveness. There are well-established andongoing procedures in place for identifying,evaluating and managing significant risks faced by the Group. Management has the primeresponsibility for identifying and evaluating,on a continuous basis, significant risks to thebusiness of the Group and for the design andoperation of appropriate internal controls.The Group’s system of internal control pro-vides for a documented and auditable trail ofaccountability across the Group’s operations.The system is designed to ensure effective andefficient operations and compliance with all

applicable laws and regulations, and seeks tomanage risk with a view to avoiding materialerrors, losses and fraud.

Board CommitteesSpecific responsibilities have been delegated to the Board committees. The two principalBoard committees are the ExecutiveCommittee and the Audit Committee.Additionally, the Board has recently appointed a Compensation Committee. The current membership of each committee is shown onpages 4 and 5.

Subject to certain specific matters which the Board reserves to itself, the ExecutiveCommittee retains all of the responsibilities and exercises all of the authority of the Boardbetween its meetings.

The Board has delegated to the Group Audit Committee the responsibility for ensuring the existence of an effective systemof financial, accounting and risk managementcontrols. The Audit Committee achieves this through its regular review of the adeq-uacy and effectiveness of the internal controlstructure of the Group. The Committee alsomonitors compliance with the requirementsof the regulatory authorities in the variouscountries in which the Group operates.

The Audit Committee meets at least fourtimes a year. During its meetings, it reviews procedures for identifying business risks and controlling their financial impact, preventing ordetecting fraud, complying with regulatory and legal requirements, and monitoring theoperational effectiveness of policies and sys-tems. Selected members of management areinvited to meetings to discuss relevant issues.

The Committee reviews the Group’s annual and interim financial statements,summaries of all internal audit reports, the adequacy of loan loss provisions, all reportsissued by the various regulatory authoritiesand by external auditors and other externalconsultants on specific investigative or advisoryengagements, and all management letters from the external auditors. It is kept informedof legal, compliance and regulatory matters as they arise.

The Committee meets regularly with both the external auditors and the internal auditors.

Group Internal Audit reports directly to it.During these meetings, it considers the annualaudit plans, the frequency and scope of internal reviews of any given business unitbeing determined by several factors includingits level of financial, operational and credit riskand the previous rating assigned to it. TheCommittee also makes recommendations to the Board regarding the appointment and retirement of external auditors.

Executive remuneration policy is formu-lated by the Compensation Committee andapproved by the Board.The policy is to providecompetitive remuneration packages to find andkeep high calibre executives and to encourageand reward superior business performance.The Compensation Committee, which has formal terms of reference that are approvedand reviewed by the Board, meets severaltimes during the year. It has access to advice internally from Human Resources &Administration Department and from external remuneration consultants and others. The Committee makes recommend-ations to the Board, for its decision, on thetotal remuneration of the President & ChiefExecutive, the Deputy Chief Executive andmembers of senior management, includingthe heads of subsidiaries of ABC. It also recommends to the Board, for proposing to the shareholders at the Annual GeneralMeeting, the level of remuneration of theDirectors themselves. No Director is involvedin determining his own remuneration.

Control EnvironmentThere are two main areas of business activitywithin the Group. The first is the ‘core bank’,comprising ABC's branches and wholesale banking subsidiaries worldwide, and the Arabregion’s retail banks. These business units aredirected, supervised, and supported within amatrix structure under which commercial banking activities are controlled by theBanking Group, through the Arab World andInternational Divisions, foreign exchange dealing, securities trading and related activitiesby the Treasury Group, credit and risk man-agement matters by the Credit & Risk Group,while administrative matters are coordinatedby the Administration Group.

Whilst each subsidiary’s Head Office retains fullresponsibility for its own day-to-day activities, itoperates under the guidance of ABC Group’soverall policies.


The activities of Banco ABC Brasil S.A.,Banco Atlántico, S.A. and International Bank of Asia Limited are coordinated under theInvestment Group. These subsidiaries areconsiderably more autonomous than the ‘corebank’ units, due to the substantial difference inthe nature of their business. Banco Atlántico,S.A. and International Bank of Asia Limited are largely domestic retail banks, serving both the consumer and commercial markets.Banco ABC Brasil S.A. is a domestic commer-cial bank with mainly corporate clients. Whilsteach subsidiary’s Head Office retains fullresponsibility for its own day-to-day activities,it operates under the guidance of ABCGroup’s overall policies. Assistance and adviceis provided by the Group Head Office inBahrain as and when necessary.

COMPLIANCEIn accordance with the directives 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 inrespect to all matters relating to BMA regu-latory reporting, capital markets regulationsand other requirements. This responsibility lies with the Chief Administrative Officer.In addition to specific BMA mandated issues,the function also covers the broad areas of corporate governance, adherence to bestpractices, code of conduct, conflict of interest,etc. Each operating entity has appointed localCompliance Officers to ensure adherence to local requirements and regulatory issues.

It is the duty of the Money LaunderingReporting Officer (MLRO) in each unit toensure that the local regulatory and ABCGroup anti-money laundering regulations,guidelines and procedures are implemented,including establishing and monitoring adher-ence to Know Your Customer best practices andsuspicious transaction reporting procedures.The MLRO is also responsible for ensuringthat relevant staff in the units undergo suitable Anti-Money Laundering training.These responsibilities lie with the Head ofOperations in Head Office, who also performsthe role of MLRO for the Group, whoseresponsibilities include formulating the Group’s

overall anti-money laundering strategy andmonitoring and assessing the adequacy of the anti-money laundering procedures of thevarious ABC business units.

The Legal & Compliance Department in Head Office is responsible for developing,implementing and monitoring programmesfor ensuring that all business units in theGroup adhere to laws and governmental regulations in their respective countries.

RISK MANAGEMENTThe Group manages risk strategically to buildshareholder value. The key to effective risk management is a strong and well-understoodrisk management culture, supported by on-going strategy and policy developmentprocesses. The Board entrusts responsibilityfor overall risk strategy to management, whoimplement this through senior managementcommittees, including the Head Office CreditCommittee (HOCC) and the Asset andLiability Committee (ALCO). These commit-tees determine appropriate strategies andpolicies and ensure their adherence, and are inturn supported by dedicated Group supportdivisions. Both Committees are chaired by thePresident & Chief Executive with membershipdrawn from relevant senior management.

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 responsi-ble for capital raising, liquidity and structuralhedging policies. Operational responsibility isdelegated to each major subsidiary for its ownasset and liability management.

OverviewRisk management involves the identification,assessment and control of material risks thatcould detrimentally affect the organisation’s performance and achievement of its long-termobjectives. The primary goal of risk manage-ment is not so much the avoidance of thoserisks inherent in the business, but rather theconscious management of them with a view toensuring the generation of income appropriateto the degree of risk assumed.

The Group’s risk management philosophy is focused on the generation of consistently

increasing shareholder value over time,through the maintenance of an internal culturethat ensures that adequate and effective control mechanisms are in place. It is commit-ted to applying industry best practice riskmanagement, through continuous researchand identification of new risks and the devel-opment of the latest systems and proceduresfor measuring,monitoring and controlling risks.

The major risks to which the Group isexposed are credit, market, liquidity, opera-tional and legal risks.

Credit RiskCredit risk is the risk of financial loss arising from the inability or unwillingness of a customer to meet an obligation entered into with the Group. It emanates from theloans, contingent obligations, treasury andother activities undertaken by the Group.In the normal course of business the parentbank and its subsidiaries deal with all types of customers, ranging from governments andtheir agencies, central banks and other financialinstitutions, correspondent banks, multinationalcorporations and corporates of all sizes, tofamily-run firms and individuals.

The Group controls credit risk at trans-action, counterparty, country and portfoliolevels through the process of initial approvaland granting of credit, the subsequent monitoring of customer creditworthiness and active management of credit exposures.

The primary means of avoidance of loss on credit risk is the initial decision on whether or not to extend credit. Authority to approve credits is delegated by ABC’s Board under and subject to the guidelines laid down in the Group Credit Policy. At the highest executive level, the Board and the HOCC set Group country and customer credit limits within the guidelines of the Group Credit Policy and other parameters laid down by theBoard. The purpose of these Group limits istwofold: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

The Board has overall responsibility for theGroup’s system of internal control and its effectiveness.



Credit Risk continued

commensurate with their ability to meet theirobligations when due. The HOCC allocatesthe Group limits between ABC and its banking subsidiaries, which may extend creditonly within these pre-set limits.

The parent bank and its banking subsidiariesare governed by specific credit policies that,whilst closely following Group policies, areadapted to suit local practices and regulatoryrequirements and product and sectoral needs.Credit exposure to individual counterpartiesor groups of counterparties is controlledthrough a tiered hierarchy of delegatedapproval authorities; approval requirements for each decision being based on the trans-action amount, the customer’s aggregate facilities, credit risk ratings, tenor and the nature of the risk. Significant aggregated credit exposures are reviewed by senior management on a regular basis, as are industry/sectoral exposures periodically.

ABC Group maintains a strong credit culture that places the responsibility for anyproposed credit firstly and primarily on theaccount officer and business unit head exer-cising delegated authority or recommendingthe credit to the next level of decision-making.Responsibility for day-to-day management ofexisting credit exposure is similarly delegatedto the business unit officers who, in turn, mustadhere to the detailed requirements for regular review of the customers and analysisof their financial and economic condition.The ‘core’ wholesale banking units employ the Group’s proprietary credit risk rating andcountry risk rating systems in the assessmentand grading of credit exposure. Credit expo-sures of less than satisfactory grade are managed separately as weak credits, with escalating levels of specific loan loss provisionsmade against those below ‘watchlist’ and ‘special mention’ categories, up to 100% in the case of credits classified as Loss.

Where unsecured, or ‘clean’, facilities beingsought are considered to be beyond pruden-tial limits, Group policies require collateral inthe form of cash, securities, legal charges over the customer’s assets or third-party guarantees to mitigate the credit risk. At 31December 2003, assets secured by collateral

amounted to US$6,159 million, or 20% oftotal assets (2002: US$6,299 million.).

The parent bank and its banking subsidiariesmaintain their own head office credit depart-ments, responsible for assessing credits post-fact following a business unit’s exercise of its delegated authority or prior to Head Office approval if outside the business unit’sdelegated authority, as well as on a regularreview basis. In addition, Head Office CreditDepartment in Bahrain assesses the quality ofGroup common customers (including corre-spondent banks) and recommends appropri-ate Group limits to the HOCC for its decision.

Internal Audit is responsible for carrying outRisk Asset Reviews of business units to assessand provide an independent opinion on thequality of their credit exposures and the efficacy of, and adherence to, approval andanalytical standards laid down in Group and individual subsidiaries' credit policies andprocedures.

‘Core bank’ business units’ portfolios are subject to Head Office review at least quar-terly, while those of the Investment Groupsubsidiaries are reviewed at least annually.Weaker credits are subject to detailed quarterly appraisal at the Head Office leveland all criticised credits are additionallyreviewed regularly by the respective businessunit's account officers and unit heads, withprogress reports made to the Head OfficeRemedial Loans Unit and the respectiveDivision Head no less frequently than quarterly. Reports are in an ‘Action Plan’format demanding firm undertakings from the responsible account officers as to actionsto be taken to reduce exposure and maximiserecoveries. Criticised credits are also subjectedto occasional detailed in situ case-by-casereviews between the business units and theHead Office.

Group country limits are reviewed at leastannually by the HOCC and set for the ensuing business year, taking into considerationin-house and external economic reviews and various quantitative and qualitative data,with particular emphasis on countries where there are risk concentrations, exposure growthis anticipated or which are subject to greaterthan normal risk volatilities. Country risk limits

are regularly monitored and risk ratings arereviewed quarterly with appropriate adjust-ments being made.

The Head Office Credit Department isresponsible for coordinating all technologydevelopment related to credit risk manage-ment and for providing senior managementwith consolidated information on Groupexposures to counterparties, countries andindustries. It is also responsible for recom-mending Group credit policy and proceduralamendments and initiatives to the HOCC for approval.

Following an extended period of dialoguebetween the Basel Committee on BankingSupervision and the international banking community, the Basel Committee issued its third Consultative Paper on the draft of thenew Capital Accord (‘Basel Two’) to replacethe 1988 Capital Accord that establishedguidelines as to the minimum capital thatbanks should maintain in relation to their riskweighted assets. The primary goal of the regulatory reform is the introduction of ahigher and more sophisticated degree of riskdifferentiation in establishing the amount ofcapital required to be allocated by banks todifferent categories of their credit risk expo-sure. Basel II will be based on three pillars ofregulation: the establishment of a minimumamount of capital required to be set aside byeach bank in cover of its credit operations; theregulator’s authority to examine a bank’sprocesses for calculating such capital, and torequire additional capital to be set aside ifdeemed necessary in light of any identifiedshortcomings in the systems employed; andthe requirement for banks to disclose publicly– under their respective accounting standards– sufficient data as to ensure their adherenceto the disciplines being imposed on them.Implementation of the new Capital Accord isdue to commence by the end of 2006, but theCommittee has indicated that given resourcesconstraints and other priorities, both in the G10 and in countries with less sophisticated regulatory infrastructure, it is understood that the timetable will be extended beyond that date. Once a bank’s systems are in place,calculations will be conducted in parallel withthose under the current Accord for at least

ABC Group maintains a strong credit culture that places the responsibility for any proposedcredit firstly and primarily on the account officerand business unit head.


a year prior to full implementation.In 2003 ABC successfully completed and

submitted to the BMA a Quantitative ImpactStudy, which demonstrated that the amount of capital required under the StandardisedMethodology of Basel Two would be higher than that required under the current Accord.ABC awaits further guidance from its regu-lator on the overall issue of Basel Two adoption and implementation. Nonetheless,guided by current best practice requirements,ABC is moving towards further refinementand development of its economic capital allo-cation and RAROC framework. In this regard,it is actively engaged in the development of itssystems in order to achieve the requireddegree of sophistication in risk assessment andhas engaged the services of an expert consultant to assist its preparation for creationof an economic capital framework, whichshould enable it to comply with the require-ments of the Internal Ratings Based Approachof Basel II, if appropriate and necessary.

Market RiskMarket risk is the risk of financial loss to theGroup resulting from adverse movements inthe value of financial instruments, arising fromchanges in the level or volatility of interestrates, foreign exchange rates or the marketprices of commodities or equities and othersecurities, including their derivatives. It arises asa normal part of the Group's activities in bothin its asset and liability management (under‘the banking book’) and its trading activities(‘the trading book’), although each has different accounting consequences.

Managing Market RiskThe Group has established risk managementpolicies and limits within which exposure to market risk is monitored and controlled,with strategic oversight exercised by the Head Office ALCO. Each major subsidiary has its own ALCO, which assesses and manages themarket risks arising in its business activitiesunder limits approved by its local Board.

ABC Group manages its market risk on adecentralised basis, with consolidation at HeadOffice for management and regulatory capitaladequacy reporting.

At Head Office in Bahrain there is an independent Risk Management Department(RMD), reporting directly to the Chief Credit& Risk Officer. The Risk ManagementDepartment is responsible, inter alia, for developing and implementing market risk policy and limit measuring and monitoringmethodology and reviewing all new tradingproducts or new or additional trading limitsprior to ALCO consideration and approval.RMD’s objective is to support the optimis-ation of shareholder return while maintainingABC’s risk exposure within self-imposed parameters through the range of market events. Specifically, RMD’s core responsibility is to monitor and measure and report market risk against limits and also to provideliquidity analysis to Bahrain Treasury.

The Group employs a mix of proprietary systems and purchased applications to quantify, monitor and control market risk.It uses a comprehensive market risk manage-ment application to compute Value-at-Risk(VaR) which has been integrated into tradingguidelines and management processes. VaR isan estimate of potential loss for a given periodof time within a stated statistical confidenceinterval. ABC uses the historical simulation VaR methodology, with a rolling 2-year timeseries of daily market values and an eventhorizon of one day with a 99% one-tail confidence interval, implying that daily tradinglosses should not exceed the estimated VaR more than 1% of the time. RMD tests VaR results against a revaluation of the portfolio using current market rates in anautomated backtest as well as against P&L,also employing stress testing and scenarioanalysis as appropriate.

For the computation of market risk capitalallocation, the Group presently utilises the standardised methodology, consistent with therelevant Basel Accord and BMA regulations.

Foreign Exchange Rate RiskThe Group is exposed to foreign exchange rate risk through both its trading portfoliosand its structural positions. Exposure manage-ment 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 inthe options markets. Spot foreign exchange risk arises when the total value of assets in any currency does not equal the total value of liabilities in that currency. Forward foreignexchange risk arises when, for a given curren-cy, the maturity profile of forward purchasesdiffers from the maturity profile of forwardsales. Options risk arises from the effect ofinterest rate and exchange rate movementsand changes in volatilities on the market valueof the options within the Group’s portfolios.

Foreign exchange rate risk is managed byappropriate limits and stop loss parametersdetermined by each subsidiary’s local ALCO and approved by its Board, in the same way asfor interest rate risk-related limits (see below).

The Group’s structural balance sheet positions relate to its net investment in its foreign subsidiaries and are included in the significant net foreign currency exposuresdetailed in Note 13 to the Financial State-ments. These positions are reviewed weekly by Head Office ALCO in accordance with the Group’s strategic plans and managed on a dynamic basis by Group Treasury,which employs a combination of foreignexchange forward contracts, options andother derivatives for hedging these exposureswhere appropriate and practicable.

Interest Rate RiskABC Group is exposed to interest rate riskfrom the effect of timing differences in thematurity (or repricing) of assets and liabilitieswhen there are mismatches or gaps in theamount of assets, liabilities and off-balancesheet 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 main-tain gaps, under limits authorised to them).It can also be affected by the impact of changesin the slope and shape of the yield curve,differences in repricing references of twoinstruments or an imperfect correlation in theadjustment of rates earned and paid. Likewise,it is exposed to options value fluctuations,when interest rate movements or changes involatilities impact on the market value ofoptions held within the Group’s portfolio.

Ultimately it is Group Treasury’s responsibility to oversee all subsidiaries to ensure that they maintain sufficient liquidity to meet theirown needs.



Interest Rate Risk continued

In managing the interest rate risk resulting from its trading and banking activities, theGroup does not differentiate between theways 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 isassessed using sensitivity analyses and othermodelling techniques.

There are established limits on individual business units’ aggregate maximum exposuresand on an overall basis for the core bankingunits, consistent with ABC Group strategy andfinancial plan targets. Board approved tradinglimits are monitored by Risk ManagementDepartment and any exceptions are brought to the attention of Head Office ALCO forregularisation. Trading activities generatinginterest rate risk are concentrated largely inthe Bahrain Treasury Department, from whereit can be managed directly under the super-vision of the Group Treasurer. Interest rate riskin the trading book is controlled through BasisPoint Value (‘BPV’) limits allocated to autho-rised dealing desks in the Bahrain Treasury.

For purposes of illustration, a suddenadverse, 100 basis point, parallel, all curve,interest rate shock as at 31 December 2003has been calculated to reduce the next 12 months’ Net Interest Income by US$9.4million (2002: an increase of US$0.8 million) if no other action were to be taken.

In managing the interest rate risk on theGroup’s structural balance sheet positions,Group Treasury employs derivative hedging as mentioned under Foreign Exchange Rate Risk above.

Equity, Debt Securities and Commodity RiskAs a normal part of its treasury trading activities, ABC is exposed to the risk of anadverse impact on the Group’s earnings dueto movements in the prices of individual equities or other securities or commodities,or generally in the value of their respectivemarkets, or in either case their related deriva-tives. The Marketable Securities Departmentin Head Office buys and sells securities as part

of its management of the Group’s capital aswell as in the course of its fund managementactivities on behalf of clients. ABC’s bankingsubsidiaries, particularly those engaged in retailbanking, also manage their capital or provideclient fund management services, in additionto buying and selling securities as part of their brokerage activities.

Management of these risks is similar to that explained above in relation to foreignexchange risk, with Marketable SecuritiesDepartment working within set limits andstop loss parameters.

Liquidity RiskLiquidity risk generally arises from mismatches in the timing of cash flows relating to assets,liabilities and off-balance sheet instruments.

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 assetscoverage of short-term wholesale depositsand in particular the potential risk impact of withdrawals by large single depositors,ensuring that there is no reliance on any one customer or small group of customers.Maturity mismatch is also managed withininternal policy limits.

Liquidity management recognises theimpact of potential cash outflows arising fromirrevocable commitments to fund new assets.It also seeks to maintain the capability to execute specific large transactions at or nearcurrent market prices without unduly affectingthose market prices. It manages both by closely monitoring the depth and spreads inmarkets in which it transacts and carefully timing its executions, as well as by limiting itsactivities in less liquid markets or productsaltogether.

The liquidity reports of the two majorTreasury Hubs in Bahrain and London arereviewed daily by the responsible Treasurer.A report on ABC Bahrain and branches is prepared by RMD on a weekly basis for presentation to the Head Office ALCO who,in addition to the monitoring of ABC’s own position, also reviews the consolidatedliquidity profiles of relevant units and topdepositor and borrower concentrations by

currency, region and entity. Liquidity manage-ment reporting by ABC’s subsidiaries conforms to all local regulations.

Ultimately it is Group Treasury’s responsi-bility to oversee all subsidiaries to ensure that they maintain sufficient liquidity to meet their own needs. The overall Groupapproach to liquidity management is, firstly,to project liquidity requirements based onboth expected and stressed conditions. It thenensures that sufficient funds are always avail-able to meet all financial needs, even in timesof crisis, through the exercise of centralisedstrategies, including the use of repurchase and resale agreements, established to addressprojected and potential liquidity shortfalls.

