annual report 2004 contents - bbac · usd c/v total loans and advances ll usd c/v total net...
TRANSCRIPT
BBAC Management
Chairman's Letter 2BBAC New Organization Chart 4
Summary of Performance 6Board of Directors 8Major Shareholders and General Management 9Excerpts from the Ordinary General Shareholders Assembly 10
BBAC Financial Statements BBAC Balance Sheet 12BBAC Income Statement 14
BBAC Management Discussion and Analysis Basis of Presentation 16Corporate Profile 16Observance of Anti-Money Laundering Requirements 16
Private Banking 21Insurance 21Human Resources 21Civic Role 22
BBAC Auditor's Report Independent Auditor's Report 45Balance Sheet 46Income Statement 47Statement of Changes in Equity 48Statement of Cash Flows 49Notes to Financial Statements 50Balance sheet presented in accordance with Bank of Lebanon Circular No. 33 86Income statement presented in accordance with Bank of Lebanon Circular No. 33 87
BBAC Network Branch Network and Addresses 90Main Correspondents 91Subsidiaries 92
Developments Economic Developments 17Growth and Market Share 19Technology: 20
• IT-MIS • E-Banking
Risk Management Asset - Liability Management 23• Risk Profile 26• Asset Management 26• Liability Management 33• LCs 35• Asset Quality 35• Regulatory Guidelines 36
Financial Performance Ratios Liquidity 37Profitability 38Management Efficiency 39Interest Margin 39Non-Interest Income 40General Operating Expenses 41Net Financial Income 41
Annual Report 2004
Contents 1
Chairman's Letter
A
I wish to thank our loyal customers for their valued trust, ourstaff for their dedication, our correspondents for theircooperation, and our shareholders for their support. BBAC hasand will continue to strive in providing excellence in itsservices, outstanding performance, as well as economic andsocial value-added to the country.
A good economic environment prevailed during the year 2004,with real GDP growth standing at 5% while most economicsectors witnessed some improvement.
The balance of payments scored a surplus for the thirdconsecutive year, fueled by capital inflows, which offset themassive trade deficit of USD 7.6 billion. The Central Bank ofLebanon maintained its FX and gold reserves at around USD13.5 billion. These interesting results in Lebanon's foreignsector underscore the vitality and vigor of our open economy.
Results during the year were even better, as mild politicaluncertainty emerged in the last quarter, which, however, didnot affect the country's financial stability.
The decline in the interest rate structure in 2003 following theParis II conference, as well as the contribution of the bankingsector to this effort in the form of interest-free lending to theTreasury, continued to burden the performance of banks in2004.
BBAC performed well during the year, maintaining its positionin the Alpha Group of banks, and scoring a significant growthin profits of around 26.5% over the previous year, beforeincome tax. Shareholders' equity increased by 10% to reachLBP 187 billion, consolidating the solvency at 20.94%, andthe Bank's loan portfolio increased by 14% compared to themarket's 6.8%. BBAC's remedial efforts were consolidated in2004, leading to a significant improvement in asset quality.
Chairman's LetterC
Annual Report 2004
The bank's dollarization increased at a faster pace than that ofthe banking sector, leading to a repositioning of the currencymix. This led to a reduction in costs and drove the deposits'currency structure of our Bank closer to that of the market.
Our bank should benefit from these positive factors in theupcoming revision of our rating, specifically in the domain offinancial strength currently standing at BB+.
Our strategy continues to build on our strengths and to counterthe constraints confronting us.
To consolidate our solvency, the Ordinary General Assembly ofShareholders approved our recommendation to distribute LL24.24 billion in retained profits for reinjection in the form ofUSD contributions amounting to around USD 14.4 million inTier I capital.
In order to achieve sustainable prosperity in a competitiveenvironment, the Bank started the implementation of anadministrative restructuring based on a study conducted byDeloitte Consulting. In a corporate governance frame, the new structure set cleargrounds for controls, authority segregation, job specialization,responsibility and accountability.The restructuring, adopted at the end of 2004, aims toenhance efficiency, business development, risk control, andhence profitability.
Ghassan AssafChairman – General Manager
3
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Unit
BBAC Management
BBAC Management
A
2004 2003Change
2004-2003
3,200,5522,123
499,933332
2,459,0141,631
2,795,6221,854
159,364106
15,05510
8.14%
14.03%
9.25%
10.42%
10.71%
47.65%
3,461,2002,296
570,065378
2,686,5291,782
3,086,8722,048
176,433117
22,22915
Total AssetsLLUSD C/V
Total Loans and AdvancesLLUSD C/V
Total Net LiquidityLLUSD C/V
Deposits from CustomersLLUSD C/V
Shareholders' Equity*LLUSD C/V
Profits-after taxLLUSD C/V
(in millions)
* Including LL 10 billion accepted in owners’ equity, out of LL 21.06 billion of revaluation variance of tangible fixed assets.
Summary of Performance
BBAC ManagementB
Annual Report 2004
2004 2003(percentage)
Liquidity RatiosNet Liquidity LLNet Liquidity FCNet Liquidity TotalLoans / Deposits LLLoans / Deposits FCLoans / Deposits TotalLiquid Assets / Assets
Asset Quality *Doubtful Loans / Gross LoansProvisions for Doubtful Loans / Doubtful LoansProvisions for Loans / Gross LoansNet Doubtful / Assets
Capital Adequacy RatiosTotal Capital Adequacy RatioIncluding After tax profits
Profitability RatiosReturn on Average Assets ROAA after tax Return on Average Equity ROAE after tax Number of Shares Outstanding (million)Earnings per Share EPS in LL after taxDividends per Share DPS in LL**Dividends Payout RatioRetention RatioNet Asset Value per Share in LL
Management EfficiencyInterest Paid / Interest ReceivedCost per Average Branch (LL million)Net Commissions / Net Financial IncomeCost / Income (Efficiency Ratio)
Exchange Rate (LL/USD)***
94.03%83.31%87.96%11.35%22.89%17.88%80.59%
21.53%64.38%14.84%1.41%
19.84%21.88%
0.50%9.74%
7220955
32.80%67.20%
2,367
74.21%1,384
19.89%71.25%
1,507.5
92.88%83.80%87.03%14.16%20.85%18.47%79.63%
17.63%66.99%12.92%1.10%
20.94%23.50%
0.67%13.24%
7230965
25.99%74.01%
2,604
77.27%1,301
20.75%61.85%
1,507.5
* Non-accrual interest is included in non-performing loans; unrealized interest is included in provisions.** An additional interest payment of LL 1.2 billion was made on the cash contributions.*** The closing rate of the Lebanese Pound against the USD as set by the Central Bank.
7
BBAC ManagementB
Annual Report 2004
Senior Manager, Administrative Advisor to the General ManagerManagerial Information Technology*Senior Manager, Human ResourcesBudgetingInternal AuditCredit Cards and E-BankingITCompliance & Reconciliation Advisor for Economic Studies & HR TrainingAccounting**MISInternational Department, International Banking RelationsCorporate BankingCredit ControlInsuranceSupplies and Central ServicesTreasuryCredit AdministrationMarketingPrivate BankingInformationRemedial
Senior Regional Manager, NorthSenior Regional Manager, North Beirut Senior Regional Manager, AleyRegional Manager, ShoufRegional Manager, Bekaa
Chairman and General ManagerLegal Counselor and Advisor to the ChairmanDeputy General ManagerAssistant General Manager, Risk ManagementAssistant General Manager, BranchesExecutive Advisor for Business & DevelopmentExecutive Advisor to the Chairman
Major Shareholders and General Management Major ShareholdersAssaf FamilySheiklard FamilyOther Shareholders
General ManagementMr. Ghassan AssafMe. Abbas HalabiDr. Saad AndaryMr. Georges MirzaMr. Jean MehannaMr. Omar SaabMr. Claude Khayat
Legal CounselsMe. Abbas HalabiMe. Chafic KhalafMe. Ramzi HaykalMe. Amine RizkMe. Assaad NajmMe. Paul Morcos
AuditorsPricewaterhouse Coopers
Head Office ManagementDr. Adnan AridiMr. Pierrot AttallahMr. Elie FrancisMiss Samia AbdallahMiss Wafa AbedMr. Ramzi Abi FaresMr. Toufic Abi FarrajMr. Talal Abou ZekiDr. Amalia AzouryMr. Anwar Abou GhaidaMr. Wael DbeisiMr. Walid HadadMr. Nadim HamadehMr. Adel HamdanMr. Selim KaramMrs. Sabah KhatounianMrs. Lina MakaremMr. Raja Makarem Mr. Maher MezherMr. Raghid MneimnehMr. Salah SaabMr. Marwan Tayara
Regional ManagementMr. Ali NaboucheMr. Michel KazanMr. Chawki BadrMr. Imad Al-GhousainiMr. Michel Bou Rababi
* Post held by Mr. Berge Daw in 2004** Post held by Mr. Hafez El Danaf in 2004
52.71 %37.05 %10.24 %
9
BBAC Management
A
Excerpts from BBAC’s Ordinary GeneralShareholders’ Assembly
June 23, 2005
Resolution no. 2The Ordinary General Assembly of Shareholders of the Bank approved the activities, accounts,balance sheet and the profit and loss account for the year ending on December 31, 2004.
Resolution no. 3 The Ordinary General Assembly of Shareholders of the Bank decided on the appropriation ofthe profits for the year ended 2004 as follows:
* The General Assembly decided a USD 14.4 million cash contribution to capital.On the 23rd of June 2005, 94% of the shareholders signed the cash contribution to capitalcontracts with the bank and delegated the Board to accomplish the process.
22,229,0092,222,9012,000,000
22,101,4234,680,000
24,240,0001,199,7002,485,4637,502,367
LL thousands
Profits for the year 2004Less: Appropriation of 10 % to legal reserves
Appropriation for general banking risksProfits carried forward for 2003Less: Dividend of LL 65 per share
Additional dividend equivalent to LL 336.66 per share*Less: Interest on cash contributionLess: Reserve for capital increaseProfits carried forward for 2004
BBAC Financial Statements
BBAC Financial Statements
A
ASSETS (LL Millions) 2004FXLL
Cash and Bank of LebanonLebanese Treasury billsLoans And Advances to banksTrading SecuritiesLoans and advances to customers *Debtors by acceptancesInvestment Securities
- available-for-sale- held-to-maturity
Investments in SubsidiariesProperty acquired in settlement of debtInvestment propertyIntangible assetsProperty and equipmentOther Assets
Total Assets
Total Assets C/V in thousand USD
Off-Balance Sheet
Engagements by signature received from financial intermediariesOther engagement received
* After deduction of:Provisions for doubtful loansUnrealized interest for doubtful loans
* After deduction of:Payables against receivables
* Including net non-performing loans:Substandard loansUnrealized interest for substandard loans
852,1411,108,000
763,6216,283
570,06559,29026,261
56225,6993,524
14,26510,2711,288
32,18014,011
3,461,200
2,295,986
1,253,391
2,8931,250,497
77,29747,224
30,072
17,383
12,83820,089
7,251
395,696614,54112,248
548
155,5509
562562
03,524
1,20110,2711,098
32,0463,171
1,230,465
816,229
456,445493,459751,373
5,735
414,51559,28125,699
025,699
0
13,0640
190134
10,840
2,230,735
1,479,758
2003FXLL
919,753943,795682,900
3,529
499,93350,24629,328
56228,7663,524
10,62510,4131,592
32,95811,956
3,200,552
2,123,086
1,769,871
1,5201,768,350
81,37450,689
30,685
17,545
21,63927,350
5,711
572,543559,44011,120
548
137,7210
562562
03,524
1,14310,4131,372
32,8343,017
1,334,237
885,066
347,210384,355671,780
2,981
362,21250,24628,766
028,766
0
9,4820
220124
8,939
1,866,316
1,238,021
Balance Sheet as at December 31, 2004
BBAC Financial StatementsB
Annual Report 2004
13
LIABILITIES & SHAREHOLDERS' EQUITY (LL Millions)
2004FXLL
LiabilitiesDeposits from banksDue to customersEngagements by acceptancesOther liabilitiesCurrent income tax liabilityRetirement benefit obligationsTotal Liabilities
Shareholders’ equity Share capital and cash contribution to capitalLegal reserveReserve for unidentified banking risksRevaluation variance of tangible fixed assets *Retained earningsTotal Shareholders’ Equity
Total Liabilities & Shareholders’ Equity
Total Liabilities & Shareholders’ Equity in thousand USD
Off-Balance Sheet Engagements by endorsement given to:Financial intermediariesCustomers
* Including LL 10 billions accepted in owners’ equity.
69,7763,086,872
59,29046,290
7411,403
3,273,706
93,69720,946
11,682
21,06140,108
187,494
3,461,200
2,295,987
76,63642,13934,496
3,2141,098,599
95,166
7410,657
1,117,719
72,00020,946
11,682
21,06136,597
162,286
1,280,005
849,091
66,5621,988,273
59,28141,125
0746
2,155,987
21,6970
0
03,511
25,208
2,181,196
1,446,896
2003FXLL
120,2922,795,622
50,24650,6822,108
11,1783,030,128
93,69718,723
9,682
21,06127,261
170,425
3,200,552
2,123,086
92,10042,15349,946
3,5461,213,132
08,2402,108
10,4311,237,455
72,00018,723
9,682
21,06124,721
146,187
1,383,642
917,839
116,7451,582,491
50,24642,442
0748
1,792,672
21,6970
0
02,540
24,238
1,816,910
1,205,247
Balance Sheet as at December 31, 2004
BBAC Financial Statements
A
Interest and similar incomeLebanese T-billsDeposits and similar funds at banks and financial institutionsLoans and advances to customersInvestment SecuritiesRelated parties loans and advancesInterest and similar chargesDeposits and similar funds from banks and financial institutionsDue to customersDeposits from related partiesOther interest and similar chargesInterest margin
Net Provisions (releases) on loans and advancesProvisions for customers loans and advancesRelease of provisions and unrealized interest on doubtful and substandard loansNet Interest Received
Dividend income
Net CommissionFee and commission incomeFee and commission expense
Net trading incomeForeign exchangeInterest rate instrumentsEquities
Other operating income
Operating expensesStaff CostsOther operating expensesDepreciation and amortizationNet income of the year before taxesTaxes Net profits for the year
Income Statement for the year ended December 31, 2004
(LL Millions) 2004FXLL
195,94791,259
61,399 40,695 2,252
342 151,408
3,096 146,607
1,705 0
44,539
(800)
7,389
8,18945,340
162
13,965 15,215 1,250
5,074 2,125 2,658
291
2,751
41,617 24,018 13,7253,874
25,675 3,446
22,229
97,45255,392
30,527 11,530
03
85,502
854 84,008
641
11,949
3,913
4,507
5948,037
84
2,848 2,919
71
1,953 1,953
2,394
38,897 23,45011,646 3,801
(23,581)3,446
(27,027)
98,49635,866
30,872 29,165 2,252
339 65,906
2,242 62,599 1,064
32,590
(4,713)
2,882
7,59437,303
78
11,117 12,296 1,179
3,122 172
2,658 291
357
2,720 567
2,07973
49,256
49,256
2003FXLL
213,073114,728
49,605 45,812 2,584
344 158,123
2,203 153,600
2,312 8
54,950
13,678
20,739
7,06141,272
282
12,365 13,487 1,122
7,659 1,786 5,518
355
600
44,301 23,218 17,1833,900
17,877 2,822
15,055
111,71979,966
18,902 12,848
03
93,797
320 92,813
664
17,922
16,382
16,709
3281,540
179
2,589 2,637
47
7,102 1,682 5,420
312
41,752 22,725 15,190 3,837
(30,029)2,822
(32,851)
101,354 34,762
30,703 32,964 2,584
341 64,326
1,883 60,787 1,648
837,028
(2,704)
4,030
6,734 39,732
103
9,776 10,850 1,074
557 104 98
355
288
2,549 493
1,993 63
47,906
47,906
BBAC Management Discussion & Analysis
BBAC Management Discussion & Analysis
A
Basis of Presentation
The management discussion and analysis have been prepared by the Bank’s management onthe basis of the financial statements of the bank drawn up in conformity with the InternationalAccounting Standards (IAS). All the figures are denominated in Lebanese Pounds. Figures inUS Dollars are based on the Central Bank’s December 31, 2004 closing rate of 1507.50LL/USD.
Corporate Profile
BBAC was founded in 1956 by a group of prominent investors consisting of Mr. Toufic Assaf,Mr. Nashaat Sheiklard, and Mr. Jamal Shehaiber.
BBAC, which celebrates its 50th anniversary in 2006, has expanded its local and off-shorebranch network to cover all the Lebanese regions in addition to Syria and Cyprus.
Relying on its state-of-art technological and financial solutions, BBAC provides a wide rangeof personalized services to its clients: retail and commercial banking services, private bankingservices, electronic banking and internet facilities, as well as bancassurance products.
Observance of Anti-Money Laundering Requirements
BBAC s.a.l, along with its subsidiaries and international branches (collectively referred tohereinafter as "BBAC") are firmly committed to combat money laundering and terroristfinancing.
BBAC complies with the regulations set out in the Anti-Money Laundering Lebanese Law No.318 of April 20, 2001 and its amendments. This law aims to detect and prevent moneylaundering and potential terrorist financing, and its implementation is supervised by theSpecial Investigation Commission (SIC). BBAC also complies with the Central Bank ofLebanon's Circulars, establishing procedures for controlling financial operations and activitiesfor the prevention of Money Laundering.
BBAC implements an Anti-Money Laundering program that includes written policies andprocedures, a designated Anti-Money Laundering officer and controllers, regular training for itsstaff, and an independent audit to test the effectiveness of the program implementation.All BBAC employees, wherever located, are aware and committed to the compliance policystatement.
BBAC Management Discussion & AnalysisB
Annual Report 2004
Developments
Economic Developments
The year 2004 was characterized by a good economic performance, with real GDP growthreaching 5% and inflation running at around 3%. Economic growth was mainly driven by a risein private investment and consumption, as well as exports. The mild inflation was mostly theresult of a rise in import prices, due to the appreciation of the Euro vis-à-vis the Lebanese pound,in addition to higher fuel prices.
