our mission - bank abc · al-suwaidi ec ac* director u.a.e. citizen b.sc. in economics,...

OUR MISSION

abc annual report fin 6/15/05 12:44 PM

Our mission is to:

Consistently generate increasing value for our shareholders Specialise in Arab-related activities across the worldInvest in international financial institutions that diversify andenhance shareholder valueAttract and retain high quality employees by providingrewarding careers

Our key objectives are to create and maintain:

A strong presence in the Arab world and achieve optimal diversification of our earning streamA strong risk management processAn effectively managed expense base focused on generatingincreasing shareholder valueA strong and liquid financial institution with emphasis on asset quality

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ARAB BANKING CORPORATION 1


OUR VISION IS TO BE THE PREMIER AND MOST INNOVATIVE INTERNATIONAL ARAB FINANCIAL GROUP

OUR VISION

2 ANNUAL REPORT 2004

FABR 173


Contents

46

1011

122632397072

Board of DirectorsDirectors’ ReportGlobal Network Financial HighlightsThe President & Chief Executive’s

Review of OperationsCorporate GovernanceGroup Financial ReviewAudited Financial StatementsHead Office ManagementABC Directory



MR. MOHAMMED HUSAINLAYAS EC* RC*

ChairmanLibyanB.A. Accounting and BusinessManagement, University of Benghazi,Libya; Diploma of the Institute of EconomicDevelopment, Washington, U.S.A.

Chairman and General Manager,Libyan Arab Foreign Bank. DeputyChairman and former Director ofBritish Arab Commercial Bank,London, U.K, BanqueIntercontinentale Arabe, Paris, Franceand Arab International Bank, Cairo,Egypt. Mr. Layas joined the Board ofABC in 2001 with over 35 years'experience in international banking.

MR. HILAL MISHARI AL-MUTAIRI EC†

Deputy ChairmanKuwaitiB.Sc. in Economics, Alexandria University,Egypt.

Second Vice Chairman, KuwaitChamber of Commerce & Industry.Director of Kuwait InvestmentAuthority. Past offices include Ministerof Trade and Industry of Kuwait;General Manager of KuwaitInvestment Company and of KuwaitClearing Company. Mr. Al-Mutairi isalso a Director of ABC InternationalBank plc, U.K. He has been a Directorof ABC since 2001 and has more than35 years of commercial and financialindustry experience.

MR. ABDALLAH SAUD AL-HUMAIDHI EC GC NC*

Director KuwaitiM.S. American University of Beirut.

Chairman and Managing Director,Commercial Facilities Company,Kuwait and Member of the Board andthe Executive Committee of KuwaitInvestment Authority. Mr. Al Humaidhiis also a Member of the Board ofKuwait Chamber of Commerce &Industry and Director of Arab BankingCorporation - Tunisie. He has been aDirector of ABC since 2001 and hasover 20 years’ experience in thebanking and investment sectors.

MR. KHALIFAMOHAMMED

AL-KINDI EC† GC*

Deputy ChairmanU.A.E. citizen

B.Sc. in Economics, East MichiganUniversity, U.S.A.

Deputy Managing Director of AbuDhabi Investment Authority and Chairman of Abu Dhabi

Investment Company. AlsoDirector of ABC InternationalBank plc, U.K. He has been a

Director of ABC since 1992 andhas over 25 years' experience as

an investment banker.

MR. FARHAT OMAR EKDARA EC GC NC

DirectorLibyan

B.A. in Economics, GaryounisUniversity, Libya; Masters Degree in

Money, Banking and Finance,Sheffield University, U.K.

Deputy Governor, Central Bankof Libya and Chairman of ABC

International Bank plc, U.K. A former Deputy Chairman of

Wahda Bank, Libya, Mr. Ekdarahas been a Director of ABCsince 2001 and has over 15

years’ experience in bankingand other business sectors.

DR. ANWAR ALI AL-MUDHAFAC RC

DirectorKuwaiti

M.B.A. and Ph.D. in Finance, Peter F.Drucker Graduate School of

Management, Claremont GraduateUniversity, California, U.S.A.

Dr. Al-Mudhaf is currently theGeneral Manager of KuwaitHealth Insurance Company and a lecturer in corporate

finance, investmentmanagement and financial

institutions at Kuwait University. He is also a Director and a

Member of the Board'sInvestment Committee of the

Kuwait Public Institute forSocial Security; former

Vice-Chairman of Al-MalKuwaiti Company (K.S.C.)

and a former Director of Al-AhliBank of Kuwait. Dr. Al-Mudhaf

worked as an advisor to theFinance and Economic Affairs

Committee at Kuwait’sParliament. He is a Director ofthe Board of Governors of the

Oxford Institute for EnergyStudies. Dr Al-Mudhaf is also a

Director of Banco ABC BrasilS.A. He joined ABC's Board inDecember 1999 and has over

15 years’ experience in banking and finance.

DR. SALEH LAMINEL-ARBAH AC

DirectorLibyan

B.A. in Economics, University ofBenghazi, Libya; M.B.A. University ofHartford, U.S.A.; Ph.D. in Economics,

Academy of Science, Hungary.

Director of Accounting at theCentral Bank of Libya; former

Undersecretary of the Ministryof Planning, Economy andCommerce, Libya. Also aDirector of Arab Banking

Corporation - Tunisie. Dr. El-Arbah has been a Director

of ABC since 1996 and has over30 years' experience in

central government. Dr. El-Arbah previously held achair in Macroeconomics from

the University of Gharian (Libya).

BOARD OFDIRECTORS


MR. EISSA MOHAMMED AL-SUWAIDI EC AC*

DirectorU.A.E. citizen

B.Sc. in Economics, NortheasternUniversity of Boston, U.S.A.

Executive Director of Abu DhabiInvestment Authority and

Director of Abu Dhabi National Oil Company

For Distribution (ADNOC-FOD).Also Deputy Chairman of

Arab Banking Corporation -Egypt (S.A.E.). He has been a

Director of ABC since 1995, with over 20 years in investment banking.

MR. MUBARAK RASHID AL-MANSOURI NC RC

DirectorU.A.E. citizenB.Sc. in Finance, M.B.A. University ofWest Florida, U.S.A.

Director General, Abu DhabiRetirement Pensions and Benefits Fund, Abu Dhabi; Director of Arab InternationalBank, Egypt and Arab BankingCorporation - Egypt (S.A.E.).Mr. Al-Mansouri has been aDirector of ABC since 1997 and has more than 15 years’experience in investment and commercial banking.

MR. HASSAN ALI JUMA AC RC

DirectorBahraini

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

Managing Director of NationalBank of Bahrain; Chairman ofBahrain Telecommunications

Company. Also Director of ABCInternational Bank plc, U.K.

Mr. Juma has been a Director of ABC since 1994. He has more

than 25 years' experience as acommercial banker.

DR. SALEH HELWAN AL-HUMAIDAN NC

DirectorSaudiPh.D. in Agricultural Economics,Oklahoma State University, U.S.A.

General Manager, ArabInvestment Company, Riyadh;Member of the Boards of SaudiInternational PetrochemicalCompany, Jubail and SaudiInvestment Fund, London,U.K.; Chairman, SaudiMoroccan DevelopmentInvestment Company,Casablanca. Dr. Humaidan isalso the Deputy Chairman ofArab Banking Corporation(Jordan). He has over 25 yearsof experience in the economicand investment fields gainedthrough his work at the SaudiArabian Ministry of Planning, the SaudiDevelopment Fund, and theArab Investment Company. Dr. Humaidan joined ABC as aDirector in 2001.

MR. YOUSEFABDELMAULA EC GC

DirectorLibyan

M.B.A. Hartford University, U.S.A.

Mr. Abdelmaula has been a Director and General

Manager of portfolioinvestments, of the Libyan

Arab Foreign InvestmentCompany; and

Deputy Chairman of LibyanArab Foreign Bank. He serves

also on the boards of UnionBank for Savings and

Investments, Jordan and TheArab Potash Company, Jordanand Arab Banking Corporation

(Jordan). Mr Abdelmaula hasmore than 20 years’ banking experience.

DR. KHALED S.KAWANSecretary to the Board &

Legal CounselLibyan

Ph.D. (Doctorat D'Etat) in BankingLaws, University of Paris

(Sorbonne), France.

Secretary to ABC's Board ofDirectors since July 1992, Dr. Kawan joined Legal &

Compliance Department of ABCin June 1991, having previously

spent some time with a primeFrench law firm in Paris. He wasmade Legal Counsel and Head of

Legal & Compliance in March2004. Dr. Kawan also representsABC as a Director on the boards

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

Corporation (Jordan).

EC Member of the Executive CommitteeAC Member of the Audit CommitteeGC Member of the Corporate Governance CommitteeRC Member of the Risk CommitteeNC Member of the Nomination & Compensation Committee

* Chairman† Deputy Chairman


Mohammed Layas, Chairman

A new chapter…

In 2004 ABC entered a new chapter in its history when, in

addition to shedding itself of most of its non-core activities,

it began the process of restructuring its management around

the principles of product, rather than geographic orientation.

The sale during the year of its shareholdings in its Spanish

and Hong Kong based retail banking subsidiaries did more

than just earn ABC a handsome profit on those long-term

investments - it boosted the capital base of the bank to

support its future expansion plans in the region together

with the ability to focus all of its energies on two of the

prime tenets of its mission, to specialise in Arab world

business flows and to enhance shareholder value.

ABC’s shareholders were paid a dividend of $66 million in

April 2004, and, following the sale of investments in Banco

Atlántico, S.A. and International Bank of Asia Ltd., an

additional dividend of $300 million was paid in October

2004 ($226 million in cash and $74 million by the

distribution of the shares issued out of ABC’s treasury stock

held by the bank). Total dividend payout in 2004 thus

equalled $366 million or 36.6% of the paid-up capital which

equates to a return of 25% on the average market price of

ABC’s shares in 2004.The balance of the gain from the sale

of Banco Atlántico, S.A. and International Bank of Asia Ltd.

has been retained, resulting in an increase in ABC’s

consolidated equity of $267 million, inclusive of the Group’s

net profit for the year arising from its continuing operations.

The directors have recommended a final dividend of 5% for

the financial year 2004 for approval at the Annual General Meeting.

Over the course of the year, ABC also introduced a new

product-based matrix management structure. Henceforth,

responsibility for all business activities will lie with the new

product groups, set up in the Group’s two strategic hubs,

located in Bahrain and London and concentrating exclusively

on their respective products and services, representing the

six key areas identified within the Group as its focus for

future development - Treasury, Trade Finance, Project &

Structured Finance, Retail Banking & SMEs (Small and

Medium-sized Enterprises), Islamic Banking and Syndications.

Matrix management has already begun to have an impact on

the turnover and profitability of the Group. With the new

streamlined Group we have today, it is clear that the

product-based teams, no longer constrained by geographical

territories but nevertheless aided by a new team of

DIRECTORS’ REPORT

ABC'S EXPANSION WILL BE BASED ON A CONSERVATIVE RISK PROFILE

(All figures stated in US dollars)


and significantly above both the regulatory minimum and the

15% which is our internal benchmark as part of our aim to

maintain a strong and liquid financial institution.

In the coming years, the Group plans to expand in both itsretail and wholesale banking franchises. In the retail bankingarea this growth will be achieved via new ventures,acquisitions and organic expansion in the Arab world - in thisregard the Group has been awarded a banking licence in Iraqand intends to set up operations there during 2005 and alsointends to apply to open a branch in Libya. In the wholesalebanking units, expansion will come through the continuedbroadening of ABC’s range of high quality products, aimed atthe financing of the region’s ebullient infrastructuredevelopment, servicing the ever-increasing demand forShari’a-compliant facilities, intermediating in the expandingArab/international trade flows and satisfying the continuingdemand for treasury and fund management products gearedto the needs of the region and those who do business with it.

dedicated country marketing and relationship managers,

have already begun to expand their customer base and

identify new business opportunities, both in Europe and the

Arab world.

ABC's earnings stream remains strong. Net profit from

continuing operations (excluding the impact of Banco

Atlántico and International Bank of Asia) amounted to $109

million (2003: $71 million). Net interest income amounted to

$152 million (2003: $158 million) resulting from the

restructuring of the Group’s assets and the sale of its Brady

bonds portfolio which, although depriving the Group of high

yielding assets, substantially improved credit quality. Non-

interest income totalled $153 million compared with $259

million in 2003 which, as an IAS 39 adjustment, had included

an income of $140 million derived from revaluations of the

Group’s loans forming part of ABC's Brady bonds portfolio

carried at fair value. Operating expenses were reduced by

7% over the year, to $199 million (2003: $214 million) mainly

through a reduction in staff costs as the Group intensified its

efforts to rationalise and improve operating efficiencies.

Premises, equipment and other operating expenses were

also kept under control.The continuing review of the credit

portfolio resulted in a net writeback of $10 million (2003:

$74 million provision). Thus, net profit from continuing

operations at $109 million was higher than 2003.To this must

then be added the profit from the sale of the Spanish and

Hong Kong subsidiaries, which was substantial at $470

million, thus achieving a net profit for the year of $579 million.

The Group’s assets at the end of 2004 stood at around $15

billion following the disposals. The consolidated capital

adequacy ratio as at 31 December 2004 was 23.9%,

substantially higher than the 14.7% ratio at the end of 2003

0

2000

4000

6000

8000

10000

12000

Dep

osits

$ m

illion

s

2003 2004

10,156 10,587

0

500

1000

1500

2000

Shar

ehol

ders

’ fun

ds $

milli

ons

2003 2004

1,852

1,585

2003 2004

37% 27% 4% 22% 6% 4%

44% 22% 3% 22% 6% 3%

ArabWorld

WesternEurope

Asia NorthAmerica

LatinAmerica

Others

Ass

ets

Brea

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2003

2004

Note: In compliance with the Bahrain Monetary Agency Circular No. BMA/751/93, EDBC/782/93 and ODG/407/03 set out below are theinterests of Directors and Senior Managers in the shares of Arab Banking Corporation (B.S.C.) and the distribution of shareholding for the yearended 31 December 2004.

Directors’ remuneration, allowances and expenses for attendance at Board meetings for 2004 amounted to US$1,282,000 (2003: US$1,231,000).

* Treasury stock held by ABC, distributed in 2004 as stock dividend

Less than 1% 8,407,479 1,343 8.41 6,208,616 1,410 6.20

1% up to less than 5% 10,021,134 5 10.02 11,137,934 6 11.14

5% up to less than 10% - - - 5,867,736* 1 5.87

10% up to less than 20% - - - - - -

20% up to less than 50% 81,571,387 3 81.57 76,785,714 3 76.79

50% and above - - - - - -

Total 100,000,000 1,351 100.00 100,000,000 1,420 100.00

% of shares heldNo. ofshares

% of totaloutstanding

sharesNo. ofshares

No. ofshareholders

% of totaloutstanding

sharesNo. of

shareholders

2004 2003

DIRECTORS’ REPORT

1/1/2004 31/12/2004

Directors' Shares 11,000 9,670

Senior Managers' Shares 19,329 16,923

Total 30,329 26,593

This expansion will not, however, be at the cost of asset

quality. The Group’s determination to move towards an

increasingly conservative risk profile has recently found

expression through the new Board Risk Committee’s explicit

enunciation of the Group’s risk appetite, as well as through

the adoption and implementation of the latest risk

management systems. The international market’s pricing of

ABC risk in its recent highly successful syndicated loan raising

exercise - the amount of which was increased to $500 million

from the original target of $300 million - as that for an

A-rated issuer compared with ABC’s current BBB - rating,

amply demonstrates the positive perception that ABC

commands in the capital markets.

In closing, we should once again like to express our gratitude

to our dedicated and professional management team and

staff for all their hard work in the past year, as the Group

adjusted to the new and vigorous organisation structure

designed to lead it to a more successful future. We would

also like to thank all the regulatory authorities in the

jurisdictions in which our various units operate for their

guidance and support, especially the Bahrain Monetary Agency.

Mohammed Layas, Chairman


EXPANSION WILL COME THROUGH THE CONTINUOUS BROADENING OF ABC'S SKILLS BASE


GLOBAL NETWORK

US$ millions


ABC GROUP

ABC Parent ABC Group(ABC BSC)

2004 Highlights

Total Assets 10,555 14,922

Total Loans and Advances 2,807 6,012

Total Deposits 7,002 10,587

Shareholders' Funds 1,852 1,852

ARAB WORLD DIVISION US$ millions

ABC Algeria ABC Islamic Bank ABC Jordan ABC Egypt ABC Tunisie

2004 Highlights

Total Assets 267 335 527 403 140

Total Loans and Advances 60 218 205 169 83

Total Deposits 217 300 385 348 117

Shareholders' Funds 34 32 59 36 10

Number of Branches 4 Nil 16 11 4

OTHER SUBSIDIARIES US$ millions

ABC International Banco ABC Bank plc Brasil

2004 Highlights

Total Assets 3,697 830

Total Loans and Advances 1,730 639

Total Deposits 2,695 627

Shareholders' Funds 481 127

Number of Branches 4 3

FINANCIAL HIGHLIGHTS

2004 2003 2002 2001 2000Earnings (US$ million) Restated RestatedNet interest income 152 158 464 469 433 Other operating income 153 259 257 293 280 Total operating income 305 417 721 762 713 Profit before provisions, tax and minority interests 106 203 230 288 262 Writeback (Provisions for credit losses) 10 (74) (204) (128) (66)Profit before tax and minority interests 116 87 26 160 196 Net profit (loss) for the year from continuing operations 109 71 (41) 102 127 Net profit for the year from discontinued operations 470 49 - - -Financial Position (US$ million)Total assets 14,922 30,068 28,915 26,545 26,676 Loans and advances 6,012 15,921 14,981 14,225 14,039 Placements with banks and other financial institutions 4,305 6,651 6,802 6,444 7,060 Trading securities 184 86 373 341 713 Non-Trading securities 3,617 5,204 4,632 3,616 Investment securities 2,961Shareholders' funds 1,852 1,585 1,371 1,872 1,904 Ratios (%)ProfitabilityCost: Income ratio (costs as % of gross operating income) 65 51 68 62 63Net profit (loss) as % of average shareholders’ funds 30.1 7.9 (2.8) 5.4 6.8Net profit (loss) as % of average assets 4.07 0.83 (0.15) 0.38 0.50 Dividend cover (times) 1.93 1.81 0.00 1.54 1.93 CapitalRisk weighted assets (US$ million) 8,249 18,051 19,015 17,891 17,526 Capital base (US$ million) 1,974 2,661 2,495 2,373 2,367 Risk asset ratio - Tier 1 15.7 12.0 11.5 11.8 11.8Risk asset ratio - Total 23.9 14.7 13.1 13.3 13.5Average shareholders' funds as % of average total assets 13.5 10.5 5.2 7.2 7.4Loans and advances as a multiple of shareholders' funds (times) 3.2 10.0 10.9 7.6 7.4Total debt as a multiple of shareholders' funds (times) 7.0 17.6 19.8 12.9 12.8Term financing as multiple of shareholders' funds (times) 0.99 1.17 1.59 0.97 0.89 AssetsLoans and advances as % of total assets 40.3 52.9 51.8 53.6 52.6Securities as % of total assets 25.5 17.6 17.3 14.9 13.8Non-accrual loans as % of gross loans 5.1 4.5 4.9 4.5 4.7Loans loss provisions as % of non-accrual loans 141.4 102.0 94.7 94.8 89.3Loan loss provisions as % of gross loans 7.2 4.6 4.6 4.3 4.2LiquidityLiquid assets ratio 56.4 42.1 43.1 40.9 41.8Deposits to loans cover (times) 1.8 1.6 1.5 1.5 1.5Share InformationBasic Earnings per share

- Profit for the year $5.79 $1.20 $(0.41) $1.02 $1.27 - Profit from continuing operations $1.09 $0.71 - - -

Dividends per share - Cash $2.90 $0.70 - $0.70 $0.70 - Stock 0.062 shares

Net asset value per share $18.52 $16.84 $14.57 $19.89 $20.23Capitalisation (US$ million)Authorised 1,500 1,500 1,500 1,500 1,500 Issued, Subscribed and fully paid-up 1,000 1,000 1,000 1,000 1,000

Figures for 2003 exclude amounts relating to the discontinued operations, where required.

