Annual Report 2004 Contents - BBAC · USD C/V Total Loans and Advances LL USD C/V Total Net Liquidity LL USD C/V Deposits from Customers LL USD C/V Shareholders' Equity* LL USD C/V

BBAC Management

Chairman's Letter 2BBAC New Organization Chart 4

Summary of Performance 6Board of Directors 8Major Shareholders and General Management 9Excerpts from the Ordinary General Shareholders Assembly 10

BBAC Financial Statements BBAC Balance Sheet 12BBAC Income Statement 14

BBAC Management Discussion and Analysis Basis of Presentation 16Corporate Profile 16Observance of Anti-Money Laundering Requirements 16

Private Banking 21Insurance 21Human Resources 21Civic Role 22

BBAC Auditor's Report Independent Auditor's Report 45Balance Sheet 46Income Statement 47Statement of Changes in Equity 48Statement of Cash Flows 49Notes to Financial Statements 50Balance sheet presented in accordance with Bank of Lebanon Circular No. 33 86Income statement presented in accordance with Bank of Lebanon Circular No. 33 87

BBAC Network Branch Network and Addresses 90Main Correspondents 91Subsidiaries 92

Developments Economic Developments 17Growth and Market Share 19Technology: 20

• IT-MIS • E-Banking

Risk Management Asset - Liability Management 23• Risk Profile 26• Asset Management 26• Liability Management 33• LCs 35• Asset Quality 35• Regulatory Guidelines 36

Financial Performance Ratios Liquidity 37Profitability 38Management Efficiency 39Interest Margin 39Non-Interest Income 40General Operating Expenses 41Net Financial Income 41

Annual Report 2004

Contents 1

Chairman's Letter

A

I wish to thank our loyal customers for their valued trust, ourstaff for their dedication, our correspondents for theircooperation, and our shareholders for their support. BBAC hasand will continue to strive in providing excellence in itsservices, outstanding performance, as well as economic andsocial value-added to the country.

A good economic environment prevailed during the year 2004,with real GDP growth standing at 5% while most economicsectors witnessed some improvement.

The balance of payments scored a surplus for the thirdconsecutive year, fueled by capital inflows, which offset themassive trade deficit of USD 7.6 billion. The Central Bank ofLebanon maintained its FX and gold reserves at around USD13.5 billion. These interesting results in Lebanon's foreignsector underscore the vitality and vigor of our open economy.

Results during the year were even better, as mild politicaluncertainty emerged in the last quarter, which, however, didnot affect the country's financial stability.

The decline in the interest rate structure in 2003 following theParis II conference, as well as the contribution of the bankingsector to this effort in the form of interest-free lending to theTreasury, continued to burden the performance of banks in2004.

BBAC performed well during the year, maintaining its positionin the Alpha Group of banks, and scoring a significant growthin profits of around 26.5% over the previous year, beforeincome tax. Shareholders' equity increased by 10% to reachLBP 187 billion, consolidating the solvency at 20.94%, andthe Bank's loan portfolio increased by 14% compared to themarket's 6.8%. BBAC's remedial efforts were consolidated in2004, leading to a significant improvement in asset quality.

Chairman's LetterC

Annual Report 2004

The bank's dollarization increased at a faster pace than that ofthe banking sector, leading to a repositioning of the currencymix. This led to a reduction in costs and drove the deposits'currency structure of our Bank closer to that of the market.

Our bank should benefit from these positive factors in theupcoming revision of our rating, specifically in the domain offinancial strength currently standing at BB+.

Our strategy continues to build on our strengths and to counterthe constraints confronting us.

To consolidate our solvency, the Ordinary General Assembly ofShareholders approved our recommendation to distribute LL24.24 billion in retained profits for reinjection in the form ofUSD contributions amounting to around USD 14.4 million inTier I capital.

In order to achieve sustainable prosperity in a competitiveenvironment, the Bank started the implementation of anadministrative restructuring based on a study conducted byDeloitte Consulting. In a corporate governance frame, the new structure set cleargrounds for controls, authority segregation, job specialization,responsibility and accountability.The restructuring, adopted at the end of 2004, aims toenhance efficiency, business development, risk control, andhence profitability.

Ghassan AssafChairman – General Manager

3

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BBAC Management

BBAC Management

A

2004 2003Change

2004-2003

3,200,5522,123

499,933332

2,459,0141,631

2,795,6221,854

159,364106

15,05510

8.14%

14.03%

9.25%

10.42%

10.71%

47.65%

3,461,2002,296

570,065378

2,686,5291,782

3,086,8722,048

176,433117

22,22915

Total AssetsLLUSD C/V

Total Loans and AdvancesLLUSD C/V

Total Net LiquidityLLUSD C/V

Deposits from CustomersLLUSD C/V

Shareholders' Equity*LLUSD C/V

Profits-after taxLLUSD C/V

(in millions)

* Including LL 10 billion accepted in owners’ equity, out of LL 21.06 billion of revaluation variance of tangible fixed assets.

Summary of Performance

BBAC ManagementB

Annual Report 2004

2004 2003(percentage)

Liquidity RatiosNet Liquidity LLNet Liquidity FCNet Liquidity TotalLoans / Deposits LLLoans / Deposits FCLoans / Deposits TotalLiquid Assets / Assets

Asset Quality *Doubtful Loans / Gross LoansProvisions for Doubtful Loans / Doubtful LoansProvisions for Loans / Gross LoansNet Doubtful / Assets

Capital Adequacy RatiosTotal Capital Adequacy RatioIncluding After tax profits

Profitability RatiosReturn on Average Assets ROAA after tax Return on Average Equity ROAE after tax Number of Shares Outstanding (million)Earnings per Share EPS in LL after taxDividends per Share DPS in LL**Dividends Payout RatioRetention RatioNet Asset Value per Share in LL

Management EfficiencyInterest Paid / Interest ReceivedCost per Average Branch (LL million)Net Commissions / Net Financial IncomeCost / Income (Efficiency Ratio)

Exchange Rate (LL/USD)***

94.03%83.31%87.96%11.35%22.89%17.88%80.59%

21.53%64.38%14.84%1.41%

19.84%21.88%

0.50%9.74%

7220955

32.80%67.20%

2,367

74.21%1,384

19.89%71.25%

1,507.5

92.88%83.80%87.03%14.16%20.85%18.47%79.63%

17.63%66.99%12.92%1.10%

20.94%23.50%

0.67%13.24%

7230965

25.99%74.01%

2,604

77.27%1,301

20.75%61.85%

1,507.5

* Non-accrual interest is included in non-performing loans; unrealized interest is included in provisions.** An additional interest payment of LL 1.2 billion was made on the cash contributions.*** The closing rate of the Lebanese Pound against the USD as set by the Central Bank.

7

BBAC ManagementB

Annual Report 2004

Senior Manager, Administrative Advisor to the General ManagerManagerial Information Technology*Senior Manager, Human ResourcesBudgetingInternal AuditCredit Cards and E-BankingITCompliance & Reconciliation Advisor for Economic Studies & HR TrainingAccounting**MISInternational Department, International Banking RelationsCorporate BankingCredit ControlInsuranceSupplies and Central ServicesTreasuryCredit AdministrationMarketingPrivate BankingInformationRemedial

Senior Regional Manager, NorthSenior Regional Manager, North Beirut Senior Regional Manager, AleyRegional Manager, ShoufRegional Manager, Bekaa

Chairman and General ManagerLegal Counselor and Advisor to the ChairmanDeputy General ManagerAssistant General Manager, Risk ManagementAssistant General Manager, BranchesExecutive Advisor for Business & DevelopmentExecutive Advisor to the Chairman

Major Shareholders and General Management Major ShareholdersAssaf FamilySheiklard FamilyOther Shareholders

General ManagementMr. Ghassan AssafMe. Abbas HalabiDr. Saad AndaryMr. Georges MirzaMr. Jean MehannaMr. Omar SaabMr. Claude Khayat

Legal CounselsMe. Abbas HalabiMe. Chafic KhalafMe. Ramzi HaykalMe. Amine RizkMe. Assaad NajmMe. Paul Morcos

AuditorsPricewaterhouse Coopers

Head Office ManagementDr. Adnan AridiMr. Pierrot AttallahMr. Elie FrancisMiss Samia AbdallahMiss Wafa AbedMr. Ramzi Abi FaresMr. Toufic Abi FarrajMr. Talal Abou ZekiDr. Amalia AzouryMr. Anwar Abou GhaidaMr. Wael DbeisiMr. Walid HadadMr. Nadim HamadehMr. Adel HamdanMr. Selim KaramMrs. Sabah KhatounianMrs. Lina MakaremMr. Raja Makarem Mr. Maher MezherMr. Raghid MneimnehMr. Salah SaabMr. Marwan Tayara

Regional ManagementMr. Ali NaboucheMr. Michel KazanMr. Chawki BadrMr. Imad Al-GhousainiMr. Michel Bou Rababi

* Post held by Mr. Berge Daw in 2004** Post held by Mr. Hafez El Danaf in 2004

52.71 %37.05 %10.24 %

9

BBAC Management

A

Excerpts from BBAC’s Ordinary GeneralShareholders’ Assembly

June 23, 2005

Resolution no. 2The Ordinary General Assembly of Shareholders of the Bank approved the activities, accounts,balance sheet and the profit and loss account for the year ending on December 31, 2004.

Resolution no. 3 The Ordinary General Assembly of Shareholders of the Bank decided on the appropriation ofthe profits for the year ended 2004 as follows:

* The General Assembly decided a USD 14.4 million cash contribution to capital.On the 23rd of June 2005, 94% of the shareholders signed the cash contribution to capitalcontracts with the bank and delegated the Board to accomplish the process.

22,229,0092,222,9012,000,000

22,101,4234,680,000

24,240,0001,199,7002,485,4637,502,367

LL thousands

Profits for the year 2004Less: Appropriation of 10 % to legal reserves

Appropriation for general banking risksProfits carried forward for 2003Less: Dividend of LL 65 per share

Additional dividend equivalent to LL 336.66 per share*Less: Interest on cash contributionLess: Reserve for capital increaseProfits carried forward for 2004

BBAC Financial Statements


A

ASSETS (LL Millions) 2004FXLL

Cash and Bank of LebanonLebanese Treasury billsLoans And Advances to banksTrading SecuritiesLoans and advances to customers *Debtors by acceptancesInvestment Securities

- available-for-sale- held-to-maturity

Investments in SubsidiariesProperty acquired in settlement of debtInvestment propertyIntangible assetsProperty and equipmentOther Assets

Total Assets

Total Assets C/V in thousand USD

Off-Balance Sheet

Engagements by signature received from financial intermediariesOther engagement received

* After deduction of:Provisions for doubtful loansUnrealized interest for doubtful loans

* After deduction of:Payables against receivables

* Including net non-performing loans:Substandard loansUnrealized interest for substandard loans

852,1411,108,000

763,6216,283

570,06559,29026,261

56225,6993,524

14,26510,2711,288

32,18014,011

3,461,200

2,295,986

1,253,391

2,8931,250,497

77,29747,224

30,072

17,383

12,83820,089

7,251

395,696614,54112,248

548

155,5509

562562

03,524

1,20110,2711,098

32,0463,171

1,230,465

816,229

456,445493,459751,373

5,735

414,51559,28125,699

025,699

0

13,0640

190134

10,840

2,230,735

1,479,758

2003FXLL

919,753943,795682,900

3,529

499,93350,24629,328

56228,7663,524

10,62510,4131,592

32,95811,956

3,200,552

2,123,086

1,769,871

1,5201,768,350

81,37450,689

30,685

17,545

21,63927,350

5,711

572,543559,44011,120

548

137,7210

562562

03,524

1,14310,4131,372

32,8343,017

1,334,237

885,066

347,210384,355671,780

2,981

362,21250,24628,766

028,766

0

9,4820

220124

8,939

1,866,316

1,238,021

Balance Sheet as at December 31, 2004

BBAC Financial StatementsB

Annual Report 2004

13

LIABILITIES & SHAREHOLDERS' EQUITY (LL Millions)

2004FXLL

LiabilitiesDeposits from banksDue to customersEngagements by acceptancesOther liabilitiesCurrent income tax liabilityRetirement benefit obligationsTotal Liabilities

Shareholders’ equity Share capital and cash contribution to capitalLegal reserveReserve for unidentified banking risksRevaluation variance of tangible fixed assets *Retained earningsTotal Shareholders’ Equity

Total Liabilities & Shareholders’ Equity

Total Liabilities & Shareholders’ Equity in thousand USD

Off-Balance Sheet Engagements by endorsement given to:Financial intermediariesCustomers

* Including LL 10 billions accepted in owners’ equity.

69,7763,086,872

59,29046,290

7411,403

3,273,706

93,69720,946

11,682

21,06140,108

187,494

3,461,200

2,295,987

76,63642,13934,496

3,2141,098,599

95,166

7410,657

1,117,719

72,00020,946

11,682

21,06136,597

162,286

1,280,005

849,091

66,5621,988,273

59,28141,125

0746

2,155,987

21,6970

0

03,511

25,208

2,181,196

1,446,896

2003FXLL

120,2922,795,622

50,24650,6822,108

11,1783,030,128

93,69718,723

9,682

21,06127,261

170,425

3,200,552

2,123,086

92,10042,15349,946

3,5461,213,132

08,2402,108

10,4311,237,455

72,00018,723

9,682

21,06124,721

146,187

1,383,642

917,839

116,7451,582,491

50,24642,442

0748

1,792,672

21,6970

0

02,540

24,238

1,816,910

1,205,247



A

Interest and similar incomeLebanese T-billsDeposits and similar funds at banks and financial institutionsLoans and advances to customersInvestment SecuritiesRelated parties loans and advancesInterest and similar chargesDeposits and similar funds from banks and financial institutionsDue to customersDeposits from related partiesOther interest and similar chargesInterest margin

Net Provisions (releases) on loans and advancesProvisions for customers loans and advancesRelease of provisions and unrealized interest on doubtful and substandard loansNet Interest Received

Dividend income

Net CommissionFee and commission incomeFee and commission expense

Net trading incomeForeign exchangeInterest rate instrumentsEquities

Other operating income

Operating expensesStaff CostsOther operating expensesDepreciation and amortizationNet income of the year before taxesTaxes Net profits for the year

Income Statement for the year ended December 31, 2004

(LL Millions) 2004FXLL

195,94791,259

61,399 40,695 2,252

342 151,408

3,096 146,607

1,705 0

44,539

(800)

7,389

8,18945,340

162

13,965 15,215 1,250

5,074 2,125 2,658

291

2,751

41,617 24,018 13,7253,874

25,675 3,446

22,229

97,45255,392

30,527 11,530

03

85,502

854 84,008

641

11,949

3,913

4,507

5948,037

84

2,848 2,919

71

1,953 1,953

2,394

38,897 23,45011,646 3,801

(23,581)3,446

(27,027)

98,49635,866

30,872 29,165 2,252

339 65,906

2,242 62,599 1,064

32,590

(4,713)

2,882

7,59437,303

78

11,117 12,296 1,179

3,122 172

2,658 291

357

2,720 567

2,07973

49,256

49,256

2003FXLL

213,073114,728

49,605 45,812 2,584

344 158,123

2,203 153,600

2,312 8

54,950

13,678

20,739

7,06141,272

282

12,365 13,487 1,122

7,659 1,786 5,518

355

600

44,301 23,218 17,1833,900

17,877 2,822

15,055

111,71979,966

18,902 12,848

03

93,797

320 92,813

664

17,922

16,382

16,709

3281,540

179

2,589 2,637

47

7,102 1,682 5,420

312

41,752 22,725 15,190 3,837

(30,029)2,822

(32,851)

101,354 34,762

30,703 32,964 2,584

341 64,326

1,883 60,787 1,648

837,028

(2,704)

4,030

6,734 39,732

103

9,776 10,850 1,074

557 104 98

355

288

2,549 493

1,993 63

47,906

47,906

BBAC Management Discussion & Analysis


A

Basis of Presentation

The management discussion and analysis have been prepared by the Bank’s management onthe basis of the financial statements of the bank drawn up in conformity with the InternationalAccounting Standards (IAS). All the figures are denominated in Lebanese Pounds. Figures inUS Dollars are based on the Central Bank’s December 31, 2004 closing rate of 1507.50LL/USD.

Corporate Profile

BBAC was founded in 1956 by a group of prominent investors consisting of Mr. Toufic Assaf,Mr. Nashaat Sheiklard, and Mr. Jamal Shehaiber.

BBAC, which celebrates its 50th anniversary in 2006, has expanded its local and off-shorebranch network to cover all the Lebanese regions in addition to Syria and Cyprus.

Relying on its state-of-art technological and financial solutions, BBAC provides a wide rangeof personalized services to its clients: retail and commercial banking services, private bankingservices, electronic banking and internet facilities, as well as bancassurance products.

Observance of Anti-Money Laundering Requirements

BBAC s.a.l, along with its subsidiaries and international branches (collectively referred tohereinafter as "BBAC") are firmly committed to combat money laundering and terroristfinancing.

BBAC complies with the regulations set out in the Anti-Money Laundering Lebanese Law No.318 of April 20, 2001 and its amendments. This law aims to detect and prevent moneylaundering and potential terrorist financing, and its implementation is supervised by theSpecial Investigation Commission (SIC). BBAC also complies with the Central Bank ofLebanon's Circulars, establishing procedures for controlling financial operations and activitiesfor the prevention of Money Laundering.

BBAC implements an Anti-Money Laundering program that includes written policies andprocedures, a designated Anti-Money Laundering officer and controllers, regular training for itsstaff, and an independent audit to test the effectiveness of the program implementation.All BBAC employees, wherever located, are aware and committed to the compliance policystatement.