Tourism revenues were a major contributor to economic growth, with the number of touristscrossing the 1 million mark for the second consecutive year, rising by around 26% over 2003,to reach 1.279 million.Another driver was Arab investors' interest in the property sector, which was mirrored, amongothers, in a surge in the activity of the Beirut Stock Exchange. The value of traded sharesincreased by 71% over 2003, while market capitalization rose by a significant 55% to reach USD2.33 billion at the end of 2004.
Other real sector activities witnessed an improvement, including construction (4% rise in buildingpermits), transport (7% rise in the Beirut Port movement, 13% rise in the number of flights), andindustry (14.5% rise in industrial exports and 30% in imports of industrial machineries).
The rise in economic activity is also mirrored in the value of cleared checks, an indicator of totalspending, which increased by an annual 10.5%, compared to only 4.3% in 2003. The moneysupply also went up by 10.23% in 2004 driven, among other things, by capital inflows, evenwith domestic interest rates not rising at the rate of international ones.
The balance of payments registered a surplus of USD168 million, down from USD3,386 millionin 2003 and USD1,564 million in 2002, which were generated in the aftermath of theNovember 2002 Paris II conference. The BOP scored better results during the course of the year,reaching a cumulative USD 578 million in July, a part of which was eroded by politicaluncertainty that emerged towards the end of the year. The surplus in the BOP was generated byrelatively significant capital inflows, which offset the current account deficit. The trade balancein fact widened by 35.5% over 2003, despite a 14.6% rise in exports. The reason was thatLebanese imports rose by a significant 31% fueled by higher consumption, given improvedeconomic activity, and as mentioned earlier, the appreciation of the Euro and higher oil prices.
The Central Bank was able to increase its FC reserves during the first half of the year, to a peakof USD 10.7 billion at the end of May, up from USD 10.2 billion in December 2003. However,the FC reserves went back to USD 9.5 billion in December, given the political pressure thatemerged towards the end of the year, which, however, did not affect the financial stability.
The public finances deficit in 2004 reached one of its lowest post-war levels at 10.3% of GDP,down from 14.5% in 2003. The deficit to total expenditures ratio stood at 28.71%, comparedto a budgeted 33.17%. The results were caused by a combination of higher government revenuesand a control over expenditures given a reduction of the debt service. Public revenues in fact rose by 12.92% over 2003 due to higher tax revenues, especially fromVAT and income tax given the increase in economic activity, in addition to a rise in non-taxrevenues given higher transfers from telecom.On the other hand, the debt service was reduced by a significant 17.5% as a result of therestructuring of the debt following the Paris II conference.
17
BBAC Management Discussion & Analysis
A
In 2004, and due to the combined effect of high economic growth and controlled debt stockgrowth, the debt dynamics were reduced for the first time in the post-war period. The net debtto GDP ratio in fact declined from 173.8% at the end of 2003 to 168.9% in 2004. The reducedmomentum in debt level growth was manifested in a 5.07% growth in the net total debt in 2004,compared to 6.68% and 8.78% annual growth in 2003 and 2002 respectively.Debt denomination in foreign currencies increased from 49.64% in 2003 to 55.73% at the endof 2004, in line with the increase in the level of dollarization in the banking sector's deposits,especially in the last quarter of the year.
The year 2004 was characterized by new Eurobond issues after more than one year ofinterruption, following the subscriptions made by the Paris II participant countries, in addition tothe commercial banks' special 0% subscriptions. The Ministry of Finance launched new issuesamounting to USD2.57 billion, in addition to the exchange of USD1.214 billion maturing in2005 into issues maturing in 2010 and 2012. The government also swapped LL TBs held bythe Central Bank into a USD 1 billion worth of Eurobonds, which were subsequently sold in thesecondary market, hence making the aggregate gross issued amount – including a Euro 225m -equal to around USD 5.1 billion. The Ministry of Finance also paid around USD 1.4 billion worthof maturing Eurobonds in 2004.
The banking sector's FC claims on the public sector hence reached USD8,792 billion at the end of2004, rising by around 38% over 2003. The banking sector's exposure to foreign currency sovereigndebt compared to their FC deposits increased from 19.7% in 2003 to around 23% in 2004.
In order to broaden participation in the Treasury bill auctions during the last quarter of the year,the Ministry of Finance offered swaps on the 6, 12, 24 and 36 month categories in October.During most of the year, primary market rates were kept almost unchanged at more than 20-yearlows, following an approximate 6.5% reduction on all TB categories after Paris II.
The banking sector's LL treasury bills portfolio stood at LL 10,853 billion at the end of 2004,forming around 43.8% of its LL deposits, down from 45.7% in 2003.
The banks' subscriptions to LL CDs were insignificant during the course of 2004, as only shortmaturities (45 and 60 days) were issued at 4.4% and 4.89% respectively. The totaloutstanding LL CDs portfolio however remained substantial at LL 9,949 billion, formingaround 40% of the banking sector's LL deposits, due to heavy subscriptions made in 2003.
Effective rates on different TB categories Prior to Paris II
Dec-03 Dec-04
Post – Paris II
24 months12 months6 months3 months
7.996.876.535.48
14.6413.4312.1211.18
7.896.696.315.22
BBAC Management Discussion & AnalysisB
Annual Report 2004
Growth and Market Share
BBAC ranks in the top alpha group of banks, which includes 14 banks with customers'deposits of over USD 1 billion. The Bank maintained its level in the banking sector, with total assets growing by around8.14% to reach LL 3,461 billion at the end of 2004.
Clients’ deposits increased by 10.42% or LL 291 billion to reach LL 3,087 billion, forming3.73% of the total banking sector's deposits. The Bank’s loans to the private sector increased by 14.03% to LL 570 billion, which is morethan twice the market’s growth rate of 6.76%.Shareholders’ equity, including LL 21.06 billion in revaluation variance of tangible fixedassets, grew by 10.02% to reach LL 187.5 billion, equivalent to USD 124.4 million. This isalmost double the banking sector's growth rate of 5.63%. On the profitability level, BBAC's results before income tax outperformed those of its peers,with growth reaching 26.5%, compared to 11.75% in the alpha group. BBAC’s growth inprofitability is even more significant when accounting for income tax.
The comparison of the currency breakdown of deposits shows that BBAC's dollarization increasedat a higher pace than that of the banking sector in 2004. This shift helped reduce funding costsand bring the bank's dollarization closer to that of the sector as shown by table 2.
Growth (LL billion) BBAC Growth
Dec-02 Dec-03 Dec-04
Sectoral Growth
Dec-02 Dec-03 Dec-04
Assets%
Loans and advances%
Deposits from customers%
Shareholders’ Equity%
90,62314.37%
23,7580.28%
73,45513.55%
5,4999.48%
102,18712.76%
25,3646.76%
82,69112.57%
5,8095.64%
79,236
23,691
64,687
5,023
3,20113.14%
500-2.61%
2,79613.80%
1706.03%
3,4618.14%
57014.03%
3,08710.42%
18710.02%
2,829
513
2,457
161
Table 1: Growth and Market Share
19
2004200320022001200019991998
0 500 1000 1500 2000 2500 3000 3500
Customer's deposits (LL bn) Total Assets (LL bn)
BBAC Management Discussion & Analysis
A
(LL billion) BBAC
Dec-03 Dec-04 % Change
Sector
Dec-03 Dec-04 % Change
LL
FC
Total
Dollarization (%)
24,796
57,895
82,691
70.01
-0.31
19.17
12.57
3.88
24,873
48,582
73,455
66.14
1,099
1,988
3,087
64.41
-9.44
25.64
10.42
7.80
1,213
1,582
2,796
56.61
Table 2: Deposits' Dollarization
Technology
1- IT-MIS
Developments in IT continued to focus on higher security measures, in addition to businesscontinuity and disaster recovery procedures. In order to enhance productivity and smoothbanking services development, BBAC implemented a new AS/400 system which provideshigher speed and efficiency in banking operation management and is in line with the expectedrise in operations' activity. New computers and systems were also developed in the Cyprus IBU in compliance with the EU's policy.
2- E-Banking
BBAC continues to provide a wide range of plastic cards that are designed to suit the needsof its ever-growing customer base. The bank's network keeps on developing and currentlycomprises 37 ATMs that are spread in most Lebanese areas. BBAC offers Electron, Classic,Gold, Platinum and internet cards, in addition to BBAC diamond card. All BBAC cards provideworldwide easy usage, safety and convenience for the customers' banking needs. In 2004, the bank launched a Visa card that is denominated in Euro, which facilitatespayments and saves on exchange costs. It also provided the setting for the issuance of a newtransparent card in early 2005. The BBAC transparent card is the first of its kind in Lebanonand provides enhanced security for its holders through its chip feature.
BBAC is currently implementing new technological procedures to save on costs and providesmoother processing for its customers, using systems linking ATMs and POS servers to BBAC'smain information system “Equation”.
BBAC continues to develop its BBAC online banking to provide a wide range of electronicservices based on strong security measures to insure information safety and confidentiality.
The BBAC internet center, which is equipped with state-of-the-art technology and issupported by a qualified and well trained team of young staff, continues to offer free internetservices for school and university students.
In the context of promoting easy banking access, BBAC telephone banking continues toprovide 24-hour free and safe telephone service that gives customers access to their personalaccount information, at any time, from any place. BBAC customer support desk providestechnical assistance and answers queries from various public.
BBAC Management Discussion & AnalysisB
Annual Report 2004
Private BankingThe Market continues to grow, but tougher external conditions have emerged since we haveembarked in the new millennium. We are seeking to achieve superior differentiation in orderto attain and pursue greater productivity.
Faced with the pressures of commoditisation of the old servicing approach and product range,and given the choice of competing on cost leadership or differentiation, we have focused ondifferentiation with a client driven business model. We continue to broaden client segments,offer a wide range of wealth management and brokerage services, in addition to tailoredinvestment strategies that best meet our client’s aspirations.
InsuranceBBAC continues to provide all lines of insurance through its sister company, Capital Insuranceand Reinsurance Co. These include life and general insurance such as personal accidents, fireand burglary, natural hazards, health, travel, motor and marine, etc.BBAC also provides Bancassurance products in association with SNA (Société Nationaled'Assurances s.a.l.), mainly consisting of retirement and educational plans that are expresslydesigned to give customers protection and guaranteed benefits on investment accounts. In 2004, BBAC saw its sales of Bancassurance products increase by around 10 times theirlevel in 2003, following the implementation of an employee reward plan to promote sales.
Human Resources1- Staff productivity
BBAC's staff consists of qualified professionals, with around 47% belonging to the 25-40 yearsage bracket. Staff expenses grew by 3.44% in 2004 to reach LL 24.018 billion, and constituted 57.7% ofoperating expenses compared to 65.6% in 2003. Whereas the average number of staff perbranch increased from 16.8 in 2003 to 17.3 in 2004, employee productivity continued togrow, with average footings per staff increasing from LL 5.769 billion to LL 6.165 billion.
2- Training
Training topics in 2004 focused on the challenges currently faced by the banking sector, aswell as the forthcoming ones, including themes that are related to the Basel II implementation,certain legal and fiscal issues, money laundering and the latest developments in IT. Othertraditional topics such as product and service knowledge, credit, management behavior andmarketing, languages, procedures and risk management were also tackled. The total number of training hours reached 10761, 64% of which were provided by external
21
BBAC Management Discussion & Analysis
A
sources, and the rest by BBAC staff. The employee coverage ratio reached 73%, with 407 outof the 561 total number of employees having at least attended one training course.BBAC further provided training to 198 undergraduates not belonging to its staff, in line with itsstrategy to make knowledge available to the youth that would join the working force in the near future.
The bank also supported 31 employees to obtain technical certificates and academic degrees, rangingfrom the Centre d’Etudes Bancaire diplomas, to university B.A.’s and M.B.A’s.
Civic RoleEducation BBAC is aware of its prominent role in the society and has always paid special interest to developingeducation in Lebanon. In 2004, BBAC has sponsored contests for the distinguished students ininstant arithmetic calculation from all schools and research contests at universities. BBAC has alsohonored and rewarded distinguished students in the official high school examinations.
Humanitarian workIn 2004, BBAC sponsored the "Blood Bank" website that was launched by the Lions Club in Lebanon,and provided applications for blood donation in all its branches.
TourismBBAC was the first bank to sponsor a touristic map for the ancient and modern city of Baalbak, with60,000 copies distributed to tourism agencies, municipalities and tourism sites.BBAC was also the main sponsor of the "Guide for Establishing and Licensing of Touristic Institutionsin Lebanon" issued by the Association of Lebanese Tourism Establishments.
Distribution of training hours by topic
1%18%
12%
22%6%
8%
10%
13%
10%
BBAC products and services
Credit
Finance and Accounting
Procedures and risk management
Management behavior and Marketing
Legal and fiscal
Information Technology
Languages
Secreterial/Filing/Archiving
BBAC Management Discussion & AnalysisB
Annual Report 2004
Asset – Liability ManagementBBAC continues to manage its assets and liabilities with prudence, while optimizing its risk-reward ratio. The Asset and Liability Committee (ALCO) meets regularly to make investmentdecisions and manage general market risks such as currency and interest rate, in addition tomaturity risk. It also identifies the effect of these risks on the bank’s balance sheet, currencystructure, spreads, profitability, liquidity and solvency. The Credit Risk Committee managesthe credit risk by setting limits for clients, correspondents, and financial institutions. It alsosets the credit policy and reviews the effectiveness of the credit process.
Interest earning assets increased by around LL 244 billion in 2004; the ratio of interestearning assets to total assets remain almost unchanged at 96%.Treasury bills' share out of total assets increased from 29.5% in 2003 to 32% in 2004. Cashand Central Bank's share decreased from 28.74% to 24.62% due to the replacement ofmaturing certificates of deposits by treasury bills. In fact, placements in LL were made inhigher yielding treasury bills, which were more attractive than the certificates of deposits thatwere only issued in the market for short maturities (45 and 60 days).
The dollarization of the CD and TB portfolios increased following the change in thedollarization of the sources of funds. With declining local and international interest rates on investments, the bank resorted toincreased customer lending, which was made favorable by higher economic growth; the loanportfolio grew by around 14% (LL 70 billion), compared to an 8.14% growth in total assets.The ratio of loans to total assets hence increased from 15.62 % in 2003 to 16.47% in 2004.
(LL million) Amount
2003 2004
Table 3: Interest Earning Assets
2003 2004
Structure
Cash and Bank of LebanonLebanese Treasury billsLoans and advances to banksInvestment securitiesLoans and advances to customers
Total Interest Earning AssetsTotal Assets
28.74%29.49%21.34%0.90%
15.62%
96.08%100%
852,1411,108,000
763,62125,699
570,065
3,319,5263,461,200
919,753943,795682,90028,766
499,933
3,075,1473,200,552
24.62%32.01%22.06%0.74%
16.47%
95.91%100%
23
Risk Management
BBAC Management Discussion & Analysis
A
Customers' deposits increased by LL 291 billion in 2004, boosting their share out of totalliabilities from 87.35% at the end of 2003 to 89.19% at the end of 2004. As due to banksand financial institutions witnessed a decrease, the share of interest bearing liabilities out oftotal liabilities remained almost unchanged at 91.2%.
(LL million) Amount
2003 2004
Table 6: Non-Interest Bearing Liabilities
2003 2004
Structure
Engagements by acceptancesOther liabilitiesCurrent income tax liabilitiesRetirement benefit obligationsShareholders’ equityRevaluation variance of tangible fixed assets
Total Non-Interest Bearing LiabilitiesTotal Liabilities
1.57%1.58%0.07%0.35%4.47%0.85%
8.89%100%
59,29046,290
7411,403
147,38640,108
304,5523,461,200
50,24650,6822,108
11,178143,16327,261
284,6383,200,552
1.71%1.34%0.00%0.33%4.26%1.16%
8.80%100%
(LL million) Amount
2003 2004
Table 5: Interest Bearing Liabilities
2003 2004
Structure
Central BankDue to banks and financial institutionsDeposits and customer accounts
Total Interest Bearing LiabilitiesTotal Liabilities
-3.76%
87.35%
91.11%100%
-69,776
3,086,872
3,156,6493,461,200
-120,292
2,795,622
2,915,9143,200,552
-2.02%
89.19%
91.20%100%
(LL million) Amount
2003 2004
Table 4: Non-Interest Earning Assets
2003 2004
Structure
Debtors by acceptancesTrading securitiesInvestments in subsidiariesEquity securitiesProperty acquired in settlement of debtInvestment propertyIntangible assetsProperty and equipmentOther assets
Total Non-Interest Earning AssetsTotal Assets
1.57%0.11%0.11%0.02%0.33%0.33%0.05%1.03%0.37%
3.92%100%
59,2906,2833,524
56214,26510,2711,288
32,18014,011
141,6743,461,200
50,2463,5293,524
56210,62510,4131,592
32,95811,956
125,4053,200,552
1.71%0.18%0.10%0.02%0.41%0.30%0.04%0.93%0.40%
4.09%100%
The share of the non-interest earning assets out of total assets remained almost unchanged asshown in the table below.
BBAC Management Discussion & AnalysisB
Annual Report 2004
The breakdown of assets by currency (table 7) shows an increase in the structure of assetsdenominated in foreign currencies as a percentage of total assets, from 58.31 % in 2003 to64.45 % in 2004.
Liabilities denominated in foreign currencies increased from 56.77% of total liabilities in 2003to 63.02% in 2004. This was enhanced by the uncertainty that emerged in the last quarterof the year, as well as the restructuring of deposits to reduce costs and to draw the currencystructure closer to that of the banking sector.
The maturity analysis of the sources and uses of funds shows a reduced liquidity risk in 2004 forthe short maturity brackets (up to 6 months). The gap then widens for longer maturities, a situationthat characterizes the Lebanese banking sector.