Registered addressArab Banking Corporation (B.S.C.)ABC Tower, Diplomatic AreaP.O. Box 5698, Manama, Kingdom of Bahrain

Publicly quoted company listed on Bahrain Stock Exchange (Commercial Registration Number 10299)


Principal ShareholdersKuwait Investment Authority (Kuwait)Central Bank of Libya (Libya)Abu Dhabi Investment Authority (Abu Dhabi)Individual and Institutional Investors

Ghazi M.Abdul-Jawad, President & Chief Executive

In last year’s report, I foretold that 2004 would be a year oftransition, change and exploitation of synergies in ABCGroup, and indeed it was. The new matrix managementsystem, which defines and segregates the roles andresponsibilities for product and relationship management inorder to focus on marketing and product development in amore productive manner, was introduced throughout theGroup. Country Coordination Managers were appointed to coordinate marketing strategies, and product groupsorganised to be responsible for origination, structuring anddistribution of those of the Group’s products that have beenspecially targeted for strategic development and expansion –Treasury, Trade Finance, Project Finance, Islamic Banking,Retail Banking and Loan Syndications. Concentratingwholesale banking efforts out of the two key hubs of Bahrainand London should lead to optimal utilisation of resources inthe identification, creation and development of opportunitiesfor the Group’s products and services.The retail subsidiariesremain focused, each on its own country; however, throughthe matrix, synergy with the wholesale banking units hasincreased and this is reflected in the results of the retail units.

Although mostly the Country Coordination Managers(CCMs) were positioned in the hub nearest to theirrespective countries of responsibility, in the case of certaincountries in the Middle East and North Africa (MENA) region

it was apparent that it would be more appropriate forrelationship responsibility to lie with ABC International Bankplc (ABCIB) - in light of the strong trade flows existingbetween Europe and those countries. As a consequence,ABCIB’s marketing responsibilities were significantly expanded.

ABCIB’s size and geographical coverage also grewsubstantially as a result of the transfer to it of the businessesof Arab Banking Corporation - Daus & Co. GmbH inFrankfurt and ABC’s Milan branch. This networkenlargement, together with the marketing offices establishedby ABCIB in Sweden, Spain, Britain and Turkey, and itsassumption of the wider marketing responsibilities in theMENA region, will form the foundation of the Group’saspirations to play an increasingly important role in thefinance of trade between Europe and the Arab world.

As a preliminary to further expansion in the Arab world,meanwhile, the Arab World Division maintained themomentum to upgrade and standardise the IT systems in theretail banking units - a process begun several years ago - andto introduce a standardised ‘ABC Bank’ brand and unifiedimage throughout.The Division also strove to build a strongrelationship-driven ethos in all the retail units. These effortshave been combined over the last few years with theintroduction of stronger credit controls and an enhanced

(All figures stated in US dollars

unless otherwise indicated)

THE GROUP’S CONTINUING OPERATIONS AMPLY DEMONSTRATED ITS INHERENT STRENGTH AND PROGRESS WITH INCREASED PROFITABILITY

THE PRESIDENT & CHIEF EXECUTIVE’SREVIEW OF OPERATIONS


credit culture in all units. Problems relating to credit risk havebeen addressed as a priority, with credit analytical trainingprovided to Head Office standards and credit qualityappreciation and credit authority discipline strengthened.New credit policies and procedures, appropriate to the retailbanking environment, have been introduced and exposuremanagement and monitoring capabilities improved. Creditdecisions are now not only more disciplined in themselvesbut, with internal pricing requirements being increasingly tiedto asset quality assessments through the Group’s internalrating processes, combined with return on economic capitalimperatives, lower quality credits are automatically pricingthemselves out of the arena. Where appropriate, specialistproblem credit recovery units have been established in thedomestic subsidiaries to focus on collection and to segregateproblem assets from the marketing areas. I am pleased toreport that as a result of these steps, not only haverecoveries increased but very little in the way of newproblem loans have emerged in the last year.

Steps have also been taken to recruit additional qualified andexperienced staff where required and to intensify generaltraining of existing staff to improve performance standards.Gratifyingly, staff quality and capabilities have markedlyincreased, leading to improved service and customersatisfaction. A number of management changes have alsobenefited the domestic business units, as evidenced by amore focused business direction and strategy, improvedinternal controls and compliance with Group policy.

The Group’s continuing operations amply demonstrated itsinherent strength and progress with an increased net profit,half again as much as in 2003.

In 2004 the world economy grew by some 5%, its fastestpace for more than 20 years, led by the US, driven by robustconsumer spending, Japan - still the world’s second largesteconomy - putting in a superlative performance and China -finishing strongly despite all efforts to contain excessiveinvestment. However, following the disposal of ABC’sinterests in Hong Kong and Spain, and the refocusing of itsbranch in New York on the financing of American/Arabtrade, the Group’s revenues are now less tied to risk in thesegeographical areas and more closely aligned with thebusiness flows between them and the Arab World, as withthose between Europe and the Arab World. In Europe, apartfrom the UK, growth was somewhat subdued (althoughGermany did put in a strong export surge in the second halfof the year) and in the Arab world the oil producers onlybegan to benefit from increased oil prices in the second half

of the year, while the non-oil producers saw only a gradualreturn to traditional tourism and agricultural based revenuegrowth, again later in the year.

For the Group, these economic conditions were reflected inrelatively stable interest earnings but significantly increasednon-interest operating revenues. Our determination to keeppressure on costs also began to bear fruit as operatingexpenses were reduced by some 7%, mainly due to strictattention to staff costs.To this was added the reward for ourfocused attention on problem loan management andrecovery, which together resulted in a net writeback ofprovisions. After tax and minority interests, therefore, theGroup’s continuing operations amply demonstrated itsinherent strength and progress with an increased net profitof $109 million, half again as much as in 2003 ($71 million).

Looking ahead, we envisage the key product groups as beingthe main source of steady and consistent earnings growth forour shareholders. The Retail Banking & SME (Small andMedium-sized Enterprises) group will expand cautiously,both on the back of the existing Arab world retail units andout of greenfield entities or acquisitions. The Trade Financegroup is fast expanding out of Bahrain and the ABCIBbranches and marketing offices and will eventually be thegroup’s most significant revenue earner. The Treasury Groupcontinues to develop new products for its customer basewhile intensifying its marketing efforts in the region and inthe OECD, while the Project & Structured Finance groupseeks not only to maintain its leadership position in theregion but to harness the synergistic benefits of its twin hublocations to expand its services in both the MENA regionand Europe. Syndications will embrace its newresponsibilities, growing its own customer base as well asproviding its usual professional support to other parts of theGroup. Islamic Financial Services, meanwhile, have found newvigour in both hubs, with many transactions already being puttogether utilising the strong connections that have been builtup between ABC Islamic Bank and ABCIB’s Islamic AssetManagement department.

We are also pleased to report that in 2004 ABC’s applicationfor a branch licence in Iraq was approved by the relevantauthorities. Although the security situation in that countryprecludes the establishment of an operational presence atthe time of writing, management have already been recruitedand are currently undergoing training in Jordan and Bahrain.ABC is monitoring the position closely with the intention ofcommencing operations once security and stability isrestored to an extent where normalisation of commercialactivities can be foreseen.


For 2005 and beyond, therefore, with prospects lookingpositive in the MENA region and Europe, assisted by stablegrowth in the US and expectations for a soft landing inChina, ABC expects to benefit from revenue growth from itsexisting outlets while continuing to seek out opportunitiesfor regional expansion through acquisition and merger or,indeed, start-up situations in selected countries whereoperational licences are even now actively being sought.

Product Groups

Group Treasury

Group Treasury continues to be the central coordinator ofABC Group’s funding and liquidity management, which is themost important of its three strategic objectives of liquidity,profitability and customer relationships. It monitors liquidityon a daily basis to ensure that ABC Group is prepared andable to meet any contingency arising in any of the Group’sunits worldwide.

In 2004 the reporting line of the ABCIB Treasury departmentchanged as the new matrix organisational structure wasimplemented and Group Treasury became directlyresponsible for managing and guiding the activities of ABCIBTreasury in addition to that of ABC Bahrain.These units nowconstitute the two main Treasury hubs of ABC Group.

Under Group Treasury’s direction, Bahrain Treasury andLondon Treasury will focus primarily on diversification offunding sources and revenue streams.This will be achieved byaggressive marketing to develop and build long-termcustomer relationships, and investments in capital efficientand diversified investment portfolios. In addition, they willcontinue to develop and offer cutting edge treasury productsto their customers to add to the extensive range already onoffer.

Project & Structured Finance

In keeping with the new product matrix, the Project &Structured Finance group operates out of the two hubs,ABCBahrain, covering the Gulf Region, and ABCIB London whichfocuses primarily on North Africa, the Levant and Turkey.ABC Group’s international depth and strategic relationshipswithin the region enables P&SF to maintain a market-leadingfranchise where it has been building up its practice beyondthe traditional roles of regional banks and moving into highervalue-added activities such as asset financing for aircraft and ships.

Following a drop resulting from the suspension of many newprojects during the lead up to, and the immediate aftermathof, the Iraq war, project finance business activities in theMiddle East began to recover their momentum in 2004.Although the first half saw only slow progress, this waspartially offset by a particularly active second half, withseveral projects being initiated or reactivated throughout theregion, particularly in the Gulf Cooperation Council (GCC) area.

In 2004 P&SF maintained its market leadership position inthe Middle East project finance market, and a successful yearwas crowned by several international and regional plaudits,including Emerging Markets Magazine’s ‘Best Project FinanceBank in the Middle East and Africa’ award. More importantly,the group continued to be awarded the trust of itscustomers, who selected P&SF to provide a number ofsignificant lending and advisory services, a few of which arehighlighted below.

The group successfully closed several important transactionsas mandated lead arranger during the year, notably the $240million project financing for Oman Polypropylene Companyand the €290 million arranged to finance the secondTunisian GSM mobile licence, awarded to Orascom TelecomTunisie. Other mandated lead arranger roles included the$3.6 billion financing for the Qatar Liquified Gas CompanyLimited (II) transaction - the Middle East’s largest everproject financing - and the $1billion transaction for BahrainPetroleum Company to finance a low sulphur dieselproduction unit and plant upgrades.

In addition to its mandated lead arranger roles, the groupparticipated in regional financings for Dolphin Energy, IranPetrochemical Commercial Company, Equate PetrochemicalCompany and the $2.3 billion Islamic structured bridge loanfacilities for Etisalat International Company following itsaward of the second GSM licence in Saudi Arabia. P&SF also



continued to offer structured finance solutions for asset-backed transactions, closing two separate debt financefacilities for National Air Services, a private business jetoperator based in Saudi Arabia, and participating in therefinancing of two aircraft for Gulf Air, in addition to receivingtwo separate mandates as sole lead arranger for aircraftfinancing transactions, expected to be closed in early 2005.

In the area of advisory services, P&SF worked throughoutthe year as strategic and financial advisor to Jubail-basedProject Management & Development Co. Ltd. in respect of aplanned $3.5 billion integrated petrochemicals complex tobe built in Saudi Arabia. The financing for this project isexpected to be launched into the debt markets in 2005 afterthe project company has been formed betweeninternational and local joint venture partners.

For the future, P&SF’s objectives are to expand the group toenable it to continue to develop the advisory franchise thathas made such a good start, thus increasing its non-loanrelated fee income, while maintaining ABC’s lead position asunderwriter/arranger in the rapidly growing regional projectand structured finance market.

Trade Finance

The organisation of the Group’s trade and commodityfinance operations also underwent dramatic change in 2004.The successful integration of ABC’s former Frankfurt andMilan businesses extended ABCIB’s marketing responsibility

to all Europe, while the substantial trade flows betweenEurope and North Africa, the Levant and Turkey led to theshifting to ABCIB of primary marketing responsibility forthose countries. This was followed soon after by theimplementation at ABCIB of the Group’s product-led matrixmanagement system.These changes then naturally led to thedecision to centre the marketing and business efforts ofABCIB’s branch and satellite offices around trade finance, sothat each office now maintains and offers clients its own in-house trade finance capability, supported by other productspecialists drawn from around ABCIB as and when required.

These developments in turn enabled the Bahrain hub toreorganise its trade finance marketing efforts and consolidatethe trade finance services previously offered out of theCorporate Finance and Government & Financial Institutions(G&FI) departments. The Bahrain-based Trade Financeproduct group now has responsibility for all relationships andbusiness conducted in the GCC area, Iran and Iraq (as wellas Yemen, Sudan, India, Pakistan and Sri Lanka), whether withgovernment agencies, financial institutions or corporateclients. The new group will now focus its efforts onexpanding its customer base, particularly in the GCC andIran, by offering structured trade finance and forfaitingsolutions to meet the needs of all types of customers.

ABCIB meanwhile continued to expand its network ofmarketing offices, opening representative offices inRossendale, to cover the north of England, Madrid for theIberian Peninsula and Istanbul, aimed at exploiting trade


operations and the raising of its profile as a specialist in thefinancing of the trade flows between Europe and the Arabworld - and, indeed, within the Arab world itself. Thisprogress was well demonstrated in 2004 by ABC Groupearning Trade Finance magazine’s ‘Award for Excellence’ as‘Best Regional Bank in the Middle East and North Africa’ andin the same year achieving awards from both EmergingMarkets magazine - ‘Best Trade Finance Bank in the MiddleEast and North Africa’ and Trade and Forfaiting Review -

‘Best Trade Finance Bank in the Middle East’.

Looking forward, the London and Bahrain hubs’ growing

primary sourcing capabilities, complemented by Bahrain’s

expanding distribution channels in the region, should provide

ample opportunities for business growth.

Islamic Financial Services

Over the past 20 years ABC Group has built up an

unparalleled knowledge of Islamic finance business lines -

ranging from wholesale banking via syndications and club

deals to investment banking, capital markets (sukook

underwriting), treasury products, fund and portfolio

management, trade finance, equipment leasing and real

estate financing. In geographical terms, its offerings have

included Islamic investment banking transactions in the USA,

trade finance transactions linking European and American

multinationals and regional project and corporate finance

facilities in the GCC countries.

As part of the overall strategic decision to refocus the Groupon a product-based matrix,ABC’s wide skills and experiencebase in Islamic products have been brought together into asingle product line.This enables Group synergies to be usedto the advantage of clients and shareholders alike. Byrepositioning certain key personnel between London andBahrain, and supporting them with selected new high-calibreappointments, the Group is able to deliver to all its clientseverywhere the highest standard of professional service, withgreater efficiency. The Islamic product group contributes itsown specialist skills, par ticular ly in Shari’a-compliantstructuring, whilst drawing on central Group specialistanalytical, legal and distribution competencies to deliverworldwide solutions, wherever and whenever clients canbenefit from Islamically structured financial transactions.Thisnew high-level cooperation is especially valuable to clientsoperating in the areas of trade, project and asset finance. Anearly example of these initiatives is the distribution jointventure agreement with Bristol & West Building Society -

Trade Finance (continued)

opportunities inherent in Turkey’s renewed economic vigourand the exciting prospects offered by EU accessionnegotiations. This expanded network, combined with theorganisational changes in Europe and Bahrain, has enabledABCIB to focus its marketing activities on a core of highquality European exporting clients, winning and structuringseveral important transactions during 2004.

Although it began operations only in May 2004, the BahrainTrade Finance hub has already begun to establish itself as aleading player in the highly competitive GCC trade financeand forfaiting market. In addition to servicing ABC’s existingtrade related customer relationships, in the short time sinceinception, it has originated, structured and distributed orbooked for its own portfolio a very significant number oftrade finance deals for its fast expanding customer base.

The G&FI team is now part of a new Country CoordinationManagers unit which, together with the Tehran, Abu Dhabiand Singapore representative offices, falls under the BahrainTrade Finance group. In 2004, the unit continued to developbusiness and serve its clients’ needs in its main markets, withcontracts-related guarantees and documentary creditsbusiness remaining a prime business area.ABC maintained itshigh profile role in trade finance business with the Iranianbanks, at the same time working closely with the centralbank, Bank Markazi, and the Iranian Ministry of Finance inother areas such as treasury and bilateral lending.The majorGCC banks and consumer finance companies were alsoimportant customers, accessing facilities ranging from tradefinance to a variety of syndicated and direct loans. Workingwith the Syndications group the team also maintained ABC’slead role as arranger of syndicated facilities for MENA regionbanks, with six mandated facilities generated in Kuwait, Qatar,Bahrain, Egypt and Tunisia. Growth was achieved whilepreserving the desired mix of funded and unfunded assets,and net profit reached record levels. The team wasparticularly proud of the success of the debut financings ofBank of Kuwait and the Middle East Doha Bank and BanqueNationale du Agricole.

The implementation of ABC Group’s product-led matrixmanagement system has led to both a more efficient,streamlined, operation and a growing cooperation betweenthe London and Bahrain hubs in terms of sourcing,structuring and distribution of trade finance assets. By theend of the year the positive results of these changes werealready being seen in the growing strength and success ofABC Group’s global trade and commodity finance




SPECIALIST ASSET FINANCING TO SUIT THE CLIENT FROM ISLAMIC EQUIPMENT LEASING TO COMPLEX STRUCTURED FINANCING



Islamic Financial Services (continued)

part of the Bank of Ireland group - under which a Shari’a-complianthome finance programme has been structured and launchedunder the alburaq brand in the UK for British Muslims. It isintended that alburaq will be the Group’s retail bankingIslamic brand for both MENA and European markets.

Retail Banking & SME

In 2004, the new Retail Banking & SME group’s results werebetter than 2004. The group concentrated on marketresearch directed towards identifying the Group’s clientele’srequirements, projecting the products needed to meet thoseneeds and the development of delivery channels to ensureease of accessibility by those clients.

Expansion of the retail banking product base continued,aimed at offering a wide range of consumer finance andwealth management products to all target markets. Buildingon the franchise that the Group has developed over the pastfew years with its network of branches in Algeria, Tunisia,Egypt and Jordan, it has been introducing telephone, SMS(text messaging) and on-line banking as part of thedevelopment of virtual channels. Implementation of anumber of new strategic initiatives also commenced in 2004,including the move to outsource the domestic bankingsubsidiaries’ credit card processing to Arab Financial Services,ABC’s affiliate company based in Bahrain, and the formationof an alliance with a major insurance partner aimed atdelivering Bancassurance products to its customers.

In the area of risk management, the group, working with theArab World Division at Head Office in Bahrain, continuedthe process of implementing revised consumer creditpolicies in the domestic banking units, seeking a uniform andstrong credit culture as a universal backdrop to thecontrolled expansion of retail credit throughout the Arab world.

Syndications

The Syndications group had another successful year in 2004.The team again played a key role in helping ABC to maintainits lead position as mandated arranger of syndicated loans inthe MENA region, winning nine mandates to arrangesyndications in coordination with ABC Group business units.

Among its many successes, it was particularly proud to havewon its first corporate sole mandate in Kuwait, to arrange a

$100 million term loan for Commercial Facilities Company,which was later oversubscribed by 100%. It also won solemandate for a Û70 million debut syndication for BanqueNationale Agricole in Tunisia, where it has established anunrivalled track record in the last few years as the leadingsyndications bank. The Syndications group also acted asbookrunner for the two highly successful project financings,$240 million on behalf of Oman Polypropylene Companyand Û290 million on behalf of Orascom Telecom Tunisie,arranged by P&SF group as mentioned above. Allsyndications were successfully placed and sell down targetsmet, while underwriting income exceeded the group’sinternal target by more than 100%.

As Syndications is regarded as a key service utility in its ownright, the group has since 2004 been tasked with greaterresponsibility for originating new business alongside ABC Groupbusiness units. In consequence,2005 will see an expansion in theteam as it grows to meet these new responsibilities.

Banking Group

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

Egyptian business confidence improved remarkably during2004, with most firms reporting a noticeable pickup inturnover. Real GDP growth increased by an estimated 3.7%- the first increase since 1999 - with the IMF predicting a riseto 4.5% in 2005. Partly as a consequence of the flotation ofthe Egyptian pound in 2003, the balance of payments’ currentaccount exhibited a record surplus of $3 billion, after threeyears of decline, due to a surge in exports vis-à-vis imports,and increased services revenues - chiefly from tourism and SuezCanal receipts - and overseas workers’ remittances. Againstthis good news, however, had to be set the threat ofreawakened inflation - with the CPI reaching an estimated21% - and a continuous slide in purchasing power of thedomestic currency, amidst a background of weak investmentand rising unemployment. The new government of PrimeMinister Ahmed Nazif, appointed in July 2004, has promisedto attack inflation and the deterioration in public finances, butit is unclear if measures taken will be enough to maintaingrowth in the economy.

In these circumstances, ABC Egypt’s Corporate BankingGroup adopted a cautious stance, focusing on building adiversified loans portfolio and expanding indirect facilities.The bank’s Correspondent Banking Group sought to growits export-related trade finance business and its Retail


Banking Group concentrated on the improving businessopportunities in the SME sector, together with expanding theconsumer loans portfolio, supported by its new scoring system.

As a result net interest margin in 2004 rose by 23% to over$8.3 million. However, commissions, fees and other incomefell by 58% to $3.3 million. After operating expenses of $11.3 million, reflecting a moderate 5% rise, and a netwriteback of provisions through recoveries, the resultant netprofit of $2.1 million was 10% up on 2003.