BBAC Management Discussion & AnalysisB

Annual Report 2004

Developments

Economic Developments

The year 2004 was characterized by a good economic performance, with real GDP growthreaching 5% and inflation running at around 3%. Economic growth was mainly driven by a risein private investment and consumption, as well as exports. The mild inflation was mostly theresult of a rise in import prices, due to the appreciation of the Euro vis-à-vis the Lebanese pound,in addition to higher fuel prices.

Tourism revenues were a major contributor to economic growth, with the number of touristscrossing the 1 million mark for the second consecutive year, rising by around 26% over 2003,to reach 1.279 million.Another driver was Arab investors' interest in the property sector, which was mirrored, amongothers, in a surge in the activity of the Beirut Stock Exchange. The value of traded sharesincreased by 71% over 2003, while market capitalization rose by a significant 55% to reach USD2.33 billion at the end of 2004.

Other real sector activities witnessed an improvement, including construction (4% rise in buildingpermits), transport (7% rise in the Beirut Port movement, 13% rise in the number of flights), andindustry (14.5% rise in industrial exports and 30% in imports of industrial machineries).

The rise in economic activity is also mirrored in the value of cleared checks, an indicator of totalspending, which increased by an annual 10.5%, compared to only 4.3% in 2003. The moneysupply also went up by 10.23% in 2004 driven, among other things, by capital inflows, evenwith domestic interest rates not rising at the rate of international ones.

The balance of payments registered a surplus of USD168 million, down from USD3,386 millionin 2003 and USD1,564 million in 2002, which were generated in the aftermath of theNovember 2002 Paris II conference. The BOP scored better results during the course of the year,reaching a cumulative USD 578 million in July, a part of which was eroded by politicaluncertainty that emerged towards the end of the year. The surplus in the BOP was generated byrelatively significant capital inflows, which offset the current account deficit. The trade balancein fact widened by 35.5% over 2003, despite a 14.6% rise in exports. The reason was thatLebanese imports rose by a significant 31% fueled by higher consumption, given improvedeconomic activity, and as mentioned earlier, the appreciation of the Euro and higher oil prices.

The Central Bank was able to increase its FC reserves during the first half of the year, to a peakof USD 10.7 billion at the end of May, up from USD 10.2 billion in December 2003. However,the FC reserves went back to USD 9.5 billion in December, given the political pressure thatemerged towards the end of the year, which, however, did not affect the financial stability.

The public finances deficit in 2004 reached one of its lowest post-war levels at 10.3% of GDP,down from 14.5% in 2003. The deficit to total expenditures ratio stood at 28.71%, comparedto a budgeted 33.17%. The results were caused by a combination of higher government revenuesand a control over expenditures given a reduction of the debt service. Public revenues in fact rose by 12.92% over 2003 due to higher tax revenues, especially fromVAT and income tax given the increase in economic activity, in addition to a rise in non-taxrevenues given higher transfers from telecom.On the other hand, the debt service was reduced by a significant 17.5% as a result of therestructuring of the debt following the Paris II conference.

17


A

In 2004, and due to the combined effect of high economic growth and controlled debt stockgrowth, the debt dynamics were reduced for the first time in the post-war period. The net debtto GDP ratio in fact declined from 173.8% at the end of 2003 to 168.9% in 2004. The reducedmomentum in debt level growth was manifested in a 5.07% growth in the net total debt in 2004,compared to 6.68% and 8.78% annual growth in 2003 and 2002 respectively.Debt denomination in foreign currencies increased from 49.64% in 2003 to 55.73% at the endof 2004, in line with the increase in the level of dollarization in the banking sector's deposits,especially in the last quarter of the year.

The year 2004 was characterized by new Eurobond issues after more than one year ofinterruption, following the subscriptions made by the Paris II participant countries, in addition tothe commercial banks' special 0% subscriptions. The Ministry of Finance launched new issuesamounting to USD2.57 billion, in addition to the exchange of USD1.214 billion maturing in2005 into issues maturing in 2010 and 2012. The government also swapped LL TBs held bythe Central Bank into a USD 1 billion worth of Eurobonds, which were subsequently sold in thesecondary market, hence making the aggregate gross issued amount – including a Euro 225m -equal to around USD 5.1 billion. The Ministry of Finance also paid around USD 1.4 billion worthof maturing Eurobonds in 2004.

The banking sector's FC claims on the public sector hence reached USD8,792 billion at the end of2004, rising by around 38% over 2003. The banking sector's exposure to foreign currency sovereigndebt compared to their FC deposits increased from 19.7% in 2003 to around 23% in 2004.

In order to broaden participation in the Treasury bill auctions during the last quarter of the year,the Ministry of Finance offered swaps on the 6, 12, 24 and 36 month categories in October.During most of the year, primary market rates were kept almost unchanged at more than 20-yearlows, following an approximate 6.5% reduction on all TB categories after Paris II.

The banking sector's LL treasury bills portfolio stood at LL 10,853 billion at the end of 2004,forming around 43.8% of its LL deposits, down from 45.7% in 2003.

The banks' subscriptions to LL CDs were insignificant during the course of 2004, as only shortmaturities (45 and 60 days) were issued at 4.4% and 4.89% respectively. The totaloutstanding LL CDs portfolio however remained substantial at LL 9,949 billion, formingaround 40% of the banking sector's LL deposits, due to heavy subscriptions made in 2003.

Effective rates on different TB categories Prior to Paris II

Dec-03 Dec-04

Post – Paris II

24 months12 months6 months3 months

7.996.876.535.48

14.6413.4312.1211.18

7.896.696.315.22


Annual Report 2004

Growth and Market Share

BBAC ranks in the top alpha group of banks, which includes 14 banks with customers'deposits of over USD 1 billion. The Bank maintained its level in the banking sector, with total assets growing by around8.14% to reach LL 3,461 billion at the end of 2004.

Clients’ deposits increased by 10.42% or LL 291 billion to reach LL 3,087 billion, forming3.73% of the total banking sector's deposits. The Bank’s loans to the private sector increased by 14.03% to LL 570 billion, which is morethan twice the market’s growth rate of 6.76%.Shareholders’ equity, including LL 21.06 billion in revaluation variance of tangible fixedassets, grew by 10.02% to reach LL 187.5 billion, equivalent to USD 124.4 million. This isalmost double the banking sector's growth rate of 5.63%. On the profitability level, BBAC's results before income tax outperformed those of its peers,with growth reaching 26.5%, compared to 11.75% in the alpha group. BBAC’s growth inprofitability is even more significant when accounting for income tax.

The comparison of the currency breakdown of deposits shows that BBAC's dollarization increasedat a higher pace than that of the banking sector in 2004. This shift helped reduce funding costsand bring the bank's dollarization closer to that of the sector as shown by table 2.

Growth (LL billion) BBAC Growth

Dec-02 Dec-03 Dec-04

Sectoral Growth

Dec-02 Dec-03 Dec-04

Assets%

Loans and advances%

Deposits from customers%

Shareholders’ Equity%

90,62314.37%

23,7580.28%

73,45513.55%

5,4999.48%

102,18712.76%

25,3646.76%

82,69112.57%

5,8095.64%

79,236

23,691

64,687

5,023

3,20113.14%

500-2.61%

2,79613.80%

1706.03%

3,4618.14%

57014.03%

3,08710.42%

18710.02%

2,829

513

2,457

161

Table 1: Growth and Market Share

19

2004200320022001200019991998

0 500 1000 1500 2000 2500 3000 3500

Customer's deposits (LL bn) Total Assets (LL bn)


A

(LL billion) BBAC

Dec-03 Dec-04 % Change

Sector

Dec-03 Dec-04 % Change

LL

FC

Total

Dollarization (%)

24,796

57,895

82,691

70.01

-0.31

19.17

12.57

3.88

24,873

48,582

73,455

66.14

1,099

1,988

3,087

64.41

-9.44

25.64

10.42

7.80

1,213

1,582

2,796

56.61

Table 2: Deposits' Dollarization

Technology

1- IT-MIS

Developments in IT continued to focus on higher security measures, in addition to businesscontinuity and disaster recovery procedures. In order to enhance productivity and smoothbanking services development, BBAC implemented a new AS/400 system which provideshigher speed and efficiency in banking operation management and is in line with the expectedrise in operations' activity. New computers and systems were also developed in the Cyprus IBU in compliance with the EU's policy.

2- E-Banking

BBAC continues to provide a wide range of plastic cards that are designed to suit the needsof its ever-growing customer base. The bank's network keeps on developing and currentlycomprises 37 ATMs that are spread in most Lebanese areas. BBAC offers Electron, Classic,Gold, Platinum and internet cards, in addition to BBAC diamond card. All BBAC cards provideworldwide easy usage, safety and convenience for the customers' banking needs. In 2004, the bank launched a Visa card that is denominated in Euro, which facilitatespayments and saves on exchange costs. It also provided the setting for the issuance of a newtransparent card in early 2005. The BBAC transparent card is the first of its kind in Lebanonand provides enhanced security for its holders through its chip feature.

BBAC is currently implementing new technological procedures to save on costs and providesmoother processing for its customers, using systems linking ATMs and POS servers to BBAC'smain information system “Equation”.

BBAC continues to develop its BBAC online banking to provide a wide range of electronicservices based on strong security measures to insure information safety and confidentiality.

The BBAC internet center, which is equipped with state-of-the-art technology and issupported by a qualified and well trained team of young staff, continues to offer free internetservices for school and university students.

In the context of promoting easy banking access, BBAC telephone banking continues toprovide 24-hour free and safe telephone service that gives customers access to their personalaccount information, at any time, from any place. BBAC customer support desk providestechnical assistance and answers queries from various public.


Annual Report 2004

Private BankingThe Market continues to grow, but tougher external conditions have emerged since we haveembarked in the new millennium. We are seeking to achieve superior differentiation in orderto attain and pursue greater productivity.

Faced with the pressures of commoditisation of the old servicing approach and product range,and given the choice of competing on cost leadership or differentiation, we have focused ondifferentiation with a client driven business model. We continue to broaden client segments,offer a wide range of wealth management and brokerage services, in addition to tailoredinvestment strategies that best meet our client’s aspirations.

InsuranceBBAC continues to provide all lines of insurance through its sister company, Capital Insuranceand Reinsurance Co. These include life and general insurance such as personal accidents, fireand burglary, natural hazards, health, travel, motor and marine, etc.BBAC also provides Bancassurance products in association with SNA (Société Nationaled'Assurances s.a.l.), mainly consisting of retirement and educational plans that are expresslydesigned to give customers protection and guaranteed benefits on investment accounts. In 2004, BBAC saw its sales of Bancassurance products increase by around 10 times theirlevel in 2003, following the implementation of an employee reward plan to promote sales.

Human Resources1- Staff productivity

BBAC's staff consists of qualified professionals, with around 47% belonging to the 25-40 yearsage bracket. Staff expenses grew by 3.44% in 2004 to reach LL 24.018 billion, and constituted 57.7% ofoperating expenses compared to 65.6% in 2003. Whereas the average number of staff perbranch increased from 16.8 in 2003 to 17.3 in 2004, employee productivity continued togrow, with average footings per staff increasing from LL 5.769 billion to LL 6.165 billion.

2- Training

Training topics in 2004 focused on the challenges currently faced by the banking sector, aswell as the forthcoming ones, including themes that are related to the Basel II implementation,certain legal and fiscal issues, money laundering and the latest developments in IT. Othertraditional topics such as product and service knowledge, credit, management behavior andmarketing, languages, procedures and risk management were also tackled. The total number of training hours reached 10761, 64% of which were provided by external

21


A

sources, and the rest by BBAC staff. The employee coverage ratio reached 73%, with 407 outof the 561 total number of employees having at least attended one training course.BBAC further provided training to 198 undergraduates not belonging to its staff, in line with itsstrategy to make knowledge available to the youth that would join the working force in the near future.

The bank also supported 31 employees to obtain technical certificates and academic degrees, rangingfrom the Centre d’Etudes Bancaire diplomas, to university B.A.’s and M.B.A’s.

Civic RoleEducation BBAC is aware of its prominent role in the society and has always paid special interest to developingeducation in Lebanon. In 2004, BBAC has sponsored contests for the distinguished students ininstant arithmetic calculation from all schools and research contests at universities. BBAC has alsohonored and rewarded distinguished students in the official high school examinations.

Humanitarian workIn 2004, BBAC sponsored the "Blood Bank" website that was launched by the Lions Club in Lebanon,and provided applications for blood donation in all its branches.

TourismBBAC was the first bank to sponsor a touristic map for the ancient and modern city of Baalbak, with60,000 copies distributed to tourism agencies, municipalities and tourism sites.BBAC was also the main sponsor of the "Guide for Establishing and Licensing of Touristic Institutionsin Lebanon" issued by the Association of Lebanese Tourism Establishments.

Distribution of training hours by topic

1%18%

12%

22%6%

8%

10%

13%

10%

BBAC products and services

Credit

Finance and Accounting

Procedures and risk management

Management behavior and Marketing

Legal and fiscal

Information Technology

Languages

Secreterial/Filing/Archiving


Annual Report 2004

Asset – Liability ManagementBBAC continues to manage its assets and liabilities with prudence, while optimizing its risk-reward ratio. The Asset and Liability Committee (ALCO) meets regularly to make investmentdecisions and manage general market risks such as currency and interest rate, in addition tomaturity risk. It also identifies the effect of these risks on the bank’s balance sheet, currencystructure, spreads, profitability, liquidity and solvency. The Credit Risk Committee managesthe credit risk by setting limits for clients, correspondents, and financial institutions. It alsosets the credit policy and reviews the effectiveness of the credit process.

Interest earning assets increased by around LL 244 billion in 2004; the ratio of interestearning assets to total assets remain almost unchanged at 96%.Treasury bills' share out of total assets increased from 29.5% in 2003 to 32% in 2004. Cashand Central Bank's share decreased from 28.74% to 24.62% due to the replacement ofmaturing certificates of deposits by treasury bills. In fact, placements in LL were made inhigher yielding treasury bills, which were more attractive than the certificates of deposits thatwere only issued in the market for short maturities (45 and 60 days).

The dollarization of the CD and TB portfolios increased following the change in thedollarization of the sources of funds. With declining local and international interest rates on investments, the bank resorted toincreased customer lending, which was made favorable by higher economic growth; the loanportfolio grew by around 14% (LL 70 billion), compared to an 8.14% growth in total assets.The ratio of loans to total assets hence increased from 15.62 % in 2003 to 16.47% in 2004.

(LL million) Amount

2003 2004

Table 3: Interest Earning Assets

2003 2004

Structure

Cash and Bank of LebanonLebanese Treasury billsLoans and advances to banksInvestment securitiesLoans and advances to customers

Total Interest Earning AssetsTotal Assets

28.74%29.49%21.34%0.90%

15.62%

96.08%100%

852,1411,108,000

763,62125,699

570,065

3,319,5263,461,200

919,753943,795682,90028,766

499,933

3,075,1473,200,552

24.62%32.01%22.06%0.74%

16.47%

95.91%100%

23

Risk Management


A

Customers' deposits increased by LL 291 billion in 2004, boosting their share out of totalliabilities from 87.35% at the end of 2003 to 89.19% at the end of 2004. As due to banksand financial institutions witnessed a decrease, the share of interest bearing liabilities out oftotal liabilities remained almost unchanged at 91.2%.

(LL million) Amount

2003 2004

Table 6: Non-Interest Bearing Liabilities

2003 2004

Structure

Engagements by acceptancesOther liabilitiesCurrent income tax liabilitiesRetirement benefit obligationsShareholders’ equityRevaluation variance of tangible fixed assets

Total Non-Interest Bearing LiabilitiesTotal Liabilities

1.57%1.58%0.07%0.35%4.47%0.85%

8.89%100%

59,29046,290

7411,403

147,38640,108

304,5523,461,200

50,24650,6822,108

11,178143,16327,261

284,6383,200,552

1.71%1.34%0.00%0.33%4.26%1.16%

8.80%100%

(LL million) Amount

2003 2004

Table 5: Interest Bearing Liabilities

2003 2004

Structure

Central BankDue to banks and financial institutionsDeposits and customer accounts

Total Interest Bearing LiabilitiesTotal Liabilities

-3.76%

87.35%

91.11%100%

-69,776

3,086,872

3,156,6493,461,200

-120,292

2,795,622

2,915,9143,200,552

-2.02%

89.19%

91.20%100%

(LL million) Amount

2003 2004

Table 4: Non-Interest Earning Assets

2003 2004

Structure

Debtors by acceptancesTrading securitiesInvestments in subsidiariesEquity securitiesProperty acquired in settlement of debtInvestment propertyIntangible assetsProperty and equipmentOther assets

Total Non-Interest Earning AssetsTotal Assets

1.57%0.11%0.11%0.02%0.33%0.33%0.05%1.03%0.37%

3.92%100%

59,2906,2833,524

56214,26510,2711,288

32,18014,011

141,6743,461,200

50,2463,5293,524

56210,62510,4131,592

32,95811,956

125,4053,200,552

1.71%0.18%0.10%0.02%0.41%0.30%0.04%0.93%0.40%

4.09%100%

The share of the non-interest earning assets out of total assets remained almost unchanged asshown in the table below.


Annual Report 2004

The breakdown of assets by currency (table 7) shows an increase in the structure of assetsdenominated in foreign currencies as a percentage of total assets, from 58.31 % in 2003 to64.45 % in 2004.

Liabilities denominated in foreign currencies increased from 56.77% of total liabilities in 2003to 63.02% in 2004. This was enhanced by the uncertainty that emerged in the last quarterof the year, as well as the restructuring of deposits to reduce costs and to draw the currencystructure closer to that of the banking sector.