Assets and Liabilities (LL million & %)
2003 2004 2003 2004 2003 2004
Structure %Amount Change %
AssetsLLFC
LiabilitiesLLFC
3.94 %-3.94 %
3.45 %-3.45 %
35.55 %64.45 %
36.98 %63.02 %
41.69 %58.31 %
43.23 %56.77 %
3,200,5521,334,2371,866,316
3,200,5521,383,6421,816,910
3,461,2001,230,4652,230,735
3,461,2001,280,0052,181,196
-6.14 %6.14 %
-6.25 %6.25 %
Table 7: Breakdown of Assets and Liabilities by Currency
(LL million) 0 – 3months
3 – 6months
6 – 12months
1 – 5years
over5 years Total
SourcesDec - 03Dec - 04
UsesDec - 03Dec - 04
2,748,3612,891,695
1,374,8611,555,857
111,975142,431
279,923231,359
90,040132,339
542,925203,818
64,36989,617
858,7371,164,074
15,38317,624
144,106306,092
3,030,1283,273,706
3,200,5523,461,200
Table 8: Sources and Uses by Maturity
25
BBAC Management Discussion & Analysis
A
1- Risk Profile
BBAC manages with efficiency the four main categories of risk that are usually faced by banks,notably market, credit, maturity and operational risks. Market risk mainly consists of currency and interest rate risks. Currency risk is largelymitigated by Central Bank regulation setting trading limit exposure at 1% of capital funds. Inaddition, settlement limits are internally set for the exposure by currency. Interest rate risk andmaturity risk are largely connected, due the gap existing between the maturity/repricing ofassets and liabilities; they are, however, efficiently managed by ALCO to ensure an optimizedrisk-return ratio. The Credit Risk Committee manages the credit risk by setting limits forcustomers/correspondents, in addition to managing the risk per industry or product.Operational risk is a new issue tackled by banks in Lebanon and is assigned at BBAC to aspecialized unit within the Risk Management Department as of 2005. This unit coordinatesits work with the internal audit, IT security, and compliance officers of the bank. BBACcontinuously reviews its policies and procedures and is building statistical models to evaluatethe operational risk exposure.
2- Asset Management
(LL million andcumulative %)
0 – 3months
3 – 6months
6 – 12months
1 – 5years
over5 years Total
Dec - 03%
Dec - 04%
1,373,50050.02%
1,335,83853.80%
-167,94857.85%
-88,92858.90%
-452,88574.49%
-71,47962.88%
-794,368101.38%
-1,074,45796.90%
-128,723105.62%
-288,468105.73%
-170,424105.62%
-187,494105.73%
Table 9: Gap Analysis
(LL million) Amount
Table 10: Uses of Funds
2002 2003 2004 2002 2003 2004
Percentage
Liquid assetsLoans and advancesOther financial accountsPermanent assets
Total Uses of Funds
80.59%15.62%1.94%1.85%
100%
78.15%18.15%1.83%1.87%
100%
2,210,811513,31051,78952,992
2,828,902
2,579,305499,93362,20259,112
3,200,552
2,756,306570,06573,30161,528
3,461,200
79.63%16.47%2.12%1.78%
100%
BBAC Management Discussion & AnalysisB
Annual Report 2004
a- Liquid Assets
Liquid assets consist of cash and deposits with the Bank of Lebanon, Lebanese Treasury bills,trading and investment securities, as well as loans and advances to banks. They reached LL2,756 billion at the end of 2004 forming 79.63% of total assets, down from 80.59 % in2003. The decline was in favor of a rise in the share of loans and advances from 15.62% in2003 to 16.47% in 2004.
1- Cash and Central Bank deposits decreased by LL 67.6 billion to reach LL 852 billionincluding interest at the end of December 2004. The decrease was caused by the drop in theCDs portfolio (LL109 billion), and BDL current accounts (LL 29 billion), which outweighed therise in BDL term deposits (LL 50 billion). Central Bank LL CDs decreased by LL 156 billion,as most of the maturing CDs during 2004 were replaced by subscriptions in higher yieldingtreasury bills. USD-denominated CDs increased by around LL 47 billion as a result of thereplacement of LL CDs. Total Cash and Central Bank foreign currency denomination increasedfrom 37.75% in 2003 to 53.56% in 2004.
Liquid Assets
(LL million)
2003
Table 11: Breakdown of Liquid Assets
LL C/V Total
2004
Cash and Bank ofLebanon
% of total Liquid AssetsLebanese Treasury bills
% of total Liquid AssetsTrading & Investmentsecurities
% of total Liquid AssetsLoans and advances to banks
% of total Liquid Assets
Total Liquid Assets
572,54322.20%
559,44021.69%
1,1100.04%
11,1200.43%
1,144,214
347,21013.46%
384,35514.90%
31,7471.23%
671,78026.04%
1,435,092
919,75335.66%
943,79536.59%
32,8571.27%
682,90026.48%
2,579,305
(LL million) 2003 2004
Table 12: Cash and Central Bank Deposits
CashCentral Bank
Sight depositsTerm depositsCertificates of depositsAdd: Accrued interest receivable Less: tax on interest receivable
Total Central BankTotal Cash and Central Bank DepositsDenominated as follows
LL in millionsForeign currencies in thousands USD
30,388
105,034330,799354,39833,101(1,578)
821,753852,141 395,696302,783
27,075
133,835280,346463,39815,100
892,678919,753572,543230,322
LL C/V Total
395,69614.36%
614,54122.30%
1,1100.04%
12,2480.44%
1,023,595
456,44516.56%
493,45917.90%
31,4331.14%
751,37327.26%
1,732,711
852,14130.92%
1,108,00040.20%
32,5431.18%
763,62127.70%
2,756,306
27
BBAC Management Discussion & Analysis
A
2-The share of the treasury bills portfolio in total liquid assets increased from 36.6% atthe end of 2003 to 40.2% at the end of 2004. The Eurobond portfolio increased by theequivalent of LL 109 billion. Treasury bills denominated in Lebanese pound increased byLL 55 billion, and hence the denomination of the total treasury bills portfolio in foreigncurrencies increased from 40.72% to 44.5%.
3-Investments in fixed and variable income securities, as shown in table 14 below, amountedto LL 32,544 million, almost their same level at the end of 2003, constituting 1.18% of totalliquid assets. The LL 3,068 million decrease in fixed income instruments was compensatedby an almost equivalent rise in variable income securities.
(LL million) 2003 2004
Table 13: Lebanese Treasury bills
Treasury billsAdd: interest receivableLess: interest received in advance/discounts
tax on interest receivableTotalDenominated as follows
LL in millionsForeign currencies in thousand USD
1,098,04316,4295,930
5421,108,000
614,541327,336
918,98324,812
00
943,795
559,440254,962
(LL million) 2003 2004
Table 14: Fixed and Variable Income Securities
Fixed income securitiesAdd: Interest receivableLess: Provisions for debt securities
TotalVariable income securities
Less: Provision for decline in value of sharesTotalTotal Fixed and Variable Income SecuritiesDenominated as followsFixed
LL in millionsForeign currencies in thousand USD
VariableLL in millionsForeign currencies in thousand USD
25,175524
025,6998,579
(1,734)6,845
32,544
017,047
1,1103,804
28,115652
028,7676,116
(2,025)4,091
32,858
019,082
1,1101,977
BBAC Management Discussion & AnalysisB
Annual Report 2004
4-Deposits with banks and financial institutions amounted to LL 763.6 billion, with a ratio of27.7 % out of total liquid assets, against LL 683 billion and 26.48 % in 2003. The increasewas caused by higher placements in time deposits with banks, against a drop in the loweryielding demand deposits.
b- Loans and Advances to Customers
BBAC's loan portfolio grew by around 14% in 2004, almost preserving the same currencystructure as in 2003. The LL 81 billion decrease in short-term lending was outweighed by anapproximate LL 152 billion longer-term financing, most of which was collateralized.
(LL million) 2003 2004
Table 15: Deposits with Banks and Financial Institutions
Demand DepositsTime Deposits & CDsAfter-tax interest receivable Total DepositsDenominated as follows
LL in millionsForeign currencies in thousand USD
86,918675,010
1,693763,621
12,248498,423
98,099583,927
874682,900
11,120445,625
Loans and Advances to Customers (LL million) Amount
2003 20042003 2004
Structure
Denominated as followsLL in millionsForeign currencies CV in million LLForeign currencies in thousand USD
Total
137,721362,212240,273
499,933
155,550414,515274,968
570,065
27.55%72.45%
100%
27.29%72.71%
100%
Table 16: Breakdown of Loans and Advances to Customers by Currency
29
BBAC Management Discussion & Analysis
A
The breakdown of loans by economic sector shows that the structure of the loan portfolioremained almost the same, albeit a rise in the share of trade financing against a drop in theconsumer lending share. All lending to economic sectors witnessed a rise in 2004.
* Before deduction of provisions, debtors by acceptances and speculation accounts
The year 2004 witnessed higher corporate financing, with the share of loans exceeding LL1.5billion rising to 35% of the total loan portfolio, as shown in the table below.
The geographical distribution of the loan portfolio shows increased lending in most of theLebanese regions, with a rise in the shares of the Beirut and Mount Lebanon areas, where mosteconomic activity is concentrated.
Loans and Advances to Customers (LL million) Amount
2003 20042003 2004
Percentage
Beirut and SuburbsMount LebanonBekaaNorth LebanonSouth LebanonCyprus
Total (Gross Loans)
307,990102,92585,19065,31922,7812,812
587,017
365,183123,32285,63350,04228,3092,124
654,613
52.47%17.53%14.51%11.13%3.88%0.48%
100.00%
55.79%18.84%13.08%7.64%4.32%0.32%
100.00%
Loans and Advances to Customers (LL million) Amount
2003 20042003 2004
Percentage
TradeConstructionIndustryAgricultureConsumptionOthers
Total *
207,235143,28590,04626,833
168,98124,013
660,393
236,859162,57992,24630,582
181,08027,933
731,279
31.38%21.70%13.64%4.06%
25.59%3.64%
100.00%
32.39%22.23%12.61%4.18%
24.76%3.82%
100.00%
Table 17: Geographical Distribution of Loans and Advances
Table 18: Breakdown of Loans and Advances to Customers by Sectors
Table 19: Breakdown of Loans and Advances to Customers by Size
Loans and Advances to Customers (LL million) Amount
2003 20042003 2004
Percentage
Small (less than 250 million)Medium (250 – 1500 million)Large (exceeding 1500 million)
Total (Gross)
205,550183,218198,250
587,018
224,987199,801229,825
654,613
35.02%31.21%33.77%
100.00%
34.37%30.52%35.11%
100.00%
BBAC Management Discussion & AnalysisB
Annual Report 2004
The breakdown of the loans by guarantee shows more liquid security in terms of lending asthe drop in the share of real estate was compensated by a rise in the share of cash collateral.
* Before deduction of provisions, debtors by acceptances and speculation accounts
The year 2004 witnessed a success in the remedial process in light of the new BDLIntermediary circular No. 41. Substandard loans were reduced by around LL 7.3 billion anddoubtful loans by around LL 11 billion. The net substandard and doubtful loans to gross loanshence declined by 4.6% to 7.87% at the end of 2004.
c- Other Financial Accounts
Other financial accounts grew by around 18% in 2004 driven by the rise in acceptances,reflecting a large expansion in trade finance. Other assets increased by around LL 2.1 billion,consisting of higher credit card facilities, prepaid expenses, and miscellaneous debtor accounts.
Loans and Advances to Customers (LL million) Amount
2003 20042003 2004
Percentage
Real estatePersonal guaranteesNon-securedSecuritiesCash collateralOthers
Total *
328,718134,26162,5721,330
133,5057
660,393
343,109134,13882,3841,432
169,867349
731,279
49.78%20.33%9.47%0.20%
20.22%0.00%
100.00%
46.92%18.34%11.27%0.20%
23.23%0.05%
100.00%
Table 20: Breakdown of Loans and Advances to Customers by Guarantees
Loans and Advances to Customers (LL million) 20032002 2004
Table 21: Breakdown of Loans and Advances to Customers by Central Bank Classification
Net Regular Loans
Net Substandard LoansAdd: Unrealized interest
Total Substandard
Net Doubtful LoansAdd: Unrealized interestAdd: Provisions
Total Doubtful Loans
Total Net Substandard and Doubtful LoansNet Total LoansGross LoansNet Substandard and Doubtful to Gross Loans
519,138
12,8387,251
20,089
38,09030,07247,224
115,387
50,928570,066654,613
7.78%
433,274
21,6395,711
27,350
45,02030,68550,689
126,394
66,659499,933587,01811.36%
446,915
18,9087,798
26,706
47,48729,28036,540
113,307
66,395513,310586,92811.31%
31
BBAC Management Discussion & Analysis
A
d- Loans to Deposits Ratio
Customers' deposits increased by 10.42% in 2004. The breakdown by currency, as displayedin Table 23, shows that deposits in FC increased by 25.64% while deposits in LL decreasedby 9.44%. This has changed the currency composition of the bank's deposits from LL : FC43.4 : 56.6 to 35.6 : 64.4. The currency composition of loans remained almost stable at LL : FC 27.3 : 72.7, while totalloans grew by around 14% over 2003.The loans to deposits ratio increased from 17.88% in 2003 to 18.47% in 2004, given thatthe increase in loans exceeded that in deposits. Loans to deposits in LL increased from11.35% to 14.16% while that in FC decreased from 22.89% to 20.85% given the change inthe currency denomination of deposits.
Despite the rise in lending, the operating surplus increased to LL 2,516 billion in 2004, whichgives way to additional investment choices in the future.
(LL million)
2003/2002 2004/2003
Amount Change %
Table 23: Operating Surplus or Deficit
Table 22: Other Financial Accounts
Deposits from customers LL+ Deposits from customers FC= Operating resources (OR)
Loans and advances to customers LL+ Loans and advances to customers FC= Operating uses (OU)
Operating surplus LLOperating surplus FCOperating surplus (OR-OU)
Loans to Deposits LLLoans to Deposits FCLoans to Deposits (Total)
958,5681,498,1022,456,670
121,591391,719513,310836,977
1,106,3831,943,360
12.68%26.15%20.89%
1,213,1321,582,4912,795,622
137,721362,212499,933
1,075,4111,220,2782,295,689
11.35%22.89%17.88%
1,098,5991,988,2733,086,872
155,550414,515570,065943,049
1,573,7592,516,808
14.16%20.85%18.47%
26.56%5.63%
13.80%13.27%-7.53%-2.61%28.49%10.29%18.13%-1.33%-3.26%-3.01%
-9.44%25.64%10.42%12.95%14.44%14.03%-12.31%28.97%9.63%2.81%
-2.04%0.58%
2002 2003 2004
(LL million) 2003 2004
Debtors by acceptances
Other assets
Total
59,281
14,011
73,292
50,246
11,956
62,202
BBAC Management Discussion & AnalysisB
Annual Report 2004
3- Liability Management
a- Banks and Financial Institutions
Banks and financial institutions’ accounts decreased from LL120 billion at the end of 2003 toaround LL70 billion at the end of 2004. The decline was mainly in foreign currency accounts,which form the majority of those deposits. This is mainly due to the early settlement of an IFCloan as part of a plan to restructure the sources of funds.
b- Deposits from Customers
Deposits from customers grew by 10.42% to reach around LL 3,087 billion, equivalent toUSD 2,048 million.The breakdown shown in table 26 shows that the currency composition of the bank's depositschanged from LL: FC 43.4: 56.6 in 2003 to 35.6: 64.4 at the end of 2004.
(LL millions) 2003 2004
Table 25: Banks and Financial Institutions
Sight DepositsTerm depositsShort-term loanLong-term loanAccrued interest payableTotal Banks and Financial InstitutionsDenominated as follows
LL in millionsForeign currencies in USD thousands
26,36240,8211,809
0784
69,776
3,21444,154
14,037100,855
04,824
575120,292
3,54677,443
Deposits from Customers (LL million) Amount
2003 20042003 2004
Percentage
Denominated as followsLL in millionForeign currencies CV in million LLForeign currencies in thousand USD
Total
1,213,1321,582,4911,049,745
2,795,622
1,098,5991,988,2731,318,921
3,086,872
43.39%56.61%
100%
35.59%64.41%
100%
Table 26: Breakdown of Deposits from Customers by Currency
(LL million) Sources of Funds
Table 24: Sources of Funds
2002 2003 2004 2002 2003 2004
Percentage
Central BankBanks and Financial InstitutionsDeposits from customersOther financial accountsShareholders’ equity
Total Sources of Funds
0.00%3.76%
87.35%3.57%5.32%
100%
0.01%3.89%
86.84%3.57%5.68%
100%
359110,042
2,456,671101,094160,736
2,828,902
0120,292
2,795,622114,214170,425
3,200,552
069,776
3,086,872117,057187,494
3,461,200
0.00%2.02%
89.19%3.38%5.42%
100%
33
BBAC Management Discussion & Analysis
A
The geographical distribution of deposits shows a lower concentration of deposits in the capitalBeirut against a higher share for the Mount Lebanon region, where the highest growth waswitnessed (around 30%).
The breakdown by size shows that customers' deposits have maintained almost their same structureas in 2003.
c- Other financial accounts
These accounts include the counterpart of engagements by acceptances and other liabilities. Thelatter, which decreased to LL 46.290 billion, includes margins against documentary creditsamounting to LL 30.41 billion and margins against credit card and safe box facilities amounting toLL 4.56 billion. Other liabilities also include taxes and other charges mainly consisting ofwithholding taxes on interest paid on deposits, and other credit accounts mainly consisting of capitalincrease differences.
Deposits from Customers (LL million) Amount
2003 20042003 2004
Percentage
Beirut and SuburbsBekaaMount LebanonSouth LebanonNorth LebanonCyprus
Total
1,098,486788,339566,916166,431115,19960,251
2,795,622
1,151,695844,684733,752179,558109,98767,196
3,086,872
39.29%28.20%20.28%5.95%4.12%2.16%
100%
37.31%27.36%23.77%5.82%3.56%2.18%
100%
Table 27: Geographical Distribution of Customers Deposits
Deposits from Customers (LL million) Amount
2003 20042003 2004
Percentage
Small (less than 250 million)Medium (250 – 750 million)Large (exceed 750 million)
Total
1,050,073554,860
1,190,689
2,795,622
1,141,963619,112
1,325,797
3,086,872
37.56%19.85%42.59%
100%
36.99%20.06%42.95%
100%
Table 28: Breakdown of Deposits from Customers by Size
(LL million) 2003 2004
Table 29: Other Financial Accounts
Engagements by acceptancesOther liabilitiesCurrent income tax liabilitiesRetirement benefit obligations
Total
59,29046,290
7411,403
117,057
50,24650,6822,108
11,178
114,214
BBAC Management Discussion & AnalysisB
Annual Report 2004
d- Shareholders’ Equity
Shareholders’ equity increased by 10.02 % to reach LL 187.494 billion at the end of 2004,prior to dividend distribution. Reserves for general banking risk increased by LL 2 billion, andlegal reserves by LL 2.22 billion. The bank continued its internal capital formation, with theretained earnings increasing by around 47% to reach LL 40.108 billion.