DerivativesIn the normal course of business, ABC Groupenters 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 gov-ernmental institutions or major corporations)to alter their risk profile in a particular area of risk by structuring deals to suit individual client needs. The positions accumulated fromsuch activity are either passed on to others in the market or retained as open positions and managed for a profit.The Group’s tradingactivities are largely managed in Bahrain withappropriate limits and stop loss parameters.

ABC and its subsidiaries also use derivativesto manage their own asset and liability portfolios, as does ABC itself in respect to its structural positions, as referred to aboveunder Foreign Exchange Risk and Interest Rate Risk.

Operational RiskWhile operational risk can never be wholly eliminated, the Group endeavours to minimise it by ensuring that dedicated, trained and competent people, together with appropriateinfrastructure, controls and systems, are in place to ensure the identification, assessmentand management of all substantial risks in a cost effective and consistent manner.Operational risk is composed of:

• Operations risks, which are controlledthrough regular daily functions and are

Group policy dictates that the operational functions of booking, recording and monitoring of transactions are carried out by staff that areindependent of the individuals initiating the transactions.


managed through internal procedures andmonitoring mechanisms - transaction processing, operations control, technologyand systems all impinge on these risks.• Business/event risks, which include under-lying, structural and external risks that canhave a material impact on the Group -changes in taxation, accounting and financialmanagement, legal and regulatory require-ments are all included in this category,as are human resources risks and risks resulting from the use of complex pricing or valuation models.Group policy dictates that the operational

functions of booking, recording and monitor-ing of transactions are carried out by staff that are independent of the individuals initiating the transactions. Business units haveprimary responsibility for identifying and managing their own operational risks, guidedby comprehensive manuals specifying the policies, procedures, and controls that are relevant for each function. Internal controlpolicies and procedures dictate the segrega-tion of duties, delegation of authorities,exceptions reporting, exposures manage-ment and reporting, reconciliations, disasterrecovery and business continuity planning.

Separate Internal Control units carry outongoing monitoring of day-to-day proceduresand ensure adherence to key control functions, with controls frequently integratedinto processing systems.

The Group pays close attention to disasterrecovery. All essential operational datarequired for business continuity by ‘core bank’units are backed up on separate computersboth within the Head Office building itself and elsewhere in Bahrain, in addition to being downloaded hourly to the Group’s computersin London. Subsidiaries in the Investment Group maintain similar arrangements in theirown countries.

IT risk is addressed primarily by the GlobalInformation Technology Department which is continually developing and refining theGroup’s security software to ensure that itssystems can reliably repel hacker attacks.Updates and extensions to backup processesin the mainframe area, including dual databackups with outputs at different locations,

are continually being introduced to safeguard and protect the Group’s database.

The identification and assessment of all types of risk to which the Group may be subject, and the review of the efficacy of theprocedures in place to control them, are essential elements of the role of Group InternalAudit. Internal Audit therefore functions as asecond line of defence in regard to operationalrisk in ABC Group, via its periodic reviews of business and support units. Similarly, unitInternal Audit departments throughout theGroup identify potential or actual irregularitiesand procedural failures in the course of theirreviews and recommend appropriate action to their respective Audit Committees. In certain specific cases, immediate responsibilityfor assessing and neutralising operational riskmay be delegated to other, specialised, areaswithin the Group.

Legal RiskThe legal consequence of actions, investments or situations that lead to material unexpectednegative results is known as legal risk.Inadequate documentation, legal and regul-atory incapacity or insufficient authority of a counterparty, contract invalidity or unen-forceability, are all examples of legal risk.Management of this risk is through effectiveconsultation with internal and external legalcounsel.

CAPITAL MANAGEMENTThe BMA is the home supervisor for ABC and sets and monitors its capital requirementson both a consolidated and an unconsolidatedbasis. Individual banking subsidiaries are directlyregulated by their local banking supervisors,who set and monitor their capital adequacyrequirements. The BMA requires each Bahrain-based bank or banking group to maintain aminimum ratio of total capital to risk-weightedassets of 12%, taking into account both balancesheet assets and off-balance sheet transactions.This is greater than the 8% minimum ratio recommendation of the Basel Committee onBanking Supervision under its 1988 CapitalAccord.

ABC Group’s capital management is aimed at maintaining an optimum level of capital to

enable it to pursue strategies that build long-term shareholder value, whilst always meetingminimum regulatory ratio requirements.

ABC Group’s capital is divided into two tiers: tier 1, comprising shareholders’ funds and minority interests; and tier 2, comprisinggeneral loan loss provisions, long term sub-ordinated debt and the current year’searnings. The amount of qualifying tier 2 capital cannot exceed that of tier 1 capital, andthe long term subordinated debt cannotexceed 50% of tier 1 capital. There are alsolimitations on the amount of general provi-sions which may be included in the tier 2 capital. Deductions are made from tier 1capital in respect of goodwill and intangibleassets.

As mentioned above, banking operationsare divided between ‘trading book’ and ‘banking book’. Risk-weighted assets are computed according to the appropriate categorisation. ‘Banking book’ risk-weightedassets are measured by reference to a scale of risk weights, classified according to thenature of each asset and counterparty,taking into account any eligible collateral orguarantees. ‘Banking book’ off-balance sheetitems giving rise to credit, foreign exchange or interest rate risk are assigned weightsappropriate to the product and category of the counterparty, again after accounting for eligible collateral or guarantees. ‘Tradingbook’ risk-weighted assets are determined by taking into account market-related risks,such as foreign exchange, interest rate andequity position risks, in addition to counter-party risk.

As referred to above under ‘Credit Risk’,the Basel Committee on Banking Supervisionintends to introduce a new Capital Accord to replace the 1988 Accord. The Group isactively involved in dialogue on regionalforums and with the BMA on the implicationsof implementation of Basel Two and relatedpreparedness.

All essential operational data required for business continuity by ‘core bank’ units arebacked up on separate computers both withinthe Head Office building itself and elsewhere inBahrain, in addition to being downloaded hourlyto the Group’s computers in London.


senior management

Responsibility for the development of policy and strategy, and for overall operationalmanagement, is delegated to the President & Chief Executive by the Board ofDirectors. The direct responsibilities of the members of the Group’s SeniorManagement, as briefly outlined in the chart on page 9, are shown below togetherwith 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-JawadPresident & Chief Executive Saudi

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 theChartered Institute of Bankers, U.K.

Member of the Steering Committee of theInstitute of International Finance Inc.,Washingtonand member of several other consultative oradvisory committees. Also Vice Chairman ofBanco Atlántico, S.A., Spain, Chairman of theSupervisory Board of Arab Banking Corporation– Daus & Co. GmbH, Germany, Chairman of Arab Banking Corporation (Jordan) andChairman of Arab Financial Services Company,Bahrain. Previously General Manager of GulfInternational Bank (B.S.C.), Bahrain. Mr. Abdul-Jawad has over 25 years’ experience as a senior general and commercial banker and ingovernment service and has held his presentposition with ABC Group since 1997.

Mr.Abdulmagid BreishDeputy Chief Executive & Chief Banking Officer 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 1985before transferring to Tokyo as Chief Repre-sentative. In 1988 he took over as ManagingDirector of ABC Investment & Services Co.(E.C.) in Bahrain. In 1991 he assumed the position of General Manager, London Branch ofABC International Bank plc and was appointedthe bank’s Chief Executive Officer in 1993.In November 2002, Mr. Breish was appointedDeputy Chief Executive and Chief BankingOfficer of the ABC Group. He is also Chairmanof Arab Banking Corporation – Algeria, DeputyChairman of the Supervisory Board of ArabBanking Corporation – Daus & Co. GmbH,Germany and of Arab Banking Corporation –Tunisie and a Director of ABC Islamic Bank (E.C.), Bahrain. Mr. Breish’s experience in com-mercial, investment and Islamic banking spansover 25 years.

Mr. Prasad AbrahamSenior Vice President & Chief Internal Auditor Indian

B.Sc. in Chemistry, University of Calicut; Diploma inBusiness Studies, Cochin, India. Certified InformationSystems Auditor.

Formerly of Citibank N.A., Mr. Abraham joinedABC in 1983 and has over 25 years’ experiencein internal audit. In addition to his position as Secretary of the ABC Audit Committee healso represents the parent at the AuditCommittees of ABC International Bank plc, U.K.,Arab Banking Corporation - Daus & Co. GmbH,Germany and Banco Atlántico, S.A., Spain.With effect from January 2004, Mr. Abraham was transferred to ABC International Bank plc,London, to assume the role of Deputy ChiefExecutive Officer.

Mr. Essam El WakilSenior Vice President & Group Treasurer Egyptian

B.A. in Business Administration, Cairo University, Egypt.

Mr. El Wakil has been with ABC since 1980 andserved in both the Bahrain and London Treasury Departments. He took over as GroupTreasurer in 1999. He is Deputy Chairman ofABC Islamic Bank (E.C.), Bahrain, and serves on the boards of Arab Banking Corporation -Egypt (S.A.E.), Arab Banking Corporation -Tunisie, ABC Clearing Company, Bahrain andABC Islamic Fund, Bahrain in addition to severalof the executive, audit and investment steeringcommittees of those entities. Mr. El Wakil has over 25 years’ experience in TreasuryManagement.

Mr. Nour NahawiSenior Vice President & Division Head, Arab World Jordanian

B.A. in Business Administration, Colby College, Maine,U.S.A.; M.A. School for International Training,Vermount,U.S.A.

Mr. Nahawi joined ABC in June 2003, having pre-viously been Managing Director of BNP ParibasEgypt. He started his banking career with JordanNational Bank in 1973, and moved to BNPParibas in 1974, holding senior managerial postsin New York, London, Paris, Beirut, Cairo, AbuDhabi, Bahrain and Oman. A member of theBoards of Arab Banking Corporation – Egypt,Arab Banking Corporation (Jordan), ArabBanking Corporation – Algeria and Arab BankingCorporation – Tunisie, Mr. Nahawi has over 30years’ experience in international investment,retail and commercial banking.

Mr. George K. MortonSenior Vice President & Division Head, International Canadian/

British

B.A. (Hons) in Modern History and M.A. in History (EastAsia), University of Toronto, Canada.

Formerly Vice President, Trade Finance &Correspondent Banking at Bank of Nova Scotia,Toronto, earlier with National Bank of Bahrainand Gulf International Bank (B.S.C.). Member of the Supervisory Board of Arab BankingCorporation – Daus GmbH, Germany and theboards of Banco ABC Brasil S.A. and Lamco E.C., Bahrain. Mr. Morton has over 25 years’experience in international commercial banking.He joined ABC in 1998.

Mr. Richard CumberlandSenior Vice President,Chief Credit & Risk Officer British

Associate of the Chartered Institute of Bankers, U.K.

Mr. Cumberland joined ABC in 1999 after 23years with Chase Manhattan Bank N.A. and hasover 35 years’ experience in commercial bankingand credit and risk management.

Mr.Asaf MohyuddinSenior Vice President,Chief Administrative Officer,Compliance Officer Pakistani

B.Com. (Hons) in Commerce, Punjab University, Pakistan;Fellow of the Institute of Chartered Accountants in England and Wales, U.K.

Formerly Financial Controller at Citibank, N.A.in the Middle East and earlier General Manager(Finance) at Pak-Arab Fertilisers, Pakistan,Mr. Mohyuddin holds over 25 years’ experiencein the field of finance and banking. Mr.Mohyuddin joined ABC in 1983 and wasappointed to the position of Chief Administ-rative Officer in November 2002. Prior to his present assignment Mr. Mohyuddin headed the Planning & Financial Control Department.He also held former staff positions within thebank in the Europe & Americas Division and in the Branches, Subsidiaries and AffiliatesDivision. Mr. Mohyuddin serves on the board of Banco ABC Brasil S.A.

Pursuant to the transfer of Mr. Prasad Abraham to ABC International Bank plc,London, Mr. Mohyuddin has assumed the role of the Compliance Officer.


Mr. Sael Al WaarySenior 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, andfrom 1986 was General Manager & Director of ABC (IT) Services Ltd., the wholly-owned subsidiary and technology arm of ABC, locatedin London, U.K. In 1997 he relocated to theHead Office at Bahrain to head ABC’s GlobalInformation Technology Department. A boardmember 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. Dilip KumarFirst Vice President & Head of Planning & Financial Controls Indian

B.Com., University of Madras, India; Fellow of the Institute of Chartered Accountants of India; Associate of theChartered Institute of Management Accountants, U.K.

Mr. Kumar joined ABC in 1985, having formerlybeen with Whinney Murray & Co., CharteredAccountants in Bahrain. He assumed his presentposition in December 2002, and has over 20years’ experience in finance and banking.

Mr. Mounir Ben SlimaneSenior Vice President & Legal Counsel Tunisian

Diplômes d’ Etudes Approfondies (post graduatedegrees) in Law, Sorbonne University, Paris, France.

Avocat since 1978, Mr. Ben Slimane is a memberof the Tunis Bar and of the Paris Bar. He is also a member of the International Bar Association.Immediately prior to joining ABC, Mr. BenSlimane was Head of the Legal department forthe Central Province of Saudi French Bank,the affiliate of Banque Indosuez. He joined ABC as Counsel in 1985, and was appointedLegal Counsel and Head of Legal & ComplianceDepartment in 1996.

Effective March 2004, Mr. Ben Slimane hasresigned from the bank and Dr. Khaled Kawanhas assumed the responsibility of the Head ofLegal and Compliance Department, in additionto his role of being the Secretary to the Boardof Directors of ABC.

Dr. Lulwa Mutlaq Rashid MutlaqSenior Vice President, Head of Human Resources & Administration Bahraini

B.Sc. and M.A. in Community CollegeEducation/Vocational Education, Northern ArizonaUniversity, PhD in Education and Human Development,Vanderbilt University, U.S.A. Fellow of the CharteredInstitute of Personnel and Development (FCIPD), U.K.

Dr. Mutlaq joined ABC’s Human Resources & Administration Department in 1996 after acareer in human resource development in both the public and private sectors. She wasappointed Head of Human Resources &Administration in January 2002. Dr. Mutlaq currently serves on the boards of several local and regional societies and associations concerned with human resources and manage-ment issues and has over 20 years’ experience in her field.

Mr.Alexander B. RichardsonSenior Vice President & Head of Operations British

B.A. (Hons) and M.A. in Chemistry & Statistics,Cambridge University, U.K., Fellow of the Institute ofChartered Accountants in England and Wales, U.K.

Mr. Richardson joined ABC in 1997, having previously held executive positions in offshoreand investment banking in Europe, the MiddleEast and Far East with E. D. & F. Man InvestmentProducts, Alubaf Arab International Bank andErnst & Young Management Consultants.

Main Operating Subsidiaries

Mr. Manuel MontecelosChief Executive Officer, Banco Atlántico, S.A., Spain Spanish

Degree in Industrial Engineering, High TechnicalSchool of Industrial Engineers, Madrid; Degree inEconomics, I.C.A.D.E., Madrid.

Formerly with ISOLUX, S.A., joined BancoAtlántico, S.A. in 1975, appointed DeputyGeneral Manager, heading, inter alia, StrategicPlanning and General Accounting, and Memberof the Management Committee, in 1986.Appointed General Manager, Commercial Area,1996 and to his current position of ChiefExecutive in July 1999. Mr. Montecelos brings to ABC Group over 25 years’ experience inSpanish commercial banking.

Mr. Mike M. MuradVice 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 StonierGraduate School of Banking at Rutgers University, theUniversity of Michigan Graduate School of Banking, theUniversity of Wisconsin and the Harvard ExecutiveManagement Program. Honorary Doctor of HumaneLetters, DePaul University.

Mr. Murad joined ABC in 1987 after 20 years incommercial and retail banking including severalyears in senior management positions with Sun Bank of Florida, Inc., U.S.A. and the Bahrainsubsidiary 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 wasadditionally the Asia Division Head from 1991until the reorganisation of ABC Group in 1998.He served as Chief Operating Officer in HeadOffice between 1991 and 1995. He is alsoChairman of Net Alliance Co. Ltd., Hong Kong,Member of the Board of Trustees, DePaulUniversity, U.S.A. and Director, Arab BankingCorporation - Egypt (S.A.E.) and IBA FinanceCorporation, Philippines.

Mr.Tito Enrique da Silva NetoDirector 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 30years in Brazilian commercial and investmentbanking, including 15 years with Banco Finasa deInvestimento S.A. and 4 years each with Bancodo Estado de São Paulo S.A. and Banco ItamaratiS.A., before joining Banco ABC Brasil S.A. in hispresent position of Director President in 1991.

Mr. Michael DuvalChief Executive Officer, ABC International Bank plc, U.K. BritishB.A. (Hons) Business Law; Barrister-at-Law (called to the English Bar in 1983)

Mr. Duval joined ABC International Bank plc as General Manager, London Branch in 1998,having previously been in-house counsel atChase Manhattan Bank, N.A., London; Head ofLegal, Manufacturers Hanover Limited, London;and General Manager, Bank Austria, LondonBranch. Mr. Duval was made Deputy ChiefExecutive Officer, ABC International Bank plc in 2000 and appointed Chief Executive Officerof the bank in December 2002. Mr. Duval has over 20 years’ commercial and investment banking experience.


Chief executive’s review of operations

‘Despite the weak economic scenario and low interest rate environment and the reduction in business flow that followed the March 2003 Gulf War, ABC Group’s operating result proves the soundness and resilience of the policies that the Board and management have consistently followed over the years. The disposals of our investments in International Bank of Asia and Banco Atlántico have placed us on a very sound financial footing, which will form the bedrock of our developing regional presence in the future. We envisage 2004 as a year of transition, change and exploitation of synergies.’

As the Chairman has mentioned in theDirectors’ Report, ABC Group’s performance in 2003 reflected an amalgam of different influences, sometimes contradictory in theirimpact, on the fortunes of the Group. For example, the fall in net interest income compared with 2002, although a disappoint-ment in itself, was not greatly so as it merelyreflected the combined effect of the low interest rate environment and the switch inthe Group’s focus in favour of non-interestrevenue growth. On the other hand, the surgein non-interest income was partly accounted for by the decision taken during the year toimplement the revised IAS 39 requirementsleading to ABC’s ‘Brady Bond’ portfolio beingwritten down to the then current value as at 1 January 2002 and the portfolio beingmarked to market value thereafter. ABC’s‘Brady Bond’ portfolio was liquidated inFebruary 2004.

On balance, I believe we can compliment ourselves on another successful year. Fee and commission income, reflecting a change in business mix favouring project and structuredfinance operations and trending towards themore profitable trade finance transactions,improved despite a fall in documentary creditvolume. Again, although operating costs roseyear on year, much of the cause was attribut-able to the seemingly inexorable rise of theeuro against our base currency and its trans-lation effect when consolidating the accountsof our subsidiaries in the euro zone. Non-recurring staff related expense was also necessary in the course of further Grouprationalisation. Continuing infrastructure andIT investment added to overall costs, particu-larly in the expanding Arab world domesticbanking units. Some of these units were alsoaffected by local credit weaknesses, requiringappropriate loan loss provisions.

All in all, despite the weak economic scenario and low interest rate environmentand the reduction in business flow that followed the March 2003 Gulf War, ABCGroup’s operating result proves the soundnessand resilience of the policies that the Boardand management have consistently followed

(All figures in US dollars unless otherwise indicated)

ABC Group’s operating result proves the soundness

and resilience of the policies that the Board and

management have consistently followed over

the years.

Ghazi M.Abdul-JawadPresident & Chief Executive


over the years. World scale scandals, like the failures of Enron, WorldCom and morerecently SK Global and Parmalat, which continue to shock the unwary, lends credence to our own strategy – to concentrate on theregional markets and customers with whomwe are most familiar and comfortable. At thesame time we will continue to strengthenour internal credit processes and, with theaid of the most advanced technology,risk management systems to ensure that,weak credits are identified in advance of commitment, disposed of, or managed out,as appropriate.

Our commitment to the employment ofstate-of-the-art technology continues un-abated. During the year we completed the renovation of ABC Egypt’s IT infrastructure.Important consumer-related IT milestoneswere passed in Jordan. Work continues onrevitalising the systems in the Tunisian units and introducing new systems in the Algeriansubsidiary. Full integration of the new core system into the units of the Banking Group,completed in 2003, has merely set the stagefor the next leap forward – over 2004-5 aproject group will be engaged in selecting andintroducing a new core system planned forlate 2005. We are studying the standardisationof various IT products throughout the Group, including the centralisation of creditcard issuance and the introduction of a common ATM card that would not only beusable in any ABC terminal anywhere in the Arab world but would also double as an international debit card.

Release of substantial capital resources willresult from the disposals of our investments inInternational Bank of Asia and Banco Atlánticoin 2004 which will form the bedrock of ourdeveloping regional presence in the future.We will seek to build on the operational base that we have created over the past few years with our retail platforms in Algeria,Tunisia, Egypt and Jordan, to develop a trulypan-Arab retail and commercial banking presence. Already we are exploring opport-unities to acquire existing enterprises or to set up new enterprises in areas of

the region where we are not currently represented.

We envisage 2004 as a year of transition,change and exploitation of synergies. We see the introduction of product led, matrix-oriented, management as the next step in our development as a cohesive group – wehave already begun this process with ABCInternational Bank, which has introducedmatrix management with effect from January2004, and we will continue its introduction in all aspects of Group marketing and man-agement over the course of the new year.Under the new system, product heads – as opposed to unit heads – will take fullresponsibility for business development andexpansion, concentrating particularly on trade finance, project and structured finance,Islamic banking and treasury products.Organisationally, the ‘Two Hubs’ approach,first introduced in Treasury operations,will form the basis of future management,with Bahrain and London being the twinengines of our future growth.