During the year, ABC Egypt put significant effort intoexpanding and improving its delivery channels. The 6th ofOctober branch, which had been temporarily relocated atMohandseen, moved back in February 2004 to fullyrefurbished premises. New branches at Obour and Maadiopened in April and May respectively, while the Garden Cityand Bostan branches were merged in October as CairoBranch.The ATM network was increased to 30 machines, 20of them off-site. ABC Egypt’s IT Group, working togetherwith the Retail Banking & SME group and Global IT,successfully launched ABC On-line, ABC Group’s Internet-based service, in September 2004. All operations functionswere meanwhile centralised at the Central Operations Division.

The bank’s plans for 2005 include the opening of two newbranches, in Heliopolis and the Pyramids area, and adding tothe product range with car purchase and educational loans.ATM functionalities will also be enhanced, enabling somemachines in strategic locations to accept cash deposits andallow foreign exchange transactions. In ABC Egypt’s missionto achieve a high quality portfolio it has established a RetailCredit Division under its Credit & Risk Management Group,tasked with screening all credit applications and setting loanand credit card limits with the aid of its internal scoringsystem. Staff training has meanwhile been intensified,including a new summer internship programme for selectedstaff and courses in the new work systems, Basel II and Anti-Money Laundering.

Arab Banking Corporation (Jordan)

Jordan’s economy accelerated in 2004 at a rate notwitnessed since the mid-1990s. Real GDP expanded by over7% as exports surged and international aid and workers’remittances increased. Official foreign exchange reservesrose to $4.8 billion, equivalent to over eight months’ importsof goods and services. Notwithstanding the rise in fuel prices

and the effect of the weakening dollar on import prices,inflation rose only slightly, to around 3%. The Stock Exchangeindex rose by some 57%, following a 54% gain in 2003.

In light of the general economic outlook and growthexpectations for the communications, trade andinfrastructure sectors, ABC Jordan also focused on theprovision of financial services to those sectors, in addition toexpanding its services to the exporting industries. Thecorporate portfolio thus expanded to $160 million as thebank joined in financing a number of important domesticprojects for, amongst others, Central Electricity GeneratingCompany, with a participation of $34 million, and Jordan OilRefinery with $7.5 million. The retail portfolio meanwhileexpanded to $65 million.

Overall, the total loans portfolio grew by more than 15% inthe year. This expansion contributed to a 15% rise in netinterest margin and 19% growth in non-interest income.Thebank’s total income consequently rose by 17% to $29million. Operating expenses were contained within an 11%growth rate, leading to an increase in operating profit of over22% to $15 million and a rise in net profit for the thirdsuccessive year, to $10 million, up 22% on 2003 and animpressive 195% over 2002’s result.

In line with its vision to expand its customer base, buildcloser relationships with its customers and provide themwith comprehensive banking solutions and services, ABCJordan launched more new products aimed at attracting newsegments of the market, and continued the enhancement ofits technology base and electronic channels. During the year,it acquired and implemented a comprehensive VISAmanagement system aimed at the fast-growing creditcard activities.

Future plans include the introduction of SMS (textmessaging) banking services and expanding the 24-unit ATMnetwork and capabilities to service MasterCard and AMEX cardholders in addition to its VISA customers, all as part of arange of additional facilities to be provided through the ATMnetwork and the Group Internet service, ABC On-line. Newproducts launched, in time for delivery in 2005, include arange of loans targeted at professional customers -particularly those employed in the aviation and educationsectors - the introduction of co-branded card products incooperation with a number of Jordanian companies and aseries of Bancassurance products new to the Jordanian market.



A major restructuring programme was undertaken in 2004,to address both managerial and operational issues, includingredeployment of staff and centralisation of back officefunctions.The credit process was also strengthened, throughthe introduction of new credit policies and strict newprocedures. Following these actions, ABC’s Tunisianoperations expanded cautiously, with an improvement in thestructure of its loan portfolio which emphasised short-termcorporate credits to major creditworthy customers. Totaloperating income of the Tunisian operations, including bothABC's offshore branch and its Tunisian subsidiar y, at $8.1 million, was marginally higher than the equivalent for2003. Operating expenses at $6.2 million were, however,successful ly contained, as were loan loss provisionsat $0.4 million.

For 2005 ABC will focus, through both its offshore branchand its subsidiary ABC Tunisie, on establishing the foundationfor future growth, investing in its retail banking services, andpreparing the ground for the launch of a number ofconsumer-oriented savings and loans programmes.The unitsare confident that the difficulties of the past are now beingprogressively overcome and that the very selective creditdistribution profile now adopted, geared to achieving andmaintaining a higher quality loan portfolio, will lead to thedevelopment of a sustainable and sound business operation.

ABC Islamic Bank (E.C.)

ABC Islamic Bank’s role is to provide a range of solutions toGroup clients requiring financial products and servicescomplying with Shari’a law. Liability management products, such asABC Clearing Company (providing the Shari’a-compliantequivalent of an overnight deposit) and sukook portfolios(akin to bond and money market funds) are offeredalongside trade, asset and project financing productsemploying a variety of Islamic finance contracts developedwith the bank’s panel of Shari’a scholars.

After the difficulties and uncertainties experienced in 2003 inthe aftermath of the Iraq war, 2004 was a year of necessarytransition for ABC Islamic Bank.The new product group wascreated with a new head to oversee both ABC Islamic Bankand its opposite number in London, ABCIB’s Islamic AssetManagement unit.A strategic decision was taken to integrateABC Group’s key Islamic banking businesses at the functionallevel, to enable cross-fertilisation of product ideas andanalytical skills and to optimise product offerings for clientsand counterparties.

Arab Banking Corporation - Algeria

Economically, Algeria’s experience in 2004 was very similarto that of the previous year : GDP grew, by 6.5% to $90billion, foreign exchange reserves rose from $30 billion toover $40 billion, and external debt declined once more inrelation to both GDP and external debt. The inflation ratewas less than 3%.The clouds behind the silver lining also had a familiar look - social instability, unemployment remainingabove 30% and lagging economic reforms, as thegovernment’s plans for revival and privatisation of the 1000public companies inched forward. Intensified competitionbetween the local banks and the private banking sector,driven by increased foreign investment, combined withstrong market liquidity, increased pressure on margins,forcing money market rates down to only 1.75%.

With interest margins being squeezed, ABC Algeriaexperienced a 12% fall in interest income, to $5.5 million.However, this was compensated by a 41% increase in feesand commission income to $7.8 million, arising mainly fromtrade finance and treasury transactions. Total operatingincome was therefore up 13% at $13.3 million.The bank alsotightened its operating expenses, reducing them by almost7% in local currency terms, although in dollar terms theyremained steady at $8.2 million. Consequently, net incomebefore provis ions and taxes rose near ly 44% from $3.6 million to just over $5.1 million. After setting asidegeneral provisions, net profit was $4.9 million, compared witha loss of $6.6 million in 2003, the result principally of theneed for specific loan loss provisions that year.

Arab Banking Corporation - Tunis

In 2004 the Tunisian economy continued to make goodprogress, driven by export growth and agriculturalproduction. GDP growth reached 5.8%, while the currentaccount deficit fell to 2.1%.The external debt ratio decreasedby 7% as foreign currency reserves rose to the equivalent of110 days’ imports.

Within this favourable context, the re-election of PresidentBen Ali in October 2004 bode well for a continuation of thegovernment’s policies towards a lessening of direct stateintervention in the banking sector, combined with astrengthening of regulatory banking supervision and gradualreinforcement of Central Bank independence, as well as theimplementation of a series of measures and laws to assistbanks in their appraisal of group and related party risks.


By the year end, the process of restructuring and refocusingthe management team was well under way and ABC IslamicBank’s determination to harness the synergistic benefits ofcloser working partnerships with other parts of the Grouphad produced exemplary results. The bank featuredprominently in two landmark deals - the $1 billion sukookissue for Dubai Civil Aviation Authority and the Saudi mobiletelephone financing arranged to support Etisalat - where theanalytical expertise of the Project & Structured Financegroup in Bahrain provided welcome assistance. It was alsochosen as lead manager in a leading Kuwaiti consumerfinance company’s debut sukook issuance, which wassuccessfully concluded in partnership with the Syndicationsgroup. Again, working closely with the financial engineers inGroup Treasury, the bank saw the successful launching of itsAl Mua’amah Shari’a-compliant currency-hedging programmeaimed at meeting the needs of its institutional clients, andwas proud to be chosen as one of three lead managers inthe raising of £40 million of additional capital for the IslamicBank of Britain plc, the UK’s first licensed Islamic bank.

The bank’s recognised experience in the syndicatedmodaraba market also led to its winning the role of solearranger of two $20 million transactions, each with adifferent and innovative structure, for corporate clients inSaudi Arabia and Kuwait. Finally, a decision was taken tocombine the best features of the bank’s two liquiditymanagement funds,ABC Clearing Company and ABC IslamicFund, under a single entity, enabling ABC Islamic Bank to offerinvestors a single, larger and more targeted vehicle.

With the increased transactional activity, combined with areduced overhead, the breakeven financial result of 2003 wastransformed into relatively respectable results in 2004. ABCIslamic Bank’s asset base rose by nearly 22% to $335 millionand, with operating income rising to $4.0 million andoperating expenses cut to $2.7 million, the bank reported anet profit of $1.3 million, compared with $0.1 million for 2003.For the forthcoming year,ABC Islamic Bank plans to broadenits product base and structure more investmentopportunities to offer its institutional and private investors. Itwill work on further cementing intra-Group synergies anddeveloping its origination and Arab world distributioncapabilities with a view to increasing the proportion of itsprofitability emanating from non-funded income.

ABC International Bank plc

Global economic trends continued to provide a broadlypositive operating environment for ABCIB throughout 2004.

Whilst EU growth - apart from the UK - remainedsomewhat sluggish, the MENA region as a whole showedincreasingly confident performance as the year progressed.As oil prices stabilised at a higher level it became apparentthat the oil producing countries would enjoy significant fiscaland current account surpluses over the year as a whole,boosting infrastructure and project capital spending thereand increasing aid and investment flows to the region’s non-oil producers.

For ABCIB, the year was one of fundamental and ongoingchange. During the year, it successfully managed a majorexpansion from its former two-branch structure to that of afully integrated pan-European banking operation with anetwork comprising branches in London, Paris, Frankfurt andMilan and marketing offices in Stockholm, Madrid, Rossendale(Lancashire, UK) and, most recently, Istanbul. The need toadapt to this sea change in its structure, however, providedABCIB with an ideal opportunity simultaneously toimplement the Group’s new product-led matrixmanagement structure in accordance with the Group’sphilosophy of focusing on the core MENA region markets.

The enlarged base of operations, and activities, combinedwith the matrix-driven imperatives, provided ABCIB with theopportunity to reassess its internal resource allocation.Whilst not without cost in the short term, this enabled thebank to streamline its operations and attain a greater level ofefficiency at close to optimal cost. This process wasparticularly evident in the centralisation of importantsupport services. By way of example, during the year thestandalone treasury operations that previously operated outof Milan and Frankfurt branches were closed and theirfunctions centralised at London - in addition to the usualeconomies of scale achieved, these changes also facilitatedmore efficient positions management. A simultaneouslytargeted marketing programme not only ensured themaintenance of the bank’s European counterparties liabilitybase but actually achieved an increase in the liability basefrom those sources.

The reorganisation also served to renew ABCIB’s focus on itsmain business areas and to strengthen the synergies availablewithin the enlarged bank. Under the new matrix structurethe largest of the London-based product groups, the 25-strong Trade & Commodity Finance team, has been able todraw on the skills of marketing officers from across the


be strongly influenced by operational conditions in theMENA region.

Banco ABC Brasil S.A.

Although the bullish market conditions experienced in Braziltowards the end of 2003 continued for a little time into2004, the increase in oil prices and suggestions of aslowdown in growth in the stronger emerging markets,especially China, were sufficient to dampen confidence athome, with some doubt beginning to creep in as to theefficacy of the government’s economic reforms. However, asclearer signs emerged that the oil price rise was unlikely totrigger a worldwide recession, the domestic economy pickedup, while at the same time the government’s orthodoxpolicies demonstrated positive results in terms of bothproduction and employment. GDP growth was above 5% inthe year. The real strengthened against the dollar, exportsrose to $96.5 billion and, while imports also expanded tosome $62.7 billion, the $33.7 billion foreign trade surplus fedthrough to a current account surplus of $11.7 billion, whichin turn enabled a sharp reduction in external debt rolloverand a decrease in the risk premium on Brazilian internationaldebt.That virtuous circle was duly rewarded by an upgradein Brazil’s sovereign classification by the main credit-ratingagencies.The monetary authorities responded to inflationarydangers with an upward shift in domestic interest rates, alignedwith a series of measures aimed at stimulating investment.

As credit demand increased, ABC Brasil’s loans andguarantees portfolios expanded by some 7% over thecourse of 2004. Net interest margin, at $37.1 million, washowever around 3% below that for 2003, reflecting thelower spreads prevailing in a more stable market. Otherincome moreover fell dramatically from $26.5 million tominus $2.2 million, due principally to the impact of the bank’streasury results. The bank therefore reported a totaloperating income of $34.9 million, 46% less than in 2003.Operating expenses were reduced by some 23% to$19.8 million, mainly through staff reductions, in particular inthe support areas, and lower management charges and otherexpenses.ABC Brasil therefore reported a net profit of $8.9million.

For the foreseeable future ABC Brasil will concentrate on

expanding its commercial banking, trade finance and, to a

lesser extent, marketable securities activities. It is also likely to

enter the consumer finance market in 2005, and intends to

add agricultural credit to the range of products it offers to

cooperatives and agribusiness customers.

ABC International Bank plc (continued)

European network and, with its growing client base of high-quality international expor ters, managed to conclude a number of groundbreaking transactions during the year, mostnotably in the expanding market for receivables financing inthe MENA region.

The bank’s Project & Structured Finance product group wasfaced with a particularly challenging operating environment.The outstanding success of the Û290 million ‘Tunisiana’telecoms deal during the year - financing the second GSMnetwork in Tunisia, a core market for ABCIB - together witha growing expertise in the ship finance market, bodes wellfor the team’s ability to increase its portfolio in 2005.

The Islamic Financial Services group successfully launched thealburaq brand of retail Islamic products in the UK during theyear. The first product under this banner is a competitiveDiminishing Musharika home financing scheme that hasalready attracted a joint venture distribution agreement withBristol & West Building Society. Uniquely, this product is alsoavailable to non-UK residents seeking to purchase homes inthe UK, providing ABC Islamic Bank in Bahrain with a strongmarketing opportunity.The Islamic Asset Management teammeanwhile continued to originate portfolios of internationaltrade, equipment leasing and real estate assets fordistribution to its investing clients.The bank’s parallel Istissnaproperty development schemes in the UK also contributedsignificantly to income.

In 2004 ABCIB reported a net interest margin of £23.7million, a rise of 19% on the previous year, and fee andcommission income of £13.7 million compared with 2003’s£8.6 million. Together with other income, total income was£39.5 million, up 22% on 2003’s £32.4 million prior to theEuropean integration, with Trade Finance contributing £15million or 40% and Project Finance £11 million or 25%.Operating costs, however, rose 25% to £33.2 million,reflecting both the expanded network and particularly theone-off reorganisation costs. Net profit after depreciation,amortisation and taxation was £6.4 million, compared with2003’s £8.6 million.

Looking to 2005 and beyond, the major factors affectingfuture business performance are likely to be external. Inparticular, the business confidence and resultant activity ofABCIB’s European exporter and corporate client base will



Credit & Risk Group

Credit & Risk Group has overall responsibility for centralisedcredit policy and procedure formulation, country risk andcredit exposure reporting, control and risk-relatedregulatory compliance, remedial loans management and theprovision of analytical resources to senior management. It isalso responsible for identifying market risks arising from ABCGroup activities, recommending to the relevant centralcommittees appropriate policies and procedures formanaging exposure to such risks and establishing the systemsnecessary to implement effective controls.

In 2004 the Risk Management Department (RMD) wasreorganised into three separate sections addressing,respectively, credit risk, operational risk and market riskmanagement. Each section is further subdivided into unitsresponsible for risk policy development and implementation,reporting and administration.

At the same time, following the completion of a major studyof the Group’s credit risk management infrastructurecommissioned by Mercer Oliver Wyman on behalf of ABC,the study’s main recommendations were approved by theBoard and implementation commenced in September 2004.This included the launching of a two-year technology projectplan for the creation of an improved credit risk managementinfrastructure incorporating the key blocks recommended in the study. Successful completion of the various projects willprovide the Group with Basel II compliance capability as wellas an effective economic capital allocation tool. The Grouphas chosen Fermat GEM as its enterprise-wide global riskmanagement system and the successor to RXM/RWS,incorporating data capture and linking to the newproprietary Automated Credit Approval System (ACAS).Fermat, suppor ted by ACAS, will offer a sophisticated real-time global limits and exposure monitoring vehicle incorporating automatic customer, country and varioussegmental limit checks.The new system will also provide theinfrastructure to create an improved data warehouse andthe means through which essential key static data will also becollected and stored, prerequisites for planned credit riskmanagement initiatives. ACAS is to be implemented in theGroup’s wholesale banking units worldwide over the next year.

A number of related initiatives were also introduced duringthe year. As mentioned in the Corporate Governance section,a Board Risk Committee comprising four Board members

was formed and tasked with the responsibility for thecontinual review and monitoring of all risks emanating fromthe Group’s business and for keeping the Board appraised ofall developments in this area.

The Group Credit Policy was also revised, with particularattention to the underlying methodology for theestablishment and conduct of portfolio limits (country,industry and sector) and maximum customer groupthreshold levels. Reassessment of the internal ratings scalealso commenced, with a view to facilitating calibration basedon external PD (Probability of Default) surrogates andgreater conformity with external credit rating agencies'gradings. Finally, the internal RAROC (Risk Adjusted Returnon Capital) formula was further refined.

For the Market Risk Management team the emphasis in theearlier part of 2004 was on the implementation of areporting solution for the Bahrain and London treasury hubs’trading limits, enabling RMD to provide daily limit reports tothe relevant units. The Algorithmics suite is the VaRmeasurement system utilised by RMD, giving it the capabilityto calculate VaR for ABC and ABCIB and provide full analysisof limit utilisation and risk, broken down by unit (ABC Brasilmaintains its own VaR engine and submits data to RMD uponrequest). Kondor+ is used to monitor Basis Points Value (BPV)and Options stress limits, while Fenics is utilised to monitorthe Option stress limits for FX Options. During the yearRMD also implemented Yield Book, a software solution thatassists in monitoring specific products in the investmentportfolio, enabling the department to take a more active rolein reviewing investment proposals.

Global Information Technology

Global Information Technology Department is responsiblefor IT strategy and planning and related technical servicesthroughout the Group. It assesses future operational needsand develops and implements new IT systems to meet them,bearing in mind the Group’s overall technology strategy andprimary aim of delivering efficient, cost-effective systems.

In 2004, the Global Technology Group upgrade andstandardisation programme entered its final phase with theback office system installation at ABCIB’s Milan branch, withimplementation to be completed in 2005. The Group’sadvanced front office treasury and dealing room system isalso scheduled to be rolled out to the Arab world units in 2005.



Global Information Technology (continued)

Following deployment of the Group’s standard trade financesystem to its wholesale units, rollout to the retail unitscommenced in 2004 at ABC Jordan.The system is now live,with advanced functionalities addressing import and exportdocumentary credits, collections and guarantees.

e-Business Initiatives - EISII - Further developments tookplace on the Executive Information System EIS On-line, theGroup’s MIS which provides senior management with real-time on-line information and financial data on the Group’scustomers and correspondent banks, together with dataanalysis capabilities. The next generation of EIS On-line wasdeployed across the Group, offering importantenhancements, including instant up-to-the-minute access tocustomer limit/exposure data and Reuters, Bloomberg andother externally sourced data. A wireless/mobile telephoneversion - EISII - is currently under pilot testing with GroupTreasury, and is scheduled for introduction groupwide in2005, offering similar facilities to travelling marketing officers, inaddition to remote call report filing.

e-Trade Finance - As part of the drive to expand tradefinance business by providing clients with a first-class service,electronic trade finance is being introduced throughout theGroup. e -Trade Finance is an on-line facility/service that fullyintegrates with ABC On-line, the Groupwide e -Bankingservice brand now incorporating multilanguage functionality,streamlining the collection and exchange of trade data andmaking it easier for customers to manage their global tradeactivities.The pilot launch is planned at ABC Jordan in early 2005.