4- LCs opened during the year
The volume of opened import Letters of Credits increased from USD 136.4 million in 2003 toUSD 168.2 million in 2004, in a managerial decision to increase external trade financing.
5- Asset Quality
The analysis of the loan portfolio shows an improvement in most of the asset quality ratios in2004. As mentioned earlier, this was due to the successful remedial process carried duringthe course of the year. The ratio of doubtful to total loans decreased by around 4 percentagepoints to 17.63%. The bank enhanced its coverage ratio by maintaining an appropriate levelof provisioning equal to around 67%, compared to 64.38% in 2003.
(LL million) 2003 2004
Table 30: Shareholders’ Equity
Share capital and cash contribution to capitalLegal reserveReserve for unidentified banking risksRetained earningsRevaluation variance of tangible fixed assets
Total
93,69720,94611,68240,10821,061
187,494
93,69718,7239,682
27,26121,061
170,425
Asset Quality (percentage) 2003 2004
Table 31: Asset Quality Ratios
Doubtful Loans / Gross LoansProvisions for doubtful Loans / Doubtful LoansProvisions for Loans / Gross LoansNet Doubtful loans / Assets
17.63%66.99%12.92%1.10%
21.53%64.38%14.84%1.41%
35
BBAC Management Discussion & Analysis
A
6- Regulatory Guidelinesa- Article 152: Loans to Related Parties
Loans and advances to related parties decreased to LL 2,499 million at the end of 2004,down from LL 4,894 million in 2003. The ratio to total gross loans remains minor at 0.44%.
b- Capital Adequacy Ratio
The capital adequacy ratio increased from 19.84% in 2003 to 20.94% in 2004, comparedto 12% required by BDL.
Capital Adequacy (LL million and percentage) Amount
Table 32: Capital Adequacy Ratio
2003 2004
Risk weighted assets
Tier I Capital
Tier II Capital
Total Net Capital
Tier I Capital ratio
Tier II Capital ratio
Total Capital Ratio
735,088
135,814
10,000
145,814
18.48%
1.36%
19.84%
869,916
172,159
10,000
182,159
19.79%
1.15%
20.94%
BBAC Management Discussion & AnalysisB
Annual Report 2004
Financial Performance Ratios
BBAC's net income after taxes increased by 47.68 % over 2003, to reach LL 22.229 billion.The decline in the gross interest margin was more than compensated by the positive impactof the net provisioning on profits, as recoveries exceeded the provisions taken in 2004.The results were further enhanced by higher non-interest income and lower operatingexpenses. Net income before taxes in 2004 was around LL 7.8 billion higher than in 2003.
1- Liquidity
Net liquid assets increased by 9.25% in 2004; their ratio to total assets increased from76.83% in 2003 to 77.62% in 2004.Liquid assets in foreign currencies increased at the expense of LL liquidity, given the previouslymentioned repositioning of the currency mix.The net liquid assets to deposit ratio decreased by less than a percentage point to 87.03%,reflecting the increase in loans granted to the private sector.
(LL million) Amount
2003 2004 2004-2003
Growth %
Interest margin
Net provision less releases on loans and advances
Non-interest income
Staff expenses
Other operating expenses
Net Income - before tax
Tax on Interest
Net Income - before income tax
Income Tax
Net Income - after tax
54,950
(13,678)
20,906
(23,218)
(21,083)
17,877
(305)
17,572
(2,517)
15,055
44,539
800
21,952
(24,018)
(17,599)
25,675
(3,446)
22,229
0
22,229
-18.95%
-105.85%
5.00%
3.44%
-16.52%
43.62%
1029.84%
26.50%
-100.00%
47.65%
Table 33: Income Statement
37
BBAC Management Discussion & Analysis
A
2- Profitability
The return on average assets (ROAA) increased from 0.5% in 2003 to 0.67% in 2004. Thereturn on average equity (ROAE) also increased from 9.74% to 13.24%. This was due to the47.65% rise in profits compared to a 10.49% and 8.66% respective annual increases in averageassets and average equity. The earnings per share accordingly increased from LL 209 to LL 309.
Liquidity (LL million) 2003
Table 34: Liquidity Ratios
LL C/V Total LL C/V Total
2004
Liquid assetsDeposits from banksNet Liquid AssetsDue to customersLoans and advances to customers Total Assets (%)Loans / Assets Loans / Deposits Liquid Assets / DepositsLiquid Assets / AssetsNet Liquid Assets / DepositsNet Liquid Assets /Total Assets
1,732,71166,562
1,666,1481,988,273
414,5152,230,735
18.58%20.85%87.15%77.67%83.80%74.69%
1,023,5953,214
1,020,3811,098,599
155,5501,230,465
12.64%14.16%93.17%83.19%92.88%82.93%
1,144,2143,546
1,140,6681,213,132
137,7211,334,237
10.32%11.35%94.32%85.76%94.03%85.49%
1,435,092116,745
1,318,3471,582,491
362,2121,866,316
19.41%22.89%90.69%76.89%83.31%70.64%
2,579,306120,292
2,459,0142,795,622
499,9333,200,552
15.62%17.88%92.26%80.59%87.96%76.83%
2,756,30669,776
2,686,5293,086,872
570,0653,461,200
16.47%18.47%89.29%79.63%87.03%77.62%
(LL million and %) 2003 2004
Table 35: Profitability Ratios
2004-2003
Change %
Average assetsAverage equity*Return on average assets ROAA after tax (%)Return on average equity ROAE after tax (%)Net income for the year after taxNet profits**Number of shares outstanding (million)
Earnings per share EPS in LL after tax
Earnings per share ** EPS in LL after tax
Dividends per share DPS in LL***Dividends payout ratioRetention ratioNet Asset value per share in LL****
3,014,727154,519
0.509.74
15,05512,073
72209168 55
32.8067.202,367
3,330,876167,899
0.6713.24
22,22918,006
72309250 65
25.9974.012,604
10.49%8.66%
0.173.50
47.65%49.14%0.00%
47.65%49.14% 18.18%
-77
10.02%
* including only LL 10 billion revaluation variance accepted by the central bank as Tier II* * After allocation of profits to reserves for general banking risks and legal reserves *** An additional interest payment of LL 1.2 billion was made on the cash contributions**** Before Dividend Payment
BBAC Management Discussion & AnalysisB
Annual Report 2004
3- Management Efficiency
The ratio of interest paid to interest received increased from 74.21% in 2003 to 77.27% in2004. This was caused by prevailing market conditions as the decline in interest rates onLebanese TBs and CDs outweighed the reduction in costs on deposits. The effective interest rateon LL TBs decreased from 10.94% at the end of 2003 to 6.25% at the end of 2004 and to alesser extent from 9.33% to 8.3% on USD. The average deposits rate, in comparison, decreasedby only one percentage point to 5.16% in 2004.Net commissions to net financial income increased from 19.89% in 2003 to 20.75% in 2004.The cost per average branch was also reduced from LL 1,384 million to LL1,301 million in 2004.The year 2004 also witnessed a decline in the cost to income ratio from 71.25% to 61.85%.
4- Interest Margin
The gross interest margin decreased from 1.90% in 2003 to 1.39% in 2004, despite the dropin the cost of earning assets and due to the decrease in the revenue from TBs and CDs asmentioned earlier. However, the net interest margin stood at almost the same level of 1.42%,as recoveries exceeded the provisions taken in 2004, generating a positive LL 800 million onthe P&L, compared to a LL13,678 million net provisioning in 2003. The net spreadaccordingly stood at almost its same level of 1.36%.
(percentage) 2003 2004
Table 36: Management Efficiency Ratios
Interest paid / Interest receivedNet commissions / Net financial incomeCost per average branch (LL million)Cost / Income (Efficiency Ratio)
77.27%20.75%
1,30161.85%
74.21%19.89%
1,38471.25%
(LL million) 2003LL Total%CV LL% LL Total%CV LL%
2004
Average interest earning assetsInterest paidInterest receivedNet interest receivedCost of earning assets (in %) Return on earning assets (in %)Gross Interest Margin (in %)Net releases (provisions) onloans and advancesNet Interest Margin (in %)Average interest earning assets to average assets (in %)Gross spread (in %)Net spread (in %)
39.6059.3252.4332.618.17%
9.74%
1.56%
0.13%
95.54%1.49%0.13%
1,147,48793,797
111,71917,922
-16,382
1,750,29264,326
101,35437,028
2,704
60.4040.6847.5767.393.68%
5.79%
2.12%
2.27%
96.50%2.04%2.19%
2,897,779158,123213,07354,9505.46%
7.35%
1.90%
-13,678
1.42%
96.12%1.82%1.37%
38.4556.4749.7326.836.95%
7.93%
0.97%
0.65%
95.87%0.93%0.63%
1,229,42985,50297,45211,949
-3,913
1,967,90765,90698,49632,590
4,713
61.5543.5350.2773.173.35%
5.01%
1.66%
1.90%
96.06%1.59%1.82%
3,197,337151,408195,94744,5394.74%
6.13%
1.39%
800
1.42%
95.99%1.34%1.36%
Table 37: Interest Analysis
39
BBAC Management Discussion & Analysis
A
5- Non-Interest Income
Net commissions received increased from LL 12.37 billion in 2003 to LL 13.97 billion in2004. The rise in commissions received was mainly caused by the increase in trade finance,credit card activity, account services and others. The decrease in the net trading income was almost compensated by the rise in other operatingincome, due to the release of impairment provision on property acquired in settlement of debt.
(LL million) Amount
2003 20042003 2004
Percentage
Net commissions receivedDividend incomeNet trading incomeOther operating income
Total Non-Interest Income
12,365282
7,659600
20,906
13,965162
5,0742,751
21,952
59.15%1.35%
36.63%2.87%
100%
63.62%0.74%
23.12%12.53%
100%
Table 38: Non-Interest Income
Commissions Received (LL million) Amount
2003 20042003 2004
Percentage
Credit related fees and commissionEngagement by endorsement feesOther fees
Total Commissions Received
6,2173,3553,915
13,487
6,5754,0184,622
15,215
46.10%24.88%29.03%
100%
43.21%26.41%30.38%
100%
Commissions Paid (LL million) Amount
2003 20042003 2004
Percentage
Brokerage feesOther fees
Total Commissions Paid
971151
1,122
1,15595
1,250
86.54%13.46%
100%
92.40%7.60%
100%
Table 39: Commissions
BBAC Management Discussion & AnalysisB
Annual Report 2004
6- General Operating Expenses
General operating expenses decreased by around 6% in 2004. Staff expenses increased by3.44%, a growth rate that is slightly higher than last year’s. Other operating expensesdecreased by around 20%, due to the control over spending, especially with the additional costincurred by the management restructuring process.
7- Net Financial Income
The net interest margin increased by around LL 4 billion over 2003 despite the decline in thegross margin and due to a better impact from net provisions on doubtful debts. Non-interestincome on the other hand increased by 5% due to a 12.9% rise in net commissions, whichare the main contributor to non-interest income. Hence, net financial income increased byaround 8.22% over 2003. Average footings increased at even a higher rate leading to a slightdrop of 0.03% in the ratio of net financial income to average footings.
(LL million) Amount
2004-20032003 2004
Change %
Staff expensesOther operating expensesDepreciation & amortization
Total
23,21817,1833,900
44,301
24,01813,7253,874
41,617
3.44%-20.12%-0.66%
-6.06%
Table 40: General Operating Expenses
(LL million) Amount
2004-20032003 2004
Change %
Net interest marginNon interest incomeNet financial incomeAverage footings
Net Financial Income / Average Footings (%)
41,27220,90662,178
3,109,296
2.00
45,34021,95267,292
3,415,244
1.97
9.86%5.00%8.22%9.84%
-0.03
Table 41: Net Financial Income
41
BBAC Auditor's Report
45
46
47
48
49
50
86
87
Contents
Independent auditor's report
Balance sheet
Income statement
Statement of changes in shareholders' equity
Statement of cash flows
Notes to the financial statements
Balance sheet presented in accordance with Bank of Lebanon Circular No. 33
Income statement presented in accordance with Bank of Lebanon Circular No. 33
Auditor's ReportA
Annual Report 2003
Independent Auditor's Reportto the shareholders of BBAC S.A.L.
We have audited the accompanying balance sheet of BBAC S.A.L. as of 31 December2004 and the related statements of income, changes in equity and cash flows for theyear then ended as set out on pages 46 to 85. These financial statements are theresponsibility of the Bank's management. Our responsibility is to express an opinion onthese financial statements based on our audit.
We conducted our audit in accordance with International Standards on Auditing. ThoseStandards require that we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosuresin the financial statements, within the limitations imposed by the existing banking lawsin Lebanon which preclude verification procedures on coded accounts. An audit alsoincludes assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation. Webelieve that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements present fairly in all material respects, thefinancial position of BBAC S.A.L. as of 31 December 2004 and the results of itsoperations, its changes in equity and its cash flows for the year then ended inaccordance with International Financial Reporting Standards.
Beirut - Lebanon
45
Auditor's Report
A
ASSETS (LL Millions) 2004Notes 2003
Cash and Bank of Lebanon 5 852,141 919,753Lebanese Treasury bills 6 1,108,000 943,795Loans and advances to banks 7 763,621 682,900Trading securities 8 6,283 3,529Loans and advances to customers 9 570,065 499,933Debtors by acceptances 10 59,290 50,246Investment securities: 11- available-for-sale 562 562- held-to-maturity 25,699 28,767Investments in subsidiaries 12 3,524 3,524Property acquired in settlement of debt 13 14,265 10,625Investment property 14 10,271 10,413Intangible assets 15 1,288 1,592Property and equipment 16 32,180 32,957Other assets 17 14,011 11,956
Total assets 3,461,200 3,200,552
LiabilitiesDeposits from banks 18 69,776 120,292Due to customers 19 3,086,872 2,795,622Engagements by acceptances 10 59,290 50,246Other liabilities 20 46,290 50,682Current income tax liability 35 74 2,108Retirement benefit obligations 22 11,404 11,178
Total liabilities 3,273,706 3,030,128
Shareholders' equityShare capital and cash contribution to capital 23 93,697 93,697Legal reserve 24 20,946 18,723Reserve for unidentified banking risks 25 11,682 9,682Real estate revaluation reserve 26 21,061 21,061Retained earnings 40,108 27,261
Total shareholders' equity 187,494 170,424
Total liabilities and equity 3,461,200 3,200,552
Balance Sheet as at December 31, 2004
The financial statements on pages 46 to 88 were approved by the Board of Directors on 23 June 2005 and were signed by Mr. Ghassan Assaf, Chairman and General Manager.
Auditor's ReportA
Annual Report 2003
Income statement For the Year Ended December 31, 2004
(LL Millions) 2004Notes 2003
Interest and similar income 27 195,948 213,073
Interest expense and similar charges 27 (151,408) (158,123)
Net interest income 44,540 54,950
Fee and commission income 28 15,215 13,487
Fee and commission expense 28 (1,250) (1,122)
Net fee and commission income 13,965 12,365
Dividend income 29 162 282
Net trading income 30 5,074 7,659
Other operating income 31 2,751 600
Net releases (provisions) on loans and advances 32 800 (13,678)
Operating expenses 33 (41,617) (44,301)
Profit before taxes 25,675 17,877
Taxes 35 (3,446) (2,822)
Net profit for the year 22,229 15,055
47
Auditor's Report
A
Share Capital
Cash contributionto capital
Legalreserve
Real estaterevaluation
reserve
Total
Balance at 31 December 2002 72,000 21,697 17,218 21,061 8,205 20,555 160,736
Net profit for the year - - - - - 15,055 15,055
Dividends paid (note 40) - - - - - (4,752) (4,752)
Interest paid on cash contribution
to capital (note 23) - - - - - (615) (615)
Transfers (notes 24, 25) - - 1,505 - 1,477 (2,982) -
Balance at 31 December 2003 72,000 21,697 18,723 21,061 9,682 27,261 170,424
Net profit for the year - - - - - 22,229 22,229
Dividends paid (note 40) - - - - - (3,960) (3,960)
Interest paid on cash contribution
to capital (note 23) - - - - - (1,199) (1,199)
Transfers (notes 24, 25) - - 2,223 - 2,000 (4,223) -
Balance at 31 December 2004 72,000 21,697 20,946 21,061 11,682 40,108 187,494
Reserve forunidentifiedbanking risks
Retainedearnings(LL Millions)
Statement of Changes in Equity For the Year Ended December 31, 2004
Auditor's ReportA
Annual Report 2003
Statement of Cash FlowsFor the Year Ended December 31, 2004
(LL Millions) 2004 2003
Cash flows from operating activitiesNet profit for the year 22,229 15,055Adjustments:
Tax 35 3,446 2,822Loss on disposal of property and equipment 31 8 52Gain on disposal of property acquired in settlement
of debt 31 (157) -Depreciation of property and equipment 16 3,171 3,181Fair value loss on investment property 14 142 142Amortisation of intangible assets 15 561 577Net releases (provisions) on loans and advances 32 (800) 13,678Changes in fair value of trading securities 8 (291) (381)Net transfer (from) to other provisions 21 (1,199) 2,488Net transfer to (from) retirement obligations 22 226 (259)
Net changes in operating assets and liabilities:Bank of Lebanon – mandatory reserve 5 36,576 (63,590)Bank of Lebanon – loans and advances 5 (28,981) (425,956)Lebanese Treasury bills 6 (285,374) 155,365Loans and advances to banks 7 (42,129) 59,222Trading securities 8 (2,463) -Loans and advances to customers 9 (75,417) (7,127)Other assets 17 (2,055) (865)Deposits from banks 18 (50,516) 10,250Due to customers 19 291,250 338,951Other liabilities 20 (3,188) 1,840
Cash (used in) provided from operations (134,961) 105,445Taxes paid 35 (3,324) (2,989)
Net cash (used in) provided from operating activities (138,285) 102,456Cash flows from investing activitiesLebanese Treasury bills - held-to-maturity 6 120,627 (6,424)Investment securities - held-to-maturity 11 3,068 4,531Purchase of intangible assets 15 (257) (161)Purchase of property and equipment 16 (1,840) (3,414)Proceeds from disposal of property acquired
in settlement of debt 13 2,035 -Net cash provided from (used in) investing activities 123,633 (5,468)Cash flows from financing activitiesDividends paid (3,960) (4,752)Interest paid on cash contribution to capital (1,199) (615)Net cash used in financing activities (5,159) (5,367)Net (decrease) increase in cash and cash equivalents (19,811) 91,621Cash and cash equivalents at beginning of year 37 756,195 664,574Cash and cash equivalents at end of year 37 736,384 756,195Principal non-cash transactions
The principal non-cash transactions relate mainly to the properties acquired in settlement of debt amounting to LL 6.09 billion (note 13).