Arab World DivisionWhilst the Arab World Division’s coreactivities remain centred around the provision of finance and services to major corporates and governmental andfinancial institutions, its overall aim is toachieve optimum diversification of incomeand funding sources as part of the Group’sexpansion strategy in the Arab world.It thus continues to widen its business out-look with a view to achieving a graduallyincreasing contribution from retail and consumer banking.

In 2003 its particular focus in the corporatearea was on building relationships with multinationals active in the region, seeking particularly to expand the contribution oftrade finance and other fee-related activities to gross revenues. At the same time, it encouraged its domestic banking units in thedevelopment of their retail-oriented infrastruc-ture and continuous rollout of new productsand services targeted at the consumer market.

These latter activities ranged from the expan-sion of the units’ branch and ATM networks,to the establishment of new or improved callcentres and telephone and Internet bankingfacilities, through to the launching of newlydesigned credit cards tailored to selected market segments. The Division also maintainedits active encouragement of the domestic units’efforts to cross-sell their individual products.

Credit approval discipline and exposure management was further tightened, particu-larly in the domestic banking units, as theDivision continued to enhance credit and riskcontrols and procedures and to introducenew credit limits, as it implemented the new credit manuals drawn up in 2002. Thedomestic units also continued their major systems upgrade programme, achieving signif-icant improvements in client servicing, riskmonitoring and reporting capabilities withevery rollout. The business mix was mean-while carefully scrutinised with the object ofshifting emphasis towards fee income genera-tion and away from interest income and,although balance sheet growth per se was discouraged throughout the Division, lendingaimed at portfolio diversification and productexpansion was actively encouraged.

Additional loan loss provisions were madewhere and when necessary. This particularlyapplied to some North African units, whosemanagement resources were also strength-ened through a combination of managementchange and supplemental executive recruit-ment. The associated costs of these actions,together with the ongoing costs of the introduction of new technology platforms,necessarily impacted on the bottom line profitability of the affected units, ABC Jordanbeing a noteworthy exception on account of its excellent performance in investment and asset management activities and ongoing success in expanding its corporate franchise.

Overall, the Division’s results were belowthose of 2002. However, in Bahrain, theCorporate & Global Structured Financedepartment again featured prominently inMiddle East deals, managing, with the compe-tent support of the Syndications unit, to

National Air Services and ABC signed a $20 million aircraftfinancing agreement in July 2003.



In 2003, the Arab World Division’s particularfocus in the corporate area was on building relationships with multinationals active in the region.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


exceed 2002’s impressive revenue and netprofits records. The Government & FinancialInstitutions department was again successful inobtaining a number of important underwritingand lead arranging mandates, performing well in terms of gross revenues in doing so.Despite the need for some additional loan lossprovisions the Bahrain Business Unit returneda satisfactory net profit.

For the future, the Division intends to introduce a standardised logo, based on the‘ABC Bank’ brand, for all regional domestic banking units, at the same time progressing onstandardisation of products offered by thoseunits (credit cards,ATM cards, etc.) presenting a unified approach to all clients throughout the domestic network.

International DivisionThe International Division made substantialprogress in 2003 in streamlining the Group’swholesale corporate and institutional businessoutside the Arab world. Continuing the patternof the past few years, the Division’s physical andcorporate structure was further rationalised.Its core products were positioned to betterservice the targeted customer base, as all international units directed their financial andhuman resources on business lines supportingthe Arab world franchise: project and struc-tured finance, trade finance, Shari’a-compliantfinancing and investment and treasury products.

Calculating that significant expense savingscould be realised without materially impactingthe Group’s ability to service Arab world-connected business in the Far East, ABC Sing-apore branch was replaced by a representativeoffice. Similarly, the Houston representativeoffice was closed and USA marketing re-organised so as to concentrate all resources on ABC New York branch. Coupled with the decision to exit completely from LatinAmerican business, this redeployment will allow the Division to focus its US resourcesentirely on Arab world transaction flow andNorth American multinational corporationsactive in the Arab world region.

In Europe, the corporate structure wasrealigned, with the existing wholesale units inGermany and Italy being folded into newbranches of ABC International Bank (ABCIB) in Frankfurt and Milan, effective from 1 January2004. The addition of these branches to the existing London and Paris branches of ABCIB will enable the Group to provide a unified product approach, on a pan-European

basis, to an increasingly integrated market with very substantial volumes of Arab worldbusiness. Substantial expense savings are alsoanticipated from the centralisation of productexpertise, marketing, support and back-officefunctions.

Investment GroupDuring the course of 2003 ABC made the key decision, in pursuance of its strategy ofconcentrating on its core business franchise inthe Arab world and as market conditionsfavoured it, to divest itself of two of its non-core banking subsidiaries, Banco Atlántico andInternational Bank of Asia. It is intended thatthe proceeds of these disposals will largely be utilised to augment ABC’s capital resourcesand support future growth in the core Arabworld businesses. The sale of InternationalBank of Asia to Fubon Financial Holding & Co., Limited of Taiwan was finalised in March2004, whilst that of Banco Atlántico to Bancode Sabadell S.A. of Spain was announced in December 2003 and is expected to be consummated in 2004.

The decision was also taken to reduce thecapital of a third subsidiary, ABC Securities(Egypt) S.A.E. and render it dormant for the time being, in light of the state of the securitiesmarket in Egypt. The company remains a separate legal entity under the management of ABC Egypt.

Banking Group

Arab World DivisionBahrain Business UnitThe Bahrain Business Unit (BBU) continues to handle all wholesale and commercial banking activities within the Arab world, with a repertoire encompassing specialist financialadvisory services, term loans, project andstructured finance and trade-related andtreasury products. In accordance with the

terms of its offshore banking licence ABC isnot generally permitted to extend facilities to Bahraini domestic customers, with theexception of Bahrain-based offshore bankingunits (OBUs); thus its business activities are largely confined to the rest of the MiddleEast region, the GCC countries in particular.

The BBU is organised into three groups:Government & Financial Institutions, Corp-orate & Global Structured Finance andSyndications. Corporate & Global StructuredFinance in turn is subdivided into two depart-ments: Corporate Banking and Global Project& Structured Finance. Each team is responsiblefor originating its own new business, but works closely with the others on develop-ment and delivery of all the BBU’s productsand services. Business development and clientrelationship management is further supportedby the Arab world domestic banking units andrepresentative offices feeding market-relatedinformation and introducing prospectiveclients to the BBU or, where appropriate,the Divisional offices in Bahrain for onwardreferral to ABC Group units worldwide.

Despite the pressures on regional stabilitycaused by the war in Iraq, during 2003 theCorporate Banking team continued its full support for existing corporate clients in theiron-going needs in the Arab world. At thesame time it worked to broaden its client base in the GCC, with particular emphasis on expanding its trade finance services. It alsoworked closely with other ABC units locatedoutside the GCC area in support of theirclients in their trade transactions with theregion. Close attention to the credit quality ofthe corporate portfolio minimised the needfor loan loss provisioning, assuring the unit of aprofitable year.

For the Syndications group 2003 marked yet another successful year, with the team once again being instrumental in ABC main-taining its leading position in the arrangement and underwriting of loans in the Middle East and North Africa (MENA) region.

Project Management & Development Co LtdIndustry PetrochemicalsCountry Kingdom of Saudi ArabiaRole Strategic & Financial Advisor

US$3.5b

MALC Fin Five LtdIndustry AviationCountry MalaysiaRole Lead Arranger

US$68m



Bahrain Business Unit continued

The Government & Financial Institutionsgroup also experienced a successful year, inspite of some setbacks, with net profits hittinga new high. Revenues continued to grow andthe income stream remained well diversified,drawn equally from funded lending relatedtransactions and unfunded trade related transactions. Through G&FI group’s efforts,together with those of the Syndications team,ABC retained its position as global leader insyndicated facilities for Middle Eastern banks,with mandates for debut financings awardedfrom Union National Bank in the UAE, Al Ahli Bank of Kuwait and Société Tunisienne de Banque. In each of these financings ABCalso acted as bookrunner, and the substantialoversubscription achieved in each case amplydemonstrated the strength of ABC’s origina-tion and distribution capabilities. Towards theend of the year ABC was awarded the jointmandate from Commercial Bank of Kuwait toarrange a $250 million term loan.

An administrative change in methodology in Iran led to the short-term trade financefacilities previously extended by G&FI groupto the Central Bank of Iran being replaced bysimilar facilities established directly in favour of several of the Iranian commercial banks,with an increase in the aggregate lines reflect-ing the likelihood of expanded businessopportunities.Additional trade finance facilitieswere also successfully established with newNorth African and GCC clients, in addition to a number of project-related bonding facilities provided on behalf of contractorsoperating in North Africa, often combinedwith related documentary credits in favour of the contractors.

Through its extensive knowledge of theregion and the industry, built up over manyyears, ABC has attained a leadership positionin the provision of structured finance solutionsto the airline industry. In 2003 the GlobalProject & Structured Finance department successfully closed a loan facility for an Islamicequity fund to finance the purchase and leaseback of three Airbus A320s to British Airways.Through the GP&SF team ABC also advised,structured and financed the acquisition of several business jets by National Air Services,a Saudi Arabian private business jet operatorwith ties to Netjets of the US – the largestoperator of business jets in the world.

ABC also led the financing of a Boeing B777-200ER leased to Malaysian Airlines SystemBerhad (MAS) and owned by the first Islamicaviation equity fund of its kind, developedsolely to acquire and own commercial aircraftMillennium Aircraft Leasing Company(MALC). GP&SF expansion into the fields of corporate finance and financial advisoryservices also made further headway, with the award of two strategic financial advisorymandates in 2003, related to a $3.5 billionpetrochemical complex in Saudi Arabia and a $1 billion fertilizer project in Egypt.

In 2003 the BBU as a whole made goodprogress. Net interest margin at $17.0 millionwas 21% up on the previous year, on account of higher spreads and lower funding costs,while non-interest income was 26% higher at$12.2 million, reflective of higher projectfinance related loan fees and documentarycredit commissions on the back of increasedvolumes. Reduced operating expenses of $7.1million and topping up of loan loss provisionson existing problem loans left the Unit with a $17.3 million net profit compared with a loss of $22.4 million for 2002.

Arab Banking Corporation - Egypt (S.A.E.) The Egyptian government’s decision in January2003 to float the Egyptian pound led to an effective 30% devaluation of the currency.The repercussions on the local economywere felt throughout the course of the year.On the negative side, the burden of the out-standing foreign debt – and of overseas debtservice – rose immediately in line with thedevaluation, while the greatly increased priceof essential imports led to an acceleration ofthe inflation rate; on the other hand, mer-chandise exports started to rise strongly andtraditional export industries such as cement,petrochemical, agricultural, oil, gas and fertiliz-er producers began to recover their markets.The effect of the war on Iraq, however,to some extent cancelled out other benefitsthat might have been anticipated from the de-valuation, impacting, for example, on tourismand Suez Canal revenues, inward foreigninvestment and non-oil exports to Iraq - animportant market for Egypt previously.Again, as many Egyptian expatriate workersreturned home, the war was indirectlyresponsible for a sharp drop in inward remit-tances and a simultaneous increase in the

Egyptian unemployment rate.Today, however, the future looks brighter,

with exports expected to continue to rise on the back of their greater competitiveness in international markets and imports set to continue to fall under the twin impact of a devalued Egyptian pound and governmentaldetermination to limit foreign currency expenditure. New surrender requirementsimposed on most corporate foreign currencyearners require the conversion of their foreign currency earnings at the prevailingcommercial bank exchange rate, effectivelydenying them access to the parallel marketwhere rates remain more favourable, despitesome convergence of the two rates.

Predictions are for the current accountdeficit to narrow to less than 1% of GDP,as visitor numbers grow and exports rise inline with more robust global demand. Thegovernment is meanwhile actively working to promote foreign investment, particularly inthe oil and gas sectors, as well as trying toopen exports to new overseas markets.

ABC Egypt, acquired by ABC in 1999, hasdevoted much of the time since then to re-organising and repositioning itself in the market.Following the success of its marketing campaignin 2002 to introduce itself to the consumer market, 2003 was spent reinforcing the bank’simage through a combination of high-profilesponsorships and advertising. The bank also completed an extensive redesign of all aspects of customer interface such as ATM kiosks,cheque books, statements and applicationforms, in order to ensure a consistent and elitecorporate image. Unsecured and secured credit cards were launched together with new personal loans products, all targeted at the high-end consumer market. Several new liability products were also offered, includingtime deposits with interest paid in advance and an innovative ‘perpetual CD’ with no fixedmaturity but redeemable at any time and withinterest paid weekly. The bank also introduceda new service simplifying transfers of funds by Egyptian expatriates – particularly thoseresiding in the US – back to their families at home, which was an immediate success.

In addition to the new branch opened atSharm El Sheikh in 2003, the relocation of theNasr City branch to new premises in MakramEbeid and the move of the branch in 6th ofOctober City to new premises in that city


were also completed during the year, openingto customers in January and February 2004respectively. The ATM network was mean-while further expanded, now comprising 28machines in all.

In the IT area, the bank went live with(net)Symbols in 2003. This is an integratedbanking business solution that manages core banking, retail and corporate front-endoperations, trade finance, funds transfer,central operations, e-Business and lendingprocess workflow, while also providing stateof-the-art management information and decision support systems.

The bank’s Corporate Banking group was cautious in expanding its lending early in the year, but nevertheless total corporateloans increased by 27% over the year as awhole, with no deterioration in the portfolio’sinternal risk rating. In doing so it also achievedgreater portfolio diversification between commercial, manufacturing, construction con-tracting and project financing transactions.However loans to the retail sector fell year-on-year, as the bank geared itself up to offer itsnew personal loans packages to customers,the launching of which did not take place untiltowards the end of the year. The corporateproportion of the portfolio therefore rose incomparison to the consumer loan segment.

Although, for the reasons stated, ABC Egypt’s aggregate loan portfolio fell over the year, by almost 5% (29% in US dollar terms due to the devaluation of the Egyptian pound),the interest margin earned nonethelessincreased by 24% to $6.7 million due to more efficient resource management. Totalnon-interest income for the year fell by 10% to $7.9 million resulting from a fall in loan feesand other income, offset by increase in tradefinance income and increased revenues fromforeign exchange and marketable securitiestrading. Nevertheless, before annual goodwill amortization of $2.7 million, total income at $14.6 million remained at the same level asat 2002.

The ongoing expansion and refurbishment of the branch and ATM networks, together with the continuing technological upgrade programme, led to increased premises and general expenses which, however, were morethan offset by the reduction in staff expense.Total operating expenses therefore fell overall by 9% to $10.7 million.

In 2004 the retail group intends to intro-duce several new products, including twoinnovative certificate of deposit issues and a10-year savings plan, a Visa Electron card anda payroll-linked overdraft facility. Its new Maadiand Obur branches are also expected toopen for business in the first quarter of 2004.

Arab Banking Corporation (Jordan)The steady growth in Jordan’s real GDP over the last few years, driven partly by the government’s enlightened expansionary fiscalpolicy and partly by the recovery in the manufacturing sector, had been expected tocontinue in 2003 all things being equal.However, the war in neighbouring Iraq delivered a shock to the Jordanian economy,disrupting bilateral trade with its key marketand undermining tourism generally. Outputgrowth, originally anticipated at 5% for 2003;consequently fell to around 3.3%. Exportgrowth fell to around 4.4%, much less thanexpected, despite the increase in exports tothe United States (now the country’s numberone trade partner - a position previously heldby Iraq), while imports continued to grow, thecombined effect pushing up the trade deficit by around 14%.

On the plus side, recently improved relationswith the Gulf States were such that Kuwait,Saudi Arabia and the UAE all supported Jordan with the supply of oil at concessionaryrates during the war. Jordan’s reputation as aconstructive facilitator for peace in the regionand a pursuer of structural reform at home hasalso bolstered its image abroad and broughtmany economic benefits.

In 2003, despite the adverse environment,

the government maintained the momentum of its privatisation programme. Under the programme, which is aimed at increasing efficiency, productivity and competitivenessamong enterprises and stimulating the direction of private savings towards long-term investments, the government’s shares in several major companies were sold duringthe year or set up for sale in 2004.

In this environment, ABC Jordan continued its efforts to enhance its retail banking activi-ties in line with its vision of becoming Jordan’s fastest growing and most profitable, creative and trusted bank, aiding customers to accessfinancial services in a convenient, secure andfriendly environment. Led by a substantialincrease in mortgage loans, the retail loans portfolio increased by 46%, pushing the retailsegment up to 30% of the total portfolio.

As a result of these activities, ABC Jordan’sinterest and commission income was $14.3million in 2003, and the bank maintained itsstrategy of maximising non-interest income.This was achieved mainly through its sub-sidiary, Arab Cooperation Financial Invest-ment Company (AFICO) who, during theyear, expanded its brokerage services toinclude international markets and introducedmargin trading products to its clients for thefirst time. As a result, brokerage incomeexpanded to $4.3 million, compared with2002’s $1.5 million. Asset management, fastbecoming another major activity for AFICO,also expanded, with clients now being able to choose between four different portfoliotypes. AFICO’s success contributed signifi-cantly to the bank’s total non-interest incomeof $11.4 million, up 54% on 2002, and total income of $24.7 million compared withthe previous year’s $19.1 million. Althoughoperating expenses also increased, by 28% to $12.3 million, this was partly on the back of increased headcount reflecting the expan-sion of AFICO and within the bank itself,and partly due to higher retail expenses as a result of the bank’s greater emphasis

SABIC / DPCIndustry PetrochemicalsCountry Saudi ArabiaRole Mandated Lead Arranger

US$2.5b

Societé Tunisie de BanqueIndustry FinanceCountry TunisiaRole Mandated Arranger

US$100m

Overall aim is toachieve optimumdiversification ofincome and fundingsources as part of the Group’s expansion strategy in the Arab world.



Arab Banking Corporation (Jordan) continued

on retail credit - mainly consultation expenses,along with marketing, promotional and advertising costs and higher communicationexpenses. Despite the increased expense,after lower loan loss provisions of $2.1 million(2002: $4.3 million) and after amortisation ofgoodwill, the contribution to the head officewas $6.3 million was more than double the$2.3 million of the previous year.

ABC Jordan also completed the develop-ment of its technology infrastructure and communication network, at the same time re-furbishing the core banking system and othersupporting systems. One uneconomic branchwas closed, another renovated and yet anotherrelocated to a more suitable site. The ATM network was expanded and new retail lending,bank transfer, credit management and auto-mated reporting modules were installed.

A new Disaster Recovery Centre was established and equipped in place of the previous system. The bank’s Internet bankingservice, ABC On-line, was successfullylaunched while new innovative credit cardswere issued. In the area of operational risk,a Central Operations Unit was established to better ensure that the operational functionsof booking, recording and monitoring of trans-actions are carried out by staff independent of those initiating transactions, while separateOperation Control Units carry out ongoingmonitoring of day-to-day procedures and ensure adherence to key control functions as an adjunct to the normal activities of the bank’s Internal Audit Department.

In 2004 ABC Jordan plans to add threebranches to its network, while continuing therenovation of existing ones. Further improve-ments to the ABC On-line service and addi-tions to the 25-ATM network and its range of functionalities are also planned, together with a new Call Centre designed to maintain thebank’s present superiority and reputation forexcellence in customer service. Various newproducts are in the pipeline, including a range of loans specially structured and aimed at professionals, corporate employees and

vehicle owners and a suite of liability productstargeted at selected market segments, notablychildren’s and ladies’ savings accounts.

Arab Banking Corporation - AlgeriaAlgeria again experienced remarkable eco-nomic growth in 2003, as GDP expanded by6.5% against the previous year’s 4.1%. Foreignexchange reserves rose from $21 billion to$30 billion while external debt declined as a percentage of both GDP and reserves.

Increasing foreign investment in the new private banking sector led to growing compe-tition between the local banks and the privatebanks. The strong liquidity in the economypushed down the cost of funds but alsosqueezed margins and this, combined withthe inefficiencies inherent in the centralisation,via the Central Bank, of inter-bank placement activity, and ABC Algeria’s own reluctance to expand its loan portfolio indiscriminately,made 2003 a difficult year for the bank.

Although ABC Algeria’s liquidity strength-ened as the loan portfolio was allowed to fall by over 29%, with the greatest reductionbeing in longer term loans, this reduction,exacerbated by the low interest rate environ-ment, led to a 12% decline, to $6.3 million,in total interest margin compared with the previous year. Additionally, increased revenuesfrom exchange commissions and other retailbank income were insufficient to compensatefor a marked reduction in the volume of documentary credits issued, causing a drop of 26% to $5.5 million in non-interest income,leaving total operating income down by 18%at $11.8 million.

Operating expenses meanwhile increasedby 24% reflecting a change in the accounting treatment of deposit insurance, which had formerly been deducted from non-interestincome, and a rise in staff-related costs, toreach $8.2 million, producing a net incomebefore provisions and taxes of $3.6 million.Increased loan loss provisions of $10.2 millioncontributed directly to a net loss of $6.6 million, compared with a loss of $0.6 million in 2002.

Following a strategic reorganisation ABC

Algeria repositioned itself to concentrate ontrade finance and retail activity. A separate treasury division was created in 2003, to bringclearer focus to the administration of theincreasing volume of treasury resources,while an internal control division, a credit risk management division and a separate retail banking division were also set up to imple-ment the new retail banking strategy, underwhich a number of retail products are due to be launched in early 2004.

The bank also envisages expanding its ATMservices and bringing them into the domesticnetwork in Algeria later in the year, while several new branches in Algiers are in theplanning stages. To the now upgraded IT system was added Internet communicationfunctionality in order to facilitate the exchangeof information within the Group in addition tomeeting Central Bank reporting requirements.

ABC Algeria expects the arrival in the market of a number of subsidiaries of inter-national banks from next year to further intensify competition, but is confident that itsnew direction and focus on the retail marketand trade finance will position it to face thechallenges of the future with confidence.