Arab World Retail Core Systems StandardisationProgramme - ABC Group embarked on a major platformstandardisation programme intended to increase operationalefficiency and reduce operational costs. Developments included:

> ABC On-line Retail e-Banking - ABC Tunis followedABC Egypt by going live with ABC On-line. Rollout to the other Arab world units will continue in 2005when a new re lease , incorporat ing fur therenhancements to support secure transactional andother capabilities, will also be introduced.

> Retail Banking Systems - This initiative will capitalise onthe proven success of the standardisation and ITprocessing central isat ion model used by theGroup’s wholesale banking units, by leveraging onexisting infrastructure to provide Head Office

management with improved MIS repor ting andcontrol of the retail banking units. Implementationcommenced at Tunis and will continue in 2005 with thereplacement of the core banking systems therewith the system already in use at ABC Egypt,followed by rollout to the other retail units. Thestandardised core banking system will eventuallybe operated through a global Retail Processing Hub in Bahrain, obviating the need for separate IT centresin each of the Arab world subsidiaries.

> Card Processing, Standardisation and Branding - Aimingto reduce costs and improve efficiency, all cardprocessing will eventually be outsourced to theGroup’s affiliate company, Arab Financial Services.The migration process commenced in 2004 atABC Egypt and is set to continue with the transferof ABC Jordan’s MasterCard and Visa operations inthe first quarter of 2005 and, later in the year, transfer of the debit card processing operations of ABC Tunis andother retail banking units.

Anti-Money Laundering - In line with internationalregulatory requirements, and as part of its programme ofcontinuous review and enhancement of all regulatory -compliance systems and procedures, ABC successfullyinstalled new Anti-Money Laundering software at its Bahrainheadquarters in 2004. The system provides real-timemonitoring of incoming and outgoing SWIFT (fundstransfer) messages and automated scanning of client detailsagainst global and internal blacklist databases. Global rollout willcommence in 2005 at ABCIB’s London headquarters and branch,to be followed by the rest of the ABCIB branch network.

Human Resources & Administration

In 2004, Human Resources & Administration Department

continued to focus on meeting ABC’s business requirements

through the recruitment and development of talented

individuals and acquisition of best practice evaluation and

reward programmes. The job evaluation initiative being

implemented in 2005 presents a new grade and salary structure

reflecting market practice and providing a clear grading map

identifying the internal relativities of all jobs and how they match

the market. It is intended that the new structure will ensure that

ABC attracts and retains the highest quality human resources,

while providing the means of motivation of employees in

relation to their performance and helping to build career ladders

supported by easy to understand competency profiles,

supporting a more performance-driven culture.


ISLAMIC FINANCIAL AND INVESTMENT PRODUCTS AND SERVICES ARE TAILORED FOR ABC'SCORPORATE AND PRIVATE CLIENTS


Board of Directors

The Board of Directors is responsible for the overalldirection, supervision and control of the Group. It meetsregularly (usually eight times a year) to consider key aspectsof the Group's affairs and strategy, including, withoutlimitation, a formal schedule of matters reserved to it inorder to cover issues such as the financial statements and theoperations of the Group.

The shareholders appoint the Board for a specific term ofthree years.There are currently 12 Directors on the Board,all non-executive, with varied backgrounds and experience,who individually and collectively exercise independent andobjective judgement. As a rule Directors do not have, and in2004 no Director had at any time during the year, any director indirect material interest in any contract of significancewith ABC or any of its subsidiaries.

Board Committees

Specific responsibilities have been delegated to the followingBoard committees.

The Group Audit Committee is responsible to the Boardfor ensuring that the Group maintains an effective system offinancial, accounting and risk management controls. TheCommittee also monitors compliance with the requirementsof the regulatory authorities in the various countries in whichthe Group operates.

In the course of its work, the Committee reviews theGroup's annual and interim financial statements, summariesof all internal audit reports, the adequacy of loan lossprovisions, all reports issued by the various regulatoryauthorities and by external auditors and other externalconsultants on specific investigative or advisory engagements,and all management letters from the external auditors. It iskept informed of legal, compliance and regulatory matters asthey arise.

The Audit Committee normally meets at least four times ayear, regularly reviewing matters with both the externalauditors and the internal auditors, as well as selectedmembers of management invited to meetings to discussrelevant issues. Group Audit reports directly to it. TheCommittee also makes recommendations to the Boardregarding the appointment and retirement of external auditors.

The primary purpose of the Corporate GovernanceCommittee is to assist the Board in shaping andmonitoring the Corporate Governance policies andpractices of the Group and to evaluate compliance withpolicies and procedures. The Corporate GovernanceCommittee has a formal charter approved and reviewed bythe Board and is currently composed of four members, all ofwhom are non-executive directors of ABC.The Committee’sduties include reviewing and assessing the adequacy of theGroup’s policies and practices on corporate governance;recommending to the Board the number, identity andresponsibilities of Board Committees and their membership;assisting the Board in developing criteria for identifying andselecting qualified individuals who may be nominated forelection to serve on Group subsidiaries’ boards of directors;reviewing and recommending to the Board thecompensation structure of Board or committee services andother related policies including retirement andindemnification issues; assessing the effectiveness of theBoard in representing the long-term interests ofshareholders; and reviewing management succession plans.

The Risk Committee reviews and recommends to theBoard the Group’s Risk Policies and Medium Term RiskStrategy/Appetite, within which business strategy andobjectives and targets are formulated. It also (a) delegatesauthority to senior management to conduct business withinthe prescribed policy and strategy parameters and ensuresthat processes and controls are adequate to manage RiskPolicies and Strategy; (b) continuously reviews the Group’sRisk Profile to ensure that it is within the Risk Policies andAppetite parameters; and (c) submits annually to the Boardfor its endorsement its recommendations for RiskStrategy/Appetite as reflected in the various limits and returncriteria within which business is expected to be conducted.The Committee comprises four Board members and meetsquarterly, reporting to each Board meeting on keydevelopments within its responsibility. It also meets half-yearly with the Head Office Credit Committee to discussmajor risk policy and planning issues. ABC’s Chief Credit &Risk Officer has a ‘dotted’ functional reporting line to the RiskCommittee and day-to-day executive reporting to thePresident & Chief Executive.

The Nomination and Compensation Committee isresponsible for the formulation of the Group’s executiveremuneration policy, which is designed to providecompetitive remuneration packages to attract and retain highcalibre executives and encourage and reward superior

CORPORATE GOVERNANCE


PROJECT & STRUCTURED FINANCE FACILITATES MAJOR REGIONAL INFRASTRUCTURE PROJECTS


business performance. The Committee also makesrecommendations to the Board, for its decision, on seniormanagement appointments and appointments to the boardsof directors of ABC's subsidiaries.The Committee has formalterms of reference that are approved by the Board andmeets at least twice during the year.

Compliance

In accordance with the directives of the Bahrain MonetaryAgency (BMA), ABC has appointed a Compliance Officerand a Money Laundering Reporting Officer (MLRO).

The role of the Compliance Officer is to act as centralcoordinator for the Group in respect of all matters relatingto BMA regulatory reporting and other requirements. Thisresponsibility lies for the time being with the ChiefAdministrative Officer. The compliance function covers thebroad areas of corporate governance, adherence to bestpractices, code of conduct, conflict of interest, etc. Eachoperating entity has appointed local Compliance Officers toensure adherence to local requirements and regulatory issues.

It is the duty of the MLRO in each unit to ensure thatsufficient evidence is obtained in all cases to enable theidentity of every customer to be satisfactorily established,failing which monies cannot be transferred, and to report anysuspicions concerning a customer or account to that unit’sregulator and senior management. The MLRO is alsoresponsible for establishing and maintaining appropriate andeffective systems, controls and records to ensure compliancewith regulatory obligations in regard to money laundering.This responsibility in Head Office lies with the Head ofOperations, who also performs the role of MLRO for theGroup and whose responsibility includes the issue andimplementation of policy and procedural manuals to all unitsthroughout the Group, arranging in-house and externaltraining for relevant officers and submission of Groupreports to the BMA.

Risk Management

The Group manages risk strategically to build shareholdervalue. Once the Board, acting through the Group RiskCommittee, sets the Group’s risk appetite, it entrustsimplementation responsibility to management, who also havethe prime responsibility for identifying and evaluating, on acontinuous basis, significant risks to the business of theGroup and for the design and operation of appropriate

internal controls to minimise those risks.These controls areimplemented through senior management committees, inparticular the Head Office Credit Committee (HOCC) andthe Head Office Asset and Liability Committee (ALCO). BothCommittees are chaired by the President & Chief Executivewith membership drawn from relevant senior management.

Operational responsibility is delegated to each subsidiary forits own asset and liability management. Each major subsidiaryhas its own Credit Committee and ALCO or equivalent,whose responsibilities are generally analogous to those ofthe Group committees.

Credit Risk

The parent bank and its banking subsidiaries are governed byspecific credit policies that, whilst closely following andsubject to the Group Credit Policy, may be adapted to suitlocal practices and regulatory requirements as well asindividual units’ product and sectoral needs.

The first level of protection against undue credit risk isthrough Group country and customer credit limits, set by theBoard and the HOCC, allocated between ABC and itsbanking subsidiaries.

Credit exposure to individual customers or groups ofcustomers is controlled through a tiered hierarchy ofdelegated approval authorities. Significant aggregated creditexposures are reviewed by senior management on a regularbasis, as are industry/sectoral exposures periodically.

Where unsecured, or 'clean', facilities being sought areconsidered to be beyond prudential limits, Group policiesrequire collateral in the form of cash, securities, legal chargesover the customer's assets or third-party guarantees tomitigate the credit risk. At 31 December 2004, assetssecured by collateral amounted to US$ 2,353 million, or 16%of total assets.

Responsibility for day-to-day management of existing creditexposure is delegated to the business unit officers who, inturn, must adhere to the detailed requirements for regularreview of the customers and analysis of their financial andeconomic condition, under the oversight of the BahrainHead Office Credit Department in the case of Groupcustomers. Credit exposures found to rank belowsatisfactory grade are segregated and managed separately asweak credits, with escalating levels of specific loan lossprovisions applied as appropriate.



Group Audit Department is responsible for carrying out RiskAsset Reviews of business units to assess and provide anindependent opinion on the quality of their credit exposuresand adherence to credit policies and procedures.

ABC and ABC International Bank plc branches’ portfolios aresubject to Head Office review at least quarterly, while thoseof the other banking subsidiaries are reviewed at leastannually. Weak credits are subject to detailed quarterlyappraisal at the Head Office level and all criticised credits areadditionally reviewed regularly by the respective businessunit's account officers and unit heads, with progress reportsmade to the Head Office Remedial Loans Unit no lessfrequently than quarterly.

At Head Office in Bahrain there is an independent RiskManagement Department (RMD), reporting directly to theChief Credit & Risk Officer. The Credit Risk section of theRMD coordinates all technology development related tocredit risk management and provides senior managementwith consolidated information on Group exposures tocounterparties, countries and industries. It is also responsiblefor recommending Group Credit Policy and proceduralamendments and initiatives to the HOCC for approval.

Market Risk

The Group has established risk management policies and

limits within which exposure to market risk is monitored,

measured and controlled, with strategic oversight exercised

by ALCO.

RMD is responsible, inter alia, for developing and

implementing market risk policy and limit measuring and

monitoring methodology and for reviewing all new trading

products and trading limits for submission to ALCO for

approval. RMD’s core responsibility is to monitor, measure

and report market risk against limits.

Foreign Exchange Rate Risk

The Group is exposed to foreign exchange rate risk throughboth its trading portfolios and its structural positions.Exposure management is divided accordingly.

Foreign exchange rate risk is managed by appropriate limitsand stop loss parameters determined by each subsidiary'slocal ALCO and approved by its Board.

The Group's structural balance sheet positions relate to itsnet investment in its foreign subsidiaries and are regularlyreviewed by ALCO in accordance with the Group's strategicplans and managed on a dynamic basis by Group Treasury,hedging these exposures where appropriate.

Interest Rate Risk

In managing the interest rate risk resulting from its tradingand banking activities, the effect of interest rate movementsis assessed using sensitivity analyses and othermodelling techniques.

There are established limits on individual business units'aggregate maximum exposures to interest rate risk and onan overall basis for the core banking units. Board approvedtrading limits are monitored by RMD and any exceptions arebrought to the attention of ALCO.

For purposes of illustration, a sudden adverse, 100 basispoint, parallel, all curve, interest rate shock as at 31December 2004 has been calculated to reduce the next 12months' Net Interest Income by US$8.9 million if noremedial action were to be taken.

Equity, Debt Securities and Commodity Risk

As a normal part of its treasury trading activities, ABC isexposed to the risk of an adverse impact on the Group'searnings due to movements in the prices of individualequities or other securities or commodities, or generally inthe value of their respective markets, or in either case theirrelated derivatives. Management of these risks is similar tothat explained above in relation to foreign exchange risk,through specified limits and stop loss parameters.

Liquidity Risk

ABC maintains liquid assets at prudential levels to ensurethat cash can quickly be made available to honour all itsobligations, even under adverse conditions. It has specificpolicies regarding liquid assets coverage of short-termwholesale deposits and in particular the potential risk impactof withdrawals by large single depositors, ensuring that thereis no reliance on any one customer or small group ofcustomers. Maturity mismatch is also managed withininternal policy limits. The maturity profile of the Group’sassets, liabilities and off-balance sheet items is given in Note17 to the consolidated Financial Statements.


Derivatives

In the normal course of business, ABC Group enters intomany kinds of derivative activities in both its trading andbanking books. In the trading book the Group assistscustomers and counterparties (typically financial orgovernmental institutions or major corporations) to altertheir risk profile in a particular area of risk by structuring dealsto suit individual client needs.The positions accumulated fromsuch activity are either passed on to others in the market orretained as open positions and managed for a profit. TheGroup's trading activities are largely managed in Bahrain withappropriate limits and stop loss parameters.

For all trading options products, RMD conducts a two-factorstress analysis. All volatility parameters are calculated byRMD. The Option stress adds another independentmeasurement of risk.

Operational Risk

Group policy dictates that the operational functions ofbooking, recording and monitoring of transactions arecarried out by staff that are independent of the individualsinitiating the transactions. Business units have primaryresponsibility for identifying and managing their ownoperational risks, guided by comprehensive manualsspecifying the policies, procedures, and controls that arerelevant for each function.

The Global Information Technology Department is continuallydeveloping and refining the Group’s security software toensure that its systems can reliably identify and interceptunauthorised access. The Group pays close attention todisaster recovery. All essential operational data required forbusiness continuity are backed up on separate computersboth within the Head Office building itself and elsewhere in

Bahrain, in addition to being downloaded hourly to theGroup’s servers in London. Individual subsidiaries maintainsimilar arrangements in their own countries.

Legal Risk

The provision of the highest level of integrated, cost-effectivelegal advice, guidance and services to management and thebusiness units is the responsibility of the Head Office Legal &Compliance Department. All major Group subsidiaries havetheir own in-house legal departments, acting under theguidance of the Department. The Legal & ComplianceDepartment is also the focus for ABC’s compliance activitieswithin the Group, although the Chief Administrative Officercurrently performs the role of Group Compliance Officer inmatters in liaison with the BMA.

Capital Management

The BMA is the lead regulator for ABC and sets andmonitors its capital requirements on both a consolidated andan unconsolidated basis. Individual banking subsidiaries aredirectly regulated by their local banking supervisors, who setand monitor their capital adequacy requirements. The BMArequires each Bahrain-based bank or banking group tomaintain a minimum ratio of total capital to risk-weightedassets of 12%, taking into account both on and off balancesheet transactions.This is greater than the 8% minimum ratiorecommendation of the Basel Committee on BankingSupervision under its 1988 Capital Accord.

ABC Group’s capital management is aimed at maintaining anoptimum level of capital to enable it to pursue strategies thatbuild long-term shareholder value, whilst always meetingminimum regulatory ratio requirements. Details of riskweighted assets, capital base and the risk asset ratio areprovided in Note 29 of the consolidated financial statements.




THE GROUP'S EXECUTIVE INFORMATION SYSTEM PROVIDES MANAGEMENT WITH REAL-TIME ON-LINE CUSTOMER INFORMATION


GROUPFINANCIAL REVIEW

As a consequence of the sale during the year of its majorityshareholdings in Banco Atlántico, S.A., Spain and InternationalBank of Asia Ltd., Hong Kong, ABC’s consolidated balancesheet and income statement are markedly different fromthose of 2003. In order to make the analytical comparisonbetween the two years meaningful, the comparativesexclude amounts relating to the above-mentionedsubsidiaries, except where stated otherwise.

Income Statement

In 2004, the Group’s net profit for the year from continuingoperations increased to $109 million from $71 million in 2003.

Net operating income rose by 4.6% to $315 million. Netinterest income amounted to $152 million (2003: $158million) resulting from the restructuring of the Group’s assetsand the sale of the Brady bonds portfolio, which deprivedthe Group of high yielding assets, to substantially improvecredit quality. Non-interest income totalled $153 millioncompared with $259 million in 2003 which, as an IAS 39

adjustment, had included an income of $140 million derived from revaluations of the Group’s loans forming part of ABC'sBrady bonds portfolio carried at fair value. The continuingreview of the credit portfolio resulted in a net writeback of$10 million (2003: $74 million provision).

Operating expenses fell by 7.0% to $199 million (2003: $214million) as staff-related costs were reduced by 12.3% as aresult of rationalisation to bring about operating efficiencies.Premises, equipment and other operating costs were alsokept under control. Profit before taxation and minorityinterests on continuing operations was therefore $116million, up from $87 million in 2003. After taxation onoperations outside Bahrain of $3 million (2003: $13 millionexcluding taxes relating to Banco Atlántico, S.A. andInternational Bank of Asia Ltd.) and minority interests insubsidiaries of $4 million (2003: $3 million excluding interestsin Banco Atlántico, S.A. and International Bank of Asia Ltd.),the net profit for the year from continuing operations

increased to $109 million, up 53.5% from 2003’s $71 million.Profit from discontinued operations - ABC’s shares in itsSpanish and Hong Kong subsidiaries, the sales of which tookplace in the first quarter of 2004 - contributed an additional,non-recurring profit of $470 million, net of tax. Net profitfrom these operations in 2003, after accounting for minorityinterest thereon, was $49 million.

Consequently, the Group’s net profit for the year, including profitfrom the sale of subsidiaries,was $579 million (2003: $120 million).

Sources and Use of Funds

Strong Asset-Liability management initiatives undertaken bythe Group resulted in a significant improvement in the liquidassets, comprising trading and non-trading securities,together with placements and liquid funds, totall ing $8,409 million which was up 21.7% over the 2003comparative of $6,906 million (from continuing operations).Non-trading securities (almost entirely ‘available for sale’securities) stood at $3,617 million (2003: $3,002 million)

whereas money market placements were $4,305 million(2003: $3,512 million) and liquid funds and trading securitieswere $487 million (2003: $392 million). The loans andadvances portfolio stood at $6,012 million (2003: $6,242million which included the Brady bonds portfolio of $663million disposed of in 2004) while investments inassociates, interest receivable, premises and equipment andother assets, in aggregate standing at $501 million (2003:$642 million), made up the remainder of the total assets.These assets were funded by deposits from customers of$5,081 million (2003: $3,161 million), deposits from banksand other financial institutions totalling $5,506 million (2003:$6,995 million), term notes, bonds and other term financingsof $1,828 million (2003: $1,319 million) and certificates ofdeposit $94 million (2003: $117 million). Interest payable,taxation and other liabilities amounted to $521 million(2003: $612 million in aggregate). Total deposits included$179 million (2003: $933 million) relating to sale andrepurchase agreements.

IN 2004, THE GROUP’S NET PROFIT FOR THE YEAR FROM CONTINUING OPERATIONSINCREASED TO $109 MILLION FROM $71 MILLION IN 2003

(All figures stated in US dollars)


Placements, together with liquid funds of $303 million(2003: $320 million), represented 30.9% (2003: 27.8%) oftotal assets. Including non-trading securities, total liquid assetsrepresented 56.4% (2003: 50%) of total assets.

The total assets of the Group in 2004 amounted to $14,922million (2003: $13,789 million).Average assets were $14,228(2003: $14,470 million) while average liabilities, excludingshareholders' equity, amounted to $12,302 million (2003:$12,954 million).

Term funding totalled $1,828 million (2003: $1,319 million).Whereas in 2003 term obligations were divided 73:27between the parent bank and its subsidiaries respectively, in2004 the division was 80:20 respectively as ABC raised anadditional $500 million of term debt to equal $1,460 millionin total.

Credit Commitments, Contingent Items and Derivatives

At the end of 2004, ABC Group's consolidated off-balancesheet items stood at $12,790 million (2003: $18,107 million).The total credit risk-weighted asset equivalent ofcommitments and contingent items and derivatives was$1,383 million (2003: $1,395 million). The total volume ofdocumentary credits, acceptances and guaranteesundertaken during the year was $6,180 million (2003: $5,961million), 53% (2003: 53%) of which related to the Arab world.