Notes
49
Auditor's Report
A
Notes to the financial statementsFor the Year Ended December 31, 20041- Establishment and operations
BBAC S.A.L. was incorporated in Lebanon in 1956 and registered at the Commercial Courtin Beirut under No. 6196. It appears under number 28 in the list of Lebanese banks.The Bank undertakes commercial banking operations through its head office in Beirut andits network of thirty branches across Lebanon, in addition to a branch in Cyprus (off-shore)and a branch at the Damascus free zone in Syria.
2- Summary of significant accounting policies
The principal accounting policies applied in the preparation of these financial statementsare set out below. These policies have been consistently applied to all the years presented,unless otherwise stated. These financial statements are not consolidated. Consolidatedfinancial statements are prepared at the end of each financial year.
2.1 Basis of presentation
The financial statements have been prepared in accordance with International FinancialReporting Standards (IFRS) and in conformity with the banking laws and regulations andthe directives of the Bank of Lebanon. The financial statements have been prepared underthe historical cost convention, as modified by the revaluation of certain property, tradingand available-for-sale investment securities at fair value through profit or loss andinvestment properties, which are carried at fair value.The preparation of financial statements in conformity with IFRS requires the use of certaincritical accounting estimates. It also requires management to exercise its judgement in theprocess of applying the Bank's accounting policies. The areas involving a higher degree ofjudgement or complexity, or areas where assumption and estimates are significant to thefinancial statements, are disclosed in note 4.
2.2 Foreign currency
Foreign currency transactions are translated into Lebanese pounds at the rate ruling on thetransaction date. Foreign currency monetary assets and liabilities are translated intoLebanese pounds at the rate ruling at the balance sheet date. Exchange differences arereported within the income statement.
2.3 Interest income and expense
Interest income and expense are recognised in the income statement for all instrumentsmeasured at amortised cost using the effective interest method.The effective interest method is a method of calculating the amortised cost of a financialasset or a financial liability and of allocating the interest income or interest expense overthe relevant period. The effective interest rate is the rate that exactly discounts estimatedfuture cash payments or receipts through the expected life of the financial instrument or,when appropriate, a shorter period to the net carrying amount of the financial asset orfinancial liability. When calculating the effective interest rate, the Bank estimates cashflows considering all contractual terms of the financial instrument but does not considerfuture credit losses. The calculation includes all fees and points paid or received betweenparties to the contract that are an integral part of the effective interest rate, transactioncosts and all other premiums or discounts.
Auditor's ReportA
Annual Report 2003
2.4 Fee and commission income
Fees and commissions are recognised on an accrual basis when the service has beenprovided and mainly comprise commissions on client transactions.
2.5 Financial assets
The Bank classified its financial assets into the following categories: trading, available-for-sale,held-to-maturity and originated loans.Trading securities are securities that were either acquired for generating a profit from short-termfluctuations in price or dealer's margin, or are securities included in a portfolio in which a patternof short-term profit taking exists. Trading securities are initially recognised at cost (whichincludes transaction costs) and subsequently re-measured at fair value based on quoted bidprices. All related realised and unrealised gains and losses are included in net trading income.Investment securities intended to be held for an indefinite period of time, which may be sold inresponse to needs for liquidity or changes in interest rates, exchange rates or equity prices areclassified as available-for-sale. Available-for-sale securities are initially recognised at cost (whichincludes transaction costs) and subsequently re-measured at fair value (market value) based onquoted bid prices. Unrealised gains and losses arising from changes in fair value of securitiesclassified as available-for-sale are recognised in equity under revaluation reserve – available-for-sale investments. Unquoted equity instruments are stated at cost adjusted for any impairmentin their value, which is recognised in the income statement as loss from investment securities.Investment securities with fixed maturity where management has both the intent and theability to hold to maturity are classified as held-to-maturity. Held-to-maturity investments arecarried at amortised cost using the effective yield method, less any provision for impairment.Loans originated by the Bank by providing money directly to the borrower are categorisedas loans originated by the Bank and are carried at amortised cost. Third party expenses,such as legal fees, incurred in securing a loan are treated as part of the cost of thetransaction. All loans and advances are recognised when cash is advanced to borrowers.A financial asset is impaired if its carrying amount is greater than its estimated recoverableamount. The amount of the impairment loss for assets carried at amortised cost iscalculated as the difference between the asset's carrying amount and the present value ofexpected future cash flows discounted at the financial instrument's original effective interestrate. By comparison, the recoverable amount of an instrument measured at fair value is thepresent value of expected future cash flows discounted at the current market rate of interestfor a similar financial asset.Interest earned whilst holding investment securities is reported as interest income.Dividends receivable are included separately under dividend income when received.All purchases and sales of securities that require delivery within the time frame establishedby regulation or market convention ('regular way' purchases and sales) are recognised attrade date, which is the date that the Bank commits to purchase or sell the asset.Otherwise such transactions are treated as derivatives until settlement occurs.
2.6 Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the balance sheetwhen there is a legally enforceable right to offset the recognised amounts and there is anintention to settle on a net basis, or realise the asset and settle the liability simultaneously.
2.7 Provisions for loan impairment
A credit risk for loan impairment is established if there is objective evidence that the Bankwill not be able to collect the amounts due. The amount is based on management'scontinued evaluation of the loan portfolio, taking into consideration current economicconditions, past experience and the Bank of Lebanon requirements. The aforementioned
51
Auditor's Report
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provision amount is the difference between the carrying amount and the recoverableamount, being the present value of expected cash flows, including amounts recoverablefrom guarantees and collateral, discounted based on the interest rate at inception.
2.8 Computer software
Acquired computer software licenses are capitalised on the basis of the costs incurred toacquire and bring to use the specific software. These costs are amortised on the basis ofthe expected useful lives of five years.Costs associated with developing or maintaining computer software programs arerecognised as an expense as incurred. Costs that are directly associated with the productionof identifiable and unique software products controlled by the Bank, and that will probablygenerate economic benefits exceeding costs beyond one year, are recognised as intangibleassets. Direct costs include software development employee costs and an appropriateportion of relevant overheads.
2.9 Key money
Key money paid for repossessed properties from tenants is amortised over a period of four years.
2.10 Property and equipment
Land and buildings comprise mainly branches and offices. All property and equipment isstated at historical cost or revaluation less depreciation. Historical cost includes expenditurethat is directly attributable to the acquisition of the items.Subsequent costs are included in the asset's carrying amount or are recognised as aseparate asset, as appropriate, only when it is probable that future economic benefitsassociated with the item will flow to the Bank and the cost of the item can be measuredreliably. All other repairs and maintenance are charged to the income statement during thefinancial period in which they are incurred. Increases in the carrying amount arising onrevaluation of land and buildings are credited to a revaluation reserve in shareholders' equity.Decreases that offset previous increases of the same asset are charged against revaluationreserves directly in equity; all other decreases are charged to the income statement.Land is not depreciated. Depreciation on other assets is calculated using the straight-linemethod to allocate their cost or revaluation to their residual values over their estimateduseful lives. The principal annual rates used for this purpose are:
%
Buildings 2.5Computer equipment 20Furniture, fixtures and equipment 9 - 13Vehicles 15Leasehold improvements 25
The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.Assets that are subject to depreciation are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount may not be recoverable. Anasset's carrying amount is written down immediately to its recoverable amount if the asset'scarrying amount is greater than its estimated recoverable amount. The recoverable amountis the higher of the asset's fair value less costs to sell and value in use.Gains and losses on disposals are determined by comparing proceeds with carrying amount.These are included in the income statement.
2.11 Investment property
Investment property, principally comprising land and buildings, is held for long-term rental
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yields and is not occupied by the Bank. Investment property is carried at fair value,representing open-market value determined annually by external valuers. Changes in fairvalues are recorded in the income statement as part of other income.
2.12 Properties acquired in settlement of debt
The Bank exercises its ownership rights over the real estate collateral when it exhausts allreasonable means for collecting non-performing loans.The Bank measures real estate acquired in settlement of debt at its fair value andrecognises gains or losses by comparing the fair value of the acquired property to the netbook amount of the non-performing loan.The Bank reviews for impairment the carrying value of property acquired in settlement ofdebt at least annually or whenever events or changes in circumstances indicate that thecarrying amount may not be recoverable. An impairment loss is recognised for the amountby which the asset's carrying amount exceeds its recoverable amount. The recoverableamount is the higher of an asset's fair value less costs to sell and value in use.
2.13 Investments in subsidiaries
Investments in subsidiaries are stated at cost. When the carrying amount of the investmentis greater than its recoverable amount, it is written down to its recoverable amount.
2.14 Deferred income taxes
Deferred income tax is provided in full, using the liability method, on temporary differencesarising between the tax bases of assets and liabilities and their carrying amounts in the financialstatements. Currently enacted tax rates are used in the determination of deferred income tax.Deferred tax assets are recognised to the extent that it is probable that future taxable profitwill be available against which the temporary differences can be utilised.Deferred income tax is provided on temporary differences arising from general provisions onloans and advances to customers and differences between accounting and fiscal depreciation,except where the timing of the reversal of the temporary difference can be controlled and it isprobable that the temporary difference will not reverse in the foreseeable future.
2.15 Speculation accounts
Foreign currency placements and foreign currency borrowings relating to speculationaccounts of Bank customers are netted off as required by the Bank of Lebanon directives.
2.16 Cash and cash equivalents
For the purposes of the cash flow statement, cash and cash equivalents comprise cash onhand, non-restricted balances with Bank of Lebanon, Lebanese Treasury bills and loans andadvances to banks with original maturities of three months or less at the date of acquisition.
2.17 Provisions
Provisions are recognised when the Bank has a present legal or constructive obligation asa result of past events, it is probable that an outflow of resources will be required to settlethe obligation and a reliable estimate of the amount can be made.
2.18 Retirement benefit obligations
The Bank has a defined benefit plan in accordance with the national social security fundregulations. A defined benefit plan is a pension plan that defines an amount of pensionbenefit to be provided, usually as a function of one or more factors such as age, years of
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service or compensation. The liability in respect of the defined benefit plan is the presentvalue of the defined benefit obligation at the balance sheet date less contributions to thefund, together with adjustments for actuarial gains/losses and past service cost. The definedbenefit obligation is calculated annually by the Bank using the projected unit credit method.The present value of the defined benefit obligation is determined by the estimated futurecash outflows using interest rates of government securities that have terms to maturityapproximating the terms of the related liability.
2.19 Dividends
Dividends are recognised in equity in the year in which they are approved by the Bank'sshareholders. Dividends for the year that are declared after the balance sheet date are dealtwith in the dividends per share note.
2.20 Fiduciary activities
The Bank commonly acts as trustees and in other fiduciary capacities that result in the holdingor placing of assets on behalf of individuals and other institutions. These assets and incomearising thereon are excluded from these financial statements, as they are not assets of the Bank.
2.21 Comparatives
Where necessary, comparative figures have been adjusted to conform with changes inpresentation in the current year.
3- Financial risk management
A- Financial instruments
By their nature, the Bank's activities are principally related to the use of financialinstruments. The Bank accepts deposits from customers at both fixed and floating rates,and for various periods, and seeks to earn above-average interest margins by investing thesefunds in high-quality assets. The Bank seeks to increase these margins by consolidatingshort-term funds and lending for longer periods at higher rates, while maintaining sufficientliquidity to meet all claims that might fall due.The Bank also seeks to raise its interest margins by obtaining above-average margins, netof allowances, through lending to commercial and retail borrowers with a range of creditstanding. Such exposures involve not just on-balance sheet loans and advances; the Bankalso enters into guarantees and other commitments such as letters of credit andperformance, and other bonds.The Bank also trades in financial instruments where it takes positions in traded and over-the-counter instruments to take advantage of short-term market movements in equities and bondsand in currency, interest rate and commodity prices. The Board places trading limits on thelevel of exposure that can be taken in relation to both overnight and intra-day market positions.
B- Capital adequacy
To monitor the adequacy of its capital the Bank uses ratios established by the Bank forInternational Settlements (BIS). These ratios measure capital adequacy (minimum 8% asrequired by BIS and 12% as required by the Bank of Lebanon) by comparing the Bank'seligible capital with its balance sheet assets, off-balance-sheet commitments and marketand other risk positions at weighted amounts to reflect their relative risk.The market risk approach covers the general market risk and the risk of open positions incurrencies and debt and equity securities. Assets are weighted according to broadcategories of notional risk, being assigned a risk weighting according to the amount ofcapital deemed to be necessary to support them. Five categories of risk weights (0%, 20%,30%, 50%, 100%) are applied; for example cash and placements with the Bank of
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Lebanon have a zero risk weighting which means that no capital is required to support theholding of these assets. Property and equipment carries a 100% risk weighting, meaningthat it must be supported by capital equal to 12% of the carrying amount.Off-balance-sheet credit related commitments and forwards and options based derivativeinstruments are taken into account by applying different categories of conversion factors,designed to convert these items into balance sheet equivalents. The resulting equivalentamounts are then weighted for risk using the same percentages as for on-balance-sheet assets.Tier 1 capital consists of capital and reserves. Tier 2 capital includes the Bank's eligible realestate revaluation surplus.
The Group's capital adequacy level was as follows:
(LL Millions)
Balance sheet assets (net of provisions)Cash and Bank of Lebanon 852,152 919,761 - -Lebanese Treasury bills 1,108,000 943,795 206,887 120,870Loans and advances to banks 764,399 683,656 153,417 160,350Trading securities 6,283 3,529 6,283 3,529Loans and advances to customers 569,716 499,936 327,885 297,725Debtors by acceptances 59,290 50,246 46,987 34,220Investment securities:- available-for-sale 562 562 562 562- held-to-maturity 25,699 28,767 12,750 14,797Property acquired in settlement of debt 14,265 10,625 - -Investment property 11,825 11,967 11,825 11,967Intangible assets 1,297 1,761 1,297 1,761Property and equipment 33,031 33,481 33,031 33,481Other assets 15,663 14,034 15,663 14,034
Off-balance sheet positionsLetters of credit 39,939 34,748 21,987 12,352Letters of guarantee 30,192 28,652 30,192 28,652
Unassigned market risk components 1,150 788
Total risk-weighted assets 869,916 735,088
2004 2003
Consolidated Balance SheetNotional amount Risk Weighted Amount
2004 2003
(LL Millions)
Tier I capitalTier I + Tier II capital
135,814145,814
172,159182,159
2004 2003
Capital BIS (%)
18.4819.84
19.7920.94
2004 2003
BIS Capital Ratios
C- Credit risk
The Bank takes on exposure to credit risk which is the risk that a counterparty will be unableto pay amounts in full when due. Impairment provisions are provided for losses that have beenincurred at the balance sheet date. Significant changes in the economy, or in the health of aparticular industry segment that represents a concentration in the Bank's portfolio, could resultin losses that are different from those provided for at the balance sheet date. Managementtherefore carefully manages its exposure to credit risk.The Bank structures the levels of credit risk it undertakes by placing limits on the amount ofrisk accepted in relation to one borrower, or groups of borrowers, and to geographical andindustry segments. Such risks are monitored on a revolving basis and subject to an annual ormore frequent review. Limits on the level of credit risk by product, industry sector and by
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country are approved annually by the Board of Directors.The exposure to any one borrower including banks and brokers is further restricted by sub-limits covering on and off-balance sheet exposures and daily delivery risk limits in relationto trading items such as forward foreign exchange contracts. Actual exposures against limitsare monitored daily.Exposure to credit risk is managed through regular analysis of the ability of borrowers andpotential borrowers to meet interest and capital repayment obligations and by changing theselending limits where appropriate. Exposure to credit risk is also managed in part by obtainingcollateral and corporate and personal guarantees.
Master netting arrangements
The Bank further restricts its exposure to credit losses by entering into master netting arrangementswith counterparties with which it undertakes a significant volume of transactions. Master nettingarrangements do not generally result in an offset of balance sheet assets and liabilities, astransactions are usually settled on a gross basis. However, the credit risk associated withfavourable contracts is reduced by a master netting arrangement to the extent that if an event ofdefault occurs, all amounts with the counterparty are terminated and settled on a net basis.
Credit related commitments
The primary purpose of these instruments is to ensure that funds are available to a customeras required. Guarantees and standby letters of credit, which represent irrevocable assurancesthat the Bank will make payments in the event that a customer cannot meet its obligations tothird parties, carry the same credit risk as loans. Documentary and commercial letters of credit,which are written undertakings by the Bank on behalf of a customer authorising a third partyto draw drafts on the Bank up to a stipulated amount under specific terms and conditions, arecollateralised by the underlying shipments of goods to which they relate and therefore carry lessrisk than a direct borrowing.Commitments to extend credit represent unused portions of authorisations to extend credit inthe form of loans, guarantees or letters of credit. With respect to credit risk on commitments toextend credit, the Bank is potentially exposed to loss in an amount equal to the total unusedcommitments. However, the likely amount of loss is less than the total unused commitments,as most commitments to extend credit are contingent upon customers maintaining specificcredit standards. The Bank monitors the term to maturity of credit commitments becauselonger-term commitments generally have a greater degree of credit risk than shorter-termcommitments.
The economic sector concentration within the customer loan portfolio (before offsettingprovisions, debtors by acceptances and speculation accounts) were as follows:
\
A concentration of credit risk in loans and advances to customers exists where the top 161debtors' balances of LL 351 billion (or 1.4% of total debtors) represent approximately 48% ofthe total loans and advances to customers amounting to LL 731 billion (before offsettingprovisions, debtors by acceptances and speculation accounts) at 31 December 2004.