Arab Banking Corporation - TunisieThe crises and tensions which marked the international scene in the early part of 2003 certainly impacted on Tunisia’s economy, with the key industries of transportand tourism being particularly affected.However, the government’s sound political and economic reforms, coupled with the strong recovery of the agricultural sector from droughts of recent years, contributed significantly to the economy’s ability to over-come these difficulties by the end of the year.

Exports rebounded, tourism stabilised andthe economy experienced annual growth estimated at 5.5%, only slightly less than the10th Economic Development Plan (2002-2006) aim of 5.7% annual GDP growth.Tunisia remains one of the few MENA regioncountries to have investment grade ratings forlong-term foreign currency debt, which werereaffirmed by the major credit rating agencies.

ABC Jordan also completed the development ofits technology infrastructure and communicationnetwork, at the same time refurbishing the corebanking system and other supporting systems.


Through its extensive knowledge of the regionand the industry, built up over many years,ABC has attained a leadership position in theprovision of structured finance solutions to the airline industry.

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Arab Banking Corporation - Tunisie continued

The Central Bank of Tunisia continued itsmodernisation programme for the banking sector. In 2003 it implemented the electronicclearing of bills, following the previous year’s successful implementation of electroniccheque clearing. It also launched a central risk database of individuals’ credit exposures,to strengthen transparency, facilitate risk monitoring among the banks and help develop the consumer banking market.

Notwithstanding the economic stability evidenced during the year, the failure by a few leading corporate groups to honour their debts, following the Central Bank’s movetowards a more restrictive credit policy,posed difficulties for the banking sector,including ABC Tunisie. The bank thereforefocused its efforts primarily on collection and/or restructuring of impaired assets, mainlythrough consolidation and enhancement of collateral. Its credit activity also slowed, such that net loans and advances declined over theyear by 15%. Money market activity was alsodepressed, due to the low yields available for the placement of the bank’s surplus liquidity and the slowdown of deposit collection activity prompted by the bank’s reduced funding requirements. The cost of funding non-accrual loans led to a 64% fall in overallinterest margin. Non-interest income, at $0.7 million, was slightly higher than the previous year, reflecting a small increase indocumentary credits and other trade relatedtransactions. Operating expenses, at $3.4 million, were 21% higher than 2002 due mainly to the network expansion and theNabeul branch’s operations. Following loanloss provisions of $0.9 million, ABC Tunisie therefore returned a net loss of $2.1 million,compared with a $1.3 million loss in 2002.

Despite a disappointing end result, the bank extended its product offerings to its customers during the year. It commenced the issuance of the debit cards that it haddeveloped and tested in 2002 for both thecorporate and private banking markets,and launched its new ‘sms-banking’ (mobile

phone instant messaging) service,‘ABContact’,providing its customers with online access to their account movements and records,the first bank in Tunisia to do so.

For the future,ABC Tunisie will concentrate its efforts on developing trade finance and short-term corporate credit, targeting healthysmall and medium sized companies and the top tier of major corporations and multi-national organisations. It will also continuebuilding its consumer banking portfolio,through the establishment of a separate Retail Banking Division and the opening of itsfirst wholly retail-oriented branch in 2004, inaddition to offering a suite of new productsranging from consumer loans and mortgages,credit cards, new savings accounts and a telephone banking service, ‘ABCall’.

ABC Islamic Bank (E.C.)ABC Islamic Bank is dedicated to realising the potential behind the current evolution of Islamic banking by developing Shari’a-compliant banking products for its clients.Its product range includes murabaha,modaraba, musharaka, ijara, Ijara Wa-Iktana,bai salam and Istissna, sukook and other Islamicbonds. Additionally, the ABC Islamic Fund and ABC Clearing Company were created as secured short-term investment vehicles tohelp Islamic financial institutions in managingtheir excess liquidity.

In line with Group strategy, in 2003 ABCIslamic Bank realigned its business focus,concentrating more on the Arab world andreducing its exposure to other geographical and industrial sectors that do not suit the newportfolio aims. Its equity was reduced from $50.2 million to $30.2 million during the year to better reflect its likely future asset base.It intends to redirect its efforts towards playing a larger role within the Islamic syndi-cated market, seeking either to source andunderwrite major transactions or to join with other institutions in a lead arrangercapacity and thus maximise the returns oneach investment via syndication fees and subsequent sell down.

Among its early successes in this new role,

the bank was lead arranger and agent for the $250 million tranche of a $1.5 billionexpansion project for Aluminium Bahrain.It continued to work closely with ABCIB’sIslamic Asset Management division, in 2003joining its sister bank in the successful closingof an $80 million murabaha syndicated facilityin Europe and ABCIB’s newly launched Al BaitUK Property Fund. During the year it alsoestablished a number of new direct murabahafacilities for clients in the GCC countries.

However, the war in Iraq impacted business at ABC Islamic Bank as much as, or even more than, other ABC Group business units.At the end of 2003 the bank’s total assets at $275 million stood below those of the previous year, reflecting the reduced opport-unities for murabaha financings, which formthe bulk of business turnover at the bank.This area returned lower income of $1.9 million, lower 26% from the previous year.However, investments in ijara assets, althoughstanding 5% lower at the end of 2003 than2002, recorded an overall increase of 39% inincome, at $1.7 million. Return to investors net of the bank’s share as mudarib fell by 8% to $2.9 million. Income from non-tradinginvestments and mudarib management andagency fees from restricted investmentaccounts totalled $1.2 million, down 45% on 2002, while commission and fee incomewas reduced from $1.2 million in 2002 to$0.46 million, mainly due to delays in finalisinga number of significant transactions which will now be booked in 2004. Consequently,operating income fell by 15% from $4.5 millionto $3.8 million.

Operating expenses rose by 10% from $3.4 million to $3.8 million.This was attribut-able to the consolidation of the formation and running expenses of the InternationalCredit Card Company, the bank’s newlyformed operating subsidiary responsible forthe management of its innovative Islamic credit card, now being prepared for launch.As a result, net profit fell to $0.1 million from2002’s $1.1 million.

ABC Islamic Bank intends to continue todevelop new products aimed at the needs

ABCIB’s chief mission is to finance trade flowsand facilitate capital investment between the Arab world and Europe.


of the market place. Its aim is to pursue expansion opportunities within the GCCregion through a combination of retail banking, corporate banking and investmentmanagement services. To achieve this, it doesnot rule out the possibility of establishing its own direct retail presence to access stable and relatively cheap deposits, to betterenable it to offer consumer finance to the general public. Meanwhile, it will continue towork closely with ABCIB’s Islamic AssetManagement division to help to bring Islamicbanking products to markets elsewhere.

International Division

ABC International Bank plcABCIB’s chief mission is to finance trade flowsand facilitate capital investment between theArab world and Europe, utilising its origination,structuring and distribution skills to capture anincreasing share of the market for the Group.Its organisational structure reflects this focus,introducing matrix disciplines for branch-based marketing personnel working under the direction of the heads of three main productdivisions: Trade, Commodity Finance &Financial Institutions, Project & StructuredFinance and Islamic Asset Managementrespectively. Its Treasury Division likewiseworks to meet the needs of all the bank’sbranches, in addition to performing the role of London Treasury Hub in partnership withthe Bahrain Hub, managing Group resourcesfor the benefit of ABC Group as a whole.

The bank had an active year in all productareas. The Trade, Commodity Finance & Financial Institutions Division continued toexpand its core client base, both in Europe and the MENA region, as well as its range oftrade finance products.The aggregate volume of documentary credits, acceptances and guarantees transacted totalled $2.9 billion,with around 75% of turnover generatedthrough exports to 13 MENA region coun-tries. Forfaiting business – increasingly used by the bank’s exporter client base - totalled in excess of $150 million, with risks typically

extending from 180 days up to 5 years.Financings of receivables from both theMENA region and European sources (typical-ly with tenors up to 180 days) also did well,reaching $140 million, with insurance coverprovided where deemed appropriate.Commodity Finance activities were likewiseconcentrated on the European /MENA tradeflows, with innovative products – includingfinancing techniques adapted to comply with the requirements of Islamic finance –being introduced to assist commodity traders, particularly those in the oil sector.The Distribution / Syndication unit meanwhile sold down a total of US$100 million of assets during the year, meeting buoyant investorappetite for the transactions offered for sale.

The Project & Structured Finance Divisionrepositioned its existing loan portfolio to reflect changing market dynamics and investorsentiment. It successfully completed an important refinancing for an existing client in the hotel sector. Following the award of the second telecommunication GSM licencein Tunisia, it cooperated closely with ABC in Bahrain in seeking to capture lead-arrangingmandates on behalf of key regional sponsors.It is now well positioned to undertake furtherimportant advisory roles in the MENA region, working closely with other ABC Group business units. In October it also successfully closed a $20 million bridge financefor Medex Petroleum Limited of Cyprus, tofinance development works with respect to Algerian and Tunisian oil concessions.

Islamic Asset Management acquired severalleasing assets for portfolio retention, rangingfrom containers on lease to a major Europeanshipping company to coal moving equipmentleased to a North American power utility.The unit also successfully disposed of a power generation plant lease and a machine toollease portfolio to third-party investors. In

collaboration with Global Securities House ofKuwait, IAM established the Al Bait UK RealEstate Fund which, by year-end, had acquiredaround £30 million of properties. In additionthe unit was mandated to arrange the financ-ing of two residential developments in theNorth of England for an aggregate sum ofclose to £100 million, both of which havealready pre-sold a proportion of their units.A number of murabaha transactions were also concluded during the year, including a significant 12-month syndicated facility for amajor investment grade energy trading groupwhich incidentally provided a good illustrationof how ABCIB’s traditional commodity financeskills, the product development expertise ofthe IAM team and the distribution skills ofABC Islamic Bank in Bahrain may be success-fully combined to meet a client’s needs. In anew development, the team plans to launch a Shari’a-compliant residential home financeprogramme in the UK, in the first quarter of2004.

As mentioned elsewhere, effective 1 January2004 the businesses of ABC’s Milan branch and Arab Banking Corporation – Daus & Co.GmbH, Frankfurt were transferred to newlyestablished branches of ABCIB in those cities.This initiative is in line with the aim of creating a strong European business platform focusing on the core businesses of trade finance,project finance and Islamic banking productswith a strong emphasis on the Arab world.Through these means it is intended to max-imise the synergies available between units ofa pan-European enterprise, whilst achievingoptimal deployment of resources and cover-age of European exporter and Arab worldimporter markets.

As at year-end, net interest margin fell by 9% to £19.9 million, largely reflecting the lower interest rate environment. However,fees, commissions and other income increased

Oryx Gas to Liquids Ltd

Industry Oil & GasCountry QatarRole Mandated Lead Arranger

US$700m

Our ‘Two Hubs’approach will formthe basis of futuremanagement,with Bahrain andLondon being thetwin engines of our future growth.

Union National BankIndustry FinanceCountry U.A.ERole Lead Arranger

US$275m



ABC International Bank plc continued

by nearly 11% to £12.5 million, mostly onaccount of higher earnings from project and structured finance and profits generatedfrom the disposal of the Islamic leases.Total income declined marginally by 2% to £32.4 million. Operating costs increased by 10% to £27.6 million, principally on account of the restructuring costs of the Paris branch and the costs incurred in the integration of the newly established Frankfurt and Milanbranches within the ABCIB Group. Afteraccounting for net recoveries in respect ofpast loan loss provisions, and taxation paid,ABCIB returned a net profit of £8.6 million,compared with a loss of £14.8 million in 2002.

For 2004, ABCIB will be concentrating itsefforts on ensuring that it delivers the benefitsthat underpin the reorganisation of its newlyacquired European operations. In doing so the emphasis will be on maximising income in cooperation with those ABC Group unitsoperating within the MENA region.

Arab Banking Corporation - Daus & Co. GmbHThe German economy continued in a state of virtual stagnation throughout the year,with declining net exports and a subdueddomestic demand (the construction sector,for example, falling by 11.5%) contributing amere 0.1% increase in GDP. The unemploy-ment rate remained high at 10.5%, demand for German equities was low except amongsome foreign investors and the capital marketssaw very little new money raised. Of all theeuro zone economies, Germany’s suffered the most from the steadily rising value of theeuro against the weakening US dollar, as itsproducts were rendered less competitive.Despite massive increases in taxes and duties,government revenues rose more slowly thanexpenditures, resulting in an increase in the

budget deficit to around €80 billion, 3.7% ofGDP.

In this environment, ABC Daus focused on maintaining a quality loan portfolio andbuilding on its franchise in the MENA region toprovide trade finance facilities to importersthere, as well as arranging finance for a number of important capital projects involvingmajor German corporations, with associatedHermes export credit guaranteed facilitieswhere appropriate.

In 2003, ABC Daus’ net interest marginincreased by 8% over that of 2002 to €4.7 million. The impact of the economic factors mentioned above, together with the affect of the war on Iraq in the early part of the year,however led to a 21% fall in commission and fee income to €3.8 million. After accountingfor other income and extraordinary loss arising from the liquidation of the remainder of the bank’s managed investment port-folio, total operating income of €7.8 millionrepresented a 22% decline from 2002. Afterdeducting total expenses of €7.8 million virtually unchanged from the previous year as lower administration charges compensatedfor increased staff expenses, and loan loss provisions of just over €1.1 million, a net lossof €1.2 million was reported, compared with €2.0 million profit for 2002.

As part of the Group’s strategy to realignthe European units to better take advantageof potential synergies, and following the successful migration of its electronic data systems to the ABC core system, as men-tioned above ABC Daus will transfer all itsassets and liabilities to a newly establishedFrankfurt branch of ABCIB on 1 January 2004.One immediate advantage from this mergerwith ABCIB will be the new Frankfurt branch’senhanced capability to provide large-scalefacilities to German clients. Many such facilitieshave hitherto had to be passed to other,

larger, ABC units for execution due to ABCDaus’ restricted lending capability on accountof its relatively small capital base. ABC Daus’German clients, although still dealing with theFrankfurt office as the prime point of contact,will henceforth have the full constellation ofABCIB’s product resources and underwritingcapacity to call upon.

Investment Group

Banco Atlántico, S.A.The Spanish economy showed a considerablecapacity in 2003 to avoid the consequences of a fragile international economy, growingaround 2.3% and maintaining a positive differential vis-à-vis the remainder of the euro zone. Like 2002, its growth was largely based on the strength of private consumptionand construction investment, aided by job creation and the success of internal measuresto render its markets more flexible and competitive. Only industrial investment andthe performance of the export market continued to disappoint.

During the year Banco Atlántico continued to maintain the momentum of its programme of change, aimed at improving its position inthe market and transforming it into a morebusiness-focused and efficient organisation.Initiatives launched or completed in 2003included: the installation of new treasury and financial risk management systems andapplications aimed at supporting credit proposals; improvements to the manage-ment information systems; expansion of theInternet banking services offered by its foreign subsidiaries and the opening of a new branch in Spain and a representativeoffice in Ecuador. The bank also launched a wide range of new products focusing on its targeted market segments.

Oman LNG L.L.C.

Industry Oil & GasCountry OmanRole Mandated Lead Arranger

US$1.3b

Al Ahli Bank ofKuwait K.S.C.

Industry FinanceCountry KuwaitRole Mandated Lead Arranger

US$165m


Despite a 5.6% expansion to the loan port-folio, Banco Atlántico’s net interest margin fell by 5% to €176.8 million in 2003 as a result of a decline in total money market placements and marketable securities held, combined with lower prevailing interest rates in the Spanishmarket.The bank however did well from sales of public securities and real estate and the sale of its 20% shareholding in Banco Real S.A. and this income category, aggregated with fees, commissions and other income,totalled €150.7 million.Total operating income was therefore 6% down on 2002 at €327.6million. On the other hand, after the previousyear’s extraordinary charge for early retire-ment expenses, and further staff costs savings,total operating expenses dropped by 6% to€235.3 million. After deducting loan loss provisions, charges for taxes and minority interest, Banco Atlántico ended the year with a net profit of €48 million, an improvement of 5% on the previous year.

For 2004, the full deployment of its rela-tional banking model will enable BancoAtlántico to deepen its customer relationshipmanagement capabilities and customise itsservices to the targeted personal and privatebanking segments of the market. It also intends to build on recent enhancements toits asset management capabilities and developits Bankassurance business. Its internationalactivity will also continue to be reinforced and expanded, especially in the Panama,Monaco and Bahamas subsidiaries, the international private banking capabilities ofwhich will be expanded.

On 21 December 2003 ABC and BancoBilbao Vizcaya Argentaria, the two largest shareholders in Banco Atlántico, entered intoagreements with Banco de Sabadell where-under the latter committed to launch a public offer for all the outstanding shares inBanco Atlántico and the former committed to tender all their shares to that offer.The disposal of ABC’s shareholding in Banco Atlántico, made within the frame-work of ABC’s strategy of focusing on its core Arab related business took place on 18 March 2004.

International Bank of Asia LimitedAs 2003 opened, Hong Kong’s cycle of risingunemployment and falling prices continued tobear down on the poor state of its economy.While the outbreak of hostilities in the MiddleEast in late March did nothing to alleviate thiscondition, the earlier outbreak of the SARSvirus in China, Singapore, Taiwan and HongKong had a devastating, and lasting impact,on tourism, domestic demand and exportsales. At the peak of the epidemic air traffichad fallen by 70%, hotel occupancy haddropped below 10% and customers had all

but disappeared from stores, restaurants andentertainment centres.The impact was exac-erbated by the cancellation of buying trips by overseas merchandisers, who normallyflood into Hong Kong in the spring to placetheir winter orders.

Although China also faced similar challengesfrom the SARS outbreak, in its case the economic damage was contained, with GDPgrowth merely receding to 6% in the secondquarter before rebounding with a blistering9.1% in the third quarter. Chinese importdemand, along with Hong Kong’s role inChinese exports, fortunately kept HongKong’s external sector growing. China alsotook steps to support the Hong Kong economy, loosening restrictions on travel by Chinese citizens to Hong Kong and inaug-urating the Closer Economic PartnershipArrangement which, from 2004, will eliminatetariffs on 270 categories of Hong Kong goods exported to China and allow 17 service industries full market access.

In this hostile economic climate,International Bank of Asia (IBA) again focusedon fundamentals. The dramatic growth of the ‘Magic Money Manager’ deposit schemeintroduced in 2001 demonstrated its successas interest bearing current account balancesexceeded HK$8.5 billion, substantially reduc-ing funding costs and increasing liquidity.Low cost funding accounted for 34% of total funding, as compared with 18% in 2002. IBA also reduced the cost of its medium term funding through the issuance of Callable Certificates of Deposit, offeringretail customers an attractive interest ratewhilst utilising an interest rate swap to reduceactual interest expense to the bank. As a result of these initiatives, customer depositsrose by HK$7.6 billion.

The bank also achieved a healthy growth inthe loan portfolio, at a time when the industryas a whole experienced a 2% decline, by successfully targeting its marketing efforts onequipment leasing and hire purchase, workingcapital loans to small and medium sized enter-prises, and housing loans. At the same time,new risk management systems implementedat the end of 2002, aimed at addressing the

deteriorating quality of Hong Kong’s con-sumer loan environment by more aggressivecredit evaluation and monitoring, proved theireffectiveness as specific provisions were cut by 45% and IBA achieved one of the lowestlevels of non-performing loans in Hong Kong.

In its search for new sources of fee income,IBA also introduced a range of new wealthmanagement products including currency-linked, equity-linked and target redemptiondeposits, along with an array of bond andmutual fund offerings.

IBA also made effective use of its data warehouse, customer relationship manage-ment software and its advanced Call Centreto execute effective marketing programmes.Its Call Centre now handles more than100,000 calls per month, a near doubling of2002’s service. Apart from its ability torespond rapidly to customer enquiries,through statistical monitoring the bank is able to achieve highly targeted marketing programmes with significantly higher successrates than from typical direct mail or news-paper advertising programmes.

A new Superbranch and three new WealthManagement Centres were opened in 2003,increasing the total branch network to 25 andtotal number of wealth management centresto 10. The capability of these branches andcentres to deliver treasury products was alsoenhanced by the installation of an on-linetransaction system, giving branches access to real time quotes on foreign exchange and derivative-linked instruments, such as the bank’s equity-linked note issue.

Despite these successes, in 2003 IBA’s interest income fell 20% to HK$609 million,on account of reduced average loan out-standings over the year as a whole and narrower margins generally so that, total operating income fell by 19% to HK$835 million. Operating expenses, meanwhile,rose 7% to HK$489 million, mainly because of increased headcount and other costs associated with opening the new outlets,branch renovation expenses, and the unantic-ipated costs of protecting the bank and staff against the SARS epidemic. Operating profit therefore suffered a 39% decline, to

One immediate advantage for ABC Daus from this merger with ABCIB will be the new Frankfurtbranch’s enhanced capability to provide large-scale facilities to German clients.



Becoming the pre-eminent Arab financial institution for the trading and distribution of alltreasury and capital market products within the Arab world.

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International Bank of Asia Limited continued

HK$346 million. Although loan loss pro-visions fell to HK$186 million, after increasedprovisions for the decline in the value ofrepossessed assets, at HK$71 million morethan double those of 2002, and increased taxation, net profit was down 38% at HK$138million (2002: HK$224 million).

ABC’s decision at the end of 2002 to dispose of its 55% shareholding in IBA, basedon its renewed strategic focus on expansion in the Middle East, was followed in September2003 by an agreement signed with FubonFinancial Holding & Co., Limited of Taiwan,one of the leading financial conglomerates inthe region, to acquire the shareholding.The disposal took place on 16 February 2004.