The Group uses a range of derivative products for thepurposes of hedging and servicing customer-relatedrequirements, as well as for proprietary trading purposes.The total market risk-weighted equivalent of the exposuresunder these categories at the end of 2004 was $197 million(2003: $388 million).

No significant credit derivative trading activities wereundertaken during the year.

Geographical and Maturity Distribution of the Balance Sheet

In 2004, ABC Group's total assets in the Arab worldremained stable in absolute terms, although the proportionof its assets there fell from 44% to 37% as its assets inWestern Europe increased from 22% to 27%.The Group’sassets in North America remained stable at 22% and in Asiaincreased from 3% to 4%. The proportion of liabilities toWestern Europe fell from 17% to 9% while those to Asiaincreased from 2% to 4%.The proportion of liabilities to theArab world accordingly rose, from 71% to 77%.

LiabilitiesAssets & Equity

(%) 2004 2003 2004 2003

Arab world

Western Europe

Asia

North America

Latin America

Others

Loans &Earning Assets Advances

(%) 2004 2003 2004 2003

Arab world

Western Europe

Asia

North America

Latin America

Others

An analysis of the maturity profile of earning assets showsthat, at the end of 2004, 60% (2003: 61%) did not exceedone year’s maturity. Loans and advances maturing within oneyear amounted to 56% (2003: 44%) of all loans andadvances. The proportion of liabilities maturing within oneyear was 75% (2003: 73%) of all liabilities and equity.

LiabilitiesEarning Assets & Equity

(%) 2004 2003 2004 2003

Within 1 month

1 - 3 months

3 - 6 months

6 -12 months

Over 1 year

Undated

37274

2264

100

44

22

3

22

6

3

100

7794244

100

71

17

2

2

3

5

100

37274

2363

100

42

22

4

23

7

2

100

641423

125

100

52

13

3

16

13

3

100

28121010382

100

36

9

8

8

38

1

100

45

20

5

3

11

16

100

44171049

16

100



Distribution of Credit Exposure

ABC Group’s credit exposure (defined as the gross credit risk to which the Group is potentially exposed) as at 31 December2004 is given below.

($ millions) Funded Exposure Credit Commitments Derivatives*

& Contingent Items

2004 2003 2004 2003 2004 2003

Customer type

Banks

Non-banks

Sovereign

Risk rating

1 = Exceptional

2 = Excellent

3 = Superior

4 = Good

5 = Satisfactory

6 = Adequate

7 = Watchlist

8 = Special Mention

9 = Substandard

10 = Doubtful

11 = Loss

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

5,577

4,094

4,733

14,404

4,429

1,926

1,584

2,239

1,901

1,759

333

96

10

33

94

14,404

6,376

4,009

2,747

13,132

1,672

2,584

2,035

2,062

2,251

1,918

228

185

121

36

40

13,132

1,180

1,518

1,782

4,480

191

711

536

960

543

1,356

134

11

33

4

1

4,480

1,855

1,766

427

4,048

34

263

392

912

718

1,537

158

23

8

3

-

4,048

45

72

1

118

10

29

10

28

38

2

1

-

-

-

-

118

152

88

1

241

66

105

18

50

1

1

-

-

-

-

-

241

0

3000

6000

9000

12000

15000

Tota

l Ass

ets

$ m

illion

s

20042003

13,78914,922

0

500

1000

1500

2000

2500

3000

3500

4000

Loan

Por

tfolio

$ m

illion

s

2003 2004

3,5393,366

2,703 2,646

Short term Long term


THE PROJECT & STRUCTURED FINANCE GROUP FACILITATES MAJOR REGIONAL INFRASTRUCTURE DEVELOPMENTS


Factors Affecting Historical or Future Performance

ABC Group seeks greater diversification in its revenue baseprimarily through expansion in the financing of Arab worldbusiness flows. Its strategy is based on acquiring or creating newregional banking platforms, whilst simultaneously expanding itscapabilities to meet the needs of its expanding andsophisticated client base worldwide. Its activities are centred onfinancing Arab world trade flows, assisting MENA regiongovernments, their agencies and public and private sectorfinancial institutions in raising capital - particularly forinfrastructure and regional development needs - the provisionof a growing array of Islamic banking services and products andthe maintenance of its existing regional market leader niches inproject and structured financing and treasury products.

Given the dependence of many countries in the region onrevenues from oil and gas producing industries - and thus onworld energy prices and demand - and of others oninternational tourism and/or agricultural exports, the region’sfortunes are mainly tied to those of the major economieswith which it trades. Periods of economic slowdown orrecession in the industrialised world will therefore tend tohave an impact on the gross revenues of ABC Group and thehealth of its credit portfolios, as it seeks to intermediatebetween these natural international trading partners.

Having withdrawn from Latin America and several of themore vulnerable Asian markets in recent years, the Grouphas no significant risk exposures outside of the Arab world,the USA and Europe.

ABC Group's primary financial goal is consistent generationof value for shareholders, including sustainable growth inearnings and assets per share. Having achieved its target of amaintainable capital adequacy ratio of at least 15%, remaininglong-term goals are for a productivity ratio of 2:1 and aconsistent risk-adjusted return on capital (RAROC) of 15%p.a. Based on its evaluation of the following factors,management remains optimistic about the Group'sprospects for meeting these targets over time.

Political stability - On the whole, management believes that theGroup's activities and assets are sufficiently widely diversified toprovide a cushion against major losses from isolated cases ofpolitical instability in the region. The Group has in placerigorous, regularly tested, disaster recovery procedures to faceeventualities arising from political or other disruptions.


Classified Loans and Provisions

Non-performing loans and off-balance sheet credits aredefined as those in default on contractual repayments ofprincipal or payment of interest in excess of 90 days. Suchcredits are immediately placed on non-accrual status, with allpast due interest being reversed, accumulated unpaid interestthereafter being excluded from income. In practice theGroup adopts a highly conservative stance and places allcredits on non-accrual status as soon as a reasonable doubtas to timely collection becomes apparent.

The total of all loans on non-accrual status as at the end of2004 amounted to $331 million (2003: $602 million).Aggregate provisions at the end of 2004 stood at $468million (2003: $608 million) and constituted 141% (2003:101%) of all non-performing loans and 7.2% (2003: 8.9%) ofgross loans and advances.

An ageing analysis is given below in respect of all loans andadvances on non-accrual, together with their related provisions:

($ millions) Principal Provisions Book Value-Net

Less than 3 months

3 months to 1 year

1 to 3 years

Over 3 years

Group Capital Structure and Capital Adequacy Ratios

The Group’s capital base of $1,969 million comessubstantially from the shareholders’ funds of $1,852 million,compared with 2003 when the capital base of $2,661 millionincluded shareholders’ funds of $1,585 million and minorityinterests of $512 million in Banco Atlántico and InternationalBank of Asia.The consolidated capital adequacy ratio as at 31 December 2004 was 23.9%, substantially higher than the14.7% ratio at the end of 2003 and significantly above theregulatory minimum of 12% and the 8% guideline under theBasel Accord for international banks.

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

1

45

134

151

331

-

27

97

151

275

1

18

37

-

56


Energy prices - Global energy prices have a direct impacton the annual budgets and infrastructure improvementsof many of the countries in the Arab world. This in turnaffects both the Group’s OECD-based expor ting andcontracting customers and importer customers in theMENA region. When energy prices are high, oilproducers benefit and import more capital equipmentand construction services under infrastructure-buildingprojects as well as impor ting more consumer goods.When energy prices are lower, on the other hand, thisbenefits residents of developed countries who spendmore on tourism and developing countries’ goods, thusbenefiting the agricultural producers and tourism-dependent countries. The Group’s own revenues can inturn benefit from each of these scenarios. The prognosisis for energy prices to increase steadily in real terms inthe medium to long term.

Foreign currency values - Where ABC’s subsidiaries arecapitalised with currencies other than the US dollar, it isexposed to fluctuations in the values of those currencies.ABC takes all appropriate steps to hedge against suchfluctuations where this is practicable.

Volatility of currency markets - The degree of volatility inforeign exchange rates can affect the amount of foreignexchange trading revenues. In general, the Group believesthat it benefits from currency volatility, which createsopportunities for profitable proprietary trading.

Interest rates - Although the Group’s net interest revenue canbe negatively affected by interest rate changes, the impact ismainly on income from equity funds since its lending andmarketable securities holdings are based predominantly onfloating or short-term interest rates and largely insulatedfrom interest rate swings.


ABC GROUP SEEKS GREATER DIVERSIFICATION IN ITS REVENUE BASE PRIMARILY THROUGHEXPANSION IN THE FINANCING OF ARAB WORLD BUSINESS FLOWS


AUDITORS’ REPORT TO THESHAREHOLDERS OF ARAB BANKING CORPORATION (B.S.C.)

We have audited the accompanying consolidated balance sheet of Arab Banking Corporation (B.S.C.) [the bank] and its subsidiaries

[the group] as of 31 December 2004, and the related consolidated statements of income, cash flows and the changes in equity for the

year then ended. These consolidated financial statements are the responsibility of the bank’s Board of Directors. Our responsibility is to

express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the

audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit

includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit

also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall

financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the group as of

31 December 2004 and of the results of its operations and its cash flows for the year then ended in accordance with International

Financial Reporting Standards.

We confirm that, in our opinion, proper accounting records have been kept by the bank and the consolidated financial statements, and

the contents of the Directors’ report relating to these consolidated financial statements, are in agreement therewith. We further report,

to the best of our knowledge and belief, that no violations of the Bahrain Commercial Companies Law, nor of the Bahrain Monetary

Agency Law, nor of the memorandum and articles of association of the bank have occurred during the year ended 31 December 2004

that might have had a material adverse effect on the business of the bank or on its consolidated financial position and that the bank has

complied with the terms of its banking licence. We obtained all the information and explanations which we required for the purposes

of our audit.

23 February 2005Manama, Kingdom of Bahrain


ABC Annual Report@fin 2004 5/4/05 10:25 AM Page 1

CONSOLIDATEDBALANCE SHEET31 December 2004

ASSETS

Liquid fundsTrading securitiesPlacements with banks and other financial institutionsNon-trading securitiesLoans and advances Investments in associatesInterest receivableOther assetsPremises and equipment

TOTAL ASSETS

LIABILITIES

Deposits from customersDeposits from banks and other financial institutionsCertificates of depositInterest payableTaxationOther liabilities

TERM NOTES, BONDS AND OTHER TERM FINANCING

MINORITY INTERESTS

EQUITY

Share capitalTreasury stockReservesRetained earnings

TOTAL LIABILITIES, MINORITY INTERESTSAND EQUITY

These consolidated financial statements were authorised for issue by the Board of Directors on 23 February 2005 and signed on theirbehalf by the Chairman and President & Chief Executive.

The attached notes 1 to 31 form part of these consolidated financial statements.

303 184

4,305 3,617 6,012

31 89

238 143

14,922

5,081 5,506

94 72 23

426

1,828

13,030

40

1,000 -

428 424

1,852

14,922

2004Note

3

45,6

7

89

10

11

2003

All figures in US$ million

709 86

6,651 5,204

15,921 51

134 828 484

30,068

14,434 9,932

423 92 69

1,171

1,850

27,971

512

1,000 (74)448 211

1,585

30,068


Mohammed LayasChairman

Ghazi M. Abdul-JawadPresident & Chief Executive


CONSOLIDATED STATEMENT OF INCOMEYear ended 31 December 2004


OPERATING INCOME

Interest incomeInterest expense

Net interest incomeOther operating income

Total operating income

Writeback/(Provision) for impairment - net

NET OPERATING INCOME AFTER PROVISIONS

OPERATING EXPENSESStaffPremises and equipmentOther

Total operating expenses

PROFIT BEFORE TAXATION AND MINORITY INTERESTS

Taxation on foreign operationsMinority interests in subsidiaries

NET PROFIT FOR THE YEAR FROM CONTINUINGOPERATIONS

Profit from discontinued operations - net of taxMinority interest

NET PROFIT FOR THE YEAR FROM DISCONTINUEDOPERATIONS

NET PROFIT FOR THE YEAR

BASIC EARNINGS PER SHARE (expressed in US$)- Profit for the year- Profit from continuing operations

512 (360)

152 153

305

10

315

121 24 54

199

116

(3)(4)

109

470 -

470

579

5.79 1.09

2004Note

12

6

13

8

14

28

2003Restated


539 (381)

158 259

417

(116)

301

138 25 51

214

87

(13)(3)

71

75 (26)

49

120

1.20 0.71



OPERATING ACTIVITIESNet profit for the yearItems not involving cash flow:

(Writeback)/Provision for impairment (net)Depreciation

Item considered separately:Gains less losses on non-trading securitiesProfit on sale of subsidiaries

Changes in operating assets and liabilities:Trading securitiesPlacements with banks and other financial institutionsLoans and advancesOther assetsDeposits from customersDeposits from banks and other financial institutionsOther liabilitiesOther non-cash movements

Net cash (used in) from operating activities

INVESTING ACTIVITIESNet proceeds from sale of subsidiariesPurchase of non-trading securitiesSale and redemption of non-trading securitiesPurchase of premises and equipmentSale of premises and equipment

Net cash used in investing activities

FINANCING ACTIVITIES(Repayment) Issue of certificates of deposit - netIssue of term notes, bonds and other term financingRepayment of term notes, bonds and other term financingCash dividend paid - 2003

- 2004 interim

Net cash from (used in) financing activities

Decrease in liquid fundsEffect of exchange rate changes on liquid fundsLiquid funds at beginning of the year*

(excluding US$ 390 million relating to subsidiaries sold in 2004)

Liquid funds at end of the year*

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

The cashflows of the current year do not include the activities of Banco Atlántico S.A. Group companies, Spain and International Bankof Asia, Hong Kong which have been sold.

579

(10)11

(9)(470)

(112)(646)357 164

1,834 (1,634)

(65)(97)

(98)

1,198 (3,770)2,462

(13)3

(120)

(25)616

(105)(66)

(226)

194

(24) 8

319

303

2004 2003Restated


120

116 36

(16)-

297 698 575 67

(456)(359)(526)(235)

317

- (20,031)19,782

(45)22

(272)

333 261

(649)- -

(55)

(10)54

665

709



CONSOLIDATED STATEMENTOF CASHFLOWSYear ended 31 December 2004


CONSOLIDATED STATEMENT OF CHANGES IN EQUITYYear ended 31 December 2004


1,000 (74) 193 140 10) 9) 71 62) (40) 1,371- - - - - -) - 120) -) 120- - 12 - - -) - (12) -) -

- - - - - -) - 41) -) 41- - - - - -) - -) 53) 53

1,000 (74) 205 140 10) 9) 71 211) 13) 1,585- - - - - -) - 579) -) 579

11 - - 58 10 (10) -) - (58) -) -28 - - - - - -) - (66) -) (66)28 - - - - - -) - (226) -) (226)28 - 74) - - - -) (71) (3) -) -

- - - - - -) - (13) -) (13)- - - - - -) - -) 2) 2

11 - - - - - (9) - -) -) (9)

1,000 - 263 150 - -) - 424) 15) 1,852

Balance at the end of the year 2002 (as restated)

Net profit for the year - 2003

Transfer from retained earnings

Foreign exchange translation adjustments

Cumulative changes in fair values

Balance at the end of the year 2003

Net profit for the year - 2004

Transfers during the year

Cash dividend - 2003

Interim cash dividend - 2004

Interim stock dividend - 2004

Foreign exchange translation adjustments

Cumulative changes in fair values

Other

Balance at the end of the year 2004

1. Retained earnings include a negative balance of US$4 million (2003: positive balance of US$9 million) representing netunrealised gains/(losses) on translation of investments in foreign subsidiaries into US dollars.

2. Note 11 contains further details of equity.

NoteSharecapital

Treasurystock

Statutoryreserve

Generalreserve

Extra-ordinaryfinancialreserve

Capitalreserve

Sharepremium

Retainedearnings1

Cumulativechanges infair values Total




1 INCORPORATION AND ACTIVITIES

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

In 2003, the Bank entered into agreements to sell its entirestakes in International Bank of Asia, Hong Kong to FubonFinancial Holding Co., Ltd and in Banco Atlántico S.A. Groupcompanies, Spain to Banco De Sabadell S.A. The sales werecompleted during the year. Please refer to Note 14 for furtherdetails.

2 SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements of Arab BankingCorporation (B.S.C.) and its subsidiaries [the Group] areprepared in accordance with the Bahrain CommercialCompanies Law and the Bahrain Monetary Agency Law and inconformity with the Standards issued by the InternationalAccounting Standards Board (IASB) and interpretations issuedby the International Financial Reporting InterpretationCommittee. The following is a summary of the significantaccounting policies:

Accounting conventionThese consolidated financial statements are prepared under thehistorical cost convention, as modified by the measurement atfair value of derivatives, trading and available for sale financialassets and financial assets carried at fair value through thestatement of income. In addition, as more fully discussed below,assets and liabilities that are hedged are carried at fair value tothe extent of the risk being hedged.

Early adoption of IAS 32 and IAS 39During the prior year, the Group had early adopted the revisedversions of IAS 32 and IAS 39 which would have becomemandatory for the year ending 31 December 2005.

ConsolidationThese consolidated financial statements include the financialstatements of the Parent Bank and its subsidiaries afteradjustment for minority interests and elimination of inter-company transactions and balances. The financial statements ofthe subsidiaries are prepared for the same reporting year as theParent Bank, using consistent accounting policies.

Subsidiaries are consolidated from the date on which control istransferred to the Bank and cease to be consolidated from thedate on which control is transferred out of the Bank.

Liquid fundsLiquid funds comprise cash, nostro balances and balances withcentral banks.

Trading securitiesTrading securities are initially recorded at cost and subsequentlyremeasured at fair value with any gains and losses arising fromchanges in fair values being included in the consolidatedstatement of income in the period in which it arises. Interestearned and dividends received are included in interest incomeand other operating income respectively.

Placements with banks and other financial institutionsPlacements with banks and other financial institutions are statedat cost net of any amounts written off and provision forimpairment. The carrying values of such assets which are beingeffectively hedged for changes in fair value are adjusted to theextent of the changes in fair value being hedged. Resultantchanges are recognised in the consolidated statement of income.

Non-trading securities These are classified as follows:

- Held to maturity- Available for sale

All non-trading securities are initially recognised at cost, beingthe fair value of the consideration given including incrementalacquisition charges associated with the security.

Held to maturitySecurities which have fixed or determinable payments and fixedmaturity which are intended to be held to maturity, aresubsequently measured at amortised cost, less provision forimpairment in value.

Available for saleSecurities intended to be held for an indefinite period of timeand which may be sold in response to needs for liquidity,changes in interest rates or equity prices are classified as“available for sale”. These are remeasured at fair value unlessfair value is not reliably ascertainable. Unless unrealised gains andlosses on remeasurement to fair value are part of an effectivehedging relationship, they are reported as a separate componentof equity until the security is sold, collected or otherwisedisposed of, or the security is determined to be impaired, atwhich time the cumulative gain or loss previously reported inequity is included in the consolidated statement of income forthe period.

In relation to investments which are part of an effective hedgingrelationship any gain or loss arising from a change in fair value isrecognised directly in the consolidated statement of income

Loans and advancesLoans and advances quoted in an active market are classified as“held to maturity”, “available for sale” or “loans and advancescarried at fair value through statement of income” depending onmanagement's intent.

NOTES TO THECONSOLIDATED FINANCIALSTATEMENTS31 December 2004





Loans and advances that are not quoted in an active market are

classified as “unquoted loans and advances”.

Unquoted loans and advances and held to maturity loans and

advances are stated at amortised cost, less provision for

impairment.

Loans and advances classified as available for sale are stated at

fair value. Unless unrealised gains and losses on remeasurement

to fair value are part of an effective hedging relationship, they are

reported as a separate component of equity until the loan is

sold, collected or otherwise disposed of, or the loan is

determined to be impaired, at which time the cumulative gain or

loss previously reported in equity is included in the consolidated

statement of income for the period.

Loans and advances classified as loans and advances carried at

fair value through statement of income upon initial recognition

are remeasured at fair value with all changes in fair value being

recorded in the consolidated statement of income.

In relation to unquoted loans and advances and available for sale

loans which are part of an effective hedging relationship, any gain

or loss arising from a change in fair value is recognised directly in

the consolidated statement of income. The carrying values of

unquoted loans and advances which are being effectively hedged

for changes in fair value are adjusted to the extent of the changes

in fair value being hedged.

Investments in associates

Investments in associates are accounted for by the equity

method. Associates are enterprises in which the bank exercises

significant influence, normally where it holds 20% to 50% of the

voting power.