The maturity analysis of the sources and uses of funds shows a reduced liquidity risk in 2004 forthe short maturity brackets (up to 6 months). The gap then widens for longer maturities, a situationthat characterizes the Lebanese banking sector.

Assets and Liabilities (LL million & %)

2003 2004 2003 2004 2003 2004

Structure %Amount Change %

AssetsLLFC

LiabilitiesLLFC

3.94 %-3.94 %

3.45 %-3.45 %

35.55 %64.45 %

36.98 %63.02 %

41.69 %58.31 %

43.23 %56.77 %

3,200,5521,334,2371,866,316

3,200,5521,383,6421,816,910

3,461,2001,230,4652,230,735

3,461,2001,280,0052,181,196

-6.14 %6.14 %

-6.25 %6.25 %

Table 7: Breakdown of Assets and Liabilities by Currency

(LL million) 0 – 3months

3 – 6months

6 – 12months

1 – 5years

over5 years Total

SourcesDec - 03Dec - 04

UsesDec - 03Dec - 04

2,748,3612,891,695

1,374,8611,555,857

111,975142,431

279,923231,359

90,040132,339

542,925203,818

64,36989,617

858,7371,164,074

15,38317,624

144,106306,092

3,030,1283,273,706

3,200,5523,461,200

Table 8: Sources and Uses by Maturity

25


A

1- Risk Profile

BBAC manages with efficiency the four main categories of risk that are usually faced by banks,notably market, credit, maturity and operational risks. Market risk mainly consists of currency and interest rate risks. Currency risk is largelymitigated by Central Bank regulation setting trading limit exposure at 1% of capital funds. Inaddition, settlement limits are internally set for the exposure by currency. Interest rate risk andmaturity risk are largely connected, due the gap existing between the maturity/repricing ofassets and liabilities; they are, however, efficiently managed by ALCO to ensure an optimizedrisk-return ratio. The Credit Risk Committee manages the credit risk by setting limits forcustomers/correspondents, in addition to managing the risk per industry or product.Operational risk is a new issue tackled by banks in Lebanon and is assigned at BBAC to aspecialized unit within the Risk Management Department as of 2005. This unit coordinatesits work with the internal audit, IT security, and compliance officers of the bank. BBACcontinuously reviews its policies and procedures and is building statistical models to evaluatethe operational risk exposure.

2- Asset Management

(LL million andcumulative %)

0 – 3months

3 – 6months

6 – 12months

1 – 5years

over5 years Total

Dec - 03%

Dec - 04%

1,373,50050.02%

1,335,83853.80%

-167,94857.85%

-88,92858.90%

-452,88574.49%

-71,47962.88%

-794,368101.38%

-1,074,45796.90%

-128,723105.62%

-288,468105.73%

-170,424105.62%

-187,494105.73%

Table 9: Gap Analysis

(LL million) Amount

Table 10: Uses of Funds

2002 2003 2004 2002 2003 2004

Percentage

Liquid assetsLoans and advancesOther financial accountsPermanent assets

Total Uses of Funds

80.59%15.62%1.94%1.85%

100%

78.15%18.15%1.83%1.87%

100%

2,210,811513,31051,78952,992

2,828,902

2,579,305499,93362,20259,112

3,200,552

2,756,306570,06573,30161,528

3,461,200

79.63%16.47%2.12%1.78%

100%


Annual Report 2004

a- Liquid Assets

Liquid assets consist of cash and deposits with the Bank of Lebanon, Lebanese Treasury bills,trading and investment securities, as well as loans and advances to banks. They reached LL2,756 billion at the end of 2004 forming 79.63% of total assets, down from 80.59 % in2003. The decline was in favor of a rise in the share of loans and advances from 15.62% in2003 to 16.47% in 2004.

1- Cash and Central Bank deposits decreased by LL 67.6 billion to reach LL 852 billionincluding interest at the end of December 2004. The decrease was caused by the drop in theCDs portfolio (LL109 billion), and BDL current accounts (LL 29 billion), which outweighed therise in BDL term deposits (LL 50 billion). Central Bank LL CDs decreased by LL 156 billion,as most of the maturing CDs during 2004 were replaced by subscriptions in higher yieldingtreasury bills. USD-denominated CDs increased by around LL 47 billion as a result of thereplacement of LL CDs. Total Cash and Central Bank foreign currency denomination increasedfrom 37.75% in 2003 to 53.56% in 2004.

Liquid Assets

(LL million)

2003

Table 11: Breakdown of Liquid Assets

LL C/V Total

2004

Cash and Bank ofLebanon

% of total Liquid AssetsLebanese Treasury bills

% of total Liquid AssetsTrading & Investmentsecurities

% of total Liquid AssetsLoans and advances to banks

% of total Liquid Assets

Total Liquid Assets

572,54322.20%

559,44021.69%

1,1100.04%

11,1200.43%

1,144,214

347,21013.46%

384,35514.90%

31,7471.23%

671,78026.04%

1,435,092

919,75335.66%

943,79536.59%

32,8571.27%

682,90026.48%

2,579,305

(LL million) 2003 2004

Table 12: Cash and Central Bank Deposits

CashCentral Bank

Sight depositsTerm depositsCertificates of depositsAdd: Accrued interest receivable Less: tax on interest receivable

Total Central BankTotal Cash and Central Bank DepositsDenominated as follows

LL in millionsForeign currencies in thousands USD

30,388

105,034330,799354,39833,101(1,578)

821,753852,141 395,696302,783

27,075

133,835280,346463,39815,100

892,678919,753572,543230,322

LL C/V Total

395,69614.36%

614,54122.30%

1,1100.04%

12,2480.44%

1,023,595

456,44516.56%

493,45917.90%

31,4331.14%

751,37327.26%

1,732,711

852,14130.92%

1,108,00040.20%

32,5431.18%

763,62127.70%

2,756,306

27


A

2-The share of the treasury bills portfolio in total liquid assets increased from 36.6% atthe end of 2003 to 40.2% at the end of 2004. The Eurobond portfolio increased by theequivalent of LL 109 billion. Treasury bills denominated in Lebanese pound increased byLL 55 billion, and hence the denomination of the total treasury bills portfolio in foreigncurrencies increased from 40.72% to 44.5%.

3-Investments in fixed and variable income securities, as shown in table 14 below, amountedto LL 32,544 million, almost their same level at the end of 2003, constituting 1.18% of totalliquid assets. The LL 3,068 million decrease in fixed income instruments was compensatedby an almost equivalent rise in variable income securities.


Table 13: Lebanese Treasury bills

Treasury billsAdd: interest receivableLess: interest received in advance/discounts

tax on interest receivableTotalDenominated as follows

LL in millionsForeign currencies in thousand USD

1,098,04316,4295,930

5421,108,000

614,541327,336

918,98324,812

00

943,795

559,440254,962


Table 14: Fixed and Variable Income Securities

Fixed income securitiesAdd: Interest receivableLess: Provisions for debt securities

TotalVariable income securities

Less: Provision for decline in value of sharesTotalTotal Fixed and Variable Income SecuritiesDenominated as followsFixed


VariableLL in millionsForeign currencies in thousand USD

25,175524

025,6998,579

(1,734)6,845

32,544

017,047

1,1103,804

28,115652

028,7676,116

(2,025)4,091

32,858

019,082

1,1101,977


Annual Report 2004

4-Deposits with banks and financial institutions amounted to LL 763.6 billion, with a ratio of27.7 % out of total liquid assets, against LL 683 billion and 26.48 % in 2003. The increasewas caused by higher placements in time deposits with banks, against a drop in the loweryielding demand deposits.

b- Loans and Advances to Customers

BBAC's loan portfolio grew by around 14% in 2004, almost preserving the same currencystructure as in 2003. The LL 81 billion decrease in short-term lending was outweighed by anapproximate LL 152 billion longer-term financing, most of which was collateralized.


Table 15: Deposits with Banks and Financial Institutions

Demand DepositsTime Deposits & CDsAfter-tax interest receivable Total DepositsDenominated as follows


86,918675,010

1,693763,621

12,248498,423

98,099583,927

874682,900

11,120445,625

Loans and Advances to Customers (LL million) Amount

2003 20042003 2004

Structure

Denominated as followsLL in millionsForeign currencies CV in million LLForeign currencies in thousand USD

Total

137,721362,212240,273

499,933

155,550414,515274,968

570,065

27.55%72.45%

100%

27.29%72.71%

100%

Table 16: Breakdown of Loans and Advances to Customers by Currency

29


A

The breakdown of loans by economic sector shows that the structure of the loan portfolioremained almost the same, albeit a rise in the share of trade financing against a drop in theconsumer lending share. All lending to economic sectors witnessed a rise in 2004.

* Before deduction of provisions, debtors by acceptances and speculation accounts

The year 2004 witnessed higher corporate financing, with the share of loans exceeding LL1.5billion rising to 35% of the total loan portfolio, as shown in the table below.

The geographical distribution of the loan portfolio shows increased lending in most of theLebanese regions, with a rise in the shares of the Beirut and Mount Lebanon areas, where mosteconomic activity is concentrated.


2003 20042003 2004

Percentage

Beirut and SuburbsMount LebanonBekaaNorth LebanonSouth LebanonCyprus

Total (Gross Loans)

307,990102,92585,19065,31922,7812,812

587,017

365,183123,32285,63350,04228,3092,124

654,613

52.47%17.53%14.51%11.13%3.88%0.48%

100.00%

55.79%18.84%13.08%7.64%4.32%0.32%

100.00%


2003 20042003 2004

Percentage

TradeConstructionIndustryAgricultureConsumptionOthers

Total *

207,235143,28590,04626,833

168,98124,013

660,393

236,859162,57992,24630,582

181,08027,933

731,279

31.38%21.70%13.64%4.06%

25.59%3.64%

100.00%

32.39%22.23%12.61%4.18%

24.76%3.82%

100.00%

Table 17: Geographical Distribution of Loans and Advances

Table 18: Breakdown of Loans and Advances to Customers by Sectors

Table 19: Breakdown of Loans and Advances to Customers by Size


2003 20042003 2004

Percentage

Small (less than 250 million)Medium (250 – 1500 million)Large (exceeding 1500 million)

Total (Gross)

205,550183,218198,250

587,018

224,987199,801229,825

654,613

35.02%31.21%33.77%

100.00%

34.37%30.52%35.11%

100.00%


Annual Report 2004

The breakdown of the loans by guarantee shows more liquid security in terms of lending asthe drop in the share of real estate was compensated by a rise in the share of cash collateral.

* Before deduction of provisions, debtors by acceptances and speculation accounts

The year 2004 witnessed a success in the remedial process in light of the new BDLIntermediary circular No. 41. Substandard loans were reduced by around LL 7.3 billion anddoubtful loans by around LL 11 billion. The net substandard and doubtful loans to gross loanshence declined by 4.6% to 7.87% at the end of 2004.

c- Other Financial Accounts

Other financial accounts grew by around 18% in 2004 driven by the rise in acceptances,reflecting a large expansion in trade finance. Other assets increased by around LL 2.1 billion,consisting of higher credit card facilities, prepaid expenses, and miscellaneous debtor accounts.


2003 20042003 2004

Percentage

Real estatePersonal guaranteesNon-securedSecuritiesCash collateralOthers

Total *

328,718134,26162,5721,330

133,5057

660,393

343,109134,13882,3841,432

169,867349

731,279

49.78%20.33%9.47%0.20%

20.22%0.00%

100.00%

46.92%18.34%11.27%0.20%

23.23%0.05%

100.00%

Table 20: Breakdown of Loans and Advances to Customers by Guarantees

Loans and Advances to Customers (LL million) 20032002 2004

Table 21: Breakdown of Loans and Advances to Customers by Central Bank Classification

Net Regular Loans

Net Substandard LoansAdd: Unrealized interest

Total Substandard

Net Doubtful LoansAdd: Unrealized interestAdd: Provisions

Total Doubtful Loans

Total Net Substandard and Doubtful LoansNet Total LoansGross LoansNet Substandard and Doubtful to Gross Loans

519,138

12,8387,251

20,089

38,09030,07247,224

115,387

50,928570,066654,613

7.78%

433,274

21,6395,711

27,350

45,02030,68550,689

126,394

66,659499,933587,01811.36%

446,915

18,9087,798

26,706

47,48729,28036,540

113,307

66,395513,310586,92811.31%

31


A

d- Loans to Deposits Ratio

Customers' deposits increased by 10.42% in 2004. The breakdown by currency, as displayedin Table 23, shows that deposits in FC increased by 25.64% while deposits in LL decreasedby 9.44%. This has changed the currency composition of the bank's deposits from LL : FC43.4 : 56.6 to 35.6 : 64.4. The currency composition of loans remained almost stable at LL : FC 27.3 : 72.7, while totalloans grew by around 14% over 2003.The loans to deposits ratio increased from 17.88% in 2003 to 18.47% in 2004, given thatthe increase in loans exceeded that in deposits. Loans to deposits in LL increased from11.35% to 14.16% while that in FC decreased from 22.89% to 20.85% given the change inthe currency denomination of deposits.

Despite the rise in lending, the operating surplus increased to LL 2,516 billion in 2004, whichgives way to additional investment choices in the future.

(LL million)

2003/2002 2004/2003

Amount Change %

Table 23: Operating Surplus or Deficit

Table 22: Other Financial Accounts

Deposits from customers LL+ Deposits from customers FC= Operating resources (OR)

Loans and advances to customers LL+ Loans and advances to customers FC= Operating uses (OU)

Operating surplus LLOperating surplus FCOperating surplus (OR-OU)

Loans to Deposits LLLoans to Deposits FCLoans to Deposits (Total)

958,5681,498,1022,456,670

121,591391,719513,310836,977

1,106,3831,943,360

12.68%26.15%20.89%

1,213,1321,582,4912,795,622

137,721362,212499,933

1,075,4111,220,2782,295,689

11.35%22.89%17.88%

1,098,5991,988,2733,086,872

155,550414,515570,065943,049

1,573,7592,516,808

14.16%20.85%18.47%

26.56%5.63%

13.80%13.27%-7.53%-2.61%28.49%10.29%18.13%-1.33%-3.26%-3.01%

-9.44%25.64%10.42%12.95%14.44%14.03%-12.31%28.97%9.63%2.81%

-2.04%0.58%

2002 2003 2004


Debtors by acceptances

Other assets

Total

59,281

14,011

73,292

50,246

11,956

62,202


Annual Report 2004

3- Liability Management

a- Banks and Financial Institutions

Banks and financial institutions’ accounts decreased from LL120 billion at the end of 2003 toaround LL70 billion at the end of 2004. The decline was mainly in foreign currency accounts,which form the majority of those deposits. This is mainly due to the early settlement of an IFCloan as part of a plan to restructure the sources of funds.

b- Deposits from Customers

Deposits from customers grew by 10.42% to reach around LL 3,087 billion, equivalent toUSD 2,048 million.The breakdown shown in table 26 shows that the currency composition of the bank's depositschanged from LL: FC 43.4: 56.6 in 2003 to 35.6: 64.4 at the end of 2004.

(LL millions) 2003 2004

Table 25: Banks and Financial Institutions

Sight DepositsTerm depositsShort-term loanLong-term loanAccrued interest payableTotal Banks and Financial InstitutionsDenominated as follows

LL in millionsForeign currencies in USD thousands

26,36240,8211,809

0784

69,776

3,21444,154

14,037100,855

04,824

575120,292

3,54677,443

Deposits from Customers (LL million) Amount

2003 20042003 2004

Percentage

Denominated as followsLL in millionForeign currencies CV in million LLForeign currencies in thousand USD

Total

1,213,1321,582,4911,049,745

2,795,622

1,098,5991,988,2731,318,921

3,086,872

43.39%56.61%

100%

35.59%64.41%

100%

Table 26: Breakdown of Deposits from Customers by Currency

(LL million) Sources of Funds

Table 24: Sources of Funds

2002 2003 2004 2002 2003 2004

Percentage

Central BankBanks and Financial InstitutionsDeposits from customersOther financial accountsShareholders’ equity

Total Sources of Funds

0.00%3.76%

87.35%3.57%5.32%

100%

0.01%3.89%

86.84%3.57%5.68%

100%

359110,042

2,456,671101,094160,736

2,828,902

0120,292

2,795,622114,214170,425

3,200,552

069,776

3,086,872117,057187,494

3,461,200

0.00%2.02%

89.19%3.38%5.42%

100%

33


A

The geographical distribution of deposits shows a lower concentration of deposits in the capitalBeirut against a higher share for the Mount Lebanon region, where the highest growth waswitnessed (around 30%).

The breakdown by size shows that customers' deposits have maintained almost their same structureas in 2003.

c- Other financial accounts

These accounts include the counterpart of engagements by acceptances and other liabilities. Thelatter, which decreased to LL 46.290 billion, includes margins against documentary creditsamounting to LL 30.41 billion and margins against credit card and safe box facilities amounting toLL 4.56 billion. Other liabilities also include taxes and other charges mainly consisting ofwithholding taxes on interest paid on deposits, and other credit accounts mainly consisting of capitalincrease differences.