Banco ABC Brasil S.A.After the turmoil in Brazil at the end of 2002,which saw interest rates driven up in defenceof a tumbling real, the stabilisation policiesbrought in by the Lula administration, withstrong public support, began to take effect in 2003. New Brazilian economic policyembraced strict control of inflation and publicdebt, healthy foreign trade surpluses andsteady domestic growth as fundamental values. The success of this policy becameapparent during the year as inflation began tofall, reaching single-digit figures, exports roseby over 20% while imports inched up by only3% to produce a trade surplus of over $24.8billion and a current account close to balance.

Nevertheless, the necessity to keep interestrates high throughout much of the year –although rates did decline over the period –constrained growth, with GDP rising byaround 1%. Consumer spending remainedlow, as did new net new investment.

In this scenario ABC Brasil maintained thestance it took in 2002, when it reduced its exposure to companies with large uncoveredUS dollar liabilities or other susceptibilities to exchange rate swings, and continued tomanage its credit portfolio at a low level,allowing further run offs to take place. Its netloan portfolio thus fell by 12%. Other assetswere also allowed to decline slightly, so that by the end of the year total assets had fallenby 18% while liabilities fell back by 18% asfunding requirements were reduced.

Reflecting this cautious approach, anddespite an improvement in spreads and bondyields, ABC Brasil’s net interest margin fell by14% over the year to $38.2 million. On the

other hand, net commission and other incomerose by 7% to $26.5 million, the net effect ofrevaluation gains from the treasury derivativesportfolio, documentary credit commissionsahead of budget and marketable securitiestrading profits being only slightly offset by losses on foreign exchange activities. Totaloperating income thus fell by only 6% to $64.7million, as compared with 2002’s $69.2 million.Operating expenses were also contained, asstaff costs maintained a decreasing path due to organisational changes in the bank and themaintenance of tight controls. Total operatingexpenses therefore fell, by 3%, to $25.9 millionand, after loan loss provisions of $4.8 millionnet of recoveries, and a taxation charge of $13.2 million, the bank returned a net profit of $20.9 million, compared with a net profit of $18.4 million the previous year.

2003 saw the beginnings of a return tohealth by the Brazilian economy, especially inthe last quarter, and ABC Brasil was pleased to be able to meet its main institutional objectives, with a return on equity of onlyslightly under 13% and the maintenance of acapital adequacy ratio fully in line with therequirements of both the Central Bank ofBrasil and the BMA. In a year of difficult decisions, however, it closed its Bahamas operation and transferred the business to itsCayman Islands subsidiary and reorganised itsstructure to better cope with future needs.For 2004 it intends to focus on niche activitiessuch as the financing of Brazil-Arab trade,proprietary treasury products keyed to theneeds of investors with currency and interestrisks to manage, advisory activities in mergersand acquisitions, fiscal planning, corporate debt instrument issuance and other servicesoffering good opportunities in a recoveringeconomy for a bank with an independent profile and close knowledge of the marketsand appreciation of its clients’ needs.

Group Treasury, Bahrain & London Treasury Hubs

Group Treasury is the central coordinator of ABC Group’s funding and liquidity manage-ment, the most important of its three keystrategic objectives of liquidity, profitability andcustomer relationships. Liquidity being GroupTreasury’s primary responsibility is monitoredon a daily basis to ensure that ABC Group isprepared and able to meet any contingencyarising in any of the units worldwide.

In pursuance of the other two key objectives,Group Treasury has made it its mission thatABC Group becomes the pre-eminent Arabfinancial institution for the trading and distri-bution of all treasury and capital market products within the Arab world and, within the global marketplace, the premier provider of currency and capital markets expertise from the Arab world.

Under its direction, Bahrain Treasury and theLondon Treasury in ABCIB will constitute thetwo main treasury hubs of the Group. Theirbusiness development focus will be primarilyon diversification of funding sources and revenue streams through the building of longterm customer relationships and capital effi-cient and diversified investment portfolios andthe continuous development of sophisticatedtreasury products to add to the extensiverange already on offer to their clients.

Bahrain Treasury is already one of thebiggest and most active treasuries in theMiddle East. Its services and products span theinter-bank money market, foreign exchange(including most Middle East currencies),interest rate and currency derivatives, struc-tured products, Islamic murabaha, fixedincome proprietary trading and investments,alternative investments, equities and customerportfolio management.

The London hub is involved in proprietary

Commercial Bank ofQatar (Q.S.C.)

Industry FinanceCountry QatarRole Mandated Arranger

US$120m

National Air Services(NAS)

Industry AviationCountry Kingdom of Saudi ArabiaRole Lead Arranger

US$20m



trading and investments in fixed income,money markets and foreign exchange, but in future will focus on building banking andfinancial relationships in Europe, includingEastern European countries, particularly withinstitutions that have Middle East and Arabworld dealings. Additionally, London will focus on catering to GCC and MENA region customers that prefer dealing with aUK-based entity.

In 2003 Bahrain Treasury reported an interest margin of $21.5 million, 12% lowerthan 2002, in view of the lower interest rates prevailing generally. However, non-interestincome rose by 123% to $13.6 million,reflecting increased returns from marketablesecurities activities and treasury trading revenues only slightly down on the previousyear. After deducting $8.0 million for operating expenses, 7% down on the yearbefore, and an unbudgeted loan loss provisionrecovery, the net unit’s net profit of $29.8 million was 35% up on that for 2002.

ABC Group, with its growing presence,expertise and emphasis on the Arab world,presents the Treasury group with a uniqueopportunity to become a counterparty ofchoice for its target markets. Treasury plans for 2004 call for expansion and development of a significant customer base in order to diversify earnings.

2004 will mark the beginning of a shift in the management structure of ABC GroupTreasury units. Matching the matrix-type organisation structure being introduced in theBanking Group, the reporting lines of the core banking Treasury departments willchange and centralised management at Group Treasury will become directly respon-sible for the activities of all Treasury units in ABCIB and ABC branches. These changesare relatively simple to implement as all theunits now share the same systems but, in time, it is also foreseen that the Treasury

units of Arab World Division domestic banking subsidiaries, as well as that of ABCBrasil, will also report directly to GroupTreasury. These measures are aimed atimproving the liability profile, product range,asset quality and profitability of all units, as well as ensuring recruitment and retention of the best staff through unified training and incentive schemes.

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 loansmanagement and the provision of analyticalresources to senior management. It is alsoresponsible for identifying market risks arisingfrom ABC Group activities, recommending to the relevant central committees appro-priate policies and procedures for managingexposure to such risks and establishing the systems necessary to implement effectivecontrols.

CRG have followed closely the latest developments on the Basel Committee onBanking Supervision’s new Capital Accord (‘Basel Two’), in particular the Committee’s third Quantitative Impact Study and consult-ative paper. It spearheaded ABC Group’s participation in the Quantitative Impact Studyinitiated by the BMA and represented the Group on the Chief Risk Officers’ Forum of the Institute for International Finance.

During the year, CRG enhanced its port-folio/asset management role, with further refinements in the estimation of risk adjustedreturn on capital employed. Other initiatives during the course of the year included functionality enhancements to the existingRXM/RWS (Risk Exposure Management /

Reporting Work Station) credit limit andexposure monitoring system, collectivelyknown as ABC’s Credit Risk Manage-ment System, and implementation of creditratings-linked delegated approval authoritiesthroughout the Group.

The Risk Management Department (RMD)saw further progress made on the validationof non-trading Value-at-Risk (VaR) in the network, aiming towards a consolidated non-trading VaR system.Work was completedin London and Milan and a VaR engineinstalled in Frankfurt. Validation for Bahrainshould be completed in 2004. Currently,RMD has the capacity to calculate VaR for ABC the parent bank and ABCIB and provide full statistical analysis of limit utilisationand risk, broken down by unit. ABC Brasilmaintains its own VaR engine and submits data to RMD upon request.

The Remedial Loans Unit continued to pursue its primary objective of an ongoingreduction in the impaired or classified assetportfolio of ABC Group, through proactiveasset management and disposals, practicalworkouts and debt restructuring exit strate-gies with a view to maximising the net presentvalue of recoveries whilst minimising theimpact of credit losses. ABC business unitssubmit quarterly Loan Portfolio Reviews for evaluation by Head Office senior manage-ment to determine the adequacy of existingprovisions. They are also required to submitspecific credit reviews on impaired assets in a standardised ‘Action Plan’ format, whichanalyses recovery prospects under at leasttwo alternative and identifiable exit route scenarios, progress on which is reported insubsequent reviews. This procedure focusesaccount officers on the need to reduce non-performing assets within specific agreeddeadlines.

For 2004 CRG plans, inter alia, the intro-duction of an enhanced risk scoring and rating

National Bank ofEgyptIndustry FinanceCountry EgyptRole Mandated Lead Arranger

US$300m

State of QatarCountry QatarRole Mandated Lead

ArrangerUS$550m


process, further automation of the creditapproval process and the establishment of a systematic portfolio risk assessment proce-dure based on risk-adjusted return on risk-adjusted capital (RARORAC) methodology.

Global Information Technology

Head Office Global Information TechnologyDepartment (GIT) is responsible for global IT strategy and planning and all related technical services throughout the Group.It assesses the Group’s future operationalneeds and develops and implements new IT systems to meet them, in the context of the Group’s overall technology strategy and primary aim of delivering efficient, cost-effective systems.

In the first half of 2003, the escalating crisis in Iraq led ABC to place a freeze on all IT projects. GIT concentrated its efforts on proving and rehearsing the Group’s contingency plans and business continuity scenarios. Preparations were made to activate the Group’s Disaster RecoveryProgram should it prove necessary, whichwould have entailed the transfer of theGroup’s liquidity and asset/ liability manage-ment to a temporary London branch of ABC, authorised in advance by the UK’sFinancial Services Authority.

Whilst these were undoubtedly difficult operating circumstances, they nonethe-less presented an opportunity to test thecapability of the Bahrain Head Office systemsto effect a smooth and seamless transfer of functions to the London recovery site.The exercise was completely successful.

GIT was able to resume its normal activities only late in the second quarter.However, it managed not only to achieve all major deliverables for 2003, but also to set the scene for further initiatives in 2004.

Core System DeploymentThe Group’s global technology upgrade andstandardisation programme continued with

the implementation of the integrated core banking systems at ABC’s wholesale units.GIT completed the integration of the Urbis back office system at ABC Daus and ABCInternational Bank’s Paris branch and full rollout of the Trade Innovation trade financesystem the Frankfurt unit, in addition to imple-mentation of the export letters of credit and import guarantees modules in Paris.

European IntegrationThe transfer of the businesses of ABC’s Milanbranch and ABC Daus to new branches of ABC International Bank in Milan and Frankfurt,effected in January 2004, required some major preparatory development work and system changes. Essential deliverables includedManagement Information System (MIS) reporting at ABC Daus, integration of credit and risk management systems in both centresand the development of German, Italian and UK regulatory reports.

e-Business Initiatives‘ABC On-line’ Retail e-BankingABC Jordan became the first ABC retail bank to offer ‘ABC On-line’ e-Banking when it went live with Internet banking in July 2003.Further deployment to other ABC retail banks will continue in 2004. A new release to support transactional capabilities and additional functionality, including interactive e-Banking and transaction-based processing,is also planned.

‘ABC On-line’ Wholesale e -BankingThis enhanced version of ‘ABC On-line’ waslaunched in 2003 to provide cross-border,multi-currency and multi-branch availability tocorporate customers of Group units running the core banking systems.

‘EIS On-line’The Executive Information System is ABCGroup’s MIS, providing senior managementsince 2002 with real-time on-line informationand financial data on ABC’s customers andcorrespondent banks, together with data

analysis capabilities. In 2003 GIT launched awireless / mobile technology pilot to providemobile executives with the flexibility to access EIS customer information and accountdetails via next generation pocket PCs.The full service is scheduled for launch in2004.

e-Trade FinanceElectronic trade finance is an on-line facility/service that fully integrates with ABC On-lineand streamlines the collection and exchange of trade data, making it easier for customers to manage their global trade activities. The e-Trade Finance initiative was launched in late2003 as part of ABC’s drive for superior customer service, and is currently beingassessed for introduction across the Group.

‘e-Procurement’ & Strategic SourcingElectronic Procurement involves purchasing IT hardware and stationary over the Web, utilising specially discounted prices.The benefits from this kind of strategic sourcing, hitherto available only in Bahrain,were extended in 2003 to all Group units.

Global InitiativesA solution is being developed to introduceStraight Through Processing (STP) to improvethe deal capture process and eliminate duplication of tasks in the dealing room.This will use the Kondor+ front office systemas the main deal capture system whileautomating the back-end limit and pre-dealcheck engine.

IT Retail BankingABC Egypt went live with its new retail banking system and completed the up-grading of its credit card processing and handling facilities. Infrastructure enhance-ments at ABC Algeria included the introduction of enterprise-wide mail andupgrading of the telecommunications andinternal networks; the unit also commenced a major system upgrade, expected to becompleted in 2004.

Electronic trade finance is an on-line facility/service that fully integrates with ABC On-line and streamlines the collection and exchange of trade data, making it easier for customers tomanage their global trade activities.

An acute sense of timing helps us to recognise and exploitsynergies as we envisage 2004 as ayear of transition.



Internal Technical ServicesDuring the year GIT launched the Internet-based ‘ABC Mail’, designed to provide ABC Group senior executives and middlemanagement with secure access to their ABC enterprise email from any PC with anInternet connection.

2004 and beyondInitiatives include enhancements to ABC’s Anti-Money Laundering procedures and alert systems through the use of more sophisticated IT tools. Rollout of Urbis will continue at ABC's Tunis branch and ABCInternational Bank’s Milan branch. GIT will also play a key role in ABC’s selection and subsequent implementation of a global creditrisk management system to replace theGroup’s current global limits and exposuresystem, together with a new centralisedGroup client information database.

Upcoming feasibility studies include aGroup Management Information System(MIS) to centralise and consolidate customerdata; standardisation of the retail banking platform; a Group call centre for customers of all the Arab world retail banking units;and centralisation of the Group’s credit cardbusinesses and ATM networks. GIT is also

studying further possible improvements tonetwork and management support remotemonitoring facilities and is assessing the potential benefits of a Wireless Local AreaNetwork (WLAN) in Bahrain. Meanwhile,it continues to work towards IT Policy & Security Guidelines Compliance with ISO 17799.

Human Resources &Administration

During 2003, the activities of the HumanResources & Administration Departmentfocused primarily on improving the quality of services and processes through the maximum utilisation of technology in HRprocesses and procedures. Development continued on the HR Intranet webpage,which provides management and employeeswith continually updated on-line informationon a variety of topics.

During the year the Department also introduced the ‘Balanced Scorecard’ concept,under which individuals will be assessed in a transparent manner geared towards performance under Management byObjectives criteria featuring four key areas

covering, in the case of business generatingunits, profitability, synergy, management/compliance and development; in the case ofsupport units the first two criteria are substituted by cost /quality control and innovation. Each individual is then com-pensated according to a formula related to overall bank, team and individual performance.

HR policies and procedures are continuallyreviewed and updated to ensure alignment with best practice HR methodology and full compliance with all relevant rules and regulations, whether externally or internallyinitiated. ABC sees human resource develop-ment as a key area where investment inemployee training and development willensure that employees are equipped with the required skills and knowledge to meettheir business objectives. Local, regional andoverseas training is organised and offered toemployees at all levels. ABC continues torecruit and develop high potential graduatesto further meet its long-term objectives.

Ghazi M.Abdul-JawadPresident & Chief Executive

ABC sees human resource development as a key area where investment in employee trainingand development will ensure that employees are equipped with the required skills and knowledge to meet their business objectives.


The activities of the Human Resources &Administration Department focused primarilyon improving the quality of services andprocesses through the maximum utilisation oftechnology in HR processes and procedures.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Financial Review

‘The Group returned a net profit of $120 million, compared with a loss of$41 million for 2002, in itself a reflection of the countervailing economicforces experienced throughout much of the world in the last two years’.

Following the revision of InternationalAccounting Standard 39, published in 2003, and ABC’s decision to implement it immediately rather than await the deadline set of January 2005, the financial statementsfor 2002 have been restated to reflect, in themain, the write down of the ‘Brady Bond’portfolio to then current market value as at 1 January 2002, with the portfolio beingmarked to market value thereafter, togetherwith other mandatory adjustments flowingfrom that decision. Comparisons with 2002 in the review that follows therefore refer tothe financial statements as restated. ABC’s ‘Brady Bond’ portfolio was liquidated inFebruary 2004.

INCOME STATEMENTIn 2003 ABC Group’s net interest income fell by 5.8% from $464 million to $437 million, largely on account of lower interestrates prevailing in the countries of its. Non-interest income, on the other hand, rose by 79.4% from $257 million to $461 million,as the positive effect of rising emerging marketdebt instrument values on Brady Bonds,combined with higher fees earned on loansand (despite lower volumes) documentarycredits and profitable dealings in marketablesecurities and other treasury activities,more than outweighed reduced income onforeign exchange operations. Total operatingincome was $898 million, up 24.5% on 2002’s $721 million.

Provisions against loans and advances for the year amounted to $195 million (2002:$262 million).The net charge, after recoveriesof $62 million (2002: $58 million), amountedto $133 million (2002: $204 million). Significantprovisions were necessary in the businessunits based in Tunisia, Algeria and the UnitedStates, although the Investment Group sub-sidiaries in Spain and Hong Kong accountedfor $59 million or 44.4% of the net charge.

After accounting for these provisions,net operating income rose by 39.8% to $723million (2002: $517 million).

Operating expenses showed an increase of 10.8% to $544 million (2002: $491 million), mainly reflecting the translationimpact of the strengthening of the euroagainst the US dollar on the operating costs of those units based in the euro zone,particularly Banco Atlántico, S.A., but also,to a lesser extent, exceptional restructuringcosts at ABC units in France, Bahrain,Brazil, Italy, Jordan and Hong Kong. The overhead expense (cost: income) ratiodecreased to 61% from 2002’s 68%.

Taxes on operations outside Bahrainreduced to $30 million (2002: $37 million) as lower taxes at Banco Atlántico, S.A.and ABC Milan branch, together with thewrite back of earlier charges by ABC New York branch and ABC International Bank plc, outweighed increased tax expense in the Hong Kong, Brazilian and Jordanianunits. Following these deductions, the Group returned a net profit of $120 million,compared with a loss of $41 million for 2002, in itself a reflection of the countervailingeconomic forces experienced throughoutmuch of the world in the last two years.

SOURCES AND USES OF FUNDSTotal liquid assets rose marginally by 1.4% to $12,650 million (2002: $12,472 million).The total increase was comprised of a 12.3%increase, or $572 million, in non-trading securities (which include ’available for sale’securities) and an increase in liquid funds of $44 million, or 6.6%, offsetting a reductionof $287 million in trading securities from $373 million to $86 million and a $151 million,or 2.2%, fall in money market placements.The marginal increase in liquid assets,together with the increase of $940 million in the loans and advances portfolio referredto in greater detail below, was funded mainlyfrom increases of $354 million or 3.7% indeposits from the interbank market and theGroup’s financial institution customer base(which grew from $9,578 million to $9,932million) and $1,276 million, or 9.4%, in

deposits from customers including certificatesof deposit (which grew from $13,581 million to $14,857 million). Total deposits included$3,791 million (2002: $3,066 million) relatingto sale and repurchase agreements.

Total placements, together with liquid fundsof $709 million (2002: $665 million), repre-sented 24.5% (2002: 25.8%) of total assets.Including marketable securities, total liquidassets represented 42.1% (2002: 43.1%) oftotal assets.

The total assets of the Group in 2003 rose 4.0% to $30,068 million (2002: $28,915million). Average assets were $28,643 million(2002: $28,038 million) while average liabilities, excluding shareholders’ equity andminority interest, amounted to $27,168 million (2002: $26,570 million).

The Group’s overall loan exposure grew by 6.3% to $15,921 million (2002: $14,981 million), entirely from loan expansion at Banco Atlántico, S.A., exacerbated by thetranslation impact of the weak dollar againsteuro, although partially offset by a significantfurther reduction in ABC’s Latin Americanportfolio together with minor downwardadjustments to the North American andother categories of loans. The Group’s totalloans to deposits ratio stood little changed at 64%.

Term funding fell by 14.9% to $1,850 million(2002: $2,174 million), reflecting repaymentsof $649 million during the year partly offset by new funds raised during the year of $261 million.The total of term funds in excessof 5 years fell by $50 million during the year.

COMMITMENTS, CONTINGENT LIABILITIESAND OTHER OFF-BALANCE SHEET ITEMSAt the end of 2003, ABC Group’s consolidated off-balance sheet items stood at $29,128 million (2002: $29,291 million).The total credit risk-weighted asset equiv-alent of commitments and contingent liabilities and derivatives was $2,796 million(2002: $3,419 million). The total volume ofdocumentary credits, acceptances and

All figures in US$ Dollars


guarantees undertaken during the year was $8,204 million (2002: $10,197 million),39% (2002: 53%) of which related to the Arab world.

The Group uses a range of derivative products for the purposes of hedging andservicing 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 2003 was $451 million (2002:$603 million).

No significant credit derivative trading activities were undertaken during the year.

GEOGRAPHICAL AND MATURITYDISTRIBUTION OF THE BALANCESHEET In 2003, ABC Group’s total assets in the Arabworld were stable, although the proportion of its liabilities there fell from 37% to 34%.Its assets in Western Europe increased,compensated for by small proportionatereductions in assets in North America, from14% to 12%, and in Latin America, from 7% to 6%. Liabilities to Western Europe likewisegrew, as did those to Asia.