Premises and equipment

Premises and equipment are stated at cost, less accumulated

depreciation and provision for impairment in value, if any.

Freehold land is not depreciated. Depreciation on other

premises and equipment is provided on a straight-line basis over

their estimated useful lives.

Impairment and uncollectability of financial assets

An assessment is made at each balance sheet date to determine

whether there is objective evidence that a specific financial asset

may be impaired. If such evidence exists, an impairment loss is

recognised in the statement of income. The recoverable amount

is based on the net present value of anticipated future cash flows,

discounted at the original interest rate.

In addition to the provision for specific impaired loans andadvances, a provision is made to cover impairment againstspecific group of assets where there is a measurable decrease inestimated future cashflows.

Impairment is determined as follows:

(a) for assets carried at amortised cost, impairment is based onthe present value of estimated future cash flows discountedat the original effective interest rate;

(b) for assets carried at fair value, impairment is the differencebetween cost and fair value; and

(c) for assets carried at cost, impairment is based on the presentvalue of estimated future cash flows discounted at thecurrent market rate of return for a similar financial asset.

In the case of impaired available for sale equity securities, anyincrease in fair value is recognised as an increase in cumulativechanges in fair value directly in equity until disposed.

Deposits

All money market and customer deposits are carried atamortised cost. An adjustment is made to these, where effectivefair value hedges have been made, to adjust the value of thedeposit for the fair value being hedged with the resultantchanges being recognised in the consolidated statement ofincome.

Repurchase and resale agreements

Assets sold with a simultaneous commitment to repurchase at aspecified future date (‘repos’) are not derecognised. Thecounterparty liability for amounts received under theseagreements is included in deposits from banks and other financialinstitutions or deposits from customers, as appropriate. Thedifference between sale and repurchase price is treated asinterest expense using effective yield method. Assets purchasedwith a corresponding commitment to resell at a specified futuredate (‘reverse repos’) are not recognised in the balance sheet, asthe bank does not obtain control over the assets. Amounts paidunder these agreements are included in placements with banksand other financial institutions or loans and advances, asappropriate. The difference between purchase and resale priceis treated as interest income using effective yield method.

Provisions

Provisions are recognised when the Group has a presentobligation (legal or constructive) as a result of a past event andthe costs to settle the obligation are both probable and able tobe reliably measured.




2 SIGNIFICANT ACCOUNTING POLICIES (continued)

Employee pension and other end of service benefits

Costs relating to employee pension and other end of service benefits

are generally accrued in accordance with actuarial valuations based

on prevailing regulations applicable in each location.

Treasury stock

Treasury stock is stated at cost. Treasury stock does not carry

the right to dividends or to voting.

Revenue recognition

Interest income and loan fees which are considered an integral

part of the effective yield of a loan, are recognised using the

effective yield method unless collectibility is in doubt. The

recognition of interest income is suspended when loans become

impaired, such as when overdue by more than 90 days.

Other fee income and expense are recognised when earned or

incurred.

Premiums and discounts on non-trading securities and loans and

advances (except loans and advances carried at fair value

through statement of income) are amortised using the effective

interest method and taken to interest income.

Where the Bank enters into an interest rate swap to change

interest from fixed to floating (or vice versa) the amount of

interest income or expense is adjusted by the net interest

on the swap.

Use of estimates

The preparation of the consolidated financial statements

requires management to make estimates and assumptions that

affect the reported amount of financial assets and liabilities at the

date of the consolidated financial statements and the resultant

provisions and changes in fair value for the year.

In particular, considerable judgment by management is required in

the estimation of the amount and timing of future cash flows when

determining the level of provisions required for non-performing

credit facilities as well as for impairment provisions for unquoted

securities. Such estimates are necessarily based on assumptions

about several factors involving varying degrees of judgment and

uncertainty and actual results may differ from management’s

estimates resulting in future changes in such provisions.

Fair values

For securities, derivatives and loans and advances traded in

organised financial markets, fair value is determined by reference

to quoted market prices. Bid prices are used for assets and offer

prices are used for liabilities. In the case of units in mutual funds,

unit trusts, or similar investment vehicles fair values are based on

the last published bid price.

For unquoted securities fair value is determined by reference to

brokers' quotes, recent transaction(s), the market value of similar

securities, or based on the expected cash flows discounted at

current rates applicable for items with similar terms and risk

characteristics.

The estimated fair value of deposits with no stated maturity,

which includes non-interest bearing deposits, is the amount

payable on demand.

The fair value of forward exchange contracts is calculated by

reference to forward exchange rates with similar maturities. The

fair value of unquoted derivative instruments is determined

either by discounted cash flows, internal pricing models or by

reference to brokers’ quotes.

Taxation on foreign operations

There is no tax on corporate income in the Kingdom of Bahrain.

Taxation on foreign operations is provided for in accordance

with the fiscal regulations applicable in each location. No

provision is made for any liability that may arise in the event of

distribution of the reserves of subsidiaries. A substantial portion

of such reserves is required to be retained to meet local

regulatory requirements.

Foreign currencies

Monetary assets and liabilities in foreign currencies are translated

into US dollars at the market rates of exchange prevailing at the

balance sheet date. Any gains or losses are taken to the

consolidated statement of income.

The assets and liabilities of foreign operations are translated at

rates of exchange ruling at the balance sheet date. Income and

expense items are translated at average exchange rates for the

period. Foreign exchange translation gains and losses arising

from translating the financial statements of subsidiaries into US

dollars are recorded directly in retained earnings.




Trade and settlement date accounting

All “regular way purchases” and sales of financial assets are

recognised on the trade date, i.e. the date that the bank commits

to purchase or sell the asset.

Derivatives

The Group enters into derivative instruments including forwards,

futures, forward rate agreements, swaps and options in the

foreign exchange, interest rate and capital markets. These are

stated at fair value. The fair value of a derivative is the equivalent

of the unrealised gain or loss from marking to market the

derivative using prevailing market rates or internal pricing

models. Derivatives with positive market values (unrealised

gains) are included in other assets and derivatives with negative

market values (unrealised losses) are included in other liabilities

in the consolidated balance sheet.

Changes in the fair values of derivatives held for trading activities

or to offset other trading positions are included in other

operating income in the consolidated statement of income.

For the purposes of hedge accounting, hedges are classified into

two categories: (a) fair value hedges which hedge the exposure

to changes in the fair value of a recognised asset or liability; and

(b) cash flow hedges which hedge exposure to variability in cash

flows that is attributable to a particular risk associated with a

recognised asset or liability or a forecasted transaction.

Changes in the fair value of derivatives that are designated, and

qualify, as fair value hedges and that prove to be highly effective

in relation to the hedged risk, are included in other operating

income along with the corresponding changes in the fair value of

the hedged assets or liabilities which are attributable to the risk

being hedged.

Changes in the fair value of derivatives that are designated, and

qualify, as cash flow hedges and that prove to be highly effective

in relation to the hedged risk are recognised in a separate

component of equity, and the ineffective portion recognised in

the consolidated statement of income. The gains or losses on

cash flow hedges recognised initially in equity are transferred to

the consolidated statement of income in the period in which the

hedged transaction impacts the income. Where the hedged

transaction results in the recognition of an asset or a liability the

associated gain or loss that had been initially recognised in equity

is included in the initial measurement of the cost of the related

asset or liability.

Hedge accounting is discontinued when the derivative hedging

instrument either expires or is sold, terminated or exercised, no

longer qualifies for hedge accounting or is revoked. Upon such

discontinuance:

- in the case of cash flow hedges, any cumulative gain or loss

on the hedging instrument recognised in equity is retained in

equity until the forecasted transaction occurs. When such a

transaction occurs, the gain or loss retained in equity is

recognised in the consolidated statement of income or

included in the initial measurement of the cost of the related

asset or liability, as appropriate. Where the hedged

transaction is no longer expected to occur, the net

cumulative gain or loss recognised in equity is transferred to

the consolidated statement of income.

- in the case of fair value hedges of interest-bearing financial

instruments any adjustment to the carrying amount relating to

the hedged risk is amortised in the consolidated statement of

income over the remaining term to maturity.

Certain derivative transactions, while providing effective

economic hedges under the Group's asset and liability

management and risk management positions, do not qualify for

hedge accounting under the specific rules in IAS 39 and are

therefore accounted for as derivatives held for trading and the

related fair value gains and losses reported in other operating

income.

Certain derivatives embedded in other financial instruments are

treated as separate derivatives when their economic

characteristics and risks are not closely related to those of the

host contract and the host contract is not carried at fair value

through the income statement. These embedded derivatives are

measured at fair value with the changes in fair value recognised

in the income statement.

Fiduciary assets

Assets held in trust or in a fiduciary capacity are not treated as

assets of the Group and, accordingly, are not included in the

consolidated balance sheet.

Offsetting

Financial assets and financial liabilities are only offset and the net

amount reported in the balance sheet when there is a legally

enforceable right to offset the recognised amounts and the bank

intends to settle on a net basis.


3 TRADING SECURITIES

Debt securitiesEquitiesExternally managed funds

Externally managed funds represent investments in funds of hedge funds managed by internationally renowned asset managers.

4 NON-TRADING SECURITIES

Available for saleAAA rated debt securitiesAA to A rated debt securitiesOther investment grade debt securitiesOther debt securitiesEquity securities

Held to maturity - Debt securities

Available for sale securities include:

(i) investments of US$ 208 million (2003: US$ 58 million) of structured finance nature of investment grade securities which aremanaged by international investment banks with underlying investments in predominantly AAA rated debt securities.

(ii) equity securities, which are net of provisions of US$ 28 million (2003: US$ 5 million on continuing operations and US$ 15 millionon discontinued operations); provisions at year end include US$ 25 million transferred during the year from provisions on loansand advances following the restructuring of a loan converted partly into equity. US$ 2 million provision on equity securities waswritten off during the year.

311045

86

2,7361,900

236167131

5,17034

5,204

22 2

160

184

2,51253134417548

3,6107

3,617

2004 2003


2004 2003






5 LOANS AND ADVANCES

i) By industrial sector

Financial servicesOther servicesManufacturingConstructionTrade ConsumerGovernmentOther

Loan loss provisions

ii) By classification

Quoted loans and advancesAvailable for saleHeld to maturityCarried at fair value through statement of income

Unquoted loans and advances

Loan loss provisions

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

At 1 JanuaryCharge for the yearWritebacks/recoveriesWrite-offsForeign exchange translation and other adjustments *

At 31 December

* Foreign exchange translation and other adjustments include US$ 25 million (2003: Nil) transferred to provisions on non-tradingsecurities following the restructuring of a loan converted partially into equity.

At 31 December 2004 uncollected interest in suspense on past due loans amounted to US$ 175 million (2003: continuing operationsUS$ 289 million and discontinued operations US$ 15 million).

The gross carrying value of loans placed on a non-accrual basis amounted to US$ 331 million at the year end (2003: US$ 748 million).

2,345 1,500 1,503

196 381 32

357 166

6,480

(468)

6,012

160 1 -

6,319

6,480 (468)

6,012

2,378 3,338 2,896 1,214 1,321 4,099 1,089

349

16,684

(763)

15,921

461 4

627 15,592

16,684 (763)

15,921

132 71

(12)(44)

8

155

728 195 (62)

(110)12

763

608 42

(52)(99)(31)

468

596 124 (50)(66)

4

608

2004 2003


2004 2003

2004 2003

Continuingoperations

Discontinuedoperations Total


6 WRITEBACK/(PROVISION) FOR IMPAIRMENT - NET

During the year the Group has made the following writeback/(provisions) for impairment - net:

Loans and advances (note 5)Goodwill

Due to the significant devaluation of the Egyptian Pound and the state of the Egyptian economy, the carrying amount of goodwill of US$ 42 million which arose on the investment in ABC Egypt S.A.E. (a retail banking subsidiary) was written off in 2003 as a prudent measure.

7 OTHER ASSETS

Positive fair value of derivatives (note 15)Assets acquired on debt settlementStaff loansBank owned life insuranceSecurities sold awaiting valueDeferred tax assetsOthers

The negative fair value of derivatives amounting to US$ 89 million is included in other liabilities (Note 9). Details of derivatives are givenin Note 15.

8 TAXATION ON FOREIGN OPERATIONS

Consolidated balance sheet:Current tax liabilityDeferred tax liability

Continuing Discontinued

Consolidated statement of income:Current tax on foreign operationsDeferred tax on foreign operations

In view of the operations of the Group being subject to various tax jurisdictions and regulations, it is not practical to provide areconciliation between the accounting and taxable profits together with the details of effective tax rates.

10-

10

(74)(42)

(116)

2004 2003


73111125101692

238

1748155351

106376

828

2004 2003

518

23

4326

69

2004 2003

10(7)

3

30(13)

17

17(4)

13

2004 2003






9 OTHER LIABILITIES

Negative fair value of derivatives (note 15)Margin deposits including cash collateralShort positions in securitiesEmployee related payablesNon corporate tax payableSecurities purchased awaiting valueCheques for collectionDeferred IncomeAccrued charges and other payables

Short positions in securities in 2003 relate to short term government securities in a foreign subsidiary, of which US$ 193 million havematurities of less than six months and US$ 10 million have maturities more than six months.

The positive fair value of derivatives amounting to US$ 73 million is included in other assets (Note 7). Details of derivatives are given in Note 15.

10 TERM NOTES, BONDS AND OTHER TERM FINANCING

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

Total obligations outstanding at 31 December 2004

Parent Bank Subsidiaries TotalAggregate maturities:2005200620072009

Interest basis:FixedFloating

Total obligations outstanding at 31 December 2003

89 98

- 41 10 10 19 13

146

426

21268

20355

159-

16620

288

1,171

2004 2003


560100300500

1,460

-1,460

1,460

960

770158400500

1,828

-1,828

1,828

1,850

21058

100-

368

-368

368

890


11 EQUITY

a) Share capital

Authorised – 150 million shares of US$ 10 each

Issued, subscribed and fully paid – 100 million shares of US$ 10 each

b) Treasury stock

Treasury stock represents the purchase by the Bank of its own shares. At the end of the year the Bank did not hold any treasury stock(2003: 5,867,736 shares) as these treasury shares were distributed as stock dividend to the shareholders during the year.

c) Statutory reserve

As required by the Articles of Association of the Bank and the Bahrain Commercial Companies Law, 10% of the net profit for the yearis transferred to the statutory reserve. Such annual transfers will cease when the reserve totals 50% of the paid up share capital. Thereserve is not available for distribution but can be utilised as security for purpose of a distribution in such circumstances as stipulated inthe Bahrain Commercial Companies Law and following the approval of the Bahrain Monetary Agency.

d) General reserve

The general reserve underlines the shareholders’ commitment to enhance the strong equity base of the Bank.

e) Extraordinary financial reserve

The extraordinary financial reserve was established to cover any possible future diminution in the carrying value of assets and used at thediscretion of the Board of Directors. During the year, the directors have resolved to transfer the extraordinary financial reserve to generalreserve.

f) Capital reserve

The capital reserve arose on one of the subsidiaries which was sold during the year.

g) Share premium

The share premium was utilised to distribute interim stock dividend after obtaining the required regulatory approval.

1,500

1,000

1,500

1,000

2004 2003







12 OTHER OPERATING INCOME

Fee and commission incomeFee and commission expenseGains less losses on non-trading securitiesGains less losses on dealing in foreign currenciesGains less losses on dealing in derivativesGains less losses on trading securitiesGains less losses on loans carried at fair value through statement of incomeForeign exchange and other losses on investmentsOther – net

13 STAFF

The number of staff employed by the Group as of 31 December 2004 was 1,798 (2003: continuing operations 1,963 and discontinuedoperations 3,303).

14 INVESTMENTS IN SUBSIDIARIES AND ASSOCIATES

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

Country of Interest of Arab Bankingincorporation Corporation (B.S.C.)

(%)

ABC International Bank plc United Kingdom 100ABC Islamic Bank (E.C.) Bahrain 100Arab Banking Corporation (ABC) - Jordan Jordan 87Banco ABC Brasil S.A. Brazil 84ABC Algeria Algeria 70Arab Banking Corporation - Egypt [S.A.E.] Egypt 96ABC Tunisie Tunisia 100

The principal associate is Arab Financial Services B.S.C. (c), incorporated in Bahrain, with a 42% ownership (2003:36%).

b) Discontinued operations - Sale of subsidiaries

The sales of the Bank’s retail subsidiaries, Banco Atlántico S.A. group of companies, Spain and International Bank of Asia Limited, Hong Kong, agreements for which were entered into in 2003, were completed during the quarter ended 31 March 2004.

Proceeds, net of expenses, from the sales of Banco Atlántico S.A. group of companies and International Bank of Asia Limited amounted toUS$ 1,200 million and US$ 301 million, respectively; tax expense arising from the sales amounted to US$ 303 million and nil, respectively.

The profit on disposal of the subsidiaries is calculated based on the carrying values as presented in the audited financial statements forthe year ended 31 December 2003.

The consolidated financial statements for the year ended 31 December 2004 do not include the results of International Bank of AsiaLimited and Banco Atlántico S.A. group of companies as these were sold effective 31 December 2003.

72(7)91

117

20-

40

153

70(6)9

23117

140(34)39

259

2004 2003



14 INVESTMENTS IN SUBSIDIARIES AND ASSOCIATES (continued)

b) Discontinued operations - Sale of subsidiaries (continued)

The results of International Bank of Asia Limited and Banco Atlántico S.A. group of companies for the year ended 31 December 2003included in the consolidated statement of income as "Profit from discontinued operations - net of tax" were as follows:

OPERATING INCOMEInterest incomeInterest expense

Net interest incomeOther operating income

Total operating incomeProvision for impairment

NET OPERATING INCOME AFTER PROVISIONS

OPERATING EXPENSESStaffPremises and equipmentOther

Total operating expenses

PROFIT BEFORE TAXATION

Taxation

NET PROFIT FOR THE YEAR

The cash flows of International Bank of Asia Limited and Banco Atlántico S.A. Group of companies for the year ended 31 December 2003 included in the consolidated statement of cash flows were as follows:

Net cash from operating activitiesNet cash used in investing activitiesNet cash from financing activities

Increase in liquid funds

124 (46)

78 29

107 (24)

83

31 11 21

63

20

(2)

18

639 (727)109

21


370 (169)

201 173

374 (35)

339

161 34 72

267

72

(15)

57

572 (614)

69

27

International Bankof Asia Limited

Banco AtlánticoS.A. group of

companies






The balances relating to International Bank of Asia Limited and Banco Atlántico S.A. group of companies included in the consolidatedbalance sheet as at 31 December 2003 were as follows:

Liquid fundsTrading securitiesPlacements with banks and other financial institutionsNon-trading securitiesLoans and advances Interest receivableInvestments in associatesOther assetsPremises and equipment

TOTAL ASSETS

Deposits from customersDeposits from banks and other financial institutionsCertificates of depositInterest payableTaxationOther liabilitiesTerm notes, bonds and other term financing

TOTAL LIABILITIES

Equity

TOTAL LIABILITIES AND EQUITY

The balances relating to International Bank of Asia Limited and Banco Atlántico S.A. group of companies included in the credit commitments and contingent items and derivatives as at 31 December 2003 were as follows:

Credit commitments and contingent items

Derivatives held for trading


International Bankof Asia Limited

Banco AtlánticoS.A. group of

companies

338 1

2,149 1,474 7,705

32 24

268 195

12,186

7,564 2,876

306 16 35

448 189

11,434

752

12,186

6,296

1,936

52 13

989 1,502 1,974

14 1

165 158

4,868

3,709 61

- 6 1

261 342

4,380

488

4,868

917

1,873


15 DERIVATIVES

In the ordinary course of business the Group enters into various types of transactions that involve derivative financial instruments.

The table below shows the positive and negative fair values of derivative financial instruments. The notional amount is the amount of aderivative’s underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured.The notional amounts indicate the volume of transactions outstanding at year end and are not indicative of either market or credit risk.

Derivatives held for trading:Interest rate and currency swapsForward foreign exchange contractsOptionsFuturesForward rate agreementsEquity contracts

Derivatives held as hedgesInterest rate and currency swapsForward foreign exchange contractsOptions Futures

Risk weighted equivalents (credit and market risk)

Derivatives held as hedges include:

a) Fair value hedges which are predominantly used to hedge fair value changes arising from interest rate fluctuations in loans andadvances, placements, deposits and available for sale debt securities.

b) Cash flow hedges with a notional amount of US$ 7 million (2003: US$ 7 million), comprising of interest rate swaps of US$ 7 million(2003: US$ 7 million), the fair value of which is immaterial; and

c) Hedge of net investment in a foreign subsidiary of US$ 264 million in 2003 through foreign currency options, which had a negativefair value of US$ 2 million. At 31 December 2004, there was no hedge on net investment in foreign subsidiary.