2003 20042003 2004

Percentage

Beirut and SuburbsBekaaMount LebanonSouth LebanonNorth LebanonCyprus

Total

1,098,486788,339566,916166,431115,19960,251

2,795,622

1,151,695844,684733,752179,558109,98767,196

3,086,872

39.29%28.20%20.28%5.95%4.12%2.16%

100%

37.31%27.36%23.77%5.82%3.56%2.18%

100%

Table 27: Geographical Distribution of Customers Deposits


2003 20042003 2004

Percentage

Small (less than 250 million)Medium (250 – 750 million)Large (exceed 750 million)

Total

1,050,073554,860

1,190,689

2,795,622

1,141,963619,112

1,325,797

3,086,872

37.56%19.85%42.59%

100%

36.99%20.06%42.95%

100%

Table 28: Breakdown of Deposits from Customers by Size


Table 29: Other Financial Accounts

Engagements by acceptancesOther liabilitiesCurrent income tax liabilitiesRetirement benefit obligations

Total

59,29046,290

7411,403

117,057

50,24650,6822,108

11,178

114,214


Annual Report 2004

d- Shareholders’ Equity

Shareholders’ equity increased by 10.02 % to reach LL 187.494 billion at the end of 2004,prior to dividend distribution. Reserves for general banking risk increased by LL 2 billion, andlegal reserves by LL 2.22 billion. The bank continued its internal capital formation, with theretained earnings increasing by around 47% to reach LL 40.108 billion.

4- LCs opened during the year

The volume of opened import Letters of Credits increased from USD 136.4 million in 2003 toUSD 168.2 million in 2004, in a managerial decision to increase external trade financing.

5- Asset Quality

The analysis of the loan portfolio shows an improvement in most of the asset quality ratios in2004. As mentioned earlier, this was due to the successful remedial process carried duringthe course of the year. The ratio of doubtful to total loans decreased by around 4 percentagepoints to 17.63%. The bank enhanced its coverage ratio by maintaining an appropriate levelof provisioning equal to around 67%, compared to 64.38% in 2003.


Table 30: Shareholders’ Equity

Share capital and cash contribution to capitalLegal reserveReserve for unidentified banking risksRetained earningsRevaluation variance of tangible fixed assets

Total

93,69720,94611,68240,10821,061

187,494

93,69718,7239,682

27,26121,061

170,425

Asset Quality (percentage) 2003 2004

Table 31: Asset Quality Ratios

Doubtful Loans / Gross LoansProvisions for doubtful Loans / Doubtful LoansProvisions for Loans / Gross LoansNet Doubtful loans / Assets

17.63%66.99%12.92%1.10%

21.53%64.38%14.84%1.41%

35


A

6- Regulatory Guidelinesa- Article 152: Loans to Related Parties

Loans and advances to related parties decreased to LL 2,499 million at the end of 2004,down from LL 4,894 million in 2003. The ratio to total gross loans remains minor at 0.44%.

b- Capital Adequacy Ratio

The capital adequacy ratio increased from 19.84% in 2003 to 20.94% in 2004, comparedto 12% required by BDL.

Capital Adequacy (LL million and percentage) Amount

Table 32: Capital Adequacy Ratio

2003 2004

Risk weighted assets

Tier I Capital

Tier II Capital

Total Net Capital

Tier I Capital ratio

Tier II Capital ratio

Total Capital Ratio

735,088

135,814

10,000

145,814

18.48%

1.36%

19.84%

869,916

172,159

10,000

182,159

19.79%

1.15%

20.94%


Annual Report 2004

Financial Performance Ratios

BBAC's net income after taxes increased by 47.68 % over 2003, to reach LL 22.229 billion.The decline in the gross interest margin was more than compensated by the positive impactof the net provisioning on profits, as recoveries exceeded the provisions taken in 2004.The results were further enhanced by higher non-interest income and lower operatingexpenses. Net income before taxes in 2004 was around LL 7.8 billion higher than in 2003.

1- Liquidity

Net liquid assets increased by 9.25% in 2004; their ratio to total assets increased from76.83% in 2003 to 77.62% in 2004.Liquid assets in foreign currencies increased at the expense of LL liquidity, given the previouslymentioned repositioning of the currency mix.The net liquid assets to deposit ratio decreased by less than a percentage point to 87.03%,reflecting the increase in loans granted to the private sector.

(LL million) Amount

2003 2004 2004-2003

Growth %

Interest margin

Net provision less releases on loans and advances

Non-interest income

Staff expenses

Other operating expenses

Net Income - before tax

Tax on Interest

Net Income - before income tax

Income Tax

Net Income - after tax

54,950

(13,678)

20,906

(23,218)

(21,083)

17,877

(305)

17,572

(2,517)

15,055

44,539

800

21,952

(24,018)

(17,599)

25,675

(3,446)

22,229

0

22,229

-18.95%

-105.85%

5.00%

3.44%

-16.52%

43.62%

1029.84%

26.50%

-100.00%

47.65%

Table 33: Income Statement

37


A

2- Profitability

The return on average assets (ROAA) increased from 0.5% in 2003 to 0.67% in 2004. Thereturn on average equity (ROAE) also increased from 9.74% to 13.24%. This was due to the47.65% rise in profits compared to a 10.49% and 8.66% respective annual increases in averageassets and average equity. The earnings per share accordingly increased from LL 209 to LL 309.

Liquidity (LL million) 2003

Table 34: Liquidity Ratios

LL C/V Total LL C/V Total

2004

Liquid assetsDeposits from banksNet Liquid AssetsDue to customersLoans and advances to customers Total Assets (%)Loans / Assets Loans / Deposits Liquid Assets / DepositsLiquid Assets / AssetsNet Liquid Assets / DepositsNet Liquid Assets /Total Assets

1,732,71166,562

1,666,1481,988,273

414,5152,230,735

18.58%20.85%87.15%77.67%83.80%74.69%

1,023,5953,214

1,020,3811,098,599

155,5501,230,465

12.64%14.16%93.17%83.19%92.88%82.93%

1,144,2143,546

1,140,6681,213,132

137,7211,334,237

10.32%11.35%94.32%85.76%94.03%85.49%

1,435,092116,745

1,318,3471,582,491

362,2121,866,316

19.41%22.89%90.69%76.89%83.31%70.64%

2,579,306120,292

2,459,0142,795,622

499,9333,200,552

15.62%17.88%92.26%80.59%87.96%76.83%

2,756,30669,776

2,686,5293,086,872

570,0653,461,200

16.47%18.47%89.29%79.63%87.03%77.62%

(LL million and %) 2003 2004

Table 35: Profitability Ratios

2004-2003

Change %

Average assetsAverage equity*Return on average assets ROAA after tax (%)Return on average equity ROAE after tax (%)Net income for the year after taxNet profits**Number of shares outstanding (million)

Earnings per share EPS in LL after tax

Earnings per share ** EPS in LL after tax

Dividends per share DPS in LL***Dividends payout ratioRetention ratioNet Asset value per share in LL****

3,014,727154,519

0.509.74

15,05512,073

72209168 55

32.8067.202,367

3,330,876167,899

0.6713.24

22,22918,006

72309250 65

25.9974.012,604

10.49%8.66%

0.173.50

47.65%49.14%0.00%

47.65%49.14% 18.18%

-77

10.02%

* including only LL 10 billion revaluation variance accepted by the central bank as Tier II* * After allocation of profits to reserves for general banking risks and legal reserves *** An additional interest payment of LL 1.2 billion was made on the cash contributions**** Before Dividend Payment


Annual Report 2004

3- Management Efficiency

The ratio of interest paid to interest received increased from 74.21% in 2003 to 77.27% in2004. This was caused by prevailing market conditions as the decline in interest rates onLebanese TBs and CDs outweighed the reduction in costs on deposits. The effective interest rateon LL TBs decreased from 10.94% at the end of 2003 to 6.25% at the end of 2004 and to alesser extent from 9.33% to 8.3% on USD. The average deposits rate, in comparison, decreasedby only one percentage point to 5.16% in 2004.Net commissions to net financial income increased from 19.89% in 2003 to 20.75% in 2004.The cost per average branch was also reduced from LL 1,384 million to LL1,301 million in 2004.The year 2004 also witnessed a decline in the cost to income ratio from 71.25% to 61.85%.

4- Interest Margin

The gross interest margin decreased from 1.90% in 2003 to 1.39% in 2004, despite the dropin the cost of earning assets and due to the decrease in the revenue from TBs and CDs asmentioned earlier. However, the net interest margin stood at almost the same level of 1.42%,as recoveries exceeded the provisions taken in 2004, generating a positive LL 800 million onthe P&L, compared to a LL13,678 million net provisioning in 2003. The net spreadaccordingly stood at almost its same level of 1.36%.

(percentage) 2003 2004

Table 36: Management Efficiency Ratios

Interest paid / Interest receivedNet commissions / Net financial incomeCost per average branch (LL million)Cost / Income (Efficiency Ratio)

77.27%20.75%

1,30161.85%

74.21%19.89%

1,38471.25%

(LL million) 2003LL Total%CV LL% LL Total%CV LL%

2004

Average interest earning assetsInterest paidInterest receivedNet interest receivedCost of earning assets (in %) Return on earning assets (in %)Gross Interest Margin (in %)Net releases (provisions) onloans and advancesNet Interest Margin (in %)Average interest earning assets to average assets (in %)Gross spread (in %)Net spread (in %)

39.6059.3252.4332.618.17%

9.74%

1.56%

0.13%

95.54%1.49%0.13%

1,147,48793,797

111,71917,922

-16,382

1,750,29264,326

101,35437,028

2,704

60.4040.6847.5767.393.68%

5.79%

2.12%

2.27%

96.50%2.04%2.19%

2,897,779158,123213,07354,9505.46%

7.35%

1.90%

-13,678

1.42%

96.12%1.82%1.37%

38.4556.4749.7326.836.95%

7.93%

0.97%

0.65%

95.87%0.93%0.63%

1,229,42985,50297,45211,949

-3,913

1,967,90765,90698,49632,590

4,713

61.5543.5350.2773.173.35%

5.01%

1.66%

1.90%

96.06%1.59%1.82%

3,197,337151,408195,94744,5394.74%

6.13%

1.39%

800

1.42%

95.99%1.34%1.36%

Table 37: Interest Analysis

39


A

5- Non-Interest Income

Net commissions received increased from LL 12.37 billion in 2003 to LL 13.97 billion in2004. The rise in commissions received was mainly caused by the increase in trade finance,credit card activity, account services and others. The decrease in the net trading income was almost compensated by the rise in other operatingincome, due to the release of impairment provision on property acquired in settlement of debt.

(LL million) Amount

2003 20042003 2004

Percentage

Net commissions receivedDividend incomeNet trading incomeOther operating income

Total Non-Interest Income

12,365282

7,659600

20,906

13,965162

5,0742,751

21,952

59.15%1.35%

36.63%2.87%

100%

63.62%0.74%

23.12%12.53%

100%

Table 38: Non-Interest Income

Commissions Received (LL million) Amount

2003 20042003 2004

Percentage

Credit related fees and commissionEngagement by endorsement feesOther fees

Total Commissions Received

6,2173,3553,915

13,487

6,5754,0184,622

15,215

46.10%24.88%29.03%

100%

43.21%26.41%30.38%

100%

Commissions Paid (LL million) Amount

2003 20042003 2004

Percentage

Brokerage feesOther fees

Total Commissions Paid

971151

1,122

1,15595

1,250

86.54%13.46%

100%

92.40%7.60%

100%

Table 39: Commissions


Annual Report 2004

6- General Operating Expenses

General operating expenses decreased by around 6% in 2004. Staff expenses increased by3.44%, a growth rate that is slightly higher than last year’s. Other operating expensesdecreased by around 20%, due to the control over spending, especially with the additional costincurred by the management restructuring process.

7- Net Financial Income

The net interest margin increased by around LL 4 billion over 2003 despite the decline in thegross margin and due to a better impact from net provisions on doubtful debts. Non-interestincome on the other hand increased by 5% due to a 12.9% rise in net commissions, whichare the main contributor to non-interest income. Hence, net financial income increased byaround 8.22% over 2003. Average footings increased at even a higher rate leading to a slightdrop of 0.03% in the ratio of net financial income to average footings.

(LL million) Amount

2004-20032003 2004

Change %

Staff expensesOther operating expensesDepreciation & amortization

Total

23,21817,1833,900

44,301

24,01813,7253,874

41,617

3.44%-20.12%-0.66%

-6.06%

Table 40: General Operating Expenses

(LL million) Amount

2004-20032003 2004

Change %

Net interest marginNon interest incomeNet financial incomeAverage footings

Net Financial Income / Average Footings (%)

41,27220,90662,178

3,109,296

2.00

45,34021,95267,292

3,415,244

1.97

9.86%5.00%8.22%9.84%

-0.03

Table 41: Net Financial Income

41

BBAC Auditor's Report

45

46

47

48

49

50

86

87

Contents

Independent auditor's report

Balance sheet

Income statement

Statement of changes in shareholders' equity

Statement of cash flows

Notes to the financial statements

Balance sheet presented in accordance with Bank of Lebanon Circular No. 33

Income statement presented in accordance with Bank of Lebanon Circular No. 33

Auditor's ReportA

Annual Report 2003

Independent Auditor's Reportto the shareholders of BBAC S.A.L.

We have audited the accompanying balance sheet of BBAC S.A.L. as of 31 December2004 and the related statements of income, changes in equity and cash flows for theyear then ended as set out on pages 46 to 85. These financial statements are theresponsibility of the Bank's management. Our responsibility is to express an opinion onthese financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing. ThoseStandards require that we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosuresin the financial statements, within the limitations imposed by the existing banking lawsin Lebanon which preclude verification procedures on coded accounts. An audit alsoincludes assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation. Webelieve that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements present fairly in all material respects, thefinancial position of BBAC S.A.L. as of 31 December 2004 and the results of itsoperations, its changes in equity and its cash flows for the year then ended inaccordance with International Financial Reporting Standards.

Beirut - Lebanon

45

Auditor's Report

A

ASSETS (LL Millions) 2004Notes 2003

Cash and Bank of Lebanon 5 852,141 919,753Lebanese Treasury bills 6 1,108,000 943,795Loans and advances to banks 7 763,621 682,900Trading securities 8 6,283 3,529Loans and advances to customers 9 570,065 499,933Debtors by acceptances 10 59,290 50,246Investment securities: 11- available-for-sale 562 562- held-to-maturity 25,699 28,767Investments in subsidiaries 12 3,524 3,524Property acquired in settlement of debt 13 14,265 10,625Investment property 14 10,271 10,413Intangible assets 15 1,288 1,592Property and equipment 16 32,180 32,957Other assets 17 14,011 11,956

Total assets 3,461,200 3,200,552

LiabilitiesDeposits from banks 18 69,776 120,292Due to customers 19 3,086,872 2,795,622Engagements by acceptances 10 59,290 50,246Other liabilities 20 46,290 50,682Current income tax liability 35 74 2,108Retirement benefit obligations 22 11,404 11,178

Total liabilities 3,273,706 3,030,128

Shareholders' equityShare capital and cash contribution to capital 23 93,697 93,697Legal reserve 24 20,946 18,723Reserve for unidentified banking risks 25 11,682 9,682Real estate revaluation reserve 26 21,061 21,061Retained earnings 40,108 27,261

Total shareholders' equity 187,494 170,424

Total liabilities and equity 3,461,200 3,200,552


The financial statements on pages 46 to 88 were approved by the Board of Directors on 23 June 2005 and were signed by Mr. Ghassan Assaf, Chairman and General Manager.

Auditor's ReportA

Annual Report 2003

Income statement For the Year Ended December 31, 2004

(LL Millions) 2004Notes 2003

Interest and similar income 27 195,948 213,073

Interest expense and similar charges 27 (151,408) (158,123)

Net interest income 44,540 54,950

Fee and commission income 28 15,215 13,487

Fee and commission expense 28 (1,250) (1,122)

Net fee and commission income 13,965 12,365

Dividend income 29 162 282

Net trading income 30 5,074 7,659

Other operating income 31 2,751 600

Net releases (provisions) on loans and advances 32 800 (13,678)

Operating expenses 33 (41,617) (44,301)

Profit before taxes 25,675 17,877

Taxes 35 (3,446) (2,822)

Net profit for the year 22,229 15,055

47

Auditor's Report

A

Share Capital

Cash contributionto capital

Legalreserve

Real estaterevaluation

reserve

Total

Balance at 31 December 2002 72,000 21,697 17,218 21,061 8,205 20,555 160,736

Net profit for the year - - - - - 15,055 15,055

Dividends paid (note 40) - - - - - (4,752) (4,752)

Interest paid on cash contribution

to capital (note 23) - - - - - (615) (615)

Transfers (notes 24, 25) - - 1,505 - 1,477 (2,982) -


Net profit for the year - - - - - 22,229 22,229

Dividends paid (note 40) - - - - - (3,960) (3,960)

Interest paid on cash contribution

to capital (note 23) - - - - - (1,199) (1,199)

Transfers (notes 24, 25) - - 2,223 - 2,000 (4,223) -


Reserve forunidentifiedbanking risks

Retainedearnings(LL Millions)

Statement of Changes in Equity For the Year Ended December 31, 2004

Auditor's ReportA

Annual Report 2003

Statement of Cash FlowsFor the Year Ended December 31, 2004

(LL Millions) 2004 2003

Cash flows from operating activitiesNet profit for the year 22,229 15,055Adjustments:

Tax 35 3,446 2,822Loss on disposal of property and equipment 31 8 52Gain on disposal of property acquired in settlement

of debt 31 (157) -Depreciation of property and equipment 16 3,171 3,181Fair value loss on investment property 14 142 142Amortisation of intangible assets 15 561 577Net releases (provisions) on loans and advances 32 (800) 13,678Changes in fair value of trading securities 8 (291) (381)Net transfer (from) to other provisions 21 (1,199) 2,488Net transfer to (from) retirement obligations 22 226 (259)

Net changes in operating assets and liabilities:Bank of Lebanon – mandatory reserve 5 36,576 (63,590)Bank of Lebanon – loans and advances 5 (28,981) (425,956)Lebanese Treasury bills 6 (285,374) 155,365Loans and advances to banks 7 (42,129) 59,222Trading securities 8 (2,463) -Loans and advances to customers 9 (75,417) (7,127)Other assets 17 (2,055) (865)Deposits from banks 18 (50,516) 10,250Due to customers 19 291,250 338,951Other liabilities 20 (3,188) 1,840

Cash (used in) provided from operations (134,961) 105,445Taxes paid 35 (3,324) (2,989)

Net cash (used in) provided from operating activities (138,285) 102,456Cash flows from investing activitiesLebanese Treasury bills - held-to-maturity 6 120,627 (6,424)Investment securities - held-to-maturity 11 3,068 4,531Purchase of intangible assets 15 (257) (161)Purchase of property and equipment 16 (1,840) (3,414)Proceeds from disposal of property acquired

in settlement of debt 13 2,035 -Net cash provided from (used in) investing activities 123,633 (5,468)Cash flows from financing activitiesDividends paid (3,960) (4,752)Interest paid on cash contribution to capital (1,199) (615)Net cash used in financing activities (5,159) (5,367)Net (decrease) increase in cash and cash equivalents (19,811) 91,621Cash and cash equivalents at beginning of year 37 756,195 664,574Cash and cash equivalents at end of year 37 736,384 756,195Principal non-cash transactions

The principal non-cash transactions relate mainly to the properties acquired in settlement of debt amounting to LL 6.09 billion (note 13).