Liabilities Assets & Equity

(%) 2003 2002 2003 2002

Arab world 17 17 34 37Western Europe 46 44 38 37Asia 17 16 17 14North America 12 14 1 2Latin America 6 7 8 7Others 2 2 2 3

100 100 100 100

Loans &Earning Assets Advances

(%) 2003 2002 2003 2002

Arab world 16 16 19 22Western Europe 47 46 47 42Asia 17 16 15 16North America 12 13 7 7Latin America 6 7 11 11Others 2 2 1 2

100 100 100 100

An analysis of the maturity profile of assets shows that, at the end of 2003, 55% (2002: 56%)did not exceed one year’s maturity, as the Group maintained its conservative approach to longer term lending. Loans and advances maturing within one year amounted to 42% (2002: 43%) of all loans and advances. However, the proportion of liabilities maturing within one year remained at 81% (2002: 82%) of all liabilities and equity.

DISTRIBUTION OF CREDIT EXPOSUREABC Group’s credit exposure (defined as the gross credit risk to which the Group is potentially exposed) as at 31 December 2003 is given below.

Funded Exposure Commitments & Contingents Derivatives*($ millions) 2003 2002 2003 2002 2003 2002

Customer typeBanks 11,068 10,902 1,880 2,015 183 199Non-banks 12,182 11,963 8,904 6,928 102 55Sovereign 5,298 4,617 477 1,582 1 1

28,548 27,482 11,261 10,525 286 255

Risk rating1 = Exceptional 5,297 5,501 1,411 944 66 682 = Excellent 5,273 5,690 1,335 1,056 130 79 3 = Superior 3,447 3,394 1,091 1,019 18 21 4 = Good 3,546 3,857 2,071 1,998 50 69 5 = Satisfactory 6,776 5,531 2,833 2,742 7 12 6 = Adequate 3,231 2,326 2,195 2,081 15 27 = Watchlist 557 531 283 412 - 48 = Special Mention 185 187 23 119 - -9 = Substandard 121 233 8 126 - -10 = Doubtful 75 214 11 28 - -11 = Loss 40 18 - - - -

28,548 27,482 11,261 10,525 286 255

* Derivative exposures are computed as the cost of replacing derivative contracts represented by mark-to-market values where they are positive, and an estimate for the potential change in market values reflectingthe volatilities that affect them.

CLASSIFIED LOANS AND PROVISIONSNon-performing loans and off-balance sheetcredits are defined as those in default on contractual repayments of principal or pay-ment 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 interestthereafter being excluded from income.In practice, the Group adopts a highly conservative stance and places all credits

on non-accrual status as soon as a reasonabledoubt as to timely collection becomes apparent.

The total of all restructured loans on the books of the Group at the end of 2003 was $1,169 million (2002: $1,472 million). The total of loans restructured during the year was $29.1 million (2002:$49.7 million). Interest written off during 2003 as a result of such restructuring amounted to $12 million (2002: $24 million).

Loan Portfolio US$ millions

Short Term Long Term

2002 2003

8,570

6,411

6,732

9,189

10,000

8,000

6,000

4,000

2,000

0

Total Assets US$ millions

2002 2003

28,915

30,068

30,000

20,000

10,000

0

goals include a productivity ratio of 2:1 and a capital adequacy ratio of 15%. Based on its evaluation of the following factors,management is optimistic about the Group’sprospects for meeting these targets in time.

Political stability – On the whole, managementbelieves that the Group’s activities and assetsare sufficiently widely diversified to provide acushion against any losses from isolated casesof political instability.

Energy prices – Global energy prices have adirect impact on the annual budgets and infrastructure improvements of many of the countries in the Arab world. This in turnaffects both the Group’s OECD-basedexporting and contracting customers and itsArab world importing clients, and thus theGroup’s own revenue stream. The prognosis is for energy prices to increase steadily in real terms in the medium to long term.

Foreign currency values – Where ABC’s subsidiaries are capitalised with currenciesother than the US dollar it is exposed to fluctuations in the values of those currencies.ABC takes all appropriate steps to hedgeagainst such fluctuations where appropriateand practicable.

Volatility of currency markets – The degree ofvolatility in foreign exchange rates can affectthe amount of foreign exchange trading revenues. In general, the Group believes that it benefits from currency volatility.

Interest rates – Although the Group’s net interest revenue can be negatively affected by interest rate changes, the impact is mainly on income from equity funds since its lending and marketable securities holdingsare based predominantly on floating or short-term interest rates and largely insulatedfrom interest rate swings.


Financial Review

The total of all loans placed on non-accrual status as at the end of 2003 fell by 2.7% to $748 million over the year (2002:$769 million). Aggregate provisions at the end of 2003 amounted to $763 million (2002: $728 million). They constituted 102%(2002: 95%) of all non-performing loans and 4.6% (2002: 4.6%) of gross loans andadvances.

An ageing analysis is given below in respect of all loans and advances placed onnon-accrual, together with their related provisions:($ millions) Principal Provisions Book Value

Less than 3 months 78 26 523 months to 1 year 85 31 541 to 3 years 316 215 101Over 3 years 269 238 31

748 510 238

GROUP CAPITAL STRUCTURE ANDCAPITAL ADEQUACY RATIOSABC Group’s tier 1 capital fell by $20 millionor 0.9% to $2,162 million (2002: $2,182 million); however, in light of the 5.1% reductionin total risk weighted assets over the year, thetier 1 capital ratio rose marginally to 12.0%from 11.5%.

Tier 2 capital rose by 59.4% from $313 million to $499 million. Thus, the total capital base rose by $166 million or 6.6% to $2,661 million (2002: $2,495 million),producing a consolidated capital ratio of14.7%, compared with 13.1% at the end of 2002, above the minimum 12% require-ment of the Bahrain Monetary Agency and well above the 8% guideline under the Basel Accord for international banks.

As mentioned above, risk-weighted assets fell in 2003, by $964 million to $18,051million (2002: $19,015 million), reflectingreductions generally in commitments,contingent liabilities and claims on bothOECD and non-OECD based banks and public sector companies, partially offset byincreases in claims secured by residentialmortgages, mainly out of the Spanish sub-sidiary.

All ABC Group subsidiaries meet the capital adequacy requirements of their respective regulatory authorities.

FACTORS AFFECTING HISTORICAL ORFUTURE PERFORMANCEABC Group seeks greater diversification in its revenue base primarily through expan-sion in the Arab world. Its strategy is based on acquiring or creating new regional bankingplatforms while simultaneously expanding its

Middle Eastern corporate, project /structuredfinance and treasury capabilities with the aimof becoming regional leader in innovativeproducts to better service its expanding customer base.

By leveraging its Arab world and inter-national – largely European – representation the Group aims to intermediate and facilitateboth the Arab countries’ imports of consumerand capital goods and their exports of rawmaterials or services to the developed world.

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 others on internationaltourism and / or agricultural exports, clearlythe region’s fortunes are tied to those of the major economies with which it trades.Periods of economic slowdown or recessionin the developed world will therefore tend to have an impact on the gross revenues of the Group and the health of its credit port-folios. The weak recovery from the global economic downturn of recent years in theOECD countries continues to affect theeconomies of many Arab world countries,reflected in the performance of several of the Group’s business units in those areas.

With the withdrawal from all new LatinAmerican business by the wholesale bankingunits, the impending disposal of BancoAtlántico, S.A., and the liquidation of the BradyBond portfolio, the Group’s vulnerability tothe region will be limited to the portfoliomaintained by ABC Brasil S.A., the majority of which is denominated in local currency.

FINANCIAL GOALS AND FACTORSTHAT MAY AFFECT THEMABC Group’s primary financial goal is consistent generation of value for share-holders, including sustainable growth in earnings and assets per share. The long-term revenue goal is for a 15% annual post-tax return on equity. Other long-term

Equity Term notes, bonds and other term financing

Non-Deposit Sources of Funds US$ millions

2002 2003

2,174

1,371

1,585

1,850

2,500

2,000

1,500

1,000

500

0

Breakdown of Earning Assets by Region Percentage

Arab World

16% 16% 7% 13% 46% 2%

16% 17% 6% 12% 47% 2%

2002

2003

Asia LatinAmerica

NorthAmerica

Europe Others

2002 2003

Consolidated Statement of IncomeYear ended 31 December 2003

All figures in US$ Million


We have audited the accompanying consolidated balance sheet of Arab Banking Corporation (B.S.C.) [the bank] and itssubsidiaries [the group] as of 31 December 2003, 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 statementsbased on our audit.

We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we planand perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures inthe 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 ouraudit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of thegroup as of 31 December 2003 and of the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

We confirm that, in our opinion, proper accounting records have been kept by the bank and the consolidated financialstatements, and the contents of the directors’ report relating to these consolidated financial statements, are in agreementtherewith. We further report, to the best of our knowledge and belief, that no violations of the Bahrain CommercialCompanies 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 2003 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 itsbanking licence. We obtained all the information and explanations which we required for the purposes of our audit.

15 February 2004Manama, Kingdom of Bahrain

Auditors’ Report to the Shareholders of Arab Banking Corporation (B.S.C.)


Consolidated Balance Sheet31 December 2003


2003 2002Note Restated

ASSETS

Liquid funds 709 665 Trading securities 86 373 Non-trading securities 3 5,204 4,632 Placements with banks and other financial institutions 6,651 6,802 Loans and advances 4,5 15,921 14,981 Interest receivable 134 154 Investments in associates 51 44 Other assets 828 813 Premises and equipment 484 451

TOTAL ASSETS 30,068 28,915

LIABILITIES

Deposits from customers 14,434 13,496 Deposits from banks and other financial institutions 9,932 9,578 Certificates of deposit 423 85 Interest payable 92 113 Taxation 6 69 79 Other liabilities 7 1,171 1,556

TERM NOTES, BONDS AND OTHER TERM FINANCING 8 1,850 2,174

27,971 27,081

MINORITY INTERESTS 512 463

EQUITY 9Share capital 1,000 1,000 Treasury stock (74) (74)Reserves 448 383 Retained earnings 211 62

1,585 1,371

TOTAL LIABILITIES, MINORITY INTERESTS AND EQUITY 30,068 28,915

These consolidated financial statements were authorised for issue by the Board of Directors on 15th February 2004 and signed on their behalf by the Chairman and President & Chief Executive.

Khalifa Al- KindiChairman

Ghazi Abdul-JawadPresident & Chief Executive

The attached notes 1 to 29 form part of these consolidated financial statements.


Consolidated Statement of IncomeYear ended 31 December 2003


2003 2002Note Restated

OPERATING INCOME

Interest income 1,033 1,175 Interest expense (596) (711)

Net interest income 437 464 Other operating income 10 461 257

Total operating income 898 721

Provision for impairment (net) 5 (175) (204)

NET OPERATING INCOME AFTER PROVISIONS 723 517

OPERATING EXPENSES

Staff 11 330 298 Premises and equipment 70 61 Other 144 132

Total operating expenses 544 491

PROFIT BEFORE TAXATION AND MINORITY INTERESTS 179 26

Taxation on foreign operations 6 (30) (37)Minority interests in subsidiaries (29) (30)

NET PROFIT (LOSS) FOR THE YEAR 120 (41)

BASIC EARNINGS PER SHARE (expressed in US$) 26 1.27 (0.44)



Consolidated statement of cash flowsYear ended 31 December 2003


2003 2002Restated

OPERATING ACTIVITIES

Net profit (loss) for the year 120 (41)Items not involving cash flow:

Provision for impairment (net) 175 204 Depreciation 36 32

Item considered separately:Gains less losses on non-trading securities (42) (12)

Changes in operating assets and liabilities:Trading securities 297 (72)Placements with banks and other financial institutions 698 112 Loans and advances 575 (653)Other assets 67 54 Deposits from customers (456) (358)Deposits from banks and other financial institutions (359) 692 Other liabilities (526) 849 Other non-cash movements (268) (50)

Net cash inflow from operating activities 317 757

INVESTING ACTIVITIES

Purchase of non-trading securities (20,031) (13,904)Sale and redemption of non-trading securities 19,782 13,117 Purchase of premises and equipment (45) (55)Sale of premises and equipment 22 18

Net cash outflow from investing activities (272) (824)

FINANCING ACTIVITIES

Issue of certificates of deposit- net 333 2 Issue of term notes, bonds and other term financing 261 2,676 Repayment of term notes, bonds and other term financing (649) (2,382)Dividend paid - (66)

Net cash (outflow) inflow from financing activities (55) 230

(Decrease) increase in liquid funds (10) 163 Effect of exchange rate changes on liquid funds 54 40 Liquid funds at beginning of the year * 665 462

Liquid funds at end of the year * 709 665

* Liquid funds comprise cash, nostro balances and balances with central banks.



Consolidated Statement of changes in equityYear ended 31 December 2003


Extra-ordinary Cumulative

Share Treasury Statutory General financial Capital Share Retained changes in capital stock reserve reserve reserve reserve premium2 earnings3 fair values Total

Balance at the end of the year 2001 1,000 (74) 193 140 10 10 71 524 (2) 1,872Restatement in accordance with

revised IAS 39 - - - - - - - (372) (4) (376)Dividend - - - - - - - (66) - (66)Net loss for the year – 2002 (restated) - - - - - - - (41) - (41)Transfer from retained earnings - - - - - (1) - 1 - -Foreign exchange translation

adjustments - - - - - - - 16 - 16Cumulative changes in fair values - - - - - - - - (34) (34)

Balance at the end of the year 2002 (as restated) 1,000 (74) 193 140 10 9 71 62 (40) 1,371

Net profit for the year – 2003 - - - - - - - 120 - 120 Transfer from retained earnings - - 12 - - - - (12) - -Foreign exchange translation adjustments - - - - - - - 41 - 41Cumulative changes in fair values - - - - - - - - 53 53

Balance at the end of the year 2003 1,000 (74) 205 140 10 9 71 211 13 1,585

1. A dividend of US$0.70 per share (2002: Nil) has been proposed for approval at the Annual Ordinary General Meeting.2. These reserves are not distributable.3. Retained earnings include a positive balance of US$ 9 million (2002: negative balance of US$ 31 million) representing net

unrealised gains/(losses) on translation of investments in foreign subsidiaries into US dollars.4. Note 9 contains further details of equity.



notes to the Consolidated Financial statements31 December 2003

1 • INCORPORATION AND ACTIVITIES

The Parent Bank, Arab Banking Corporation (B.S.C.), [the Bank] incorporated in the Kingdom of Bahrain by an Amiri decree, operatesunder an offshore banking licence issued by the Bahrain Monetary Agency.

During 2003, the Bank entered into agreements to sell its entire stakes in International Bank of Asia Limited, Hong Kong to Fubon Financial Holding Co., Ltd and in Banco Alantico S.A. Group companies, Spain to Banco de Sabadell S.A. Please refer to Note 12for further details.

2 • SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements of Arab Banking Corporation (B.S.C.) and its subsidiaries [the Group] are prepared in accordancewith the Bahrain Commercial Companies Law and the Bahrain Monetary Agency Law and in conformity with the Standards issued bythe International Accounting Standards Board (IASB), interpretations issued by the International Financial Reporting InterpretationCommittee and prevailing practices of the banking industry. The following is a summary of the significant accounting policies:

Accounting conventionThese consolidated financial statements are prepared under the historical cost convention, as modified by the measurement at fair valueof derivatives, trading and available for sale financial assets and financial assets carried at fair value through the statement of income. Inaddition, as more fully discussed below, assets and liabilities that are hedged are carried at fair value to the extent of the risk being hedged.

The accounting policies, with the exception of the early adoption of the revised versions of International Accounting Standard (IAS) 32, Financial Instruments: Disclosure and Presentation and IAS 39, Financial Instruments: Recognition and Measurement, are consistent with those used in the previous year.

Early adoption of IAS 32 and IAS 39The Group has early adopted the revised versions of IAS 32 and IAS 39 which would have become mandatory for the year ending 31 December 2005. The main changes are summarised as follows:

Loans and advancesLoans and advances originated by the Group by providing money directly to the borrower or to a sub-participation agent at drawdowndates, were previously classified as “originated by the Group” and stated at amortised cost, adjusted for effective fair value hedges,less provision for impairment. In accordance with the revised IAS 39, loans and advances that are quoted in an active market have beenreclassified with effect from 1 January 2002, as either available for sale loans or as loans and advances carried at fair value through state-ment of income, as appropriate. The impact of such reclassifications was to adjust the carrying value of such loans now classified as:

(a) Available for sale loans by US$ nil, and (US$32) million at 1 January 2002 and 31 December 2002 respectively with corresponding adjustments in cumulative changes in fair value at these dates; and

(b) Loans and advances carried at fair value through statement of income by (US$376) million and (US$366) million at 1 January 2002 and 31 December 2002 respectively.

The impact of these reclassifications was to reduce the retained earnings at 1 January 2002 by US$376 million and decrease the netloss for the year 2002 by US$10 million.

Available for sale equity securitiesIn the case of available for sale equity securities, reversals of impairment previously recognised in the statement of income is no longerreversed through the statement of income but as increases in cumulative changes in fair value directly in equity. There was no impact onthe income for the year 2002 as there were no such reversals.

Derecognition of financial assetsWith effect from 1 January 2002, a financial asset is derecognised either when the Group has transferred substantially all the risks andrewards of ownership or when it no longer has control over the asset. There was no financial impact due to this change for the years 2002.

ConsolidationThese consolidated financial statements include the financial statements of the Parent Bank and its subsidiaries after adjustment for minorityinterests and elimination of inter-company transactions and balances. Goodwill arising on consolidation is amortised through the statementof income over the expected period of benefit (5 to 20 years) on a straight-line basis, except for any impairment loss which is recognised asand when impairment is determined to have occurred.

Liquid fundsLiquid funds comprise cash, nostro balances and balances with central banks.

Placements with banks and other financial institutionsPlacements with banks and other financial institutions 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 infair value being hedged. Resultant changes are recognised in the consolidated statement of income.



Investments in associatesInvestments in associates are accounted for by the equity method. Associates are enterprises in which the bank holds 20% to 50%of the voting power or over which it exercises significant influence.

Trading securitiesTrading securities are initially recorded at cost and subsequently remeasured at fair value with any gains and losses arising from a change in fair value being included in the consolidated statement of income in the period in which it arises. Interest earned ordividends received are included in interest income and other operating income respectively.

Non-trading securities These are classified as follows:• Held to maturity • Available for saleAll non-trading securities are initially recognised at cost, being the fair value of the consideration given including acquisition chargesassociated with the security.

Held to maturitySecurities which have fixed or determinable payments and which are intended to be held to maturity, are subsequently measuredat amortised cost, less provision for impairment in value.

Available for saleSecurities 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”. These are remeasured at fair value based on quoted marketprices, 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, collectedor 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 consolidated statement of income for the period. In relation to investments which are partof an effective hedging relationship any gain or loss arising from a change in fair value is recognised directly in the consolidatedstatement of income.

Fair valuesFor securities, derivatives and loans and advances traded in organised financial markets, fair value is determined by reference toquoted market prices. Bid prices are used for assets and offer prices are used for liabilities. In the case of units in mutual funds,unit trusts, or similar investment vehicles fair values are based on the last published bid price.

For unquoted securities fair value is determined by reference to recent transaction(s), the market value of similar securities,or based on the expected cash flows discounted at current rates applicable for items with similar terms and risk characteristics.

The fair value of forward exchange contracts is calculated by reference to forward exchange rates with similar maturities.The fair value of unquoted derivative instruments is determined either by discounted cash flows, internal pricing models or byreference to brokers’ quotes.

Use of estimatesThe preparation of the consolidated financial statements requires management to make estimates and assumptions that affect thereported amount of financial assets and liabilities at the date of the consolidated financial statements and the resultant provisionsand changes in fair value for the year. In particular, considerable judgment by management is required in the estimation of theamount and timing of future cash flows when determining the level of provisions required for non-performing credit facilities as well as for impairment provisions for unquoted securities. Such estimates are necessarily based on assumptions about severalfactors involving varying degrees of judgment and uncertainty and actual results may differ from management’s estimates resultingin future changes in such provisions.

Premises and equipmentPremises and equipment are stated at cost, less accumulated depreciation and provision for impairment in value, if any.

Freehold land is not depreciated. Depreciation on other premises and equipment is provided on a straight-line basis over theirestimated useful lives.

Revenue recognitionInterest income and loan fees which are considered an integral part of the effective yield of a loan, are recognised using the effective yield method. Other fee income and expense are recognised when earned or incurred.

Premiums and discounts on non trading securities and loans and advances (except loans and advances carried at fair valuethrough statement of income) are amortised using the effective interest method and taken to interest income.

OffsettingFinancial assets and financial liabilities are only offset and the net amount reported in the balance sheet when there is a legallyenforceable right to offset the recognised amounts and the bank intends to settle on a net basis.



2 • SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Loans and advancesLoans and advances quoted in an active market are classified as “held to maturity”, “available for sale” or “loans and advances carried atfair value through statement of income” depending on management’s intent.

Loans and advances that are not quoted in an active market are classified as “unquoted loans and advances”.Unquoted loans and advances and held to maturity loans and advances are stated at amortised cost, less provision for impairment.Loans and advances classified as available for sale are stated at fair value. 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 loan is sold, collectedor otherwise disposed of, or the loan is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in the consolidated statement of income for the period.

Loans and advances classified as loans and advances carried at fair value through statement of income upon initial recognition areremeasured at fair value with all changes in fair value being recorded in the consolidated statement of income.

In relation to unquoted loans and advances and available for sale loans which are part of an effective hedging relationship any gain orloss arising from a change in fair value is recognised directly in the consolidated statement of income. The carrying values of unquotedloans and advances which are being effectively hedged for changes in fair value are adjusted to the extent of the changes in fair valuebeing hedged.