Derivative product typesForwards and futures are contractual agreements to either buy or sell a specified currency, commodity or financial instrument at a specificprice and date in the future. Forwards are customised contracts transacted in the over-the-counter market. Foreign currency and interestrate futures are transacted in standardised amounts on regulated exchanges and are subject to daily cash margin requirements. Forwardrate agreements are effectively tailor-made interest rate futures which fix a forward rate of interest on a notional loan, for an agreedperiod of time starting on a specified future date.

Swaps are contractual agreements between two parties to exchange interest or foreign currency differentials based on a specific notionalamount. For interest rate swaps, counterparties generally exchange fixed and floating rate interest payments based on a notional value ina single currency. For cross-currency swaps, fixed or floating interest payments and notional amounts are exchanged in differentcurrencies. For cross-currency interest rate swaps, notional amounts and fixed and floating interest payments are exchanged in differentcurrencies.


49 44 1,989 60 56 3,713 9 10 1,727 12 26 4,321

11 15 2,626 97 98 7,311 2 - 508 1 - 244 - - 10 1 1 137 - - - - - 370

71 69 6,860 171 181 16,096

1 20 612 2 29 569 - - 749 - - 483 - - - - 2 532 1 - 89 1 - 187

2 20 1,450 3 31 1,771

73 89 8,310 174 212 17,867

208 476

2004 2003


Positive Negative Notionalfair value fair value amount

Positive Negative Notionalfair value fair value amount





16 CREDIT COMMITMENTS AND CONTINGENT ITEMS

Credit commitments and contingent items include commitments to extend credit, standby letters of credit, acceptances and guarantees,which are structured to meet the various requirements of customers.

At the balance sheet date, the principal outstanding and the risk weighted equivalents calculated in accordance with the capital adequacyguidelines established for the global banking industry were as follows:

Short-term self-liquidating trade and transaction-related contingent itemsDirect credit substitutes, guarantees and acceptancesForward asset purchase commitmentsOther commitments (including undrawn loans)

Risk weighted equivalents

2,663430

-1,387

4,480

1,372

5,009502327

5,423

11,261

2,771

2004 2003

Options are contractual agreements that convey the right, but notthe obligation, to either buy or sell a specific amount of acommodity or financial instrument at a fixed price, either at a fixedfuture date or at any time within a specified period.

Derivative related credit riskCredit risk in respect of derivative financial instruments arises fromthe potential for a counterparty to default on its contractualobligations and is limited to the positive fair value of instrumentsthat are favourable to the Group. The majority of the Group’sderivative contracts are entered into with other financialinstitutions and there is no significant concentration of credit risk inrespect of contracts with positive fair value with any individualcounterparty at the balance sheet date.

Derivatives held or issued for trading purposesMost of the Group’s derivative trading activities relate to sales,positioning and arbitrage. Sales activities involve offering productsto customers. Positioning involves managing market risk positionswith the expectation of profiting from favourable movements inprices, rates or indices. Arbitrage involves identifying and profitingfrom price differentials between markets or products. Alsoincluded under this heading are any derivatives which do not meetIAS 39 hedging requirements.

Derivatives held or issued for hedging purposesThe Group has adopted a comprehensive system for themeasurement and management of risk. Part of the riskmanagement process involves managing the Group’s exposure tofluctuations in foreign exchange rates (currency risk) and interestrates through asset and liability management activities. It is theGroup’s policy to reduce its exposure to currency and interest rate

risks to acceptable levels as determined by the Board of Directors.The Board has established levels of currency risk by setting limitson currency position exposures. Positions are monitored on a dailybasis and hedging strategies used to ensure positions aremaintained within established limits. The Board has establishedlevels of interest rate risk by setting limits on the interest rate gapsfor stipulated periods. Interest rate gaps are reviewed on a dailybasis and hedging strategies used to reduce the interest rate gapsto within the limits established by the Board.

As part of its asset and liability management the Group usesderivatives for hedging purposes in order to reduce its exposure tocurrency and interest rate risks. This is achieved by hedging specificfinancial instrument, forecasted transactions as well as strategichedging against overall balance sheet exposures. For interest raterisk this is carried out by monitoring the duration of assets andliabilities using simulations to estimate the level of interest rate riskand entering into interest rate swaps and futures to hedge aproportion of the interest rate exposure. Since strategic hedgingdoes not qualify for special hedge accounting related derivativesare accounted for as trading instruments.

The Group uses forward foreign exchange contracts and currencyswaps to hedge against specifically identified currency risks. Inaddition, the Group uses interest rate swaps and interest ratefutures to hedge against the interest rate risk arising fromspecifically identified fixed interest rate loans. The Group also usesinterest rate swaps to hedge against the cash flow risks arising oncertain floating rate loans. In all such cases the hedging relationshipand objective, including details of the hedged item and hedginginstrument, are formally documented and the transactions areaccounted for as hedges.



17 MATURITIES OF ASSETS, LIABILITIES AND OFF BALANCE SHEET ITEMS

The maturity analysis of assets, liabilities and off balance sheet items based on remaining period to the contractual maturity date, exceptfor mortgage backed securities classified as Non-trading securities amounting to US$ 2,268 million which is based on expected repaymentdates is as follows:

At 31 December 2004

AssetsLiquid fundsTrading securitiesPlacements with banks and

other financial institutionsNon-trading securitiesLoans and advancesOthers

Total assets

Liabilities, minority interests and equity

Deposits from customers Deposits from banks and

other financial institutionsCertificates of depositTerm notes, bonds and other

term financingMinority interests and othersEquity

Total liabilities, minority interests and equity

Off balance sheet items Credit commitments and

contingent items Foreign exchange contracts Interest rate contracts

Total



303 - - - - - - - - 303 22 - - - - - - - 162 184

3,335 838 90 2 37 3 - - - 4,305 3 36 179 562 1,844 790 155 - 48 3,617

617 759 1,154 861 1,643 776 198 4 - 6,012 - - - - - - - - 501 501

4,280 1,633 1,423 1,425 3,524 1,569 353 4 711 14,922

3,384 723 356 386 214 18 - - - 5,081

3,105 1,564 615 134 86 2 - - - 5,506 10 21 60 2 1 - - - - 94

- 137 500 133 1,058 - - - - 1,828 - - - - - - - - 561 561 - - - - - - - - 1,852 1,852

6,499 2,445 1,531 655 1,359 20 - - 2,413 14,922

962 712 403 959 1,201 173 43 27 - 4,480 2,267 1,323 1,127 322 24 15 - - - 5,078

286 299 425 382 979 769 92 - - 3,232

3,515 2,334 1,955 1,663 2,204 957 135 27 - 12,790

Within 1Month

1 - 3Months

3 - 6Months

6 - 12Months

1 - 5Years

5 - 10Years

10 - 20Years

Over 20Years Undated Total





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

At 31 December 2003

AssetsLiquid fundsTrading securitiesPlacements with banks and

other financial institutionsNon-trading securitiesLoans and advancesOthers

Total assets

Liabilities, minority interests and equity

Deposits from customers Deposits from banks and

other financial institutionsCertificates of depositTerm notes, bonds and other

term financingMinority interests and othersEquity

Total liabilities, minority interests and equity

Off balance sheet items Credit commitments and

contingent items Foreign exchange contracts Interest rate contractsEquity and other contracts

Total


Within 1Month

1 - 3Months

3 - 6Months

6 - 12Months

1 - 5Years

5 - 10Years

10 - 20Years

Over 20Years Undated Total

709 - - - - - - - - 709 31 - - - - - - 1 54 86

5,175 881 125 445 15 - - 10 - 6,651 1,933 362 73 94 1,821 645 166 64 46 5,204 2,994 1,359 1,292 1,087 3,290 4,675 855 369 - 15,921

- - - - - - - - 1,497 1,497

10,842 2,602 1,490 1,626 5,126 5,320 1,021 444 1,597 30,068

11,888 1,084 514 275 636 37 - - - 14,434

6,566 2,532 367 267 167 33 - - - 9,932 146 192 61 21 3 - - - - 423

- 84 103 105 1,482 76 - - - 1,850 - - 193 1 9 - - - 1,641 1,844 - - - - - - - - 1,585 1,585

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

2,546 735 896 3,047 3,708 230 62 37 - 11,261 4,165 3,074 3,267 1,872 60 15 - - - 12,453

271 200 504 1,186 1,865 673 345 - - 5,044 63 19 1 57 230 - - - - 370

7,045 4,028 4,668 6,162 5,863 918 407 37 - 29,128


18 INTEREST RATE EXPOSURE

Interest rate exposure is the sensitivity of earnings to changes in interest rates. Such exposures arise in the ordinary course of businessand are managed on a decentralised basis employing the use of off balance sheet interest rate products where appropriate. The respectiveAsset and Liability Committees of the Bank and its subsidiaries establish the maximum levels of interest rate mismatch that are permitted,and regularly monitor the exposures.

The repricing profile of assets, liabilities and off balance sheet financial instruments used to hedge exposures to interest rate risk basedon the earlier of contractual maturity and the next interest repricing date has been shown in the table below.

At 31 December 2004

US dollarsAssetsLiabilities and minority interestsEquityOff balance sheet items

EuroAssetsLiabilities and minority interestsOff balance sheet items

Pound SterlingAssetsLiabilities and minority interestsOff balance sheet items

Other currenciesAssetsLiabilities and minority interestsOff balance sheet items

TotalAssetsLiabilities, minority interests and equityOff balance sheet items

5,792) 1,813) 1,107) 244) 242) 37) 652) 9,887)(4,535) (1,861) (1,326) (430) (46) (72) (511) (8,781)

-) -) -) -) -) -) (1,852) (1,852)(35) 136) 100) (21) 28) (17) - 191)

1,222) 88) (119) (207) 224) (52) (1,711) (555)

382) 481) 528) 28) 228) 48) 49) 1,744)(857) (183) (67) (17) (1) (1) (47) (1,173)101) (58) (68) (14) 185) 50) -) 196)

(374) 240) 393) (3) 412) 97) 2) 767)

543) 216) 18) 103) 3) -) 90) 973)(454) (257) (46) (3) -) -) (130) (890)

-) -) -) -) -) -) -) -)

89) (41) (28) 100) 3) -) (40) 83)

1,147) 395) 176) 205) 124) 105) 166) 2,318)(1,374) (469) (212) (30) (26) (48) (67) (2,226)

(260) (124) (29) (14) 24) 16) -) (387)

(487) (198) (65) 161) 122) 73) 99) (295)

7,864) 2,905) 1,829) 580) 597) 190) 957) 14,922)(7,220) (2,770) (1,651) (480) (73) (121) (2,607) (14,922)

(194) (46) 3) (49) 237) 49) -)) -)

450) 89) 181) 51) 761) 118) (1,650) -)



Within 1Month

1 - 3Months

3 - 6Months

6 - 12Months

1 - 5Years

Over 5Years

Non-interestBearing Total





At 31 December 2003

US dollarsAssetsLiabilities and minority interestsEquityOff balance sheet items

EuroAssets Liabilities and minority interestsOff balance sheet items

Hong Kong dollarsAssetsLiabilities and minority interestsOff balance sheet items

Pound SterlingAssetsLiabilities and minority interestsOff balance sheet items

Other currenciesAssetsLiabilities and minority interestsOff balance sheet items

TotalAssetsLiabilities, minority interests and equityOff balance sheet items


Within 1Month

1 - 3Months

3 - 6Months

6 - 12Months

1 - 5Years

Over 5Years

Non-InterestBearing Total

4,425) 2,152) 1,401) 309) 740) 342) 616) 9,985)(6,372) (2,165) (345) (180) (181) (22) (671) (9,936)

-) -) -) -) -) -) (1,585) (1,585)(316) (97) (283) (10) 170) (49) -) (585)

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

3,971) 2,729) 1,611) 1,820) 1,096) 142) 660) 12,029)(6,284) (1,052) (276) (194) (824) (7) (2,787) (11,424)

164) 121) (35) (32) 88) 84) -) 390)

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

1,969) 253) 51) 70) 958) 44) 335) 3,680)(2,182) (532) (49) (15) (201) (7) (321) (3,307)

-) -) -) (35) -) -) -) (35)

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

275) 220) 104) 404) 89) -) 73) 1,165)(495) (292) (33) (44) (22) -) (282) (1,168)

22) -) -) -) -) -) -) 22)

(198) (72) 71) 360) 67) -) (209) 19)

1,832) 492) 239) 222) 123) 80) 221) 3,209)(1,868) (234) (253) (122) (36) (73) (62) (2,648)

3) 25) 104) 45) 12) 19) -) 208)

(33) 283) 90) 145) 99) 26) 159) 769)

12,472) 5,846) 3,406) 2,825) 3,006) 608) 1,905) 30,068)(17,201) (4,275) (956) (555) (1,264) (109) (5,708) (30,068)

(127) 49) (214) (32) 270) 54) -) -)

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



18 INTEREST RATE EXPOSURE (continued)

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

At 31 December 2004

US dollarsAssetsLiabilitiesOff balance sheet items

EurosAssetsLiabilitiesOff balance sheet items

Pound sterlingAssetsLiabilitiesOff balance sheet items

At 31 December 2003

US dollarsAssetsLiabilitiesOff balance sheet items

EurosAssetsLiabilitiesOff balance sheet items

Hong Kong dollarsAssetsLiabilitiesOff balance sheet items

Pound SterlingAssetsLiabilitiesOff balance sheet items


Within 1Month

%

1 - 3Months

%

3 - 6Months

%

6 - 12Months

%

1 - 5Years

%

Over 5Years

%

2.9 3.1 3.4 4.3 6.4 5.1 2.3 2.7 2.8 2.6 3.9 3.9 2.4 3.1 3.3 2.2 6.3 5.9

3.3 3.4 3.6 4.5 6.8 5.6 2.3 2.2 2.3 2.3 2.2 2.4 2.2 3.6 3.8 3.8 5.7 5.2

5.2 3.3 4.9 7.0 7.8 - 4.8 4.8 4.9 5.1 - -

- - - - - -

1.6 1.7 2.1 3.6 2.7 6.2 1.1 1.2 2.5 2.5 3.4 4.5 1.3 1.9 1.2 1.4 5.0 5.9

2.9 3.5 3.7 3.5 3.5 5.2 1.7 2.1 1.6 2.5 3.2 5.8 2.2 2.9 3.1 3.3 4.5 6.1

3.3 1.6 6.2 6.3 3.1 4.5 0.4 0.6 0.9 1.2 3.5 0.7

- - - 1.0 - -

5.1 5.2 5.5 5.8 6.6 - 3.8 3.8 3.9 3.8 4.1 - 3.7 - - - - -





19 SIGNIFICANT NET FOREIGN CURRENCY EXPOSURES

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

Long (Short)

Brazilian realEgyptian poundEuroHong Kong dollar Jordanian dinarPound sterlingSaudi riyalAlgerian dinarChinese yuan

The Hong Kong dollar exposure in 2003 arose from net investment in a foreign subsidiary and was covered by currency options amountingto US$ 266 million.

20 CREDIT RISK

Credit risk is the risk that a customer or counterparty will fail to meet a commitment, resulting in financial loss to the Group. Such riskarises from lending, trade finance, treasury and other activities undertaken by the Group. Credit risk is actively monitored in accordancewith the credit policies which clearly define delegated lending authorities, policies and procedures. The management of credit risk alsoinvolves the monitoring of risk concentrations by industrial sector as well as by geographic location. For details of composition of loansand advances portfolio refer note 5.

21 GEOGRAPHICAL DISTRIBUTION OF ASSETS, LIABILITIES AND OFF BALANCE SHEET ITEMS

Western EuropeArab WorldAsiaNorth AmericaLatin AmericaOther


3,976 5,583

596 3,226

865 676

14,922

1,392 11,501

585 228 588 628

14,922

821 2,872

212 370 160 45

4,480

2004 2003

(78)354 66

2,471 33 20

(616)1,797 (469)

(27)57 84

318 47 35

(164)25

(57)

11 190

- -

36 9

(231)1,725

-

4 31

- -

51 18

(61)24

-

2004 2003

US$EquivalentCurrency

Liabilitiesand

equity Assets

Creditcommitments

andcontingent

items

13,888 5,352 4,625 3,711 1,792

700

30,068

11,398 10,436 4,873

348 2,364

649

30,068

6,756 2,308 1,227

656 228 86

11,261

Liabilitiesand

equity Assets

Creditcommitments

andcontingent

items

US$Equivalent Currency



22 SEGMENTAL INFORMATION

For management purposes, the Group is organised into two major business segments, namely, wholesale and retail. These segments arethe basis on which the Group reports its primary segment information. Secondary segment information is based upon the location of theunits responsible for recording the transaction. Transactions between segments are conducted at estimated market rates on an arm’slength basis.

Primary segment information

Net interest incomeOther operating incomeOperating expensesWriteback/(Provision)

for impairment-net

Profit before taxation and minority interests fromcontinuing operations

Profit before taxation and minority interests fromdiscontinued operations

Profit before taxation and minority interests

Total assets employedIntra-group items

Segment liabilities, minority interests and equity

Intra-group items


121 128

(162)

11

98

773

871

13,761

13,742

31 25

(37)

(1)

18

-

18

1,235

1,186

152 153

(199)

10

116

773

889

14,996 (74)

14,922

14,928

(6)

14,922

2004 2003

RetailWholesale Total RetailWholesale Total

130 238

(180)

(88)

100

-

100

11,972

12,646

28 21

(34)

(28)

(13)

92

79

18,189

17,436

158 259

(214)

(116)

87

92

179

30,161 (93)

30,068

30,082

(14)

30,068





Secondary segment information

Segment profit/(loss) before taxation and minority interests from continuing operations

Segment profit before taxation and minority interests fromdiscontinued operations

Segment assets

23 REPURCHASE AND RESALE AGREEMENTS

Proceeds from assets sold under repurchase agreements at the year-end amounted to US$ 179 million (2003: US$ 3,791 million) ofwhich US$ nil (2003: US$ 2,859 million) relates to customer product and treasury activities in a major retail banking subsidiary.

Amounts paid for assets purchased under resale agreements at the year-end amounted to US$ 49 million (2003: US$ 1,491 million) andrelate to customer product and treasury activities in a subsidiary.

24 TRANSACTIONS WITH RELATED PARTIES

In the ordinary course of business there are transactions with major shareholders, associates and other related parties. Transactions withrelated parties are made on the same commercial terms as those applicable to comparable transactions with unrelated parties and donot involve more than a normal amount of risk.

The year end balances in respect of related parties included in the consolidated financial statements are as follows:

Loans and advancesDeposits from customers

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

Interest expense

25 FIDUCIARY ASSETS

Funds under management at the year-end amounted to US$ 3,208 million (2003: US$ 5,564 million). These assets are held in a fiduciarycapacity and are not included in the consolidated balance sheet.


106 - 10 116 56 (4) 35 87

773 - - 773 - 20) 72 92

10,292 - 4,630 14,922 8,630 4,831) 16,607 30,068

2004 2003

Arabworld Asia

Europe &Americas Total

Arabworld Asia

Europe &Americas Total

16407

6

6399

4

2004 2003



26 FAIR VALUE OF FINANCIAL INSTRUMENTS

“Fair value” is the amount at which an asset could be exchanged or a liability settled in a transaction between knowledgeable, willingparties in an arm’s length transaction. Underlying the definition of fair value is the presumption that the Group is a going concern withoutany intention or requirement to curtail materially the scale of its operation.

The carrying value of financial instruments from continuing operations are not significantly different from the fair values.

27 ASSETS PLEDGED AS SECURITY

At the balance sheet date, in addition to the items mentioned in note 23, assets amounting to US$ 125 million (2003: US$ 175 million) havebeen pledged as security for borrowings and other banking operations.

28 BASIC EARNINGS AND DIVIDEND PER SHARE

“Basic” earnings per share are calculated by dividing the net profit for the year by the weighted average number of shares during the year.No figures for diluted earnings per share have been presented, as the Bank has not issued any capital based instruments which wouldhave any impact on earnings per share, when exercised.

The Group's earnings and dividend per share for the year are as follows:

Net profit for the year from continuing operationsNet profit for the year Weighted average number of shares outstanding during the yearBasic earnings per share (US$)

- Profit for the year- Profit from continuing operations

Dividend per share- Proposed cash dividend (US$)- Interim cash dividend paid (US$)- Interim stock dividend distributed (per share)

During the year, an interim cash dividend of US$ 2.4 per share and an interim stock dividend of 0.062 shares for each share held on 2 September 2004 was approved by the Board of Directors and the Bahrain Monetary Agency. This was paid/distributed on 13 October 2004.A final dividend of US$0.50 pershare (2003: US$ 0.70 per share) has been proposed for approval at the Annual Ordinary General Meeting.