Notes

49

Auditor's Report

A

Notes to the financial statementsFor the Year Ended December 31, 20041- Establishment and operations

BBAC S.A.L. was incorporated in Lebanon in 1956 and registered at the Commercial Courtin Beirut under No. 6196. It appears under number 28 in the list of Lebanese banks.The Bank undertakes commercial banking operations through its head office in Beirut andits network of thirty branches across Lebanon, in addition to a branch in Cyprus (off-shore)and a branch at the Damascus free zone in Syria.

2- Summary of significant accounting policies

The principal accounting policies applied in the preparation of these financial statementsare set out below. These policies have been consistently applied to all the years presented,unless otherwise stated. These financial statements are not consolidated. Consolidatedfinancial statements are prepared at the end of each financial year.

2.1 Basis of presentation

The financial statements have been prepared in accordance with International FinancialReporting Standards (IFRS) and in conformity with the banking laws and regulations andthe directives of the Bank of Lebanon. The financial statements have been prepared underthe historical cost convention, as modified by the revaluation of certain property, tradingand available-for-sale investment securities at fair value through profit or loss andinvestment properties, which are carried at fair value.The preparation of financial statements in conformity with IFRS requires the use of certaincritical accounting estimates. It also requires management to exercise its judgement in theprocess of applying the Bank's accounting policies. The areas involving a higher degree ofjudgement or complexity, or areas where assumption and estimates are significant to thefinancial statements, are disclosed in note 4.

2.2 Foreign currency

Foreign currency transactions are translated into Lebanese pounds at the rate ruling on thetransaction date. Foreign currency monetary assets and liabilities are translated intoLebanese pounds at the rate ruling at the balance sheet date. Exchange differences arereported within the income statement.

2.3 Interest income and expense

Interest income and expense are recognised in the income statement for all instrumentsmeasured at amortised cost using the effective interest method.The effective interest method is a method of calculating the amortised cost of a financialasset or a financial liability and of allocating the interest income or interest expense overthe relevant period. The effective interest rate is the rate that exactly discounts estimatedfuture cash payments or receipts through the expected life of the financial instrument or,when appropriate, a shorter period to the net carrying amount of the financial asset orfinancial liability. When calculating the effective interest rate, the Bank estimates cashflows considering all contractual terms of the financial instrument but does not considerfuture credit losses. The calculation includes all fees and points paid or received betweenparties to the contract that are an integral part of the effective interest rate, transactioncosts and all other premiums or discounts.

Auditor's ReportA

Annual Report 2003

2.4 Fee and commission income

Fees and commissions are recognised on an accrual basis when the service has beenprovided and mainly comprise commissions on client transactions.

2.5 Financial assets

The Bank classified its financial assets into the following categories: trading, available-for-sale,held-to-maturity and originated loans.Trading securities are securities that were either acquired for generating a profit from short-termfluctuations in price or dealer's margin, or are securities included in a portfolio in which a patternof short-term profit taking exists. Trading securities are initially recognised at cost (whichincludes transaction costs) and subsequently re-measured at fair value based on quoted bidprices. All related realised and unrealised gains and losses are included in net trading income.Investment securities intended to be held for an indefinite period of time, which may be sold inresponse to needs for liquidity or changes in interest rates, exchange rates or equity prices areclassified as available-for-sale. Available-for-sale securities are initially recognised at cost (whichincludes transaction costs) and subsequently re-measured at fair value (market value) based onquoted bid prices. Unrealised gains and losses arising from changes in fair value of securitiesclassified as available-for-sale are recognised in equity under revaluation reserve – available-for-sale investments. Unquoted equity instruments are stated at cost adjusted for any impairmentin their value, which is recognised in the income statement as loss from investment securities.Investment securities with fixed maturity where management has both the intent and theability to hold to maturity are classified as held-to-maturity. Held-to-maturity investments arecarried at amortised cost using the effective yield method, less any provision for impairment.Loans originated by the Bank by providing money directly to the borrower are categorisedas loans originated by the Bank and are carried at amortised cost. Third party expenses,such as legal fees, incurred in securing a loan are treated as part of the cost of thetransaction. All loans and advances are recognised when cash is advanced to borrowers.A financial asset is impaired if its carrying amount is greater than its estimated recoverableamount. The amount of the impairment loss for assets carried at amortised cost iscalculated as the difference between the asset's carrying amount and the present value ofexpected future cash flows discounted at the financial instrument's original effective interestrate. By comparison, the recoverable amount of an instrument measured at fair value is thepresent value of expected future cash flows discounted at the current market rate of interestfor a similar financial asset.Interest earned whilst holding investment securities is reported as interest income.Dividends receivable are included separately under dividend income when received.All purchases and sales of securities that require delivery within the time frame establishedby regulation or market convention ('regular way' purchases and sales) are recognised attrade date, which is the date that the Bank commits to purchase or sell the asset.Otherwise such transactions are treated as derivatives until settlement occurs.

2.6 Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the balance sheetwhen there is a legally enforceable right to offset the recognised amounts and there is anintention to settle on a net basis, or realise the asset and settle the liability simultaneously.

2.7 Provisions for loan impairment

A credit risk for loan impairment is established if there is objective evidence that the Bankwill not be able to collect the amounts due. The amount is based on management'scontinued evaluation of the loan portfolio, taking into consideration current economicconditions, past experience and the Bank of Lebanon requirements. The aforementioned

51

Auditor's Report

A

provision amount is the difference between the carrying amount and the recoverableamount, being the present value of expected cash flows, including amounts recoverablefrom guarantees and collateral, discounted based on the interest rate at inception.

2.8 Computer software

Acquired computer software licenses are capitalised on the basis of the costs incurred toacquire and bring to use the specific software. These costs are amortised on the basis ofthe expected useful lives of five years.Costs associated with developing or maintaining computer software programs arerecognised as an expense as incurred. Costs that are directly associated with the productionof identifiable and unique software products controlled by the Bank, and that will probablygenerate economic benefits exceeding costs beyond one year, are recognised as intangibleassets. Direct costs include software development employee costs and an appropriateportion of relevant overheads.

2.9 Key money

Key money paid for repossessed properties from tenants is amortised over a period of four years.

2.10 Property and equipment

Land and buildings comprise mainly branches and offices. All property and equipment isstated at historical cost or revaluation less depreciation. Historical cost includes expenditurethat is directly attributable to the acquisition of the items.Subsequent costs are included in the asset's carrying amount or are recognised as aseparate asset, as appropriate, only when it is probable that future economic benefitsassociated with the item will flow to the Bank and the cost of the item can be measuredreliably. All other repairs and maintenance are charged to the income statement during thefinancial period in which they are incurred. Increases in the carrying amount arising onrevaluation of land and buildings are credited to a revaluation reserve in shareholders' equity.Decreases that offset previous increases of the same asset are charged against revaluationreserves directly in equity; all other decreases are charged to the income statement.Land is not depreciated. Depreciation on other assets is calculated using the straight-linemethod to allocate their cost or revaluation to their residual values over their estimateduseful lives. The principal annual rates used for this purpose are:

%

Buildings 2.5Computer equipment 20Furniture, fixtures and equipment 9 - 13Vehicles 15Leasehold improvements 25

The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.Assets that are subject to depreciation are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount may not be recoverable. Anasset's carrying amount is written down immediately to its recoverable amount if the asset'scarrying amount is greater than its estimated recoverable amount. The recoverable amountis the higher of the asset's fair value less costs to sell and value in use.Gains and losses on disposals are determined by comparing proceeds with carrying amount.These are included in the income statement.

2.11 Investment property

Investment property, principally comprising land and buildings, is held for long-term rental

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yields and is not occupied by the Bank. Investment property is carried at fair value,representing open-market value determined annually by external valuers. Changes in fairvalues are recorded in the income statement as part of other income.

2.12 Properties acquired in settlement of debt

The Bank exercises its ownership rights over the real estate collateral when it exhausts allreasonable means for collecting non-performing loans.The Bank measures real estate acquired in settlement of debt at its fair value andrecognises gains or losses by comparing the fair value of the acquired property to the netbook amount of the non-performing loan.The Bank reviews for impairment the carrying value of property acquired in settlement ofdebt at least annually or whenever events or changes in circumstances indicate that thecarrying amount may not be recoverable. An impairment loss is recognised for the amountby which the asset's carrying amount exceeds its recoverable amount. The recoverableamount is the higher of an asset's fair value less costs to sell and value in use.

2.13 Investments in subsidiaries

Investments in subsidiaries are stated at cost. When the carrying amount of the investmentis greater than its recoverable amount, it is written down to its recoverable amount.

2.14 Deferred income taxes

Deferred income tax is provided in full, using the liability method, on temporary differencesarising between the tax bases of assets and liabilities and their carrying amounts in the financialstatements. Currently enacted tax rates are used in the determination of deferred income tax.Deferred tax assets are recognised to the extent that it is probable that future taxable profitwill be available against which the temporary differences can be utilised.Deferred income tax is provided on temporary differences arising from general provisions onloans and advances to customers and differences between accounting and fiscal depreciation,except where the timing of the reversal of the temporary difference can be controlled and it isprobable that the temporary difference will not reverse in the foreseeable future.

2.15 Speculation accounts

Foreign currency placements and foreign currency borrowings relating to speculationaccounts of Bank customers are netted off as required by the Bank of Lebanon directives.

2.16 Cash and cash equivalents

For the purposes of the cash flow statement, cash and cash equivalents comprise cash onhand, non-restricted balances with Bank of Lebanon, Lebanese Treasury bills and loans andadvances to banks with original maturities of three months or less at the date of acquisition.

2.17 Provisions

Provisions are recognised when the Bank has a present legal or constructive obligation asa result of past events, it is probable that an outflow of resources will be required to settlethe obligation and a reliable estimate of the amount can be made.

2.18 Retirement benefit obligations

The Bank has a defined benefit plan in accordance with the national social security fundregulations. A defined benefit plan is a pension plan that defines an amount of pensionbenefit to be provided, usually as a function of one or more factors such as age, years of

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service or compensation. The liability in respect of the defined benefit plan is the presentvalue of the defined benefit obligation at the balance sheet date less contributions to thefund, together with adjustments for actuarial gains/losses and past service cost. The definedbenefit obligation is calculated annually by the Bank using the projected unit credit method.The present value of the defined benefit obligation is determined by the estimated futurecash outflows using interest rates of government securities that have terms to maturityapproximating the terms of the related liability.

2.19 Dividends

Dividends are recognised in equity in the year in which they are approved by the Bank'sshareholders. Dividends for the year that are declared after the balance sheet date are dealtwith in the dividends per share note.

2.20 Fiduciary activities

The Bank commonly acts as trustees and in other fiduciary capacities that result in the holdingor placing of assets on behalf of individuals and other institutions. These assets and incomearising thereon are excluded from these financial statements, as they are not assets of the Bank.

2.21 Comparatives

Where necessary, comparative figures have been adjusted to conform with changes inpresentation in the current year.

3- Financial risk management

A- Financial instruments

By their nature, the Bank's activities are principally related to the use of financialinstruments. The Bank accepts deposits from customers at both fixed and floating rates,and for various periods, and seeks to earn above-average interest margins by investing thesefunds in high-quality assets. The Bank seeks to increase these margins by consolidatingshort-term funds and lending for longer periods at higher rates, while maintaining sufficientliquidity to meet all claims that might fall due.The Bank also seeks to raise its interest margins by obtaining above-average margins, netof allowances, through lending to commercial and retail borrowers with a range of creditstanding. Such exposures involve not just on-balance sheet loans and advances; the Bankalso enters into guarantees and other commitments such as letters of credit andperformance, and other bonds.The Bank also trades in financial instruments where it takes positions in traded and over-the-counter instruments to take advantage of short-term market movements in equities and bondsand in currency, interest rate and commodity prices. The Board places trading limits on thelevel of exposure that can be taken in relation to both overnight and intra-day market positions.

B- Capital adequacy

To monitor the adequacy of its capital the Bank uses ratios established by the Bank forInternational Settlements (BIS). These ratios measure capital adequacy (minimum 8% asrequired by BIS and 12% as required by the Bank of Lebanon) by comparing the Bank'seligible capital with its balance sheet assets, off-balance-sheet commitments and marketand other risk positions at weighted amounts to reflect their relative risk.The market risk approach covers the general market risk and the risk of open positions incurrencies and debt and equity securities. Assets are weighted according to broadcategories of notional risk, being assigned a risk weighting according to the amount ofcapital deemed to be necessary to support them. Five categories of risk weights (0%, 20%,30%, 50%, 100%) are applied; for example cash and placements with the Bank of

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Lebanon have a zero risk weighting which means that no capital is required to support theholding of these assets. Property and equipment carries a 100% risk weighting, meaningthat it must be supported by capital equal to 12% of the carrying amount.Off-balance-sheet credit related commitments and forwards and options based derivativeinstruments are taken into account by applying different categories of conversion factors,designed to convert these items into balance sheet equivalents. The resulting equivalentamounts are then weighted for risk using the same percentages as for on-balance-sheet assets.Tier 1 capital consists of capital and reserves. Tier 2 capital includes the Bank's eligible realestate revaluation surplus.

The Group's capital adequacy level was as follows:

(LL Millions)

Balance sheet assets (net of provisions)Cash and Bank of Lebanon 852,152 919,761 - -Lebanese Treasury bills 1,108,000 943,795 206,887 120,870Loans and advances to banks 764,399 683,656 153,417 160,350Trading securities 6,283 3,529 6,283 3,529Loans and advances to customers 569,716 499,936 327,885 297,725Debtors by acceptances 59,290 50,246 46,987 34,220Investment securities:- available-for-sale 562 562 562 562- held-to-maturity 25,699 28,767 12,750 14,797Property acquired in settlement of debt 14,265 10,625 - -Investment property 11,825 11,967 11,825 11,967Intangible assets 1,297 1,761 1,297 1,761Property and equipment 33,031 33,481 33,031 33,481Other assets 15,663 14,034 15,663 14,034

Off-balance sheet positionsLetters of credit 39,939 34,748 21,987 12,352Letters of guarantee 30,192 28,652 30,192 28,652

Unassigned market risk components 1,150 788

Total risk-weighted assets 869,916 735,088

2004 2003

Consolidated Balance SheetNotional amount Risk Weighted Amount

2004 2003

(LL Millions)

Tier I capitalTier I + Tier II capital

135,814145,814

172,159182,159

2004 2003

Capital BIS (%)

18.4819.84

19.7920.94

2004 2003

BIS Capital Ratios

C- Credit risk

The Bank takes on exposure to credit risk which is the risk that a counterparty will be unableto pay amounts in full when due. Impairment provisions are provided for losses that have beenincurred at the balance sheet date. Significant changes in the economy, or in the health of aparticular industry segment that represents a concentration in the Bank's portfolio, could resultin losses that are different from those provided for at the balance sheet date. Managementtherefore carefully manages its exposure to credit risk.The Bank structures the levels of credit risk it undertakes by placing limits on the amount ofrisk accepted in relation to one borrower, or groups of borrowers, and to geographical andindustry segments. Such risks are monitored on a revolving basis and subject to an annual ormore frequent review. Limits on the level of credit risk by product, industry sector and by

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country are approved annually by the Board of Directors.The exposure to any one borrower including banks and brokers is further restricted by sub-limits covering on and off-balance sheet exposures and daily delivery risk limits in relationto trading items such as forward foreign exchange contracts. Actual exposures against limitsare monitored daily.Exposure to credit risk is managed through regular analysis of the ability of borrowers andpotential borrowers to meet interest and capital repayment obligations and by changing theselending limits where appropriate. Exposure to credit risk is also managed in part by obtainingcollateral and corporate and personal guarantees.

Master netting arrangements

The Bank further restricts its exposure to credit losses by entering into master netting arrangementswith counterparties with which it undertakes a significant volume of transactions. Master nettingarrangements do not generally result in an offset of balance sheet assets and liabilities, astransactions are usually settled on a gross basis. However, the credit risk associated withfavourable contracts is reduced by a master netting arrangement to the extent that if an event ofdefault occurs, all amounts with the counterparty are terminated and settled on a net basis.