(LL Millions)
Trading 236,859 32 207,235 31Construction 162,579 22 143,285 22Industrial 92,246 13 90,046 14Agriculture 30,582 4 26,833 4Consumer loans 181,080 25 168,981 25Other loans 27,933 4 24,013 4
731,279 100 660,393 100
%
2004 2004 2003 2003%
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LL USD EURO TotalGBP OthersASSETS (LL Millions)
Concentration of assets and liabilities As at 31 December 2004
Cash and Bank of Lebanon 395,696 454,228 1,855 200 162 852,141Lebanese Treasury bills 614,541 463,133 30,326 - - 1,108,000Loans and advances to banks 12,248 622,919 96,205 10,715 21,534 763,621Trading securities 548 5,735 - - - 6,283Loans and advances to customers 155,550 396,842 26,195 237 8,623 587,447Debtors by acceptances 9 47,798 6,917 58 4,508 59,290Investment securities 562 25,699 - - - 26,261Investments in subsidiaries 3,524 - - - - 3,524Property acquired in settlement of debt 1,201 13,064 - - - 14,265Investment property 10,271 - - - - 10,271Property, equipment and intangible assets 33,144 324 - - - 33,468Other assets 3,171 10,749 71 1 19 14,011Total assets 1,230,465 2,040,491 161,569 11,211 34,846 3,478,582
LiabilitiesDeposits from banks 3,214 25,794 24,710 20 16,038 69,776Due to customers 1,098,599 1,850,871 121,873 10,808 22,103 3,104,254Engagements by acceptances 9 47,798 6,917 58 4,508 59,290Other liabilities 5,166 35,645 5,050 39 390 46,290Current income tax liability 74 - - - - 74Retirement benefit obligations 10,657 747 - - - 11,404Total liabilities 1,117,719 1,960,855 158,550 10,925 43,039 3,291,088
Net on-balance sheet position 112,746 79,636 3,019 286 (8,193) 187,494
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Management believes that this concentration in loan balances conforms with the Lebanesebanking sector.
D- Market risk
The Bank takes on exposure to market risks. Market risks arise from open positions in interestrate, currency and equity products, all of which are exposed to general and specific marketmovements. The Bank applies a 'value at risk' methodology to estimate the market risk ofpositions held and the maximum losses expected, based upon a number of assumptions forvarious changes in market conditions. The Board sets limits on the value of risk that may beaccepted, which is monitored on a daily basis.
E- Currency risk
The Bank takes on exposure to effects of fluctuations in the prevailing foreign currency exchangerates on its financial position and cash flows. The Board of Directors sets limits on the level ofexposure by currency and in total for both overnight and intra-day positions, which aremonitored daily. The table below summarises the Bank's exposure to foreign currency exchangerate risk at 31 December 2004 before netting off customers' speculation accounts. Included inthe table are the Bank's assets and liabilities at carrying amounts, categorised by currency.
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F- Cash flow and fair value interest rate risk
Cash flow interest rate risk is the risk that the future cash flows of a financial instrumentwill fluctuate because of changes in market interest rates. Fair value interest rate risk is therisk that the value of a financial instrument will fluctuate because of changes in marketinterest rates. The Bank takes on exposure to the effects of fluctuations in the prevailinglevels of market interest rates on its financial position and cash flows. Interest margins mayincrease as a result of such changes but may reduce or create losses in the event thatunexpected movements arise. The Board of Directors sets limits on the level of mismatchof interest rate repricing that may be undertaken, which is monitored daily.
LL USD EURO TotalGBP OthersASSETS (LL Millions)
Concentration of assets and liabilities As at 31 December 2003
Cash and Bank of Lebanon 572,543 345,155 1,584 290 181 919,753Lebanese Treasury bills 559,440 343,163 41,192 - - 943,795Loans and advances to banks 11,120 564,512 71,582 14,217 21,469 682,900Trading securities 548 2,981 - - - 3,529Loans and advances to customers 137,721 346,684 16,932 593 14,952 516,882Debtors by acceptances - 36,818 12,542 116 770 50,246Investment securities 562 28,767 - - - 29,329Investments in subsidiaries 3,524 - - - - 3,524Property acquired in settlement of debt 1,143 9,482 - - - 10,625Investment property 10,413 - - - - 10,413Property, equipment and intangible assets 34,206 343 - - - 34,549Other assets 3,017 8,909 10 1 19 11,956Total assets 1,334,237 1,686,814 143,842 15,217 37,391 3,217,501
LiabilitiesDeposits from banks 3,546 87,748 20,197 873 7,928 120,292Due to customers 1,213,132 1,466,304 110,522 7,831 14,782 2,812,571Engagements by acceptances - 36,818 12,542 116 770 50,246Other liabilities 8,240 31,348 6,190 4,682 222 50,682Current income tax liability 2,108 - - - - 2,108Retirement benefit obligations 10,431 747 - - - 11,178Total liabilities 1,237,457 1,622,965 149,451 13,502 23,702 3,047,077
Net on-balance sheet position 96,780 63,849 (5,609) 1,715 13,689 170,424
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ASSETS (%)
As at 31 December
Cash and Bank of Lebanon 7.85 2.30 6.25 5.83
Lebanese Treasury bills 6.25 8.30 10.94 9.33
Loans and advances to banks 4.37 2.49 4.43 2.52
Loans and advances to customers 9.36 8.59 9.67 9.48
LiabilitiesDeposits from banks 10.07 1.38 10.00 0.79
Due to customers 7.27 3.85 8.13 3.90
LL USD
2004 2003LL USD
Year
2004 2,837,555 38% 62% 146,374 5.16
2003 2,511,669 40% 60% 153,600 6.12
2002 2,301,748 38% 62% 162,176 7.05
2001 2,055,977 41% 59% 163,092 7.93
2000 1,831,473 48% 52% 172,351 9.41
LL F/Cy
Average balanceof deposits
Allocation ofdeposits Cost of funds Average Interest
rate
LL MillionsLL Millions %
The table below summarises the effective interest rate by major currencies for monetaryfinancial instruments:
Average deposits and cost of funds over the last five years were as follows:
A concentration in deposits and customer accounts exists where the top 501 depositors(or 0.69% of total depositors) amounting to LL 1,049 billion account for approximately35% of total deposits and customer accounts of LL 2,966 billion (before offsettingspeculation accounts and excluding cheques and orders to be paid, public sector depositsand deposits from related parties) at 31 December 2004. Management believes that thisconcentration in loan balances conforms with the Lebanese banking sector.
The table below summarises the Bank's exposure to interest rate risks. Included in the tableare the Bank's assets and liabilities at carrying amounts, categorised by the earlier ofcontractual repricing or maturity dates. Expected repricing and maturity dates do not differsignificantly from the contract dates.
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Less than3 months
3-6months
6-12months
1-5years
Over5 years
Non interestbearing
TotalASSETS (LL Millions)
Cash flow and fair value interest rate risk As at 31 December 2004
Cash and Bank of Lebanon 116,213 17,000 5,000 430,088 - 283,840 852,141
Lebanese Treasury bills 49,526 102,836 95,837 570,020 160,927 128,854 1,108,000
Loans and advances to banks 743,434 65 - 18,429 - 1,693 763,621
Trading securities - - - - - 6,283 6,283
Loans and advances to customers 288,155 17,242 70,528 88,521 104,415 1,204 570,065
Debtors by acceptances - - - - - 59,290 59,290
Investment securities 13,081 769 6,155 4,155 1,539 562 26,261
Investments in subsidiaries - - - - - 3,524 3,524
Property acquired in settlement of debt - - - - - 14,265 14,265
Investment property - - - - - 10,271 10,271
Property, equipment and intangible assets - - - - - 33,468 33,468
Other assets - - - - - 14,011 14,011
Total assets 1,210,409 137,912 177,520 1,111,213 266,881 557,265 3,461,200
LiabilitiesDeposits from banks 40,151 - 1,148 27,665 - 812 69,776
Due to customers 2,743,685 123,328 129,254 57,835 8,333 24,437 3,086,872
Engagements by acceptances - - - - - 59,290 59,290
Other liabilities - - - - - 46,290 46,290
Current income tax liability - - - - - 74 74
Retirement benefit obligations - - - - - 11,404 11,404
Total liabilities 2,783,836 123,328 130,402 85,500 8,333 142,307 3,273,706
Balance sheet interest sensitivity gap (1,573,427) 14,584 47,118 1,025,713 258,548
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Less than3 months
3-6months
6-12months
1-5years
Over5 years
Non interestbearing
TotalASSETS (LL Millions)
Cash flow and fair value interest rate risk As at 31 December 2003
Cash and Bank of Lebanon 133,758 108,688 200,900 179,500 - 296,907 919,753
Lebanese Treasury bills 93,667 112,799 276,219 342,173 5,970 112,967 943,795
Loans and advances to banks 642,364 23,494 16,168 - - 874 682,900
Trading securities - - - - - 3,529 3,529
Loans and advances to customers 264,498 25,869 45,606 62,475 100,300 1,185 499,933
Debtors by acceptances - - - - - 50,246 50,246
Investment securities - 1,928 3,856 21,441 1,542 562 29,329
Investments in subsidiaries - - - - - 3,524 3,524
Property acquired in settlement of debt - - - - - 10,625 10,625
Investment property - - - - - 10,413 10,413
Property, equipment and intangible assets - - - - - 34,549 34,549
Other assets - - - - - 11,956 11,956
Total assets 1,134,287 272,778 542,749 605,589 107,812 537,337 3,200,552
LiabilitiesDeposits from banks 93,070 3,656 2,997 19,994 - 575 120,292
Due to customers 2,546,609 99,632 86,865 39,428 6,318 16,770 2,795,622
Engagements by acceptances - - - - - 50,246 50,246
Other liabilities - - - - - 50,682 50,682
Current income tax liability - - - - - 2,108 2,108
Retirement benefit obligations - - - - - 11,178 11,178
Total liabilities 2,639,679 103,288 89,862 59,422 6,318 131,559 3,030,128
Balance sheet interest sensitivity gap (1,505,392) 169,490 452,887 546,167 101,494
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G- Liquidity risk
The Bank is exposed to daily calls on its available cash resources from overnight deposits,current accounts, maturing deposits, loan draw downs, guarantees and from margin andother calls on cash settled derivatives. The Bank does not maintain cash resources to meetall of these needs as experience shows that a minimum level of reinvestment of maturingfunds can be predicted with a high level of certainty. The Board sets limits on the minimumproportion of maturing funds available to meet such calls and on the minimum level ofinter-bank and other borrowing facilities that should be in place to cover withdrawals atunexpected levels of demand.The matching and controlled mismatching of the maturities of assets and liabilities isfundamental to the management of the Bank. It is unusual for financial institutions ever tobe completely matched since business transacted is often of uncertain term and of differenttypes. An unmatched position potentially enhances profitability, but can also increase therisk of losses. The maturities of assets and liabilities and the ability to replace, at an acceptable cost,interest-bearing liabilities as they mature, are important factors in assessing the liquidity ofthe Bank and its exposure to changes in interest rates and exchange rates.Liquidity requirements to support calls under guarantees and standby letters of credit areconsiderably less than the amount of the commitment because the Bank does not generallyexpect the third party to draw funds under the agreement. The total outstandingcontractual amount of commitments to extend credit does not necessarily represent futurecash requirements, since many of these commitments will expire or terminate without beingfunded.The liquidity ratio of the Bank for all currencies as at 31 December 2004 was 83% (2003 - 77%), as per Bank of Lebanon’s method of calculation.
The table below analyses assets and liabilities of the Bank into relevant maturity groupingsbased on the remaining period at balance sheet date to the contractual maturity date.
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Less than3 months
3-6months
6-12months
1-5years
Over5 years
TotalASSETS (LL Millions)
Maturities of assets and liabilities As at 31 December 2004
Cash and Bank of Lebanon 347,124 45,483 9,588 449,946 - 852,141
Lebanese Treasury bills 97,900 149,300 116,158 580,700 163,942 1,108,000
Loans and advances to banks 745,019 65 - 18,537 - 763,621
Trading securities 6,283 - - - - 6,283
Loans and advances to customers 288,770 17,277 70,673 88,716 104,629 570,065
Debtors by acceptances 39,579 18,465 1,246 - - 59,290
Investment securities 13,647 769 6,153 4,153 1,539 26,261
Investments in subsidiaries 3,524 - - - - 3,524
Property acquired in settlement of debt - - - 14,265 - 14,265
Investment property - - - - 10,271 10,271
Property, equipment and intangible assets - - - 7,757 25,711 33,468
Other assets 14,011 - - - - 14,011
Total assets 1,555,857 231,359 203,818 1,164,074 306,092 3,461,200
LiabilitiesDeposits from banks 40,420 - 1,170 28,186 - 69,776
Due to customers 2,766,473 123,966 129,923 58,134 8,376 3,086,872
Engagements by acceptances 39,579 18,465 1,246 - - 59,290
Other liabilities 45,149 - - 1,141 - 46,290
Current income tax liability 74 - - - - 74
Retirement benefit obligations - - - 2,156 9,248 11,404
Total liabilities 2,891,695 142,431 132,339 89,617 17,624 3,273,706
Net liquidity gap (1,335,838) 88,928 71,479 1,074,457 288,468
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Less than3 months
3-6months
6-12months
1-5years
Over5 years
TotalASSETS (LL Millions)
Maturities of assets and liabilities As at 31 December 2003
Cash and Bank of Lebanon 309,767 108,688 200,900 300,398 - 919,753
Lebanese Treasury bills 93,667 112,799 276,219 455,140 5,970 943,795
Loans and advances to banks 643,237 23,495 16,168 - - 682,900
Trading securities 3,529 - - - - 3,529
Loans and advances to customers 265,683 25,869 45,606 62,475 100,300 499,933
Debtors by acceptances 41,381 8,687 178 - - 50,246
Investment securities 2,117 385 3,854 21,431 1,542 29,329
Investments in subsidiaries 3,524 - - - - 3,524
Property acquired in settlement of debt - - - 10,625 - 10,625
Investment property - - - - 10,413 10,413
Property, equipment and intangible assets - - - 8,668 25,881 34,549
Other assets 11,956 - - - - 11,956
Total assets 1,374,861 279,923 542,925 858,737 144,106 3,200,552
LiabilitiesDeposits from banks 93,645 3,656 2,997 19,994 - 120,292
Due to customers 2,563,379 99,632 86,865 39,428 6,318 2,795,622
Engagements by acceptances 41,381 8,687 178 - - 50,246
Other liabilities 47,848 - - 2,834 - 50,682
Current income tax liability 2,108 - - - - 2,108
Retirement benefit obligations - - - 2,113 9,065 11,178
Total liabilities 2,748,361 111,975 90,040 64,369 15,383 3,030,128
Net liquidity gap (1,373,500) 167,948 452,885 794,368 128,723
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4- Critical accounting estimates and judgements
The Bank makes estimates and assumptions that affect the reported amounts of assets andliabilities within the next financial year. Estimates and judgements are continually evaluatedand are based on historical experience and other factors, including expectations of futureevents that are believed to be reasonable under the circumstances.
4.1 Impairment losses on loans and advances
The Bank reviews its loan portfolios to assess impairment at least on a quarterly basis. Indetermining whether an impairment loss should be recorded in the income statement, theBank makes judgements as to whether there is any observable data indicating that there isa measurable decrease in the estimated future cash flows from a portfolio of loans beforethe decrease can be identified with an individual loan in that portfolio. This evidence mayinclude observable data indicating that there has been an adverse change in the paymentstatus of borrowers in a Bank, or national or local economic conditions that correlate withdefaults on assets in the Bank. Management uses estimates based on historical lossexperience for assets with credit risk characteristics and objective evidence of impairmentsimilar to those in the portfolio when scheduling its future cash flows.
4.2 Held-to-maturity investments
The Bank follows the guidance of IAS 39 on classifying non-derivative financial assets withfixed or determinable payments and fixed maturity as held-to-maturity. This classificationrequires significant judgement. In making this judgement, the Bank evaluates its intentionand ability to hold such investments to maturity. If the Bank fails to keep these investmentsto maturity other than for the specific circumstances – for example, selling an insignificantamount close to maturity – it will be required to reclassify the entire class as available-for-sale or as for trading. The investments would therefore be measured at fair value notamortised cost. If the entire class of held-to-maturity investments is tainted, the fair valuewould increase by LL 2.7 billion, with a corresponding entry in the fair value reserve inshareholders' equity if reclassified as available-for-sale or in the income statement ifreclassified as for trading.
4.3 Income taxes
The Bank is subject to income taxes. Significant estimates are required in determining theprovision for income taxes.
Auditor's Report
A
5- Cash and Bank of Lebanon
Local banking regulations require banks to maintain a mandatory reserve with the Bank ofLebanon. Mandatory reserve deposits with Bank of Lebanon at the end of 2004 comprisenon-interest earning reserves in Lebanese currency amounting to LL 101 billion and foreigncurrency deposits that earn interest at 3.21% per annum with a counter value of LL 311 billion (US$ 206 million). At end of 2003, the Lebanese currency reservesamounted to LL 129 billion while the foreign currency deposits amounted to LL 246 billion.
The Bank subscribed in certificates of deposit of LL 121 billion (US$ 80.2 million) to meetthe compulsory financial commitments on total deposits, as required by Bank of Lebanoncircular No. 87 and its amendments as part of the Government support program.
Money market placements and certificates of deposit are fixed-rate assets.
6- Lebanese Treasury bills
(LL Millions) 2004 2003
Cash on hand 30,388 27,075Money market placements 20,171 35,000Certificates of deposit - 47,000Balances with Bank of Lebanon other than
mandatory reserve deposits 4,002 3,925Included in cash and cash equivalents (note 37) 54,561 113,000Mandatory reserve deposits with Bank of Lebanon 411,659 375,083Loans and advances:Term deposits - 172Certificates of deposit 233,500 295,500Non-interest earning certificates of deposit
held as part of Government support program 120,898 120,898Interest receivable – Bank of Lebanon 1,628 3,675Interest receivable – Certificates of deposit 31,473 11,425Accrued tax on interest receivable – Certificates of deposit (note 35) (1,578) -
385,921 431,670852,141 919,753
(LL Millions) 2004 2003
Treasury bills in Lebanese Pound 515,884 446,894Treasury bonds in foreign currency 469,191 359,121Non-interest earning Treasury bills held as part
of the Government support program:- In Lebanese Pound 97,831 97,831- In foreign currency 15,137 15,137
1,098,043 918,983
Interest receivable 16,429 24,812Accrued tax on interest receivable (note 35) (542) -Unearned interest (5,930) -
9,957 24,8121,108,000 943,795
The Bank subscribed in non-interest earning Lebanese Treasury bills in Lebanese Poundand in foreign currency to meet the compulsory financial commitments on total deposits,as required by Bank of Lebanon circular No. 87 and its amendments as part of Governmentsupport program. All interest-earning Lebanese Treasury bills have fixed interest rates.