Impairment and uncollectability of financial assetsAn assessment is made at each balance sheet date to determine whether there is objective evidence that a specific financial asset maybe impaired. If such evidence exists, the estimated recoverable amount of that asset is determined and any impairment loss is recognisedin the statement of income. The recoverable amount is based on the net present value of anticipated future cash flows, discounted atthe original interest rate.

In addition to provision for specific impaired loans and advances, a general provision is made for impairment against portfolios of loans and advances based on historical default rates.

In the case of available for sale equity securities, any improvements requiring reversals of impairment previously recognised in the consolidated statement of income is not reversed through the consolidated statement of income but recognised as an increase in cumulative changes in fair value directly in equity.

Foreign currenciesMonetary assets and liabilities in foreign currencies are translated into US dollars at the market rates of exchange prevailing at the balance sheet date. Any gains or losses are taken to the consolidated statement of income.

The assets and liabilities of foreign subsidiaries are translated at rates of exchange ruling at the balance sheet date. Income andexpense 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.

DepositsAll 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 changes being recognisedin the consolidated statement of income.

Taxation on foreign operationsThere is no tax on corporate income in the Kingdom of Bahrain. Taxation on foreign operations is provided for in accordance with thefiscal regulations applicable in each location. No provision is made for any liability that may arise in the event of distribution of the reservesof subsidiaries. A substantial portion of such reserves is required to be retained to meet local regulatory requirements.

ProvisionsProvisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event and the costs tosettle the obligation are both probable and able to be reliably measured.

Treasury stockTreasury stock is stated at cost adjusted for any gain or loss on subsequent sale. Treasury stock does not carry the right to dividends or to voting.

Employee pension and other end of service benefitsCosts relating to employee pension and other end of service benefits are accrued in accordance with actuarial and other valuations asrequired by regulations applicable in each location.

Trade and settlement date accountingAll “regular way” purchases and sales of financial assets are recognised on the trade date, i.e. the date that the bank commits to purchaseor sell the asset.




Fiduciary assetsAssets held in trust or in a fiduciary capacity are not treated as assets of the Group and, accordingly, are not included in the consolidated balance sheet.

Repurchase and resale agreementsAssets sold with a simultaneous commitment to repurchase at a specified future date (‘repos’) are not recognised. The counter-party liability for amounts received under these agreements is included in deposits from banks and other financial institutions ordeposits 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. Amountspaid 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 thereverse repo agreement.

DerivativesThe Group enters into derivative instruments including forwards, futures, forward rate agreements, swaps and options in the foreign exchange, interest rate and capital markets.These are stated at fair value. 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 otheroperating 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 variabil-ity 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.

Changes in the fair value of derivatives that are designated, and qualify, as cash flow hedges and that prove to be highly effectivein 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 income. Where the hedged trans-action results in the recognition of an asset or a liability the associated gain or loss that had been initially recognised in equity is 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 inequity 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 inequity is transferred to the consolidated statement of income.

• in the case of fair value hedges of interest-bearing financial instruments any adjustment to the carrying amount relating to the hedged risk is amortised in the consolidated statement of income over the remaining term to maturity.

Certain derivative transactions, while providing effective economic hedges under the Group’s asset and liability management andrisk management positions, do not qualify for hedge accounting under the specific rules in IAS 39 and are therefore accounted foras derivatives held for trading and the related fair value gains and losses reported in other operating income.

3 • NON-TRADING SECURITIES2003 2002

Held to maturity debt securities 34 49 Available for sale - debt securities 5,039 4,413

- equity securities 131 170

Balance at 31 December 5,204 4,632

The market value of held to maturity securities at the year-end amounted to US$36 million (2002: US$53 million).Available for sale portfolio includes US$538 million (2002: US$942 million) in unquoted securities. These are primarily shortterm government securities and are carried at fair value.




4 • LOANS AND ADVANCES

i) By industrial sector 2003 2002

Financial 2,378 2,312 Manufacturing 2,896 2,818 Construction 1,214 1,101 Trade 1,321 1,256 Consumer and other services 7,437 6,378 Government 1,089 1,416 Other 349 428

16,684 15,709

Loan loss provisions (763) (728)


ii) By classification 2003 2002Quoted loans and advances

Available for sale 461 352 Held to maturity 4 11 Carried at fair value through statement of income 627 487

Unquoted loans and advances 15,592 14,859

16,684 15,709

Loan loss provisions (763) (728)


The movements in loan loss provisions during the year were as follows:2003 2002

Interest Interest Provisions in suspense Provisions in suspense

At 1 January 728 276 632 253 Charge for the year 195 - 262 -Recoveries (62) (7) (58) (15)Suspended for the year - 39 - 53 Write-offs (110) (12) (121) (24)Foreign exchange translation and other adjustments 12 8 13 9

At 31 December 763 304 728 276

The gross carrying value of loans placed on a non-accrual basis amounted to US$748 million at the year end (2002: US$769 million).




5 • PROVISION FOR IMPAIRMENT (NET)

During the year the Group has made the following provisions for impairment (net):2003 2002

Loans and advances (note 4) 133 204 Goodwill 42 -

175 204

Due to the significant devaluation of the Egyptian Pound and the state of the Egyptian economy, the carrying amount of good-will of US$ 42 million which arose on the investment in ABC Egypt S.A.E. (a retail banking subsidiary) has been written off as a prudent measure.

6 • TAXATION ON FOREIGN OPERATIONS2003 2002

Consolidated balance sheet:Current tax liability 43 41 Deferred tax liability 26 38

69 79

Consolidated statement of income:Current tax on foreign operations 47 47 Deferred tax on foreign operations (17) (10)

30 37

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.

7 • OTHER LIABILITIES2003 2002

Short positions in securities 203 525 Securities purchased awaiting value - 275 Negative fair value of derivatives (note 14) 212 161 Accruals and other payables 756 595

1,171 1,556

Short positions in securities relate to short term government securities in a foreign subsidiary, of which US$193 million (2002:US$ 525 million) have maturities of less than six months and US$10 million (2002: US$ Nil) have maturities more than six months.




8 • TERM NOTES, BONDS AND OTHER TERM FINANCING

In the ordinary course of business, the Parent Bank and certain subsidiaries raise term financing through various capital markets at commercial rates.

Total obligations outstanding at 31 December 2003

Parent Bank Subsidiaries TotalAggregate maturities:2004 - 292 292 2005 560 165 725 2006 100 92 192 2007 300 43 343 2008 - 222 222 2010 - 38 38 2011 - 38 38

960 890 1,850

Interest basis:Fixed - 213 213 Floating 960 677 1,637

960 890 1,850

Total obligations outstanding at 31 December 2002 1,169 1,005 2,174

9 • EQUITY

a) Share capital 2003 2002

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 stockTreasury stock represents the purchase by the Bank of its own shares. At the end of the year the Bank held 5,867,736 shares (2002: 5,867,736 shares).

c) Statutory reserveAs required by the Articles of Association of the Bank and the Bahrain Commercial Companies Law, 10% of the net profit forthe 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 but can be utilised as security for purpose of a distribution in such circumstances as stipulated in the Bahrain Commercial Companies Law and following the approval of the Bahrain Monetary Agency.

d) General reserveThe general reserve underlines the shareholders’ commitment to enhance the strong equity base of the Bank.

e) Extraordinary financial reserveThe extraordinary financial reserve has been established to cover any possible future diminution in the carrying value of assets and isused at the discretion of the Board of Directors.

f) Capital reserveThe capital reserve arises on the consolidation of subsidiaries acquired at a discount.




10 • OTHER OPERATING INCOME2003 2002

Fee and commission income 218 212 Fee and commission expense (17) (14)Credit card income – net 20 21 Gains less losses on non-trading securities 42 12 Gains less losses on dealing in foreign currencies 39 50 Gains less losses on dealing in derivatives 18 5 Gains less losses on trading securities 8 (26)Gains less losses on loans carried at fair value through statement of income 140 (35)Other – net (7) 32

461 257

11 • STAFF

The number of staff employed by the Group as of 31 December 2003 was 5,266 (2002: 5,195).

12 • INVESTMENTS IN SUBSIDIARIES AND ASSOCIATES

a) The principal subsidiaries, all of which have 31 December as their year end, are as follows:Interest of Arab

Banking Corporation Country of incorporation (B.S.C.)

(%)Banco Atlantico S.A. Group companies Spain 67

Banco Atlantico (Panama) S.A. Panama 67Banco Atlantico (Monaco) S.A.M. Monaco 67

International Bank of Asia Ltd. Hong Kong 55ABC International Bank plc United Kingdom 100Arab Banking Corporation – Daus & Co. GmbH Germany 100ABC Islamic Bank (E.C.) Bahrain 100Arab Banking Corporation (Jordan) Jordan 87Banco ABC Brasil S.A. Brazil 84Arab Banking Corporation – Algeria Algeria 70Arab Banking Corporation – Egypt (S.A.E) Egypt 96Arab Banking Corporation – Tunisie, S.A. Tunisia 100

The principal associate is Arab Financial Services (E.C.), incorporated in Bahrain, with a 36% ownership.

b) Agreement for the sale of subsidiaries(i) International Bank of Asia Limited, Hong Kong

On 8 September 2003, the bank entered into an agreement with Fubon Financial Holding Co., Ltd to sell its entire stake inInternational Bank of Asia Limited, Hong Kong (a retail banking subisidary).

The sale is subject to approvals from regulatory authorities in Hong Kong and Taiwan, upon receipt of which the sale will beaccounted for in the consolidated financial statements. These procedures are expected to be completed in the first half of 2004.

The selling price of International Bank of Asia Limited is US$305 million and the related expenses are estimated to be approximately US$20 million.

The total assets and liabilities of International Bank of Asia Limited included in the consolidated balance sheet as at 31 December 2003 of the Group are US$4,868 million and US$4,379 million respectively.




12 • INVESTMENTS IN SUBSIDIARIES AND ASSOCIATES (CONTINUED)

The amounts of revenue, expenses, tax and profit attributable to International Bank of Asia Limited was as follows:2003 2002

Total operating income 107 132 Provision for losses on loans and advances, net of recoveries (24) (45)Total operating expenses (63) (58)

Profit before taxation 20 29 Taxation (2) -

Profit after taxation 18 29

The amounts of net cash flows attributable to the activities of International Bank of Asia Limited were as follows:2003 2002

Net cash inflow from operating activities 639 318 Net cash outflow from investing activities (727) (265)Net cash inflow (outflow) from financing activities 108 (41)

Increase in liquid funds 20 12 Liquid funds at beginning of the year 31 19

Liquid funds at end of the year 51 31

(ii) Banco Atlantico S.A. Group of companies, Spain

On 21 December 2003, the bank entered into an agreement with Banco de Sabadell S.A. to sell its entire stake in Banco Atlantico S.A.Group of companies, Spain (a retail banking subisidary).

The sale is subject to approvals from regulatory authorities in Spain, upon receipt of which the sale will be accounted for in the consolidated financial statements. These procedures are expected to be completed in the first half of 2004.

The selling price of Banco Atlantico S.A. Group of companies is US$ 1,289 million and the related expenses (including tax expenses) areestimated to be approximately US$ 328 million.

The total assets and liabilities of Banco Atlantico S.A. Group of companies included in the consolidated balance sheet as at 31 December2003 of the Group are US$ 12,186 million and US$ 11,434 million respectively.

The amounts of revenue, expenses, tax and profit attributable to Banco Atlantico S.A. Group of companies was as follows:

2003 2002

Total operating income 372 330 Provision for losses on loans and advances, net of recoveries (35) (32)Total operating expenses (267) (236)

Profit before taxation 70 62 Taxation (15) (19)

Profit after taxation 55 43

The amounts of net cash flows attributable to the activities of Banco Atlantico S.A. Group of companies were as follows:2003 2002

Net cash inflow from operating activities 572 149 Net cash outflow from investing activities (614) (217)Net cash inflow from financing activities 69 76

Increase in liquid funds 27 8

Effect of exchange rate changes on liquid funds 55 39 Liquid funds at beginning of the year 255 208

Liquid funds at end of the year 337 255




13 • SIGNIFICANT NET FOREIGN CURRENCY EXPOSURES

Significant net foreign currency exposures, arising mainly from investments in subsidiaries, are as follows:2003 2002

(in million) (in million)

Long (Short) Currency US$ Currency US$

Brazilian real (78) (27) (46) (13)Egyptian pound 354 57 415 90 Euro 66 84 65 68 Hong Kong dollar 2,471 318 2,038 261 Jordanian dinar 33 47 23 32 Pound sterling 20 35 20 32 Saudi riyal (616) (164) (399) (106)Algerian dinar 1,797 25 1,882 24 Chinese yuan (469) (57) - -

The Hong Kong dollar exposure arising from net investment in a foreign subsidiary is covered by currency options amounting toUS$ 266 million (2002: US$ 259 million) to minimise the risk of loss from adverse movements in the foreign currency rates.

14 • DERIVATIVES

In the ordinary course of business the Group enters into various types of transactions that involve derivative financial instruments.The table below shows the positive and negative fair values of derivative financial instruments.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.

2003 2002Positive Negative Notional Positive Negative Notional

fair value fair value amount fair value fair value amountDerivatives held for trading:

Interest rate and currency swaps 60 56 3,713 83 74 4,761 Forward foreign exchange contracts 12 26 4,321 15 24 6,744Options 97 98 7,311 18 19 4,121 Futures 1 - 244 - - 251 Forward rate agreements 1 1 137 - - 215 Equity contracts - - 370 - - 432

171 181 16,096 116 117 16,524

Derivatives held as hedgesInterest rate and currency swaps 2 29 569 5 44 1,045Forward foreign exchange contracts - - 483 - - 434 Options - 2 532 - - 518 Futures 1 - 187 1 - 245

3 31 1,771 6 44 2,242

174 212 17,867 122 161 18,766

Risk weighted equivalents (credit and market risk) 476 633




14 • DERIVATIVES (CONTINUED)

Derivatives held as hedges as of 31 December 2003 include:a) cash flow hedges with a notional amount of US$7 million (2002: US$6 million), comprising of interest rate swaps of US$7 million (2002: US$6 million), the fair value of which is immaterial; and

b) hedge of net investment in a foreign subsidiary of US$264 million (2002: US$259 million) through foreign currency options,which has a negative fair value of US$2 million (2002: Nil).

Derivative product typesForwards 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 andinterest rate futures are transacted in standardised amounts on regulated exchanges and are subject to daily cash margin requirements.Forward rate agreements are effectively tailor-made interest rate futures which fix a forward rate of interest on a notional loan, for anagreed 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 specificnotional amount. For interest rate swaps, counterparties generally exchange fixed and floating rate interest payments based on anotional value in a single currency. For cross-currency swaps, fixed interest payments and notional amounts are exchanged in differentcurrencies. 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 riskCredit 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.

Derivatives held or issued for trading purposesMost 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 purposesThe Group has adopted a comprehensive system for the measurement and management of risk. Part of the risk management processinvolves 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 asdetermined 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 Boardhas established levels of interest rate risk by setting limits on the interest rate gaps for stipulated periods. Interest rate gaps are reviewedon 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 exposure to currency and interest rate risks.This is achieved by hedging specific financial instrument, forecasted transactions as well as strategic hedgingagainst 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 exposure. 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 addi-tion, the Group uses interest rate swaps and interest rate futures to hedge against the interest rate risk arising from specifically identifiedfixed 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 formallydocumented 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 andadvances, placements, deposits and available for sale debt securities.




15 • COMMITMENTS AND CONTINGENT LIABILITIES

Commitments and contingent liabilities include commitments to extend credit, standby letters of credit, acceptances and guaran-tees, 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 bankingindustry were as follows:

2003 2002

Short-term self-liquidating trade and transaction-related contingent items 5,009 3,710 Direct credit substitutes, guarantees and acceptances 502 1,713 Forward asset purchase commitments 327 32 Other commitments (including undrawn loans) 5,423 5,070

11,261 10,525

Risk weighted equivalents 2,771 3,389

16 • 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 isas follows:

Within 1 1 - 3 3 - 6 6 - 12 1 - 5 5-10 10-20 Over 20

At 31 December 2003 month months months months years years years years Undated Total

AssetsLiquid funds 709 - - - - - - - - 709Trading securities - - - - - - - 1 85 86Non-trading securities 1,933 362 73 94 1,821 645 166 64 46 5,204 Placements with banks and

other financial institutions 5,175 881 125 445 15 - - 10 - 6,651 Loans and advances 2,994 1,359 1,292 1,087 3,290 4,675 855 369 - 15,921 Other - - - - - - - - 1,497 1,497

Total assets 10,811 2,602 1,490 1,626 5,126 5,320 1,021 444 1,628 30,068

Liabilities, minority interests and equity

Deposits from customers 11,888 1,084 514 275 636 37 - - - 14,434 Deposits from banks and

other financial institutions 6,566 2,532 367 267 167 33 - - - 9,932 Certificates of deposit 146 192 61 21 3 - - - - 423 Term notes, bonds and other

term financing - 84 103 105 1,482 76 - - - 1,850 Minority interests and other - - 193 1 9 - - - 1,641 1,844 Equity - - - - - - - - 1,585 1,585 Total liabilities, minority

interests and equity 18,600 3,892 1,238 669 2,297 146 - - 3,226 30,068

Off balance sheet items Commitments and contingent

liabilities 2,546 735 896 3,047 3,300 408 230 62 37 11,261 Foreign exchange contracts 4,165 3,074 3,267 1,872 52 8 15 - - 12,453 Interest rate contracts 271 200 504 1,186 1,330 535 673 345 - 5,044 Equity and other contracts 63 19 1 57 227 3 - - - 370

Total 7,045 4,028 4,668 6,162 4,909 954 918 407 37 29,128




16 • MATURITIES OF ASSETS, LIABILITIES AND OFF BALANCE SHEET ITEMS (CONTINUED)

The maturity analysis of assets, liabilities and off balance sheet items based on remaining period to the contractual maturity date is as follows:

Within 1 1 - 3 3 - 6 6 - 12 1 - 5 5-10 10 - 20 Over 20 At 31 December 2002 month months months months years years years years Undated Total

AssetsLiquid funds 665 - - - - - - - - 665 Trading securities 234 1 - - 59 - - 1 78 373 Non-trading securities 1,334 303 361 165 1,228 1,025 10 36 170 4,632 Placements with banks and

other financial institutions 4,743 1,315 508 147 79 3 - 7 - 6,802 Loans and advances 2,861 1,172 1,434 944 3,862 3,474 1,003 231 - 14,981 Other - - - - - - - - 1,462 1,462

Total assets 9,837 2,791 2,303 1,256 5,228 4,502 1,013 275 1,710 28,915

Liabilities, minority interestsand equity

Deposits from customers 10,687 1,499 450 245 573 28 - 14 - 13,496 Deposits from banks and

other financial institutions 5,355 2,757 721 501 167 77 - - - 9,578 Certificates of deposit 48 29 - 2 6 - - - - 85 Term notes, bonds and other

term financing 182 83 283 58 1,442 126 - - - 2,174 Minority interests and other 711 - 89 - - - - - 1,411 2,211 Equity - - - - - - - - 1,371 1,371

Total liabilities, minorityinterests and equity 16,983 4,368 1,543 806 2,188 231 - 14 2,782 28,915

Off balance sheet itemsCommitments and contingent liabilities 2,075 833 798 3,044 3,381 248 114 32 - 10,525 Foreign exchange contracts 3,152 2,374 2,647 3,303 15 15 - - - 11,506 Interest rate contracts 791 1,017 732 1,406 1,971 559 352 - - 6,828 Equity and other contracts 63 - - 65 304 - - - - 432

Total 6,081 4,224 4,177 7,818 5,671 822 466 32 - 29,291




17 • 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 appropri-ate. 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 riskbased on the earlier of contractual maturity and the next interest repricing date is as follows:

Non -Within 1 1 - 3 3 - 6 6 - 12 1 - 5 Over 5 interest

At 31 December 2003 month months months months years years bearing Total

US dollarAssets 4,425 2,152 1,401 309 740 342 616 9,985Liabilities and minority interests (6,372) (2,165) (345) (180) (181) (22) (671) (9,936)Equity - - - - - - (1,585) (1,585)Off balance sheet items (316) (97) (283) (10) 170 (49) - (585)

(2,263) (110) 773 119 729 271 (1,640) (2,121)

EuroAssets 3,971 2,729 1,611 1,820 1,096 142 660 12,029Liabilities and minority interests (6,284) (1,052) (276) (194) (824) (7) (2,787) (11,424)Off balance sheet items 164 121 (35) (32) 88 84 - 390

(2,149) 1,798 1,300 1,594 360 219 (2,127) 995

Hong Kong dollarsAssets 1,969 253 51 70 958 44 335 3,680 Liabilities and minority interests (2,182) (532) (49) (15) (201) (7) (321) (3,307)Off balance sheet items - - - (35) - - - (35)

(213) (279) 2 20 757 37 14 338

Other currenciesAssets 2,107 712 343 626 212 80 294 4,374 Liabilities and minority interests (2,363) (526) (286) (166) (58) (73) (344) (3,816)Off balance sheet items 25 25 104 45 12 19 - 230

(231) 211 161 505 166 26 (50) 788

TotalAssets 12,472 5,846 3,406 2,825 3,006 608 1,905 30,068 Liabilities, minority interests and equity (17,201) (4,275) (956) (555) (1,264) (109) (5,708) (30,068)Off balance sheet items (127) 49 (214) (32) 270 54 - -

(4,856) 1,620 2,236 2,238 2,012 553 (3,803) -




17 • INTEREST RATE EXPOSURE (CONTINUED)

Non -Within 1 1 - 3 3 - 6 6 - 12 1 - 5 Over 5 interest

At 31 December 2002 month months months months years years bearing Total

US dollarsAssets 4,769 2,977 1,832 477 641 188 172 11,056 Liabilities and minority interests (5,912) (3,292) (531) (423) (103) - (935) (11,196)Equity - - - - - - (1,371) (1,371)Off balance sheet items 687 (2) (141) 95 248 31 - 918