In accordance with IAS 33 the weighted average number of shares outstanding during 2003 have been restated for the calculation of basicearnings per share.


109579

100,000,000

5.791.09

0.502.4

0.062

71120

100,000,000

1.200.71

0.70--

2004 2003





29 CAPITAL ADEQUACY

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

CAPITAL BASE

Tier 1 capitalTier 2 capital

Total capital base

RISK WEIGHTED EXPOSURES

AssetsCash and claims on, guaranteed by or collateralised by securitiesof central governments and central banks of OECD countries

Claims on banks and public sector companies incorporated inOECD countries and short term claims on banks incorporated innon-OECD countries

Claims secured by mortgage of residential property

Claims on public sector entities, central governments, centralbanks and longer term claims on banks incorporated in non-OECD countries and all other assets, including claims on privatesector entities

Off balance sheet itemsCredit commitments and contingent items (note 16)Derivatives (note 15)

Credit risk weighted assets and off balance sheet itemsMarket risk weighted assets and off balance sheet items *

Total risk weighted assets

Risk asset ratio

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


1,292682

1,974

2,162499

2,661

2004 2003

-

1,403

40

4,881

1,372 11

7,707 542

8,249

23.9%

-

1,402

1,684

11,570

2,771 25

17,452 599

18,051

14.7%

2,873

7,014

79

4,881

4,480 8,310

8,192

7,008

3,368

11,570

11,261 17,867

2004 2003 2004 2003

Risk weighted equivalentsBalance


87 45

2,507 2,070 3,553

42 1,446

21 298 25

10,094

1,5925,614

32311

960

8,509

1,000 (74)659

1,585

10,094

400 -

132


ASSETS

Liquid fundsTrading securitiesPlacements with banks and other financial institutionsNon-trading securitiesLoans and advancesInterest receivableInvestments in subsidiariesInvestments in associatesOther assetsPremises and equipment

TOTAL ASSETS

LIABILITIES

Deposits from customersDeposits from banks and other financial institutionsInterest payableOther liabilities

TERM NOTES, BONDS AND OTHER TERM FINANCING

EQUITY

Share capitalTreasury stockReserves and retained earnings

TOTAL LIABILITIES AND EQUITY

Included in the above assets and liabilities are balances due from and dueto subsidiaries and associates as follows:

Placements with banks and other financial institutionsLoans and advancesDeposits from banks and other financial institutions

31 COMPARATIVES

The corresponding figures for the previous year have been restated/reclassified in order to conform with the presentation for the currentyear. Such reclassifications do not impact the previously reported net profit or shareholders' equity.

41 162

3,138 3,297 2,807

43 881 25

139 22

10,555

3,047 3,955

34 207

1,460

8,703

1,000 -

852

1,852

10,555

592 66

306

2004 2003

All figures in US$ million30 PARENT BANK

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



Mr. Nour NahawiArab World Division Head Jordanian

B.A. in Business Administration, Colby College, Maine, U.S.A.; M.A.

School for International Training, Vermont, U.S.A.

Mr. Nahawi has a wide range of banking experience throughout

29 years in senior administrative positions in Banque Paribas in

Muscat, London,Abu Dhabi, Beirut, Paris and Bahrain culminating

with his appointment as Country Head - Managing Director at

BNP Paribas Le Caire Bank - Cairo (Egypt) from 2000 to 2003.

In 2003 he joined Arab Banking Corporation, Bahrain, as a

Senior Vice President and Head of Arab World Division. Mr.

Nahawi is also Chairman of Arab Banking Corporation - Algeria,

Deputy Chairman of Arab Banking Corporation - Tunisie,

Deputy Chairman in ABC Islamic Bank (E.C.), Bahrain and a

director of Arab Banking Corporation - Jordan and Arab Banking

Corporation - Egypt.

Mr. Jehangir JawanmardiGroup Internal Auditor British

B.A. in Economics and Accounting, University College London, Fellow

of the Institute of Chartered Accountants in England and Wales, U.K.

Mr. Jawanmardi started his career with KPMG in London where

he trained as a chartered accountant and gained experience in

audit and tax supervision. He joined the Hill Samuel Group in

1976 and was appointed to the Board of Hill Samuel Bank in

1986. He spent over 20 years developing his expertise in various

aspects of internal audit in the investment banking and asset

management arena. Mr. Jawanmardi transferred to Lloyds TSB

Group in the UK in January 1997 where he was head of Audit

in Wholesale and International Banking, prior to joining the ABC

Group in May 2004 as Chief Internal Auditor.

Mr. Ghazi M.Abdul-JawadPresident & Chief Executive Saudi

B.A. in Political Science, Lewis & Clark College, Oregon; M.A. in

International Relations, Fletcher School of Law & Diplomacy, Tufts

University, Mass., U.S.A.; Fellow of the Chartered Institute of Bankers, U.K.

Member of the Steering Committee of the Institute of International

Finance Inc.,Washington and member of several other consultative

or advisory committees. Also Chairman of Arab Banking

Corporation (Jordan), Chairman of Arab Banking Corporation -

Egypt (S.A.E.) and Chairman of Arab Financial Services Company,

Bahrain. Previously General Manager of Gulf International Bank

(B.S.C.), Bahrain. Mr.Abdul-Jawad has over 25 years' experience as

a commercial banker and in government service and has held his

present position with ABC Group since 1997.

Mr.Abdulmagid BreishDeputy Chief Executive & Chief Banking Officer Libyan

B.A. Political Sciences, American University of Beirut; Financial &

Policy Diploma, IMF,Washington D.C., U.S.A. Member of the Guild of

International Bankers, U.K.

Mr. Breish started his career in banking in 1975 when he joined

the Libyan Arab Foreign Bank in Tripoli, Libya. He joined ABC in

1980 and served as Head of Business Development until 1985

before transferring to Tokyo as Chief Representative. In 1988 he

took over as Managing Director of ABC Investment & Services

Co. (E.C.) in Bahrain. In 1991 he assumed the position of

General Manager, London Branch of ABC International Bank plc

and was appointed the bank's Chief Executive Officer in 1993.

In November 2002, Mr. Breish was appointed Deputy Chief

Executive and Chief Banking Officer of ABC Group. He is also

Chairman of ABC Islamic Bank (E.C.), Bahrain, a director of ABC

International Bank plc in the U.K., and a director of Banco ABC

Brasil, S.A.

Mr. Essam El WakilGroup Treasurer Egyptian

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

Mr. El Wakil has been with ABC since 1980 and served in both

the Bahrain and London Treasury Departments. He took over as

Group Treasurer in 1999. He represents ABC as a Director on the

boards of ABC Islamic Bank (E.C.), Bahrain, Arab Banking

Corporation - Egypt (S.A.E.),ABC Clearing Company, Bahrain and

ABC Islamic Fund, Bahrain in addition to several of the executive,

audit and investment steering committees of those entities.

HEAD OFFICEMANAGEMENT


Mr. Riyad M.Al-DughaitherChief Credit & Risk Officer Saudi

MBA (Hons) with Economics and Finance concentration, UPM,Dhahran, BSc in Civil Engineering, UPM, Dhahran, Member of theInstitute of International Finance's (IIF) Steering Committee onRegulatory Capital, Member of IIF Economic Advisory Committee.

Formerly Chief Risk Officer at Riyad Bank, Saudi Arabia. During his

employment at Riyad Bank, Mr. Al-Dughaither also held the

position of AGM, International Banking, where he was responsible

for the bank's overseas operations and investment banking

business line. Prior to that he was Executive Manager for Riyad

Bank's Houston agency where he was responsible for the Bank's

USA-based operations. Mr. Al-Dughaither formerly served on the

Boards of Riyad Bank Europe, Saudi Swiss Bank, Gulf Riyad Bank

and the Arabian Drilling Company.

Mr.Asaf MohyuddinChief Administrative Officer,

Compliance Officer Pakistani

B.Com. (Hons) in Commerce, Punjab University, Pakistan; Fellow of the

Institute of Chartered Accountants in England and Wales, U.K.

Formerly Financial Controller at Citibank, N.A. in the Middle East

and earlier General Manager (Finance) at Pak-Arab Fertilisers,

Pakistan. Mr. Mohyuddin joined ABC in 1983 and was appointed

to the position of Chief Administrative Officer in November 2002

and also assumed the role of the Compliance Officer in February

2004. Prior to his present assignment, Mr. Mohyuddin headed the

Planning & Financial Control Department. He also held former staff

positions within the bank in the Europe & Americas Division and in the

Branches, Subsidiaries and Affiliates Division.

Mr. Sael Al WaaryHead of Group Support Services British

B.Sc. (Hons) Computer Science, University of Reading, U.K.

Mr. Al Waary joined ABC Group in 1981, and from 1986 wasGeneral Manager & Director of ABC (IT) Services Ltd., thewholly-owned subsidiary and technology arm of ABC, located inLondon, U.K. In 1997 he relocated to the Head Office at Bahrainto head ABC’s Global Information Technology Department. Aboard member of Arab Financial Services Company, Bahrain andABC (IT) Services Ltd., U.K., Mr. Al Waary has over 20 years'experience in banking & IT.

Dr. Lulwa Mutlaq Rashid MutlaqHead of Human Resources &

Administration Bahraini

B.Sc. and M.A. in Community College Education/Vocational

Education, Northern Arizona University, Ph.D. in Education and

Human Development, Vanderbilt University, U.S.A. Fellow of the

Chartered Institute of Personnel and Development (FCIPD), U.K.

Dr. Mutlaq joined ABC’s Human Resources & AdministrationDepartment in 1996 after a career in human resourcedevelopment in both the public and private sectors. She wasappointed Head of Human Resources & Administration inJanuary 2002. Dr. Mutlaq is currently the Vice President of theBahrain Management Society and a member of several local,regional and international societies and associations concernedwith human resources and management issues. Dr. Mutlaq is amember of the Economic Committee of the Bahrain SupremeCouncil for Women and a Member of the Board of Trustees ofthe Human Resource Fund for the Banking and Financial Sector,Kingdom of Bahrain.


Head Office

ABC Tower, Diplomatic Area, PO Box 5698, Manama, Kingdom of BahrainTel: (973) 17 543 000,Fax: (973) 17 533 163 / 1 753 3062Tlx: 9432 ABCBAH BNhttp://www.arabbanking.com [email protected]

Ghazi Abdul-JawadPresident & Chief Executive

Abdulmagid BreishDeputy Chief Executive &Chief Banking Officer

Group AuditJehangir Jawanmardi Tel: (973) 17 543 [email protected]

Legal & ComplianceDr Khaled KawanTel: (973) 17 543 [email protected]

Chief Administrative OfficerAsaf MohyuddinTel: (973) 17 543 [email protected]

Planning & Financial Control

Dilip KumarTel: (973) 17 543 [email protected]

Group Support Services &Global Information TechnologySael Al Waary Tel: (973) 17 543 [email protected]

Corporate Communications and

Premises & Engineering

Nawaf BeyhumTel: (973) 17 543 [email protected]

Human Resources & Administration

Dr Lulwa MutlaqTel: (973) 17 543 [email protected]

Operations

Andrew WilsonTel: (973) 17 543 [email protected]

Credit & Risk Group

Chief Credit & Risk OfficerRiyad M.Al DughaitherTel: (973) 17 543 [email protected]

Risk Management Department

Abhijit ChoudhuryTel: (973) 17 543 [email protected]

Head Office Credit Department

Kishore RaoTel: (973) 17 543 [email protected]

Remedial Loans Unit

Stephen JenkinsTel: (973) 17 543 [email protected]

Economics Department

Margaret PurcellTel: (973) 17 543 [email protected]

Treasury Group

Group TreasurerEssam El WakilTel: (973) 17 543 375 / 17 532 [email protected]

Assistant Treasurer

Ali Mirza Tel: (973) 17 543 [email protected]

Treasury & Marketable Securities

FX, Middle East Currencies & Sales

Kareem DashtiTel: (973) 17 533 [email protected]

Derivatives, MM, Islamic, NewProducts & Treasury SupportAmr GadallahTel: (973) 17 543 [email protected]

Fixed Income Proprietary Investment & TradingArif MumtazTel: (973) 17 533 [email protected]

Portfolio ManagementMahmoud ZewamTel: (973) 17 533 [email protected]

Arab World Division

Division HeadNour NahawiTel: (973) 17 543 [email protected]

Co-ordination UnitQutub YousafaliTel: (973) 17 543 [email protected]

Islamic Financial ServicesDuncan SmithTel: (973) 17 543 [email protected]

Retail BankingSethu VenkateswaranTel: (973) 17 543 [email protected]

Bahrain Business Units

Project & Structured FinanceGraham ScopesTel: (973) 17 543 [email protected]

SyndicationsJohn McWallTel: (973) 17 543 [email protected]

ABC DIRECTORY


Trade FinanceRashed Al KhalifaTel: (973) 17 543 [email protected]

Trade Finance & ForfaitingAmr El AshmawiTel: (973) 17 543 [email protected]

Branches

Tunis (OBU)ABC Building, Rue du Lac d'Annecy, Les Berges du Lac, 1053 Tunis, TunisiaTel: (216) (71) 861 861

(216) (71) 861 110 (Treasury)Fax: (216) (71) 860 921 / 860 835Tlx: 12505 ABCTU [email protected] Dealing Reuters Code: ABCTSwift: ABCOTNTT

Saddek O. El-Kaber Resident Country Manager & General Manager

Baghdad (Under establishment)Mowafaq H. MahmoodMobile: 00964 790 161 [email protected]

New York32nd Floor, 277 Park Avenue, New York NY 10172-3299, USATel: (1) (212) 583 4720Fax: (1) (212) 583 0921Tlx: 661978/

427531 ABCNY(General);421911/661979 ABCFX (Dealing Room)

Direct Dealing Reuters Code: ABCN

Robert Ivosevich General ManagerTel: (1) (212) 583 [email protected]

Corporate Banking

Tarek SherlalaSenior Lending OfficerTel: (1) (212) 583 [email protected]

TreasuryDavid SiegelTreasurerTel: (1) (212) 583 [email protected]

AGM,AdministrationThomas J. CahalaneTel: (1) (212) 583 [email protected]

AGM, CreditBarbara SandersonTel: (1) (212) 583 [email protected]

Grand Caymanc/o ABC New York Branch

Subsidiaries

ABC Islamic Bank (E.C.) ABC Tower, Diplomatic AreaPO Box 2808, Manama, Kingdom of BahrainTel: (973) 17 543 000Fax: (973) 17 536 379 / 533 163Tlx: 9432 / 9433 ABCBAH BN

Naveed KhanManaging [email protected]

ABC Securities W.L.L.ABC Tower, Diplomatic Area PO Box 5698, Manama, Kingdom of BahrainTel: (973) 17 535 760Fax: (973) 17 533 012Tlx: 9432 ABCBAH BN

Mahmoud ZewamGeneral [email protected]

Arab Banking Corporation - AlgeriaPO Box 367 54 Avenue des Trois Freres Bouaddou Bir Mourad Rais, Algiers, AlgeriaTel: (213) (21) 541 515 / 541 534

Fax: (213) (21) 541 604 / 541 [email protected]: ABCODZAL

Reidha Slimane TalebGeneral Manager

Arab Banking Corporation - Egypt (S.A.E.)(ABC Bank, Egypt)1, El Saleh Ayoub St., Zamalek, Cairo, EgyptTel: (202) 736 2684 (10 lines)/

(202) 736 3629Fax: (202) 736 3643 / [email protected]

Tarek HelmyChief Executive Officer

ABC Securities (Egypt) S.A.E.1, El Saleh Ayoub St. Zamalek, Cairo, EgyptTel: (202) 736 2684 (10 lines)/

(202) 736 3629Fax: (202) 736 3643 / 14

Tarek [email protected]

Arab Banking Corporation (Jordan)(15 Branches) PO Box 926691, Amman 11190, JordanTel: (962) (6) 566 4183-5 (General)

(962) (6) 569 2713 (Dealing Room) (962) (6) 560 8302 (Foreign Dept.)(962) (6) 562 3684 (Main Branch)

Fax: (962) (6) 568 6291 (General)(962) (6) 562 3685 (Main Branch)

Tlx: 22258/21114 ABC JO [email protected]

Dr Ziad FarizChief Executive Officer

ABC Tunisie ABC Building, Rue du Lac d'Annecy, Les Berges du Lac, 1053 Tunis, TunisiaTel: (216) (71) 861 861

(216) (71) 861 110 (Treasury)Fax: (216) (71) 960 427 / 960 406Tlx: 12505 ABCTU [email protected] Dealing Reuters Code: ABCTSwift: ABCOTNTT

Saddek O. El-KaberCountry Manager


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

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

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

892171 ABC FXL G (Dealing Room)Direct Dealing Reuters Code: ABCLSwift: ABCE GB 2L

Michael DuvalChief Executive [email protected]

Prasad AbrahamDeputy Chief Executive [email protected]

ABC International Bank plc (Paris Branch)4 rue Auber, 75009 Paris, FranceTel: (33) (1) 49 52 54 00Fax: (33) (1) 47 20 74 69Tlx: 648343 ABC F (General)

Alexander AshtonGeneral [email protected]

ABC International Bank plc (Frankfurt Branch)Niedenau 13-19, D-60325 Frankfurt am MainPO Box 170218, 60076 Frankfurt am Main, GermanyTel: (49) (69) 71403-0Fax:(49) (69) 71403-240 Tlx: 411 536 AIBF [email protected]

Juergen BlumscheinGeneral Manager (Retiring 30 June 2005)

Gerald BumharterGeneral Manager (Appointed 2 May 2005)

In mid 2005 ABC International Bank plc’sFrankfurt Branch will be moving to:Neue Mainzer Strasse 75,60311 Frankfurt am MainTelephone and Fax numbers will remain unchanged

ABC International Bank plc (Milan Branch)Via Turati 16/18, 20121 Milan, ItalyTel: (39) (02) 863331 Fax: (39) (02) 86450117Tlx: 322240 ABCMI I

Paolo ProveraGeneral [email protected]

ABC International Bank Plc (Marketing Offices)

UK & IrelandStation House, Station Court, RawtenstallRossendale BB4 6AJTel: (44)(1706) 237900Fax: (44)(1706) 237909

John [email protected]

IberiaPaseo de la Castellana 1632° Dcha, Madrid 28046, SpainTel: (34)(91) 5672822Fax: (34)(91) 5672829

Usama [email protected]

Nordic RegionStortorget 18-20, SE-111 29 StockholmSwedenTel: (46) 823 0450Fax: (46) 823 0523

Klas [email protected]

TurkeyEski Büyükdere Cad. Ayazaga Yolu SokIz Plaza No:9 Kat:19 D:69 34398 Maslak - Istanbul, TurkeyTel: (90) 212 329 8000 Fax: (90) 212 290 6891

Muzaffer [email protected]

ABC (IT) Services Ltd.Arab Banking Corporation House 1-5 Moorgate, London EC2R 6AB, UKTel: (44) (20) 7776 4050Fax: (44) (20) 7606 2708Tlx: 915687 ABC [email protected]

Sael Al WaaryDirector

Banco ABC Brasil S.A.Avenida Paulista 37, 14th/15th FloorsCEP 01311-902, Sao Paulo, SP. BRAZILTel: (55) (11) 317 02000Fax: (55) (11) 317 02001

Tito Enrique da Silva [email protected]

Representative Offices

Abu Dhabi10th Floor, East Tower of the Trade Centre2nd Street, Abu Dhabi Mall PO Box 6689, Abu Dhabi, UAETel: (971) 2 644 7666Fax: (971) 2 644 [email protected]

Mohammed El CalamawyChief Representative

TehranNo. 114, 1st Floor (opposite 35th St.) Khaled Eslamboli Avenue, Tehran 15167, Islamic Republic of IranTel: (98) (21) 879 8452 / 3Fax: (98) (21) 877 4561Tlx: 216860 ABC [email protected]

Aziz FarrashiChief Representative

TripoliThat Emad Administrative CentreTower 5, 16th Floor, PO Box 3578, Tripoli, LibyaTel: (218) (21) 335 0226/

335 0227 / 335 0228Fax: (218) (21) 335 [email protected]

Mansour Abouen Chief Representative

Singapore Arab Banking Corporation (B.S.C.)9 Raffles Place, #60-03 Republic PlazaSingapore 048619Tel: (65) 653 59339 Fax: (65) 653 26288

John P. MeadsChief [email protected]

Affiliate

Arab Financial Services Company (E.C.)PO Box 2152, Manama, Kingdom of BahrainTel: (973) 17 290 333Fax: (973) 17 291 323 / 290 050Tlx: 7212 AFS BN

Rasool HujairChief Executive OfficerFax: (973) 17 291 [email protected]

ABC DIRECTORY


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