Credit related commitments

The primary purpose of these instruments is to ensure that funds are available to a customeras required. Guarantees and standby letters of credit, which represent irrevocable assurancesthat the Bank will make payments in the event that a customer cannot meet its obligations tothird parties, carry the same credit risk as loans. Documentary and commercial letters of credit,which are written undertakings by the Bank on behalf of a customer authorising a third partyto draw drafts on the Bank up to a stipulated amount under specific terms and conditions, arecollateralised by the underlying shipments of goods to which they relate and therefore carry lessrisk than a direct borrowing.Commitments to extend credit represent unused portions of authorisations to extend credit inthe form of loans, guarantees or letters of credit. With respect to credit risk on commitments toextend credit, the Bank is potentially exposed to loss in an amount equal to the total unusedcommitments. However, the likely amount of loss is less than the total unused commitments,as most commitments to extend credit are contingent upon customers maintaining specificcredit standards. The Bank monitors the term to maturity of credit commitments becauselonger-term commitments generally have a greater degree of credit risk than shorter-termcommitments.

The economic sector concentration within the customer loan portfolio (before offsettingprovisions, debtors by acceptances and speculation accounts) were as follows:

\

A concentration of credit risk in loans and advances to customers exists where the top 161debtors' balances of LL 351 billion (or 1.4% of total debtors) represent approximately 48% ofthe total loans and advances to customers amounting to LL 731 billion (before offsettingprovisions, debtors by acceptances and speculation accounts) at 31 December 2004.

(LL Millions)

Trading 236,859 32 207,235 31Construction 162,579 22 143,285 22Industrial 92,246 13 90,046 14Agriculture 30,582 4 26,833 4Consumer loans 181,080 25 168,981 25Other loans 27,933 4 24,013 4

731,279 100 660,393 100

%

2004 2004 2003 2003%

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LL USD EURO TotalGBP OthersASSETS (LL Millions)

Concentration of assets and liabilities As at 31 December 2004

Cash and Bank of Lebanon 395,696 454,228 1,855 200 162 852,141Lebanese Treasury bills 614,541 463,133 30,326 - - 1,108,000Loans and advances to banks 12,248 622,919 96,205 10,715 21,534 763,621Trading securities 548 5,735 - - - 6,283Loans and advances to customers 155,550 396,842 26,195 237 8,623 587,447Debtors by acceptances 9 47,798 6,917 58 4,508 59,290Investment securities 562 25,699 - - - 26,261Investments in subsidiaries 3,524 - - - - 3,524Property acquired in settlement of debt 1,201 13,064 - - - 14,265Investment property 10,271 - - - - 10,271Property, equipment and intangible assets 33,144 324 - - - 33,468Other assets 3,171 10,749 71 1 19 14,011Total assets 1,230,465 2,040,491 161,569 11,211 34,846 3,478,582

LiabilitiesDeposits from banks 3,214 25,794 24,710 20 16,038 69,776Due to customers 1,098,599 1,850,871 121,873 10,808 22,103 3,104,254Engagements by acceptances 9 47,798 6,917 58 4,508 59,290Other liabilities 5,166 35,645 5,050 39 390 46,290Current income tax liability 74 - - - - 74Retirement benefit obligations 10,657 747 - - - 11,404Total liabilities 1,117,719 1,960,855 158,550 10,925 43,039 3,291,088

Net on-balance sheet position 112,746 79,636 3,019 286 (8,193) 187,494

57

Management believes that this concentration in loan balances conforms with the Lebanesebanking sector.

D- Market risk

The Bank takes on exposure to market risks. Market risks arise from open positions in interestrate, currency and equity products, all of which are exposed to general and specific marketmovements. The Bank applies a 'value at risk' methodology to estimate the market risk ofpositions held and the maximum losses expected, based upon a number of assumptions forvarious changes in market conditions. The Board sets limits on the value of risk that may beaccepted, which is monitored on a daily basis.

E- Currency risk

The Bank takes on exposure to effects of fluctuations in the prevailing foreign currency exchangerates on its financial position and cash flows. The Board of Directors sets limits on the level ofexposure by currency and in total for both overnight and intra-day positions, which aremonitored daily. The table below summarises the Bank's exposure to foreign currency exchangerate risk at 31 December 2004 before netting off customers' speculation accounts. Included inthe table are the Bank's assets and liabilities at carrying amounts, categorised by currency.

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F- Cash flow and fair value interest rate risk

Cash flow interest rate risk is the risk that the future cash flows of a financial instrumentwill fluctuate because of changes in market interest rates. Fair value interest rate risk is therisk that the value of a financial instrument will fluctuate because of changes in marketinterest rates. The Bank takes on exposure to the effects of fluctuations in the prevailinglevels of market interest rates on its financial position and cash flows. Interest margins mayincrease as a result of such changes but may reduce or create losses in the event thatunexpected movements arise. The Board of Directors sets limits on the level of mismatchof interest rate repricing that may be undertaken, which is monitored daily.

LL USD EURO TotalGBP OthersASSETS (LL Millions)

Concentration of assets and liabilities As at 31 December 2003

Cash and Bank of Lebanon 572,543 345,155 1,584 290 181 919,753Lebanese Treasury bills 559,440 343,163 41,192 - - 943,795Loans and advances to banks 11,120 564,512 71,582 14,217 21,469 682,900Trading securities 548 2,981 - - - 3,529Loans and advances to customers 137,721 346,684 16,932 593 14,952 516,882Debtors by acceptances - 36,818 12,542 116 770 50,246Investment securities 562 28,767 - - - 29,329Investments in subsidiaries 3,524 - - - - 3,524Property acquired in settlement of debt 1,143 9,482 - - - 10,625Investment property 10,413 - - - - 10,413Property, equipment and intangible assets 34,206 343 - - - 34,549Other assets 3,017 8,909 10 1 19 11,956Total assets 1,334,237 1,686,814 143,842 15,217 37,391 3,217,501

LiabilitiesDeposits from banks 3,546 87,748 20,197 873 7,928 120,292Due to customers 1,213,132 1,466,304 110,522 7,831 14,782 2,812,571Engagements by acceptances - 36,818 12,542 116 770 50,246Other liabilities 8,240 31,348 6,190 4,682 222 50,682Current income tax liability 2,108 - - - - 2,108Retirement benefit obligations 10,431 747 - - - 11,178Total liabilities 1,237,457 1,622,965 149,451 13,502 23,702 3,047,077

Net on-balance sheet position 96,780 63,849 (5,609) 1,715 13,689 170,424

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59

ASSETS (%)

As at 31 December

Cash and Bank of Lebanon 7.85 2.30 6.25 5.83

Lebanese Treasury bills 6.25 8.30 10.94 9.33

Loans and advances to banks 4.37 2.49 4.43 2.52

Loans and advances to customers 9.36 8.59 9.67 9.48

LiabilitiesDeposits from banks 10.07 1.38 10.00 0.79

Due to customers 7.27 3.85 8.13 3.90

LL USD

2004 2003LL USD

Year

2004 2,837,555 38% 62% 146,374 5.16

2003 2,511,669 40% 60% 153,600 6.12

2002 2,301,748 38% 62% 162,176 7.05

2001 2,055,977 41% 59% 163,092 7.93

2000 1,831,473 48% 52% 172,351 9.41

LL F/Cy

Average balanceof deposits

Allocation ofdeposits Cost of funds Average Interest

rate

LL MillionsLL Millions %

The table below summarises the effective interest rate by major currencies for monetaryfinancial instruments:

Average deposits and cost of funds over the last five years were as follows:

A concentration in deposits and customer accounts exists where the top 501 depositors(or 0.69% of total depositors) amounting to LL 1,049 billion account for approximately35% of total deposits and customer accounts of LL 2,966 billion (before offsettingspeculation accounts and excluding cheques and orders to be paid, public sector depositsand deposits from related parties) at 31 December 2004. Management believes that thisconcentration in loan balances conforms with the Lebanese banking sector.

The table below summarises the Bank's exposure to interest rate risks. Included in the tableare the Bank's assets and liabilities at carrying amounts, categorised by the earlier ofcontractual repricing or maturity dates. Expected repricing and maturity dates do not differsignificantly from the contract dates.

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Less than3 months

3-6months

6-12months

1-5years

Over5 years

Non interestbearing

TotalASSETS (LL Millions)

Cash flow and fair value interest rate risk As at 31 December 2004

Cash and Bank of Lebanon 116,213 17,000 5,000 430,088 - 283,840 852,141

Lebanese Treasury bills 49,526 102,836 95,837 570,020 160,927 128,854 1,108,000

Loans and advances to banks 743,434 65 - 18,429 - 1,693 763,621

Trading securities - - - - - 6,283 6,283

Loans and advances to customers 288,155 17,242 70,528 88,521 104,415 1,204 570,065

Debtors by acceptances - - - - - 59,290 59,290

Investment securities 13,081 769 6,155 4,155 1,539 562 26,261

Investments in subsidiaries - - - - - 3,524 3,524

Property acquired in settlement of debt - - - - - 14,265 14,265

Investment property - - - - - 10,271 10,271

Property, equipment and intangible assets - - - - - 33,468 33,468

Other assets - - - - - 14,011 14,011

Total assets 1,210,409 137,912 177,520 1,111,213 266,881 557,265 3,461,200

LiabilitiesDeposits from banks 40,151 - 1,148 27,665 - 812 69,776

Due to customers 2,743,685 123,328 129,254 57,835 8,333 24,437 3,086,872

Engagements by acceptances - - - - - 59,290 59,290

Other liabilities - - - - - 46,290 46,290

Current income tax liability - - - - - 74 74

Retirement benefit obligations - - - - - 11,404 11,404

Total liabilities 2,783,836 123,328 130,402 85,500 8,333 142,307 3,273,706

Balance sheet interest sensitivity gap (1,573,427) 14,584 47,118 1,025,713 258,548

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Less than3 months

3-6months

6-12months

1-5years

Over5 years

Non interestbearing


Cash flow and fair value interest rate risk As at 31 December 2003

Cash and Bank of Lebanon 133,758 108,688 200,900 179,500 - 296,907 919,753

Lebanese Treasury bills 93,667 112,799 276,219 342,173 5,970 112,967 943,795

Loans and advances to banks 642,364 23,494 16,168 - - 874 682,900

Trading securities - - - - - 3,529 3,529

Loans and advances to customers 264,498 25,869 45,606 62,475 100,300 1,185 499,933

Debtors by acceptances - - - - - 50,246 50,246

Investment securities - 1,928 3,856 21,441 1,542 562 29,329

Investments in subsidiaries - - - - - 3,524 3,524

Property acquired in settlement of debt - - - - - 10,625 10,625

Investment property - - - - - 10,413 10,413

Property, equipment and intangible assets - - - - - 34,549 34,549

Other assets - - - - - 11,956 11,956

Total assets 1,134,287 272,778 542,749 605,589 107,812 537,337 3,200,552

LiabilitiesDeposits from banks 93,070 3,656 2,997 19,994 - 575 120,292

Due to customers 2,546,609 99,632 86,865 39,428 6,318 16,770 2,795,622

Engagements by acceptances - - - - - 50,246 50,246

Other liabilities - - - - - 50,682 50,682

Current income tax liability - - - - - 2,108 2,108

Retirement benefit obligations - - - - - 11,178 11,178

Total liabilities 2,639,679 103,288 89,862 59,422 6,318 131,559 3,030,128

Balance sheet interest sensitivity gap (1,505,392) 169,490 452,887 546,167 101,494

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G- Liquidity risk

The Bank is exposed to daily calls on its available cash resources from overnight deposits,current accounts, maturing deposits, loan draw downs, guarantees and from margin andother calls on cash settled derivatives. The Bank does not maintain cash resources to meetall of these needs as experience shows that a minimum level of reinvestment of maturingfunds can be predicted with a high level of certainty. The Board sets limits on the minimumproportion of maturing funds available to meet such calls and on the minimum level ofinter-bank and other borrowing facilities that should be in place to cover withdrawals atunexpected levels of demand.The matching and controlled mismatching of the maturities of assets and liabilities isfundamental to the management of the Bank. It is unusual for financial institutions ever tobe completely matched since business transacted is often of uncertain term and of differenttypes. An unmatched position potentially enhances profitability, but can also increase therisk of losses. The maturities of assets and liabilities and the ability to replace, at an acceptable cost,interest-bearing liabilities as they mature, are important factors in assessing the liquidity ofthe Bank and its exposure to changes in interest rates and exchange rates.Liquidity requirements to support calls under guarantees and standby letters of credit areconsiderably less than the amount of the commitment because the Bank does not generallyexpect the third party to draw funds under the agreement. The total outstandingcontractual amount of commitments to extend credit does not necessarily represent futurecash requirements, since many of these commitments will expire or terminate without beingfunded.The liquidity ratio of the Bank for all currencies as at 31 December 2004 was 83% (2003 - 77%), as per Bank of Lebanon’s method of calculation.

The table below analyses assets and liabilities of the Bank into relevant maturity groupingsbased on the remaining period at balance sheet date to the contractual maturity date.

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Less than3 months

3-6months

6-12months

1-5years

Over5 years


Maturities of assets and liabilities As at 31 December 2004

Cash and Bank of Lebanon 347,124 45,483 9,588 449,946 - 852,141

Lebanese Treasury bills 97,900 149,300 116,158 580,700 163,942 1,108,000

Loans and advances to banks 745,019 65 - 18,537 - 763,621

Trading securities 6,283 - - - - 6,283

Loans and advances to customers 288,770 17,277 70,673 88,716 104,629 570,065

Debtors by acceptances 39,579 18,465 1,246 - - 59,290

Investment securities 13,647 769 6,153 4,153 1,539 26,261

Investments in subsidiaries 3,524 - - - - 3,524

Property acquired in settlement of debt - - - 14,265 - 14,265

Investment property - - - - 10,271 10,271

Property, equipment and intangible assets - - - 7,757 25,711 33,468

Other assets 14,011 - - - - 14,011

Total assets 1,555,857 231,359 203,818 1,164,074 306,092 3,461,200

LiabilitiesDeposits from banks 40,420 - 1,170 28,186 - 69,776

Due to customers 2,766,473 123,966 129,923 58,134 8,376 3,086,872

Engagements by acceptances 39,579 18,465 1,246 - - 59,290

Other liabilities 45,149 - - 1,141 - 46,290

Current income tax liability 74 - - - - 74

Retirement benefit obligations - - - 2,156 9,248 11,404

Total liabilities 2,891,695 142,431 132,339 89,617 17,624 3,273,706

Net liquidity gap (1,335,838) 88,928 71,479 1,074,457 288,468

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Less than3 months

3-6months

6-12months

1-5years

Over5 years


Maturities of assets and liabilities As at 31 December 2003

Cash and Bank of Lebanon 309,767 108,688 200,900 300,398 - 919,753

Lebanese Treasury bills 93,667 112,799 276,219 455,140 5,970 943,795

Loans and advances to banks 643,237 23,495 16,168 - - 682,900

Trading securities 3,529 - - - - 3,529

Loans and advances to customers 265,683 25,869 45,606 62,475 100,300 499,933

Debtors by acceptances 41,381 8,687 178 - - 50,246

Investment securities 2,117 385 3,854 21,431 1,542 29,329

Investments in subsidiaries 3,524 - - - - 3,524

Property acquired in settlement of debt - - - 10,625 - 10,625

Investment property - - - - 10,413 10,413

Property, equipment and intangible assets - - - 8,668 25,881 34,549

Other assets 11,956 - - - - 11,956

Total assets 1,374,861 279,923 542,925 858,737 144,106 3,200,552

LiabilitiesDeposits from banks 93,645 3,656 2,997 19,994 - 120,292

Due to customers 2,563,379 99,632 86,865 39,428 6,318 2,795,622

Engagements by acceptances 41,381 8,687 178 - - 50,246

Other liabilities 47,848 - - 2,834 - 50,682

Current income tax liability 2,108 - - - - 2,108

Retirement benefit obligations - - - 2,113 9,065 11,178

Total liabilities 2,748,361 111,975 90,040 64,369 15,383 3,030,128

Net liquidity gap (1,373,500) 167,948 452,885 794,368 128,723

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4- Critical accounting estimates and judgements

The Bank makes estimates and assumptions that affect the reported amounts of assets andliabilities within the next financial year. Estimates and judgements are continually evaluatedand are based on historical experience and other factors, including expectations of futureevents that are believed to be reasonable under the circumstances.

4.1 Impairment losses on loans and advances

The Bank reviews its loan portfolios to assess impairment at least on a quarterly basis. Indetermining whether an impairment loss should be recorded in the income statement, theBank makes judgements as to whether there is any observable data indicating that there isa measurable decrease in the estimated future cash flows from a portfolio of loans beforethe decrease can be identified with an individual loan in that portfolio. This evidence mayinclude observable data indicating that there has been an adverse change in the paymentstatus of borrowers in a Bank, or national or local economic conditions that correlate withdefaults on assets in the Bank. Management uses estimates based on historical lossexperience for assets with credit risk characteristics and objective evidence of impairmentsimilar to those in the portfolio when scheduling its future cash flows.

4.2 Held-to-maturity investments

The Bank follows the guidance of IAS 39 on classifying non-derivative financial assets withfixed or determinable payments and fixed maturity as held-to-maturity. This classificationrequires significant judgement. In making this judgement, the Bank evaluates its intentionand ability to hold such investments to maturity. If the Bank fails to keep these investmentsto maturity other than for the specific circumstances – for example, selling an insignificantamount close to maturity – it will be required to reclassify the entire class as available-for-sale or as for trading. The investments would therefore be measured at fair value notamortised cost. If the entire class of held-to-maturity investments is tainted, the fair valuewould increase by LL 2.7 billion, with a corresponding entry in the fair value reserve inshareholders' equity if reclassified as available-for-sale or in the income statement ifreclassified as for trading.