Lebanese Treasury bills are classified at 31 December 2004 as follows:
Lebanese Treasury bills are classified at 31 December 2003 as follows:
7- Loans and advances to banks
Auditor's ReportA
Annual Report 2003
(LL Millions) Amortised cost Unrealisedgain (loss)Fair value
In Lebanese currencyHeld-to-maturity 64,696 65,628 932Originated Loans:- Interest earning 382,198 399,225 17,027- Non-interest earning 97,831 87,720 (10,111)
544,725 552,573 7,848In foreign currencyHeld-to-maturity 82,341 85,999 3,658Originated Loans:- Interest earning 276,780 298,536 21,756- Non-interest earning 15,137 14,069 (1,068)
374,258 398,604 24,346918,983 951,177 32,194
67
(LL Millions) 2004 2003
Items in course of collection from other banks 3,783 6,994Placements with other banks 594,905 545,096Current accounts 83,135 91,105Included in cash and cash equivalents (note 37) 681,823 643,195Loans and advances:Term deposits 77,844 38,831Certificates of deposit 2,261 -Interest receivable – banks 1,662 874Interest receivable – certificates of deposit 67 -Accrued tax on interest receivable – banks (note 35) (33) -Accrued tax on interest receivable – Certificates of deposit (note 35) (3) -
81,798 39,705763,621 682,900
(LL Millions) Amortised cost Unrealisedgain (loss)Fair value
In Lebanese currencyOriginated Loans:- Interest earning 515,884 516,213 329- Non-interest earning 97,831 96,108 (1,723)
613,715 612,321 (1,394)In foreign currencyHeld-to-maturity 26,410 28,387 1,977Originated Loans:- Interest earning 442,781 456,305 13,524- Non-interest earning 15,137 14,846 (291)
484,328 499,538 15,2101,098,043 1,111,859 13,816
Auditor's Report
A
Loans and advances to banks comprise loans with variable rates and fixed rates of LL 175 billion and LL 583 billion respectively.The table below summarises the geographical concentration of loans and advances tobanks at 31 December 2004:
8- Trading securities
9- Loans and advances to customers
(LL Millions)
Lebanon 130,233Switzerland 77,237Luxemburg 72,255North America 21,163Arab countries 70,251Other European countries 364,469Other countries 22,537Other items 5,476
763,621
(LL Millions) 2004
2004
2003
Equity securities:- Listed 3,204 2,913- Unlisted 3,079 616
6,283 3,529
(LL Millions)
Commercial advances 374,955 302,142Current debtor accounts 153,201 144,526Net doubtful accounts 38,090 45,020Net debit against credit accounts – speculation accounts 116 2,166Related parties loans and advances (note 38) 2,499 4,894Interest receivable – customers 1,204 1,185
570,065 499,933Commercial advances comprise the following:Discounted bills 10,648 6,069Bills to the order of the Bank 24,924 25,999Unpaid bills 2,125 2,106Short term loans 34,580 116,868Medium and long term loans 302,678 151,100
374,955 302,142
2004 2003
Auditor's ReportA
Annual Report 2003
Loans and advances to customers comprise the following:
Loans and advances to customers include loans classified as substandard as follows:
The movement affecting the unrealised interest is summarised as follows:
(LL Millions) 2004 2003
Advances against real estate mortgage 343,109 328,718Advances against cash collateral 169,867 133,505Advances against personal guarantees 134,138 134,261Non-secured advances 82,384 62,572Advances against securities 1,432 1,330Other advances 349 7
731,279 660,393Provision and unrealised interest on doubtful loans (77,297) (81,375)Unrealised interest on substandard loans (7,251) (5,711)Debtors by acceptances (note 10) (59,290) (50,246)Speculation accounts (18,580) (24,313)Interest receivable – customers 1,204 1,185
(161,214) (160,460)570,065 499,933
69
(LL Millions) 2004 2003
Substandard loans 20,089 27,350Unrealised interest (7,251) (5,711)
12,838 21,639
(LL Millions) 2004 2003
1 January 5,711 7,798Additions 2,503 2,328Releases (650) (3,578)Transfer to unrealised interest on doubtful loans (313) (494)Unrealised interest applied against loan write off - (343)
7,251 5,711Net doubtful accounts comprise the following:Doubtful loans 115,387 126,395Provision for doubtful loans including unrealised interest (77,297) (81,375)
38,090 45,020
Auditor's Report
A
The movement affecting the provision for doubtful loans and unrealised interest issummarised as follows:
Interest accrued on doubtful accounts is charged to the respective debtor accounts andcredited to provision for doubtful debts. Interest on past due bills is recognised upon collection.
10- Debtors by acceptances
This caption represents the customer's liability to the Bank on outstanding drafts and bills ofexchange that have been accepted by the Bank and/or by other banks for its account. Theseacceptances relate to negotiated deferred payment of import letters of credit. This captioncorresponds to and offsets engagements by acceptance caption reflected under liabilities.
11- Investment securities
All debt securities have fixed coupons. Equity securities do not bear interest.The available-for-sale securities represent 62,500 shares owned by the Bank in Banque del'Habitat S.A.L. at a cost of LL 562 million. These shares are classified as available-for-saleand are stated at historical cost since they are not listed, and their current market valuecannot be readily estimated.Unrealised gain on the securities classified as held-to-maturity amounted to LL 732 million(US$ 485,600) as at 31 December 2004.
(LL Millions) 2004 2003
Balance brought forward 81,375 65,820Provision on principal amounts 7,388 20,740Unrealised interest and commissions 6,803 1,785Provisions no longer required (7,538) (3,483)Provisions applied against loan write offs (3,838) (3,865)Transfer from unrealised interest on substandard loans 313 494Transfer to off-balance sheet (7,206) (116)Balance carried forward 77,297 81,375
(LL Millions) 2004 2003
Securities available-for-saleEquity securities:- Unlisted 562 562Securities held-to-maturityDebt securities – at amortised cost:- Listed 23,366 23,668- Unlisted 1,809 4,447
25,175 28,115Interest receivable 524 652
25,699 28,76726,261 29,329
(LL Millions) 2004 2003
Balance 59,290 50,246
Auditor's ReportA
Annual Report 2003
The movement in investment securities may be summarised as follows:
12- Investments in subsidiaries
The principal activities of Informatics Co. S.A.R.L. comprise providing informationtechnology services to the Bank. The principal activities of Société Libanaise de ServiceS.A.R.L. comprise managing the properties of the Bank and third parties, providing securityguarding services and different maintenance services.
13- Property acquired in settlement of debt
Total impairment provisions in respect of properties acquired in settlement of debtamounted to LL 1.14 billion as of 31 December 2004 (2003 – LL 2.84 billion) and areclassified under other provisions (refer to note 21). These impairment provisions are in linewith the requirements of the Bank of Lebanon Circular No. 78 and its amendments. Theseproperties are available for sale and are not included within the Bank's property used in thenormal course of business.
(LL Millions) Available-for-sale
Held-to-maturity Total
At 1 January 2004 562 28,115 28,677Additions - 3,768 3,768Redemptions - (6,708) (6,708)At 31 December 2004 562 25,175 25,737
(LL Millions) % ownership 2004 2003
Capital for Insurance and Reinsurance Company S.A.L. 80% 3,524 3,524
Informatics Co. S.A.R.L. 84% - -Société Libanaise de Service S.A.R.L. 91% - -
3,524 3,524
71
(LL Millions) 2004 2003
At 1 January 10,625 4,129Acquisitions during the year 6,085 6,826Disposals during the year (2,445) (330)At 31 December 14,265 10,625
Auditor's Report
A
14- Investment property
The investment property of the Bank was revalued in 1997 by an independent appraiserunder the provisions of fiscal law 282/93 based on market values at 31 December 1993.The revaluation resulted in an increase in the value of investment property over its carryingvalue by LL 3.3 billion.Had the Bank's investment property been stated on the historical cost basis, the amountswould have been as follows:
15- Intangible assets
(LL Millions) Land Buildings Total
Year ended 31 December 2003At 1 January 5,747 4,808 10,555Fair value loss - (142) (142)At 31 December 5,747 4,666 10,413Year ended 31 December 2004At 1 January 5,747 4,666 10,413Fair value loss - (142) (142)At 31 December 5,747 4,524 10,271
(LL Millions) Computersoftware Key money Total
At 1 January 2003Cost 2,085 1,555 3,640Accumulated amortisation (842) (790) (1,632)Net book amount 1,243 765 2,008
Year ended 31 December 2003Opening net book amount 1,243 765 2,008Additions 161 - 161Amortisation charge (397) (180) (577)Net book amount 1,007 585 1,592
At 31 December 2003Cost 2,735 1,555 4,290Accumulated amortisation (1,728) (970) (2,698)Net book amount 1,007 585 1,592
Year ended 31 December 2004Opening net book amount 1,007 585 1,592Additions 82 175 257Amortisation charge (366) (195) (561)Net book amount 723 565 1,288
At 31 December 2004Cost 2,817 1,730 4,547Accumulated amortisation (2,094) (1,165) (3,259)Net book amount 723 565 1,288
(LL Millions) 2004 2003
Cost 8,064 8,064Accumulated depreciation (430) (370)Net book amount 7,634 7,694
Auditor's ReportA
Annual Report 2003
73
Buildings ComputerEquipment
FurnitureFixtures &Equipment
Vehicles Leaseholdimprovements
Total
(LL Millions)
At 1 January 2003Cost or valuation 30,013 7,605 5,444 198 9,063 52,323Accumulated depreciation (3,770) (4,756) (3,656) (37) (7,328) (19,547)Net book amount 26,243 2,849 1,788 161 1,735 32,776
Year ended 31 December 2003Opening net book amount 26,243 2,849 1,788 161 1,735 32,776Additions 363 909 634 - 1,508 3,414Disposals - (52) - - - (52)Depreciation charge (723) (1,045) (365) (30) (1,018) (3,181)Closing net book amount 25,883 2,661 2,057 131 2,225 32,957
At 31 December 2003Cost or valuation 30,376 7,266 5,958 198 10,509 54,307Accumulated depreciation (4,493) (4,605) (3,901) (67) (8,284) (21,350)Net book amount 25,883 2,661 2,057 131 2,225 32,957
Year ended 31 December 2004Opening net book amount 25,883 2,661 2,057 131 2,225 32,957Additions 562 833 358 22 627 2,402Disposals - - - - (8) (8)Depreciation charge (733) (1,037) (294) (31) (1,076) (3,171)Closing net book amount 25,712 2,457 2,121 122 1,768 32,180
At 31 December 2004Cost or valuation 30,938 8,041 6,198 214 11,010 56,401 Accumulated depreciation (5,226) (5,584) (4,077) (92) (9,242) (24,221)Net book amount 25,712 2,457 2,121 122 1,768 32,180
16- Property and equipment
The property and equipment of the Bank were revalued in 1997 by an independentappraiser under the provisions of fiscal law 282/93 based on market values at 31December 1993. The revaluation resulted in an increase in the value of property andequipment of LL 17.8 billion.
Had the Bank's property and equipment been stated on the historical cost basis, theamounts would have been as follows:
(LL Millions) 2004 2003
Cost 38,636 36,542Accumulated depreciation (20,668) (18,974)Net book amount 17,968 17,568
Auditor's Report
A
17- Other assets
The above provisions include a provision of LL 1.8 billion set up against one of the Bank'smoney dealers. Although the total amount due from this money dealer is LL 2.6 billion,management believes that the provision of LL 1.8 billion is adequate to cover the expected loss.
The above provisions also include a provision of LL 3 billion set up during 2003 to coverlosses incurred in connection with contentious depositors' claims in one of the Bank'sbranches. On 26 April 2004, the Bank recovered an amount of LL 1.55 billion from theinsurance company relating to the above claims. However, the provision has beenmaintained at the same level of LL 3 billion.
The movement in the provisions – private sector is as follows:
18- Deposits from banks
(LL Millions)
Credit card facilities 10,089 9,014Other receivables – private sector 6,725 6,321Prepaid expenses 1,132 715Advances on fixed asset purchases 613 475Other receivables – public sector 502 460Stamps 56 73Deposits receivable 34 33Precious metals 18 18Foreign exchange difference 5 2Other 248 260
19,422 17,371Less: provisions – private sector (5,411) (5,415)
14,011 11,956
(LL Millions)
Sight deposits 26,362 14,038Term deposits 40,821 100,855Short-term loan 1,809 -Long-term loan - 4,824Interest payable – banks 784 575
69,776 120,292
(LL Millions) 2004 2003
2004 2003
2004 2003
Balance brought forward 5,415 1,805Provision against principal amounts - 3,610Difference of exchange (4) -Balance carried forward 5,411 5,415
Auditor's ReportA
Annual Report 2003
The short-term loan represents a loan granted to the Bank by the Arab Trade Financing Programin September 2004 that matures in September 2005. The loan balance will be repaid in twoinstalments due in March and September 2005 with an annual interest rate of 2.51%.
The long-term loan represents a loan granted to the Bank by the International FinanceCorporation (IFC) during 1996 and was fully settled on 17 February 2004.
Deposits from banks comprise deposits with variable rates and fixed rates ofLL 23.3 billion and LL 45.6 billion respectively.
The table below summarises the geographical concentration of deposits from banks at 31 December 2004:
19- Due to customers
75
(LL Millions)
European countries 48,935Lebanon 9,203North America 7,085Other countries 3,769Other items 784
69,776
(LL Millions) 2004
2004
2003
Sight deposits 245,495 226,471Term deposits 356,744 259,651Saving accounts 2,186,232 2,056,391Related parties accounts (note 38) 56,750 46,505Net credit against debit accounts and cash margins 225,765 189,834Interest payable – customers 15,886 16,770
3,086,872 2,795,622Sight deposits comprise the following:Checking and current accounts 222,120 205,988Debtors accidentally creditors 13,386 14,776Cheques and orders to be paid 8,551 4,702Public sector deposits 1,438 1,005
245,495 226,471Saving accounts comprise the following:Saving accounts – demand 161,295 148,970Saving accounts – term 2,024,937 1,907,421
2,186,232 2,056,391
Auditor's Report
A
Net credit against debit accounts and cash margins comprise the following:
20- Other liabilities
Withholding taxes and other charges consist mainly of withheld taxes from interest ondeposits, employee salaries, non-resident income, built property and municipality tax.
The gain resulting from the translation of the Bank's fixed foreign exchange position isdeferred in the balance sheet until realised. A provision equivalent to 5% of the net openexchange position is set up for adverse foreign currency exchange fluctuations. Foreignexchange gains on the position held against the Bank's equity represent exchange gains onthe translation of the US Dollar fixed exchange position amounting to LL 40.4 billion (US$ 26.8 million) as at 31 December 2004.
Revaluation variance on allocations to foreign branches represents exchange gains of LL 15.08 billion (US$ 10 million) allocated to the Bank's branch in the Damascus free zonein Syria.
(LL Millions) 2004 2003
Pledged deposits against credit facilities 160,956 130,423Safety margins on speculation accounts 11,427 10,908Margins on letters of guarantee 53,382 48,503
225,765 189,834
(LL Millions) 2004 2003
Margins against documentary credits 30,411 29,269Margins against credit card and safe box facilities 4,562 4,165Foreign exchange gains on position constituted
against the Bank's equity 2,545 2,545Withholding taxes and other charges 1,273 1,287Revaluation variance of allocations to foreign branches 573 573Dividends payable and interest payable on cash
contribution to capital 564 331Accrued expenses 553 716Due to the national social security fund 263 259Other provisions (note 21) 3,832 5,031Other 1,714 6,506
46,290 50,682
Auditor's ReportA
Annual Report 2003
77
21- Other provisions
22- Retirement benefit obligations
The provision for retirement benefit obligation comprises the following:
The retirement benefit obligation at 31 December 2004 is determined in accordance withthe accounting policy set out on page 53 and is broadly in line with the computation inaccordance with the national social security fund regulations.
(LL Millions) 2004 2003
Provision for risks 2,173 1,777Impairment provision for properties acquired
in settlement of debt (note 13) 1,141 2,835Provision for levies and other charges 456 357Provision for foreign exchange fluctuations 62 62
3,832 5,031
(LL Millions) 2004 2003
Provision for retirement benefit obligation 11,598 11,996Advances against retirement benefit obligation (194) (818)
11,404 11,178
(LL Millions) PaymentsAdditions1 January2004 Releases 31 December
2004
Provision for risks 1,777 1,668 (1,272) - 2,173Impairment provision for
properties acquired in settlement of debt (note 13) 2,835 156 - (1,850) 1,141
Provision for levies and other charges 357 326 (227) - 456
Provision for foreignexchange fluctuations 62 - - - 62
5,031 2,150 (1,499) (1,850) 3,832
(LL Millions) PaymentsAdditions1 January2004
31 December2004
Retirement benefit obligation 11,178 900 (674) 11,404
Auditor's Report
A
The amounts recognised in the income statement are as follows:
The principal actuarial assumptions used are as follows:
23- Share capital and cash contribution to capital
On 31 July 2002, the Central Council of the Bank of Lebanon agreed to the US Dollardenominated cash contributions to capital contracts of US$ 14.4 million between the Bank andcertain shareholders. These contracts earn interest at a rate of 5.5% per annum subject toratification by the Annual General Assembly and approval by the Banking Control Commission.
At the Annual General Assembly planned for June 2005, interest paid on cash contributionto capital in respect of 2004 of LL 1.2 billion is to be proposed. These financial statementsdo not reflect this interest payable, which will be accounted for in shareholders' equity asan appropriation of retained earnings in the year ending 31 December 2005. The interestpaid on cash contribution to capital in respect of 2003 is reflected in the year 2004 andamounts to LL 1.2 billion.
The Bank's share capital currently consists of 72 million issued and paid up nominativeshares of LL 1,000 each (2003 – 72 million shares of LL 1,000 each).
24- Legal reserves
As per Article 132 of the Code of Money and Credit, 10% of the annual net profits areto be transferred to a legal reserve. This reserve is not available for distribution.