(456) (317) 1,160 149 786 219 (2,134) (593)

EuroAssets 3,146 2,555 1,395 1,825 414 135 626 10,096 Liabilities and minority interests (4,790) (1,258) (235) (338) (620) (3) (2,388) (9,632)Off balance sheet items (513) (15) (25) 26 40 80 - (407)

(2,157) 1,282 1,135 1,513 (166) 212 (1,762) 57

Hong Kong dollarsAssets 2,485 207 51 104 168 45 293 3,353 Liabilities and minority interests (1,949) (509) (147) (54) (71) - (264) (2,994)Off balance sheet items (95) - - - - - - (95)

441 (302) (96) 50 97 45 29 264

Other currenciesAssets 2,003 805 399 286 226 35 656 4,410 Liabilities and minority interests (2,219) (670) (264) (111) (134) (66) (258) (3,722)Off balance sheet items (446) 2 19 (36) 9 36 - (416)

(662) 137 154 139 101 5 398 272

TotalAssets 12,403 6,544 3,677 2,692 1,449 403 1,747 28,915 Liabilities, minority interests and equity (14,870) (5,729) (1,177) (926) (928) (69) (5,216) (28,915)Off balance sheet items (367) (15) (147) 85 297 147 - -

(2,834) 800 2,353 1,851 818 481 (3,469) -

The effective interest rates of assets, liabilities and off balance sheet instruments in major currencies are as follows:

Within 1 1 - 3 3 - 6 6 - 12 1 - 5 Over 5 month months months months years years

At 31 December 2003 % % % % % %

US dollarsAssets 1.6 1.7 2.1 3.6 2.7 6.2Liabilities 1.1 1.2 2.5 2.5 3.4 4.5Off balance sheet items 1.3 1.9 1.2 1.4 5.0 5.9

EurosAssets 2.9 3.5 3.7 3.5 3.5 5.2Liabilities 1.7 2.1 1.6 2.5 3.2 5.8Off balance sheet items 2.2 2.9 3.1 3.3 4.5 6.1

Hong Kong dollarsAssets 3.3 1.6 6.2 6.3 3.1 4.5 Liabilities 0.4 0.6 0.9 1.2 3.5 0.7 Off balance sheet items - - - 1.0 - -




Within 1 1 - 3 3 - 6 6 - 12 1 - 5 Over 5 month months months months years years

At 31 December 2002 % % % % % %

US dollarsAssets 1.9 2.1 2.6 7.2 3.9 6.7 Liabilities 1.4 1.8 1.6 5.9 3.1 - Off balance sheet items 2.4 2.4 1.4 1.8 4.9 5.1

EurosAssets 4.1 4.1 4.1 4.4 4.8 4.8 Liabilities 2.5 3.4 3.1 2.5 2.6 4.6 Off balance sheet items 3.2 3.0 3.3 3.4 4.9 5.4

Hong Kong dollarsAssets 3.6 2.8 7.5 5.6 5.2 4.9 Liabilities 1.2 1.5 1.7 2.4 4.0 - Off balance sheet items 1.2 - - - - -

18 • 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 monitoredin accordance with the credit policies which clearly define delegated lending authorities, policies and procedures.The managementof 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.

19 • GEOGRAPHICAL DISTRIBUTION OF ASSETS, LIABILITIES AND OFF BALANCE SHEET ITEMS

2003 2002

Liabilities Off balance Liabilities Off balance

Assets and equity sheet items Assets and equity sheet items

Western Europe 13,888 11,398 16,048 12,677 10,646 15,082 Arab World 5,028 10,184 3,583 4,890 10,736 6,223 Asia 4,949 5,125 2,676 4,578 4,180 1,693 North America 3,711 348 5,381 3,950 502 5,239 Latin America 1,792 2,364 690 2,118 2,082 927 Other 700 649 750 702 769 127

30,068 30,068 29,128 28,915 28,915 29,291




20 • SEGMENTAL INFORMATION

For management purposes, the Group is organised into two major business segments, namely, wholesale and retail.These segments arethe 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 information2003 2002

Wholesale Retail Total Wholesale Retail Total

Net interest income 92 345 437 121 343 464 Other operating income 171 290 461 23 234 257 Operating expenses (154) (390) (544) (138) (353) (491)Provision for impairment (net) (42) (133) (175) (91) (113) (204)

Profit (loss) before taxation and minority interests 67 112 179 (85) 111 26

Total assets employed 11,170 18,991 30,161 12,557 16,515 29,072

Intra-group items (93) (157)

30,068 28,915

Segment liabilities,minority interests and equity 12,207 17,875 30,082 13,704 15,347 29,051

Intra-group items (14) (136)

30,068 28,915

Secondary segment information2003 2002

Arab Europe & Arab Europe & world Asia Americas Total world Asia Americas Total

Segment profit (loss) before taxation and minority interests 64 16 99 179 (31) 37 20 26

Segment assets 8,630 4,831 16,607 30,068 9,619 4,335 14,961 28,915

21 • REPURCHASE AND RESALE AGREEMENTS

Proceeds from assets sold under repurchase agreements at the year-end amounted to US$ 3,791 million (2002: US$ 3,066 million) ofwhich US$ 2,859 million (2002: US$ 1,688 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$ 1,491 million (2002: US$ 1,402 million)and relate to customer product and treasury activities in retail banking subsidiaries.




22 • 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:

2003 2002

Loans and advances 6 4 Deposits from customers 399 525 Irrevocable commitments and contingencies - 2

The expenses in respect of related parties includedin the consolidated financial statements are as follows:

Interest expense 24 22

23 • FIDUCIARY ASSETS

Funds under management at the year-end amounted to US$ 5,564 million (2002: US$ 3,216 million).These assets are held in afiduciary capacity and are not included in the consolidated balance sheet.

24 • 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 goingconcern 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 financial instruments that are not carried at fair value inthe consolidated financial statements.

31 December 2003 31 December 2002

Carrying value Fair value Difference Carrying value Fair value DifferenceFinancial assetsPlacements with banks and other financial institutions 6,651 6,651 - 6,802 6,801 (1)Loans and advances - held to maturity 4 4 - 11 11 -Non-trading securities 5,204 5,206 2 4,632 4,636 4

2 3 Financial liabilitiesDeposits 24,366 24,312 54 23,074 23,058 16

Net difference between carrying value and fair value 56 19

25 • ASSETS PLEDGED AS SECURITY

At the balance sheet date, in addition to the items mentioned in note 21, assets amounting to US$ 175 million (2002: US$ 112million) have been pledged as security for borrowings and other banking operations.

26 • BASIC EARNINGS PER SHARE

“Basic” earnings per share are calculated by dividing the net profit (loss) for the year by the weighted average number of sharesduring 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.

2003 2002

Net profit (loss) for the year 120 (41)Weighted average number of shares outstanding during the year 94,132,264 94,132,264 Basic earnings per share (US$) 1.27 (0.44)




27 • CAPITAL ADEQUACY

The risk asset ratio calculations, in accordance with the capital adequacy guidelines established for the global banking industry, are as follows:

CAPITAL BASE 2003 2002

Tier 1 Capital 2,162 2,182 Tier 2 Capital 499 313

Total capital base 2,661 2,495

RISK WEIGHTED EXPOSURESBalance Risk weighted equivalents

2003 2002 2003 2002Assets

Cash and claims on, guaranteed by or collateralised bysecurities of central governments and central banks of OECD countries 8,192 6,153 - -

Claims on banks and public sector companies incorporated in OECD countries and short term claims on banks incorporated in non-OECD countries 7,008 8,131 1,402 1,626

Claims secured by mortgage of residential property 3,368 2,804 1,684 1,402

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 11,570 11,554 11,570 11,554

Off balance sheet items

Commitments and contingent liabilities (note 15) 11,261 10,525 2,771 3,389Derivatives (note 14) 17,867 18,766 25 30

Credit risk weighted assets and off balance sheet items 17,452 18,001

Market risk weighted assets and off balance sheet items * 599 1,014

Total risk weighted assets 18,051 19,015

Risk asset ratio 14.7% 13.1%

* Market risk capital requirements are based on the standardised measurement methodology.




28 • PARENT BANK

The balance sheet of the Parent Bank, Arab Banking Corporation (B.S.C.) is presented below:

2003 2002Restated

ASSETS

Liquid funds 87 105 Trading securities 45 68 Non-trading securities 2,070 2,838 Placements with banks and other financial institutions 2,507 2,405 Loans and advances 3,553 4,402 Interest receivable 42 55 Investments in subsidiaries 1,446 1,390 Investments in associates 21 20 Other assets 298 260 Premises and equipment 25 29

TOTAL ASSETS 10,094 11,572

LIABILITIES

Deposits from customers 1,592 1,941 Deposits from banks and other financial institutions 5,614 6,525 Interest payable 32 42 Other liabilities 311 524

TERM NOTES, BONDS AND OTHER TERM FINANCING 960 1,169

8,509 10,201 EQUITY

Share capital 1,000 1,000 Treasury stock (74) (74)Reserves and retained earnings 659 445

1,585 1,371

TOTAL LIABILITIES AND EQUITY 10,094 11,572

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 400 198 Loans and advances - 200 Deposits from banks and other financial institutions 132 175

29 • COMPARATIVE FIGURES

The corresponding figures for the previous year have been restated/reclassified on early adoption of the revised versions of IAS32 and IAS 39 and in order to conform with the presentation for the current year.The impact on the consolidated statementsof income and changes in equity on adoption of the revised versions of IAS 32 and IAS 39 are disclosed in note 2 to the consolidated financial statements.


ABC directory

Head OfficeABC Tower, Diplomatic Area,PO Box 5698, Manama, Kingdom of BahrainTel: (973) 17543000 (General),

(973) 17533144 (Money Market)(973) 17533155 (Options)(973) 17533044 (Foreign Exchange)

Fax: (973) 17533163/17533062Tlx: 9432 ABCBAH BN (General),

9384 ABC DEP (Foreign Exchange)Reuters Dealing Code:

ABMM-ABCZ (Monitor), ABCD (FX),ABCB (Options),ABDB (Money Market)

Internet: http://www.arabbanking.comE-mail: [email protected]

Ghazi Abdul-JawadPresident & Chief Executive

Abdulmagid BreishDeputy Chief Executive

Internal AuditTel: (973) 17543387

Administration Group

Chief Administrative OfficerAsaf MohyuddinSenior Vice PresidentTel: (973) 17543274

Corporate CommunicationsNawaf BeyhumFirst Vice PresidentTel: (973) 17543307

Global Information TechnologySael Al WaarySenior Vice PresidentTel: (973) 17543707

Human Resources & AdministrationDr Lulwa MutlaqSenior Vice PresidentTel: (973) 17543308

Legal & ComplianceDr Khaled KawanLegal CounselTel: (973) 17543367

OperationsAlexander RichardsonSenior Vice PresidentTel: (973) 17543714

Planning & Financial ControlDilip KumarFirst Vice PresidentTel: (973) 17543320

Premises & EngineeringNawaf BeyhumFirst Vice PresidentTel: (973) 17543307

Credit & Risk Group

Chief Credit & Risk OfficerRichard CumberlandSenior Vice PresidentTel: (973) 17543280

Head Office Credit DepartmentAbhijit ChoudhuryFirst Vice PresidentTel: (973) 17543288

Remedial Loans UnitStephen JenkinsFirst Vice PresidentTel: (973) 17543713

Risk Management DepartmentTalha KarimVice PresidentTel: (973) 17543446

Economics DepartmentMargaret R PurcellVice PresidentTel: (973) 17543776

Treasury Group

Group TreasurerEssam El WakilSenior Vice PresidentTel: (973) 17543375 / 17532933

Assistant Treasurer, Group TreasuryAli Mirza First Vice President & Assistant TreasurerTel: (973) 17543241

Treasury & Marketable Securities FX, Middle East Currencies & Sales HeadKareem DashtiFirst Vice President & Assistant TreasurerTel: (973) 17533044

Derivatives, MM, Islamic, New Products & Treasury Support HeadAmr GadallahFirst Vice President & Assistant TreasurerTel: (973) 17533155

Equity & Fixed Income, Proprietary Investment & TradingArif MumtazFirst Vice President & Head of Proprietary TradingTel: (973) 17533169

Portfolio ManagementMahmoud ZewamFirst Vice President & Head of Portfolio ManagementTel: (973) 17533169

Banking Group

Chief Banking OfficerAbdulmagid BreishTel: (973) 17543205/6

Arab World DivisionDivision HeadNour NahawiSenior Vice PresidentTel: (973) 17543272Fax: (973) 17533832

Co-ordination UnitQutub YousafaliFirst Vice PresidentTel: (973) 17543273Fax: (973) 17532248

Commercial Banking

Corporate & Global Structured FinanceMark YassinFirst Vice President & HeadTel: (973) 17543292

Corporate BankingMohammed El CalamawyFirst Vice President & HeadTel: (973) 17543260

Trade FinanceAmr El-AshmawyFirst Vice President & Head, GCC Trade FinanceTel: (973) 17543516

Government & Financial InstitutionsRashed Al KhalifaFirst Vice President & HeadTel: (973) 17543314

SyndicationJohn McWall Vice President & HeadTel: (973) 17543967

Islamic Financial Services

Duncan SmithSenior Vice President, Group HeadTel: (973) 17543347


ABC directory

SUBSIDIARIES

ABC Islamic Bank (E.C.)ABC Tower, Diplomatic AreaPO Box 2808, Manama, Kingdom of BahrainTel: (973) 17543000Fax: (973) 17536379/533163Tlx: 9432/9433 ABC BAH BNSaleh M.Al YousefChairman

ABC Securities W.L.L.ABC Tower, Diplomatic AreaPO Box 5698, ManamaKingdom of BahrainTel: (973) 17535760Fax: (973) 17533012Tlx: 9432 ABCBAH BN

Abdul Hameed H. NaqiGeneral Manager

ABC TunisieABC Building, Rue du Lac d'Annecy,Les Berges du Lac,1053 Tunis,TunisiaTel: (216)(71) 861861;

(216)(71) 861110 (Treasury)Fax: (216)(71) 860921Tlx: 12505 ABCTU TNE-mail: [email protected] Dealing Reuters Code: ABCTSwift: ABCOTNTTAgeli Abdulsalam BreniChairman

Slim Chekili Acting General Manager

Arab Banking Corporation (Jordan)(15 Branches)PO Box 926691, Amman 11190, JordanTel: (962)(6) 5664183-5/5621801-7 (General)

(962)(6) 5692713/5692723 (Dealing Room) (962)(6) 5608302 (Foreign Department)(962)(6) 5623684 (Main Branch)

Fax: (962)(6) 5686291 (General)(962)(6) 5623685 (Main Branch)

Tlx: 22258/21114 ABC JO; 23022 ABCFX JOE-mail: [email protected] Abdul-JawadChairman

Dr Ziad FarizChief Executive Officer

Arab Banking Corporation - AlgeriaPO Box 36754 Avenue des Trois Freres Bouaddou Bir Mourad RaisAlgiers, AlgeriaTel: (213)(21) 541515/541534/541537/541586Fax: (213)(21) 541604/541122Tlx: 62509 / 62510 ABC DZE-mail:[email protected]: ABC O DZ ALAbdulmagid BreishChairman

Reidha SlimaneTalebGeneral Manager

Arab Banking Corporation - Egypt (S.A.E.) (ABC Bank, Egypt)1, El Saleh Ayoub St.Zamalek, Cairo, EgyptTel: (202) 7362684 (10 lines) /

(202) 76364254Fax: (202) 7363643 / 14Email: [email protected] Issa Mohamed Al SowaidiChairman

Tarek HelmyChief Executive Officer

AffiliateArab Financial Services Company (E.C.)PO Box 2152, Manama, Kingdom of BahrainTel: (973) 17290333Fax: (973) 17291323/290050Tlx: 7212 AFS BN

Ghazi Abdul-JawadChairman

Mahmood Al KoofiChief Executive OfficerFax: (973) 17291122

BRANCHES

Tunis (OBU) ABC BuildingRue du Lac d’Annecy, Les Berges du Lac,1053 Tunis,TunisiaTel: (216)(71) 861861;

(216)(71) 861110 (Treasury)Fax: (216)(71) 860921Tlx: 12505 ABCTU TNE-mail: [email protected] Dealing Reuters Code: ABCTSwift: ABCOTNTTSaddek O. El-KaberCountry Manager & General Manager

REPRESENTATIVE OFFICES

Abu Dhabi10th Floor, East Tower, Second Street,Abu Dhabi Mall PO Box 6689, Abu Dhabi, UAETel: (971)(2) 6447666Fax: (971)(2) 6444429E-mail: [email protected]

TehranNo. 114, 1st Floor (opposite 35th St.) Khaled Eslamboli AvenueTehran 15167, Islamic Republic of IranTel: (98)(21) 8798452/3Fax: (98)(21) 8774561Tlx: 216860 ABC IRE-mail: [email protected] Nasser YousefiChief Representative

Tripoli That Emad Administrative CentreTower 5, 16th FloorPO Box 3578,Tripoli, LibyaTel: (218)(21) 3350226/ 3350227/3350228Fax: (218)(21) 3350229E-mail: [email protected] AbouenChief Representative


ABC directory

International DivisionDivision HeadGeorge MortonSenior Vice PresidentTel: (973) 17543319Fax: (973) 17535639

BRANCHES

Grand Caymanc/o ABC New York Branch32nd Floor, 277 Park AvenueNew York, NY 10172-3299,USATel: (1)(212) 5834720Fax: (1)(212) 5830921Tlx: 661978/427531 ABCNY

Robert IvosevichFirst Vice President & General Manager

New York32nd Floor, 277 Park AvenueNew York, NY 10172-3299, USATel: (1)(212) 5834720Fax: (1)(212) 5830921Tlx: 661978/427531 ABCNY(General);

421911/661979 ABCFX (Dealing Room)Direct Dealing Reuters Code: ABCN

Robert IvosevichFirst Vice President & General ManagerTel: (1)(212) 5834863

Corporate BankingTarek SherlalaVice President / Senior Lending Officer Tel: (1)(212) 5834726Charles AzzaraVice President / Lending OfficerTel: (1)(212) 5834753

TreasuryDavid Siegel Vice President & TreasurerTel: (1)(212) 5834783 Thomas J. CahalaneAssistant General Manager, OperationsTel: (1)(212) 5834747Kenneth J CarrollAssistant General Manager and ControllerTel: (1)(212) 5834761 Barbara SandersonAssistant General Manager, CreditTel: (1)(212) 5834752

REPRESENTATIVE OFFICE

SingaporeArab Banking Corporation (B.S.C.)9 Raffles Place #10-01 Republic PlazaSingapore 048619 Tel: (65) 65359339 Fax: (65) 65326288 John P. MeadsChief Representative

SUBSIDIARIES

ABC (IT) Services Ltd.Arab Banking Corporation House1-5 Moorgate, London EC2R 6AB, UKTel: (44)(20) 77764050Fax: (44)(20) 76062708Tlx: 915687 ABC GE-mail: [email protected] Al WaaryDirector

ABC International Bank plc (Head Office)Arab Banking Corporation House1-5 Moorgate, London EC2R 6AB, UKTel: (44)(20) 7776 4000 Fax: (44)(20) 7606 9987Tlx: 893748 ABC GEN GFarhat EkdaraChairman

Michael DuvalChief Executive Officer

ABC International Bank plc (London Branch)Arab Banking Corporation House1-5 Moorgate, London EC2R 6AB, UKTel: (44)(20) 7776 4000 (General);

(44)(20) 7726 4091 (Dealing Room)Fax: (44)(20) 7606 9987 (General)

(44)(20) 7606 1710 (Dealing Room)Tlx: 893748 ABC GEN G (General);

892171 ABC FXL G (Dealing Room)Direct Dealing Reuters Code: ABCLMichael DuvalGeneral Manager

ABC International Bank plc (Paris Branch)4 rue Auber75009 Paris, FranceTel: (33)(1) 49525400Fax: (33)(1) 47207469Tlx: 648343 ABC F (General)

Alexander AshtonGeneral Manager

ABC International Bank plc (Frankfurt Branch)Niedenau 13-19,D-60325 Frankfurt am Main,PO Box 170218,60076 Frankfurt am Main, GermanyTel: (49)(69) 714030Fax: (49)(69) 71403240 (General);

(49)(69) 71403350 (Treasury)Tlx: 411 536 AIBF DDirect Dealing Reuters Code: ABDF (FX + MM)Swift: ABCADEFFJuergen BlumscheinGeneral Manager

ABC International Bank plc (Milan Branch)Via Turati 16/18 20121 Milan, ItalyTel: (39)(02) 863331 (General);

(39)(02) 861574 (Dealing Room)Fax: (39)(02) 86450117Tlx: 322240 ABC Mil (General);

322080 ABC FX I (Dealing Room)Direct Dealing Reuters Code: ABCXSWIFT: ABCOITMMMarco SimonelliGeneral Manager

Investment Group

Banco ABC Brasil S.A.Avenida Paulista 37, 14th/15th FloorsCEP 01311-902, Sao Paulo, SP. BrazilTel: (55)(11) 31702000Fax: (55)(11) 31702001Adroaldo Moura da SilvaChairman

Tito Enrique da Silva NetoPresident

ABC Securities (Egypt) S.A.E1, El Saleh Ayoub St.ZamalekCairo, EgyptTel: (202) 7362684 (10 lines) /

(202) 76364254Fax: (202) 7363643

Tarek HelmyChairman

our mission is to - bank abc€¦ · b.sc. in finance, m.b.a. university of west florida, u.s.a....

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