4.3 Income taxes

The Bank is subject to income taxes. Significant estimates are required in determining theprovision for income taxes.

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5- Cash and Bank of Lebanon

Local banking regulations require banks to maintain a mandatory reserve with the Bank ofLebanon. Mandatory reserve deposits with Bank of Lebanon at the end of 2004 comprisenon-interest earning reserves in Lebanese currency amounting to LL 101 billion and foreigncurrency deposits that earn interest at 3.21% per annum with a counter value of LL 311 billion (US$ 206 million). At end of 2003, the Lebanese currency reservesamounted to LL 129 billion while the foreign currency deposits amounted to LL 246 billion.

The Bank subscribed in certificates of deposit of LL 121 billion (US$ 80.2 million) to meetthe compulsory financial commitments on total deposits, as required by Bank of Lebanoncircular No. 87 and its amendments as part of the Government support program.

Money market placements and certificates of deposit are fixed-rate assets.

6- Lebanese Treasury bills


Cash on hand 30,388 27,075Money market placements 20,171 35,000Certificates of deposit - 47,000Balances with Bank of Lebanon other than

mandatory reserve deposits 4,002 3,925Included in cash and cash equivalents (note 37) 54,561 113,000Mandatory reserve deposits with Bank of Lebanon 411,659 375,083Loans and advances:Term deposits - 172Certificates of deposit 233,500 295,500Non-interest earning certificates of deposit

held as part of Government support program 120,898 120,898Interest receivable – Bank of Lebanon 1,628 3,675Interest receivable – Certificates of deposit 31,473 11,425Accrued tax on interest receivable – Certificates of deposit (note 35) (1,578) -

385,921 431,670852,141 919,753


Treasury bills in Lebanese Pound 515,884 446,894Treasury bonds in foreign currency 469,191 359,121Non-interest earning Treasury bills held as part

of the Government support program:- In Lebanese Pound 97,831 97,831- In foreign currency 15,137 15,137

1,098,043 918,983

Interest receivable 16,429 24,812Accrued tax on interest receivable (note 35) (542) -Unearned interest (5,930) -

9,957 24,8121,108,000 943,795

The Bank subscribed in non-interest earning Lebanese Treasury bills in Lebanese Poundand in foreign currency to meet the compulsory financial commitments on total deposits,as required by Bank of Lebanon circular No. 87 and its amendments as part of Governmentsupport program. All interest-earning Lebanese Treasury bills have fixed interest rates.

Lebanese Treasury bills are classified at 31 December 2004 as follows:

Lebanese Treasury bills are classified at 31 December 2003 as follows:

7- Loans and advances to banks

Auditor's ReportA

Annual Report 2003

(LL Millions) Amortised cost Unrealisedgain (loss)Fair value

In Lebanese currencyHeld-to-maturity 64,696 65,628 932Originated Loans:- Interest earning 382,198 399,225 17,027- Non-interest earning 97,831 87,720 (10,111)

544,725 552,573 7,848In foreign currencyHeld-to-maturity 82,341 85,999 3,658Originated Loans:- Interest earning 276,780 298,536 21,756- Non-interest earning 15,137 14,069 (1,068)

374,258 398,604 24,346918,983 951,177 32,194

67


Items in course of collection from other banks 3,783 6,994Placements with other banks 594,905 545,096Current accounts 83,135 91,105Included in cash and cash equivalents (note 37) 681,823 643,195Loans and advances:Term deposits 77,844 38,831Certificates of deposit 2,261 -Interest receivable – banks 1,662 874Interest receivable – certificates of deposit 67 -Accrued tax on interest receivable – banks (note 35) (33) -Accrued tax on interest receivable – Certificates of deposit (note 35) (3) -

81,798 39,705763,621 682,900

(LL Millions) Amortised cost Unrealisedgain (loss)Fair value

In Lebanese currencyOriginated Loans:- Interest earning 515,884 516,213 329- Non-interest earning 97,831 96,108 (1,723)

613,715 612,321 (1,394)In foreign currencyHeld-to-maturity 26,410 28,387 1,977Originated Loans:- Interest earning 442,781 456,305 13,524- Non-interest earning 15,137 14,846 (291)

484,328 499,538 15,2101,098,043 1,111,859 13,816

Auditor's Report

A

Loans and advances to banks comprise loans with variable rates and fixed rates of LL 175 billion and LL 583 billion respectively.The table below summarises the geographical concentration of loans and advances tobanks at 31 December 2004:

8- Trading securities

9- Loans and advances to customers

(LL Millions)

Lebanon 130,233Switzerland 77,237Luxemburg 72,255North America 21,163Arab countries 70,251Other European countries 364,469Other countries 22,537Other items 5,476

763,621

(LL Millions) 2004

2004

2003

Equity securities:- Listed 3,204 2,913- Unlisted 3,079 616

6,283 3,529

(LL Millions)

Commercial advances 374,955 302,142Current debtor accounts 153,201 144,526Net doubtful accounts 38,090 45,020Net debit against credit accounts – speculation accounts 116 2,166Related parties loans and advances (note 38) 2,499 4,894Interest receivable – customers 1,204 1,185

570,065 499,933Commercial advances comprise the following:Discounted bills 10,648 6,069Bills to the order of the Bank 24,924 25,999Unpaid bills 2,125 2,106Short term loans 34,580 116,868Medium and long term loans 302,678 151,100

374,955 302,142

2004 2003

Auditor's ReportA

Annual Report 2003

Loans and advances to customers comprise the following:

Loans and advances to customers include loans classified as substandard as follows:

The movement affecting the unrealised interest is summarised as follows:


Advances against real estate mortgage 343,109 328,718Advances against cash collateral 169,867 133,505Advances against personal guarantees 134,138 134,261Non-secured advances 82,384 62,572Advances against securities 1,432 1,330Other advances 349 7

731,279 660,393Provision and unrealised interest on doubtful loans (77,297) (81,375)Unrealised interest on substandard loans (7,251) (5,711)Debtors by acceptances (note 10) (59,290) (50,246)Speculation accounts (18,580) (24,313)Interest receivable – customers 1,204 1,185

(161,214) (160,460)570,065 499,933

69


Substandard loans 20,089 27,350Unrealised interest (7,251) (5,711)

12,838 21,639


1 January 5,711 7,798Additions 2,503 2,328Releases (650) (3,578)Transfer to unrealised interest on doubtful loans (313) (494)Unrealised interest applied against loan write off - (343)

7,251 5,711Net doubtful accounts comprise the following:Doubtful loans 115,387 126,395Provision for doubtful loans including unrealised interest (77,297) (81,375)

38,090 45,020

Auditor's Report

A

The movement affecting the provision for doubtful loans and unrealised interest issummarised as follows:

Interest accrued on doubtful accounts is charged to the respective debtor accounts andcredited to provision for doubtful debts. Interest on past due bills is recognised upon collection.

10- Debtors by acceptances

This caption represents the customer's liability to the Bank on outstanding drafts and bills ofexchange that have been accepted by the Bank and/or by other banks for its account. Theseacceptances relate to negotiated deferred payment of import letters of credit. This captioncorresponds to and offsets engagements by acceptance caption reflected under liabilities.

11- Investment securities

All debt securities have fixed coupons. Equity securities do not bear interest.The available-for-sale securities represent 62,500 shares owned by the Bank in Banque del'Habitat S.A.L. at a cost of LL 562 million. These shares are classified as available-for-saleand are stated at historical cost since they are not listed, and their current market valuecannot be readily estimated.Unrealised gain on the securities classified as held-to-maturity amounted to LL 732 million(US$ 485,600) as at 31 December 2004.


Balance brought forward 81,375 65,820Provision on principal amounts 7,388 20,740Unrealised interest and commissions 6,803 1,785Provisions no longer required (7,538) (3,483)Provisions applied against loan write offs (3,838) (3,865)Transfer from unrealised interest on substandard loans 313 494Transfer to off-balance sheet (7,206) (116)Balance carried forward 77,297 81,375


Securities available-for-saleEquity securities:- Unlisted 562 562Securities held-to-maturityDebt securities – at amortised cost:- Listed 23,366 23,668- Unlisted 1,809 4,447

25,175 28,115Interest receivable 524 652

25,699 28,76726,261 29,329


Balance 59,290 50,246

Auditor's ReportA

Annual Report 2003

The movement in investment securities may be summarised as follows:

12- Investments in subsidiaries

The principal activities of Informatics Co. S.A.R.L. comprise providing informationtechnology services to the Bank. The principal activities of Société Libanaise de ServiceS.A.R.L. comprise managing the properties of the Bank and third parties, providing securityguarding services and different maintenance services.

13- Property acquired in settlement of debt

Total impairment provisions in respect of properties acquired in settlement of debtamounted to LL 1.14 billion as of 31 December 2004 (2003 – LL 2.84 billion) and areclassified under other provisions (refer to note 21). These impairment provisions are in linewith the requirements of the Bank of Lebanon Circular No. 78 and its amendments. Theseproperties are available for sale and are not included within the Bank's property used in thenormal course of business.

(LL Millions) Available-for-sale

Held-to-maturity Total

At 1 January 2004 562 28,115 28,677Additions - 3,768 3,768Redemptions - (6,708) (6,708)At 31 December 2004 562 25,175 25,737

(LL Millions) % ownership 2004 2003

Capital for Insurance and Reinsurance Company S.A.L. 80% 3,524 3,524

Informatics Co. S.A.R.L. 84% - -Société Libanaise de Service S.A.R.L. 91% - -

3,524 3,524

71


At 1 January 10,625 4,129Acquisitions during the year 6,085 6,826Disposals during the year (2,445) (330)At 31 December 14,265 10,625

Auditor's Report

A

14- Investment property

The investment property of the Bank was revalued in 1997 by an independent appraiserunder the provisions of fiscal law 282/93 based on market values at 31 December 1993.The revaluation resulted in an increase in the value of investment property over its carryingvalue by LL 3.3 billion.Had the Bank's investment property been stated on the historical cost basis, the amountswould have been as follows:

15- Intangible assets

(LL Millions) Land Buildings Total

Year ended 31 December 2003At 1 January 5,747 4,808 10,555Fair value loss - (142) (142)At 31 December 5,747 4,666 10,413Year ended 31 December 2004At 1 January 5,747 4,666 10,413Fair value loss - (142) (142)At 31 December 5,747 4,524 10,271

(LL Millions) Computersoftware Key money Total

At 1 January 2003Cost 2,085 1,555 3,640Accumulated amortisation (842) (790) (1,632)Net book amount 1,243 765 2,008

Year ended 31 December 2003Opening net book amount 1,243 765 2,008Additions 161 - 161Amortisation charge (397) (180) (577)Net book amount 1,007 585 1,592

At 31 December 2003Cost 2,735 1,555 4,290Accumulated amortisation (1,728) (970) (2,698)Net book amount 1,007 585 1,592

Year ended 31 December 2004Opening net book amount 1,007 585 1,592Additions 82 175 257Amortisation charge (366) (195) (561)Net book amount 723 565 1,288

At 31 December 2004Cost 2,817 1,730 4,547Accumulated amortisation (2,094) (1,165) (3,259)Net book amount 723 565 1,288


Cost 8,064 8,064Accumulated depreciation (430) (370)Net book amount 7,634 7,694

Auditor's ReportA

Annual Report 2003

73

Buildings ComputerEquipment

FurnitureFixtures &Equipment

Vehicles Leaseholdimprovements

Total

(LL Millions)

At 1 January 2003Cost or valuation 30,013 7,605 5,444 198 9,063 52,323Accumulated depreciation (3,770) (4,756) (3,656) (37) (7,328) (19,547)Net book amount 26,243 2,849 1,788 161 1,735 32,776

Year ended 31 December 2003Opening net book amount 26,243 2,849 1,788 161 1,735 32,776Additions 363 909 634 - 1,508 3,414Disposals - (52) - - - (52)Depreciation charge (723) (1,045) (365) (30) (1,018) (3,181)Closing net book amount 25,883 2,661 2,057 131 2,225 32,957

At 31 December 2003Cost or valuation 30,376 7,266 5,958 198 10,509 54,307Accumulated depreciation (4,493) (4,605) (3,901) (67) (8,284) (21,350)Net book amount 25,883 2,661 2,057 131 2,225 32,957

Year ended 31 December 2004Opening net book amount 25,883 2,661 2,057 131 2,225 32,957Additions 562 833 358 22 627 2,402Disposals - - - - (8) (8)Depreciation charge (733) (1,037) (294) (31) (1,076) (3,171)Closing net book amount 25,712 2,457 2,121 122 1,768 32,180

At 31 December 2004Cost or valuation 30,938 8,041 6,198 214 11,010 56,401 Accumulated depreciation (5,226) (5,584) (4,077) (92) (9,242) (24,221)Net book amount 25,712 2,457 2,121 122 1,768 32,180

16- Property and equipment

The property and equipment of the Bank were revalued in 1997 by an independentappraiser under the provisions of fiscal law 282/93 based on market values at 31December 1993. The revaluation resulted in an increase in the value of property andequipment of LL 17.8 billion.

Had the Bank's property and equipment been stated on the historical cost basis, theamounts would have been as follows:


Cost 38,636 36,542Accumulated depreciation (20,668) (18,974)Net book amount 17,968 17,568

Auditor's Report

A

17- Other assets

The above provisions include a provision of LL 1.8 billion set up against one of the Bank'smoney dealers. Although the total amount due from this money dealer is LL 2.6 billion,management believes that the provision of LL 1.8 billion is adequate to cover the expected loss.

The above provisions also include a provision of LL 3 billion set up during 2003 to coverlosses incurred in connection with contentious depositors' claims in one of the Bank'sbranches. On 26 April 2004, the Bank recovered an amount of LL 1.55 billion from theinsurance company relating to the above claims. However, the provision has beenmaintained at the same level of LL 3 billion.

The movement in the provisions – private sector is as follows:

18- Deposits from banks

(LL Millions)

Credit card facilities 10,089 9,014Other receivables – private sector 6,725 6,321Prepaid expenses 1,132 715Advances on fixed asset purchases 613 475Other receivables – public sector 502 460Stamps 56 73Deposits receivable 34 33Precious metals 18 18Foreign exchange difference 5 2Other 248 260

19,422 17,371Less: provisions – private sector (5,411) (5,415)

14,011 11,956

(LL Millions)

Sight deposits 26,362 14,038Term deposits 40,821 100,855Short-term loan 1,809 -Long-term loan - 4,824Interest payable – banks 784 575

69,776 120,292


2004 2003

2004 2003

Balance brought forward 5,415 1,805Provision against principal amounts - 3,610Difference of exchange (4) -Balance carried forward 5,411 5,415

Auditor's ReportA

Annual Report 2003

The short-term loan represents a loan granted to the Bank by the Arab Trade Financing Programin September 2004 that matures in September 2005. The loan balance will be repaid in twoinstalments due in March and September 2005 with an annual interest rate of 2.51%.

The long-term loan represents a loan granted to the Bank by the International FinanceCorporation (IFC) during 1996 and was fully settled on 17 February 2004.

Deposits from banks comprise deposits with variable rates and fixed rates ofLL 23.3 billion and LL 45.6 billion respectively.

The table below summarises the geographical concentration of deposits from banks at 31 December 2004:

19- Due to customers

75

(LL Millions)

European countries 48,935Lebanon 9,203North America 7,085Other countries 3,769Other items 784

69,776

(LL Millions) 2004

2004

2003

Sight deposits 245,495 226,471Term deposits 356,744 259,651Saving accounts 2,186,232 2,056,391Related parties accounts (note 38) 56,750 46,505Net credit against debit accounts and cash margins 225,765 189,834Interest payable – customers 15,886 16,770

3,086,872 2,795,622Sight deposits comprise the following:Checking and current accounts 222,120 205,988Debtors accidentally creditors 13,386 14,776Cheques and orders to be paid 8,551 4,702Public sector deposits 1,438 1,005

245,495 226,471Saving accounts comprise the following:Saving accounts – demand 161,295 148,970Saving accounts – term 2,024,937 1,907,421

2,186,232 2,056,391

Auditor's Report

A

Net credit against debit accounts and cash margins comprise the following:

20- Other liabilities

Withholding taxes and other charges consist mainly of withheld taxes from interest ondeposits, employee salaries, non-resident income, built property and municipality tax.

The gain resulting from the translation of the Bank's fixed foreign exchange position isdeferred in the balance sheet until realised. A provision equivalent to 5% of the net openexchange position is set up for adverse foreign currency exchange fluctuations. Foreignexchange gains on the position held against the Bank's equity represent exchange gains onthe translation of the US Dollar fixed exchange position amounting to LL 40.4 billion (US$ 26.8 million) as at 31 December 2004.

Revaluation variance on allocations to foreign branches represents exchange gains of LL 15.08 billion (US$ 10 million) allocated to the Bank's branch in the Damascus free zonein Syria.


Pledged deposits against credit facilities 160,956 130,423Safety margins on speculation accounts 11,427 10,908Margins on letters of guarantee 53,382 48,503

225,765 189,834


Margins against documentary credits 30,411 29,269Margins against credit card and safe box facilities 4,562 4,165Foreign exchange gains on position constituted

against the Bank's equity 2,545 2,545Withholding taxes and other charges 1,273 1,287Revaluation variance of allocations to foreign branches 573 573Dividends payable and interest payable on cash

contribution to capital 564 331Accrued expenses 553 716Due to the national social security fund 263 259Other provisions (note 21) 3,832 5,031Other 1,714 6,506

46,290 50,682

Auditor's ReportA

Annual Report 2003

77

21- Other provisions

22- Retirement benefit obligations

The provision for retirement benefit obligation comprises the following:

The retirement benefit obligation at 31 December 2004 is determined in accordance withthe accounting policy set out on page 53 and is broadly in line with the computation inaccordance with the national social security fund regulations.