(LL Millions) 2004 2003
Current service cost 54 52Interest costs 846 848Total, included in staff costs (note 34) 900 900
2004 2003
Discount rate 7.5% 7.5%Future salary increases 3% 3%Future years of service 3 – 10 years 3 – 10 years
(LL Millions) 2004 2003
Share capital 72,000 72,000Cash contribution to capital 21,697 21,697
93,697 93,697
Auditor's ReportA
Annual Report 2003
25- Reserve for unidentified banking risks
According to the Bank of Lebanon directives, banks are required to appropriate fromannual profits an amount equal to 2 per mil of the solvency denominator to a reserve forunidentified banking risks. The above reserve is considered as part of Tier I capital. Thisreserve is not available for distribution.
26- Real estate revaluation reserve
As explained in notes 14 and 16, the revaluation reserve arises from the fiscalrevaluation of investment property, and property and equipment under Law No. 282/93.No further taxes are due upon the eventual distribution of this reserve.
27- Net interest income
28- Net fee and commission income
79
(LL Millions) 2004 2003
Interest and similar incomeLebanese Treasury bills 91,260 114,728Deposits and similar funds at banks
and financial institutions 61,399 49,605Loans and advances to customers 40,695 45,812Investment securities 2,252 2,584Related parties loans and advances (note 38) 342 344
195,948 213,073Interest expense and similar chargesDeposits and similar funds from banks
and financial institutions 3,096 2,203Due to customers 146,607 153,600Deposits from related parties (note 38) 1,705 2,312Other interest and similar charges - 8
151,408 158,123
(LL Millions)
Fee and commission incomeCredit related fees and commissions 6,575 6,217Engagements by endorsement fees 4,018 3,355Other fees 4,622 3,915
15,215 13,487
(LL Millions) 2004 2003
Fee and commission expenseBrokerage fees paid 1,155 971Other fees paid 95 151
1,250 1,122
2004 2003
Auditor's Report
A
29- Dividend income
30- Net trading income
31- Other operating income
32- Net (releases) provisions on loans and advances
(LL Millions)
Trading securities 135 246Available-for-sale securities 27 36
162 282
(LL Millions)
Foreign exchange:- Transaction gains less losses 1,855 471- Translation gains less losses 270 1,315Interest rate instruments 2,658 5,518Equities 291 355
5,074 7,659
(LL Millions)
Release of impairment provision of property acquired in settlement of debt (note 21) 1,850 -
Services rendered to third parties 515 465Gain on disposal of property acquired in settlement of debt 157 -Loss on disposal of property and equipment (8) (52)Rent income 159 155Other 78 32
2,751 600
(LL Millions) 2004 2003
2004 2003
2004 2003
2004 2003
Provisions for customer loans and advances (7,388) (20,740)Release of provisions and unrealised interest
on doubtful and substandard loans 8,188 7,062800 (13,678)
Auditor's ReportA
Annual Report 2003
81
33- Operating expenses
34- Staff costs
The average number of persons employed by the Bank during the year was 554 (2003 - 539).
(LL Millions)
Staff costs (note 34) 24,018 23,219Depreciation on property and equipment (note 16) 3,171 3,181Water, electricity and communication expense 2,345 2,289Deposits guarantee premiums 1,385 1,212Professional fees 1,325 798Repairs and maintenance 1,067 959Office supplies 787 737Advertising expense 721 614Subscriptions 623 736Amortisation (note 15) 561 577Municipality and other taxes 548 520IT outsourcing service cost 490 485Insurance expense 469 359Travel expense 454 407Operating lease rentals 359 330Software costs 329 251Directors' attendance fees (note 38) 272 272Cleaning expense 246 237Provision for properties acquired in settlement of debt 156 2,047Fair value loss on investment property (note 14) 142 142Provision for other receivables 120 3,730Investment property expense 106 145Other 1,923 1,054
41,617 44,301
(LL Millions) 2004 2003
2004 2003
Wages and salaries 14,509 13,969Social security costs 2,339 2,231Bonuses 1,826 1,713Scholarship 1,560 1,537Transportation 996 884Pension costs – defined benefit plan 900 900Directors' remuneration (note 38) 642 595Medical expenses 601 592Other employee benefits 525 667Training expenses 120 131
24,018 23,219
Auditor's Report
A
35- Taxes
In accordance with article 51 of law number 497/2003, the Bank is subject to tax oninterest as well as corporate income tax. In case the tax on interest exceeds the corporateincome tax, the excess constitutes an additional tax charge and is not refundable to theBank. The Bank's tax charge is determined as the higher of the corporate tax and the taxon interest during the year as follows:
Corporate income taxCorporate income tax expense for the year is determined as follows:
Tax on interestThe tax on interest income is determined as follows:
(LL Millions) 2004 2003
Profit of Lebanon branches before tax 18,717 14,623Income tax at statutory rate of 15% 2,808 2,193Effect of expenses not deductible for tax purposes or non-taxable income:
Differences between accounting and fiscal depreciation 29 25Provision for diminution in the value of fixedand variable income securities 32 18Donations 43 -Effect of tax assessment (2000 – 2001) - 62Tax on interest income 517 46Provision for properties acquired in settlement of debt 23 307Other provisions 86 -Release of provisions which were previously subject to tax (353) (59)Interest paid on cash contributions to capital (180) (180)
Tax charge 3,005 2,412
(LL Millions)
Interest5% tax onInterestInterest
2004 2003
5% tax onInterest
Interest earned:Interest received- Certificates of deposits 10,398 520 4,792 240- Lebanese Treasury bills 13,442 672 - -- Loans and advances to banks 1,957 98 1,299 65
25,797 1,290 6,091 305Interest receivable- Certificates of deposits (note 5) 31,473 1,578 - -- Lebanese Treasury bills (note 6) 10,844 542 - -- Loans and advances to banks (note 7) 719 36 - -
43,036 2,156 - -Other interest income from Lebanese
Treasury bills and loans and advancesto banks not subject to tax on interest 83,826 - 158,242 -
152,659 3,446 164,333 305
Auditor's ReportA
Annual Report 2003
83
Tax charge
The movement in the current income tax liability is as follows:
The above is classified in the Bank’s balance sheet under the following captions:
The fiscal years 2002 to 2004 remain subject to examination by the income tax authorities.
36- Contingent liabilities and commitmentsa) Legal proceedings
There were a number of legal proceedings outstanding against the Bank at 31 December2004. No provision has been made as professional advice indicates that it is unlikely thatany significant loss will arise.
(LL Millions) 2004 2003
Tax charge 3,446 2,412Tax assessment (2000 – 2001) - 410Taxes charge for the year 3,446 2,822
(LL Millions) 2004 2003
Balance brought forward 2,108 2,275Provision set up during the year 3,446 2,822Payments during the year (3,324) (2,989)Balance carried forward 2,230 2,108
(LL Millions) 2004 2003
Accrued tax on interest receivable – Certificates of deposit (note 5) 1,578 -Accrued tax on interest receivable – Lebanese Treasury bills (note 6) 542 -Accrued tax on interest receivable – Loans and advances
to banks (note 7) 36 -Current income tax liability 74 2,108
2,230 2,108
Auditor's Report
A
b) Capital commitments
At 31 December 2004 the Bank had no capital commitments.
The contractual amounts of the Bank's off-balance sheet financial instruments thatcommit it to extend credit to customers are as follows:
c) Assets pledged
Mandatory reserve deposits are held with Bank of Lebanon in accordance with statutoryrequirements. These deposits are not available to finance the Bank's day-to-day operations.
d) Operating lease commitments
Where the Bank is the lessee, the future minimum lease payments under non-cancellablebuilding operating leases are as follows:
37- Cash and cash equivalents
(LL Millions) 2004 2003
Unutilised credit facilities 6,023 1,380Letters of credit 39,939 34,748Letters of guarantee 30,192 28,652
76,154 64,780
(LL Millions) 2004 2003
Not later than 1 year 252 252Later than 1 year and no later than 5 years 191 202Later than 5 years 223 257
666 711
(LL Millions) 2004 2003
Mandatory reserve deposits with Bank of Lebanon (note 5) 411,659 375,083
(LL Millions) 2004 2003
Cash and Bank of Lebanon (note 5) 54,561 113,000Loans and advances to banks (note 7) 681,823 643,195
736,384 756,195
Auditor's ReportA
Annual Report 2003
85
38- Related party transactions
A number of banking transactions are entered into with related parties in the normal courseof business. These include loans, deposits and foreign currency transactions. The volumesof related party transactions, outstanding balances at the year end, and related expense andincome for the year are as follows:
Transactions with related parties
Outstanding balances with related parties
No provisions have been recognised in respect of loans given to related parties (2003: nil).
39- Earnings per ordinary share
Earnings per ordinary share are calculated as the ratio of net profit for the year divided bythe weighted average number of ordinary shares outstanding during the year or 72 millionshares (2003 – 72 million ordinary shares).
40- Dividends per share
At the Annual General Assembly planned for June 2005, a dividend in respect of 2004 is tobe proposed. These financial statements do not reflect this dividend payable, which will beaccounted for in shareholders' equity as an appropriation of retained earnings in the year ending31 December 2005. The dividends declared in respect of 2003 and 2002 were LL 3.96 billion(LL 55 per share) and LL 4.75 billion (LL 66 per share) and these have been accounted for asappropriations from retained earnings in the years 2004 and 2003 respectively.
2004 2003
Related parties loans and advances 2,499 4,894Related parties accounts 56,750 46,505
2004 2003
Net profit attributable to shareholders (LL Millions) 22,229 15,055Weighted average number of ordinary shares issued 72,000,000 72,000,000Earnings per ordinary share (LL) 309 209
(LL Millions) 2004 2003
Interest paid on deposits 1,705 2,312Interest received from loans and advances 342 344Fee and commission income 515 465IT outsourcing service cost 490 485Insurance expense 469 359Other operating income 86 112Directors' remuneration 642 595Directors' attendance fees 272 272Key management compensation 1,260 1,089
Balance sheet presented in accordance with Bank of Lebanon Circular No. 33At 31 December 2004
ASSETS (LL Millions) 2004 2003
Cash and Bank of Lebanon 852,141 919,753Lebanese Treasury bills 1,108,000 943,795Debt and other fixed income securities 25,699 28,767Equity and other variable income securities 6,845 4,091Due from banks and financial institutions 763,621 682,900Loans and advances to customers 570,065 499,933Debtors by acceptances 59,290 50,246Investments in subsidiaries 3,524 3,524Property and equipment 56,716 53,995Intangible assets 1,288 1,592Other assets 74 91Order and other debit accounts 13,937 11,865Total assets 3,461,200 3,200,552
LiabilitiesDue to banks and financial institutions 69,776 120,292Deposits and customer accounts 3,086,872 2,795,622Engagements by acceptances 59,290 50,246Other liabilities 38,117 43,316Order and other credit accounts 4,416 4,443Provision for liabilities and charges 15,235 16,209Total liabilities 3,273,706 3,030,128
Shareholders' equityShare capital and cash contribution to capital 93,697 93,697Legal reserve 20,946 18,723Reserve for unidentified banking risks 11,682 9,682Real estate revaluation surplus 21,061 21,061Retained earnings 40,108 27,261
Total shareholders' equity 187,494 170,424
Total liabilities and equity 3,461,200 3,200,552
Auditor's Report
A
Auditor's ReportA
Annual Report 2003
87
Income statement presented in accordance with Bank of Lebanon Circular No. 33for the year ended 31 December 2004
(LL Millions) 2004 2003
Interest and similar income
Lebanese Treasury bills 91,260 114,728
Deposits and similar funds at banks
and financial institutions 61,399 49,605
Debt and other fixed income securities 2,252 2,584
Loans and advances to customers 40,695 45,812
Related parties loans and advances 342 344
195,948 213,073
Interest expense and similar charges
Deposits and similar funds from banks
and financial institutions 3,096 2,203
Customer deposits and other credit balances 146,607 153,600
Deposits from related parties 1,705 2,312
Other interest and similar charges - 8
151,408 158,123
Net provisions less releases on loans and advances
Provision for customer loans and advances 7,388 20,740
Release of provision and unrealised interest
on doubtful and substandard loans 8,188 7,062
800 13,678
Net interest income (carried forward to next page) 45,340 41,272
Auditor's Report
A
Income statement presented in accordance with Bank of Lebanon Circular No. 33 (continued)for the year ended 31 December 2004
(LL Millions) 2004 2003
Net interest income (brought forward from previous page) 45,340 41,272
Income from variable income securities 166 285
Net commission income
Commission income 15,215 13,487
Commission expense 1,250 1,122
13,965 12,365
Profit from financial operations
Profit from foreign exchange 3,596 2,442
Profit on sale of Treasury bills 2,658 5,518
6,254 7,960
Loss from financial operations
Loss from foreign exchange 1,471 656
Other operating income 3,256 952
Other operating charges 1,709 1,396
General and administrative expenses
Staff costs 24,018 23,219
General operating expenses 12,078 13,739
36,096 36,958
Depreciation and amortisation 3,874 3,900
Provision for property acquired
in settlement of debts 156 2,047
Net income before taxes 25,675 17,877
Taxes 3,446 2,822
Net income for the year 22,229 15,055
BBAC Network
Network
A
Branch Network and AddressesHead Office:
Beirut250, Clemenceau StreetP.O. Box: 11-1536 Beirut, LebanonTel: (01) 372883 - 364883
(01) 374530 - 372890 - 360460(03) 265501/2
Fax: (01) 365200SWIFT: BBAC LBBXwww.bbac.com.lb
BRANCHES:
Central Branch250 Clemenceau StreetP.O.Box: 11-1536Tel: (01) 372883 - 364883 – 372890
(03) 245501/2Fax: (01) 365200
AchrafiehSaint NicolasTelefax: (01) 201780/1 - 331599 - 331690
(03) 541542
AleyEl-SahaTel: (05) 555433/4 – 557433
(03) 548549Fax: (05) 557434
Aley BaqaaBkeshtay RoadTelefax: (05) 554701/2 - 557701/2
(03) 563564
BaalbekMain RoadTelefax: (08) 374014/5/6
(03) 614899
BaaklineMain RoadTelefax: (05) 300776 – 300348
(03) 265503
Bar EliasDamascus RoadTelefax: (08) 510014 - 511085
(03) 840842
BekaataMain RoadTelefax: (05) 500587 - 501587
(03) 265506
Bir El-AbedHaret HreikTelefax: (01) 548900/1 - 545435
(03) 539540
Bint JbeilAl Shami Bldg., Main RoadTelefax: (07) 450121/2
(03) 499300
JbeilJbeil, Main RoadTel: (09) 546700/546407/546567
ChahharQabr ChmounTelefax: (05) 410232 – 410281/2
(03) 265509
ChoueifatOld Sidon RoadTelefax: (05) 433302/3 - 433601
(03) 271194
ChtauraDamascus RoadTel: (08) 542451/3 – (03) 840844Fax: (08) 542452
DekwanehBlvd. Camille ChamounTelefax: (01) 682389 - 682390/1/2
(03) 542543
ElyssarBekfayya, Main RoadTel: (04) 913221- 913255
FerzolMain RoadTelefax: (08) 950850/1/2
(03) 840841
Furn el ChebbakDamascus RoadTelefax: (01) 291528/9/30
(03) 388611
HamraAbdel Aziz StreetTelefax: (01) 341280/2 - 351261 – 345733
(03) 414514
HasbayaChehabi’s Sarail RoadTelefax: (03) 311788 - (07) 250273/2
Jib JannineMain RoadTelefax: (08) 660370 – 660240
(03) 840843
KaslikTripoli-Beirut HighwayTelefax: (09) 221437/8/9
(03) 494495
ManassefMain RoadTelefax: (05) 720598/9
(03) 220729
MazraaCorniche el MazraaTelefax: (01) 818429/31 – 302540
(03) 265266
MetnHammanaTel: (05) 530050 – (03) 265504Fax: (05) 530482
Rachaya El-WadiMain RoadTelefax: (08) 591243/4 – 590240
(03) 840845
SaidaNijmeh SquareTelefax: (07) 723857 – 724369
(03) 535536
Tripoli MinaAl Mina Street - Dannaoui Bldg.Tel: (06) 200103/4/5/6
(03) 566635Fax: (06) 611555
Tripoli TallTall SquareTelefax: (06) 430460/1 – 627444
(03) 388622
TyrBuss - Jal el Baher - Main RoadTelefax: (07) 343651/2
(03) 265505
UnescoCorniche el MazraaTelefax: (01) 867144/5/6
(03) 233733
ZalkaAutostrade ZalkaTelefax: (01) 893910 – 886764 -893486
(03) 534111
OVERSEAS:
International Banking Unit - CyprusEmelle Bldg.135, Makarios AvenueP.O.Box: 56201LimassolTel: +357-25- 381290 - 381369Telefax: +357-25- 381584
Offshore Banking Unit - SyriaFree Zone AreaDamascusTel: 02-11-2134596/7/8
NetworkN
Annual Report 2003
Main CorrespondentsAmmanJordan National Bank
AmsterdamABN AMRO Bank
BrusselsFortis Bank
CopenhagenDanske Bank
DubaiMashreqBank
FrankfurtDeutsche BankCommerzBank
KuwaitNational Bank of Kuwait
LondonBarclays Bank PLC
MadridBanco Bilbao Vizcaya Argentaria
MelbourneANZ Bank
MilanoBanca Intesa SpA
MontrealNational Bank of Canada
New YorkCitibankThe Bank of New YorkJP Morgan Chase Bank
OsloDen Norske Bank
ParisBanque Saradar France
RiyadhAlbank AlSaudi Alfaransi
StockholmSkandinaviska Ensklida Bank
TokyoU.B.A.F.
ViennaBank Austria A.G.
ZurichCredit Suisse First Boston
91
Network
A
Subsidiaries1- Informatics’ Co. s.a.r.l.
A software company, that offers commercial and technical services. It was established in1980 by the bank shareholders: Mr. Toufic Assaf and Mr. Nashaat Sheikhlard. It is chairedby Mr. Ghassan Assaf; 84 % of the shares are owned by BBAC s.a.l.
2- Societe Libanaise de Service s.a.r.l.
SLS started its operations in 1980, with 91 % of its shares owned by BBAC s.a.l. Thecompany is chaired by Mr. Ghassan Assaf.
3- Capital Insurance & Reinsurance Co. s.a.l.
The company provides the full-range of insurance and re-insurance services. It is chaired byMr. Assad G. Merza. BBAC s.a.l. owns 80 % of its shares.