Provision for risks 2,173 1,777Impairment provision for properties acquired

in settlement of debt (note 13) 1,141 2,835Provision for levies and other charges 456 357Provision for foreign exchange fluctuations 62 62

3,832 5,031


Provision for retirement benefit obligation 11,598 11,996Advances against retirement benefit obligation (194) (818)

11,404 11,178

(LL Millions) PaymentsAdditions1 January2004 Releases 31 December

2004

Provision for risks 1,777 1,668 (1,272) - 2,173Impairment provision for

properties acquired in settlement of debt (note 13) 2,835 156 - (1,850) 1,141

Provision for levies and other charges 357 326 (227) - 456

Provision for foreignexchange fluctuations 62 - - - 62

5,031 2,150 (1,499) (1,850) 3,832

(LL Millions) PaymentsAdditions1 January2004

31 December2004

Retirement benefit obligation 11,178 900 (674) 11,404

Auditor's Report

A

The amounts recognised in the income statement are as follows:

The principal actuarial assumptions used are as follows:

23- Share capital and cash contribution to capital

On 31 July 2002, the Central Council of the Bank of Lebanon agreed to the US Dollardenominated cash contributions to capital contracts of US$ 14.4 million between the Bank andcertain shareholders. These contracts earn interest at a rate of 5.5% per annum subject toratification by the Annual General Assembly and approval by the Banking Control Commission.

At the Annual General Assembly planned for June 2005, interest paid on cash contributionto capital in respect of 2004 of LL 1.2 billion is to be proposed. These financial statementsdo not reflect this interest payable, which will be accounted for in shareholders' equity asan appropriation of retained earnings in the year ending 31 December 2005. The interestpaid on cash contribution to capital in respect of 2003 is reflected in the year 2004 andamounts to LL 1.2 billion.

The Bank's share capital currently consists of 72 million issued and paid up nominativeshares of LL 1,000 each (2003 – 72 million shares of LL 1,000 each).

24- Legal reserves

As per Article 132 of the Code of Money and Credit, 10% of the annual net profits areto be transferred to a legal reserve. This reserve is not available for distribution.


Current service cost 54 52Interest costs 846 848Total, included in staff costs (note 34) 900 900

2004 2003

Discount rate 7.5% 7.5%Future salary increases 3% 3%Future years of service 3 – 10 years 3 – 10 years


Share capital 72,000 72,000Cash contribution to capital 21,697 21,697

93,697 93,697

Auditor's ReportA

Annual Report 2003

25- Reserve for unidentified banking risks

According to the Bank of Lebanon directives, banks are required to appropriate fromannual profits an amount equal to 2 per mil of the solvency denominator to a reserve forunidentified banking risks. The above reserve is considered as part of Tier I capital. Thisreserve is not available for distribution.

26- Real estate revaluation reserve

As explained in notes 14 and 16, the revaluation reserve arises from the fiscalrevaluation of investment property, and property and equipment under Law No. 282/93.No further taxes are due upon the eventual distribution of this reserve.

27- Net interest income

28- Net fee and commission income

79


Interest and similar incomeLebanese Treasury bills 91,260 114,728Deposits and similar funds at banks

and financial institutions 61,399 49,605Loans and advances to customers 40,695 45,812Investment securities 2,252 2,584Related parties loans and advances (note 38) 342 344

195,948 213,073Interest expense and similar chargesDeposits and similar funds from banks

and financial institutions 3,096 2,203Due to customers 146,607 153,600Deposits from related parties (note 38) 1,705 2,312Other interest and similar charges - 8

151,408 158,123

(LL Millions)

Fee and commission incomeCredit related fees and commissions 6,575 6,217Engagements by endorsement fees 4,018 3,355Other fees 4,622 3,915

15,215 13,487


Fee and commission expenseBrokerage fees paid 1,155 971Other fees paid 95 151

1,250 1,122

2004 2003

Auditor's Report

A

29- Dividend income

30- Net trading income

31- Other operating income

32- Net (releases) provisions on loans and advances

(LL Millions)

Trading securities 135 246Available-for-sale securities 27 36

162 282

(LL Millions)

Foreign exchange:- Transaction gains less losses 1,855 471- Translation gains less losses 270 1,315Interest rate instruments 2,658 5,518Equities 291 355

5,074 7,659

(LL Millions)

Release of impairment provision of property acquired in settlement of debt (note 21) 1,850 -

Services rendered to third parties 515 465Gain on disposal of property acquired in settlement of debt 157 -Loss on disposal of property and equipment (8) (52)Rent income 159 155Other 78 32

2,751 600


2004 2003

2004 2003

2004 2003

Provisions for customer loans and advances (7,388) (20,740)Release of provisions and unrealised interest

on doubtful and substandard loans 8,188 7,062800 (13,678)

Auditor's ReportA

Annual Report 2003

81

33- Operating expenses

34- Staff costs

The average number of persons employed by the Bank during the year was 554 (2003 - 539).

(LL Millions)

Staff costs (note 34) 24,018 23,219Depreciation on property and equipment (note 16) 3,171 3,181Water, electricity and communication expense 2,345 2,289Deposits guarantee premiums 1,385 1,212Professional fees 1,325 798Repairs and maintenance 1,067 959Office supplies 787 737Advertising expense 721 614Subscriptions 623 736Amortisation (note 15) 561 577Municipality and other taxes 548 520IT outsourcing service cost 490 485Insurance expense 469 359Travel expense 454 407Operating lease rentals 359 330Software costs 329 251Directors' attendance fees (note 38) 272 272Cleaning expense 246 237Provision for properties acquired in settlement of debt 156 2,047Fair value loss on investment property (note 14) 142 142Provision for other receivables 120 3,730Investment property expense 106 145Other 1,923 1,054

41,617 44,301


2004 2003

Wages and salaries 14,509 13,969Social security costs 2,339 2,231Bonuses 1,826 1,713Scholarship 1,560 1,537Transportation 996 884Pension costs – defined benefit plan 900 900Directors' remuneration (note 38) 642 595Medical expenses 601 592Other employee benefits 525 667Training expenses 120 131

24,018 23,219

Auditor's Report

A

35- Taxes

In accordance with article 51 of law number 497/2003, the Bank is subject to tax oninterest as well as corporate income tax. In case the tax on interest exceeds the corporateincome tax, the excess constitutes an additional tax charge and is not refundable to theBank. The Bank's tax charge is determined as the higher of the corporate tax and the taxon interest during the year as follows:

Corporate income taxCorporate income tax expense for the year is determined as follows:

Tax on interestThe tax on interest income is determined as follows:


Profit of Lebanon branches before tax 18,717 14,623Income tax at statutory rate of 15% 2,808 2,193Effect of expenses not deductible for tax purposes or non-taxable income:

Differences between accounting and fiscal depreciation 29 25Provision for diminution in the value of fixedand variable income securities 32 18Donations 43 -Effect of tax assessment (2000 – 2001) - 62Tax on interest income 517 46Provision for properties acquired in settlement of debt 23 307Other provisions 86 -Release of provisions which were previously subject to tax (353) (59)Interest paid on cash contributions to capital (180) (180)

Tax charge 3,005 2,412

(LL Millions)

Interest5% tax onInterestInterest

2004 2003

5% tax onInterest

Interest earned:Interest received- Certificates of deposits 10,398 520 4,792 240- Lebanese Treasury bills 13,442 672 - -- Loans and advances to banks 1,957 98 1,299 65

25,797 1,290 6,091 305Interest receivable- Certificates of deposits (note 5) 31,473 1,578 - -- Lebanese Treasury bills (note 6) 10,844 542 - -- Loans and advances to banks (note 7) 719 36 - -

43,036 2,156 - -Other interest income from Lebanese

Treasury bills and loans and advancesto banks not subject to tax on interest 83,826 - 158,242 -

152,659 3,446 164,333 305

Auditor's ReportA

Annual Report 2003

83

Tax charge

The movement in the current income tax liability is as follows:

The above is classified in the Bank’s balance sheet under the following captions:

The fiscal years 2002 to 2004 remain subject to examination by the income tax authorities.

36- Contingent liabilities and commitmentsa) Legal proceedings

There were a number of legal proceedings outstanding against the Bank at 31 December2004. No provision has been made as professional advice indicates that it is unlikely thatany significant loss will arise.


Tax charge 3,446 2,412Tax assessment (2000 – 2001) - 410Taxes charge for the year 3,446 2,822


Balance brought forward 2,108 2,275Provision set up during the year 3,446 2,822Payments during the year (3,324) (2,989)Balance carried forward 2,230 2,108


Accrued tax on interest receivable – Certificates of deposit (note 5) 1,578 -Accrued tax on interest receivable – Lebanese Treasury bills (note 6) 542 -Accrued tax on interest receivable – Loans and advances

to banks (note 7) 36 -Current income tax liability 74 2,108

2,230 2,108

Auditor's Report

A

b) Capital commitments

At 31 December 2004 the Bank had no capital commitments.

The contractual amounts of the Bank's off-balance sheet financial instruments thatcommit it to extend credit to customers are as follows:

c) Assets pledged

Mandatory reserve deposits are held with Bank of Lebanon in accordance with statutoryrequirements. These deposits are not available to finance the Bank's day-to-day operations.

d) Operating lease commitments

Where the Bank is the lessee, the future minimum lease payments under non-cancellablebuilding operating leases are as follows:

37- Cash and cash equivalents


Unutilised credit facilities 6,023 1,380Letters of credit 39,939 34,748Letters of guarantee 30,192 28,652

76,154 64,780


Not later than 1 year 252 252Later than 1 year and no later than 5 years 191 202Later than 5 years 223 257

666 711


Mandatory reserve deposits with Bank of Lebanon (note 5) 411,659 375,083


Cash and Bank of Lebanon (note 5) 54,561 113,000Loans and advances to banks (note 7) 681,823 643,195

736,384 756,195

Auditor's ReportA

Annual Report 2003

85

38- Related party transactions

A number of banking transactions are entered into with related parties in the normal courseof business. These include loans, deposits and foreign currency transactions. The volumesof related party transactions, outstanding balances at the year end, and related expense andincome for the year are as follows:

Transactions with related parties

Outstanding balances with related parties

No provisions have been recognised in respect of loans given to related parties (2003: nil).

39- Earnings per ordinary share

Earnings per ordinary share are calculated as the ratio of net profit for the year divided bythe weighted average number of ordinary shares outstanding during the year or 72 millionshares (2003 – 72 million ordinary shares).

40- Dividends per share

At the Annual General Assembly planned for June 2005, a dividend in respect of 2004 is tobe proposed. These financial statements do not reflect this dividend payable, which will beaccounted for in shareholders' equity as an appropriation of retained earnings in the year ending31 December 2005. The dividends declared in respect of 2003 and 2002 were LL 3.96 billion(LL 55 per share) and LL 4.75 billion (LL 66 per share) and these have been accounted for asappropriations from retained earnings in the years 2004 and 2003 respectively.

2004 2003

Related parties loans and advances 2,499 4,894Related parties accounts 56,750 46,505

2004 2003

Net profit attributable to shareholders (LL Millions) 22,229 15,055Weighted average number of ordinary shares issued 72,000,000 72,000,000Earnings per ordinary share (LL) 309 209


Interest paid on deposits 1,705 2,312Interest received from loans and advances 342 344Fee and commission income 515 465IT outsourcing service cost 490 485Insurance expense 469 359Other operating income 86 112Directors' remuneration 642 595Directors' attendance fees 272 272Key management compensation 1,260 1,089

Balance sheet presented in accordance with Bank of Lebanon Circular No. 33At 31 December 2004

ASSETS (LL Millions) 2004 2003

Cash and Bank of Lebanon 852,141 919,753Lebanese Treasury bills 1,108,000 943,795Debt and other fixed income securities 25,699 28,767Equity and other variable income securities 6,845 4,091Due from banks and financial institutions 763,621 682,900Loans and advances to customers 570,065 499,933Debtors by acceptances 59,290 50,246Investments in subsidiaries 3,524 3,524Property and equipment 56,716 53,995Intangible assets 1,288 1,592Other assets 74 91Order and other debit accounts 13,937 11,865Total assets 3,461,200 3,200,552

LiabilitiesDue to banks and financial institutions 69,776 120,292Deposits and customer accounts 3,086,872 2,795,622Engagements by acceptances 59,290 50,246Other liabilities 38,117 43,316Order and other credit accounts 4,416 4,443Provision for liabilities and charges 15,235 16,209Total liabilities 3,273,706 3,030,128

Shareholders' equityShare capital and cash contribution to capital 93,697 93,697Legal reserve 20,946 18,723Reserve for unidentified banking risks 11,682 9,682Real estate revaluation surplus 21,061 21,061Retained earnings 40,108 27,261

Total shareholders' equity 187,494 170,424

Total liabilities and equity 3,461,200 3,200,552

Auditor's Report

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Auditor's ReportA

Annual Report 2003

87

Income statement presented in accordance with Bank of Lebanon Circular No. 33for the year ended 31 December 2004


Interest and similar income

Lebanese Treasury bills 91,260 114,728

Deposits and similar funds at banks

and financial institutions 61,399 49,605

Debt and other fixed income securities 2,252 2,584

Loans and advances to customers 40,695 45,812

Related parties loans and advances 342 344

195,948 213,073

Interest expense and similar charges

Deposits and similar funds from banks

and financial institutions 3,096 2,203

Customer deposits and other credit balances 146,607 153,600

Deposits from related parties 1,705 2,312

Other interest and similar charges - 8

151,408 158,123

Net provisions less releases on loans and advances

Provision for customer loans and advances 7,388 20,740

Release of provision and unrealised interest

on doubtful and substandard loans 8,188 7,062

800 13,678

Net interest income (carried forward to next page) 45,340 41,272

Auditor's Report

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Income statement presented in accordance with Bank of Lebanon Circular No. 33 (continued)for the year ended 31 December 2004


Net interest income (brought forward from previous page) 45,340 41,272

Income from variable income securities 166 285

Net commission income

Commission income 15,215 13,487

Commission expense 1,250 1,122

13,965 12,365

Profit from financial operations

Profit from foreign exchange 3,596 2,442

Profit on sale of Treasury bills 2,658 5,518

6,254 7,960

Loss from financial operations

Loss from foreign exchange 1,471 656

Other operating income 3,256 952

Other operating charges 1,709 1,396

General and administrative expenses

Staff costs 24,018 23,219

General operating expenses 12,078 13,739

36,096 36,958

Depreciation and amortisation 3,874 3,900

Provision for property acquired

in settlement of debts 156 2,047

Net income before taxes 25,675 17,877

Taxes 3,446 2,822

Net income for the year 22,229 15,055

BBAC Network

Network

A

Branch Network and AddressesHead Office:

Beirut250, Clemenceau StreetP.O. Box: 11-1536 Beirut, LebanonTel: (01) 372883 - 364883

(01) 374530 - 372890 - 360460(03) 265501/2

Fax: (01) 365200SWIFT: BBAC LBBXwww.bbac.com.lb

BRANCHES:

Central Branch250 Clemenceau StreetP.O.Box: 11-1536Tel: (01) 372883 - 364883 – 372890

(03) 245501/2Fax: (01) 365200

AchrafiehSaint NicolasTelefax: (01) 201780/1 - 331599 - 331690

(03) 541542

AleyEl-SahaTel: (05) 555433/4 – 557433

(03) 548549Fax: (05) 557434

Aley BaqaaBkeshtay RoadTelefax: (05) 554701/2 - 557701/2

(03) 563564

BaalbekMain RoadTelefax: (08) 374014/5/6

(03) 614899

BaaklineMain RoadTelefax: (05) 300776 – 300348

(03) 265503

Bar EliasDamascus RoadTelefax: (08) 510014 - 511085

(03) 840842

BekaataMain RoadTelefax: (05) 500587 - 501587

(03) 265506

Bir El-AbedHaret HreikTelefax: (01) 548900/1 - 545435

(03) 539540

Bint JbeilAl Shami Bldg., Main RoadTelefax: (07) 450121/2

(03) 499300

JbeilJbeil, Main RoadTel: (09) 546700/546407/546567

ChahharQabr ChmounTelefax: (05) 410232 – 410281/2

(03) 265509

ChoueifatOld Sidon RoadTelefax: (05) 433302/3 - 433601

(03) 271194

ChtauraDamascus RoadTel: (08) 542451/3 – (03) 840844Fax: (08) 542452

DekwanehBlvd. Camille ChamounTelefax: (01) 682389 - 682390/1/2

(03) 542543

ElyssarBekfayya, Main RoadTel: (04) 913221- 913255

FerzolMain RoadTelefax: (08) 950850/1/2

(03) 840841

Furn el ChebbakDamascus RoadTelefax: (01) 291528/9/30

(03) 388611

HamraAbdel Aziz StreetTelefax: (01) 341280/2 - 351261 – 345733

(03) 414514

HasbayaChehabi’s Sarail RoadTelefax: (03) 311788 - (07) 250273/2

Jib JannineMain RoadTelefax: (08) 660370 – 660240

(03) 840843

KaslikTripoli-Beirut HighwayTelefax: (09) 221437/8/9

(03) 494495

ManassefMain RoadTelefax: (05) 720598/9

(03) 220729

MazraaCorniche el MazraaTelefax: (01) 818429/31 – 302540

(03) 265266

MetnHammanaTel: (05) 530050 – (03) 265504Fax: (05) 530482

Rachaya El-WadiMain RoadTelefax: (08) 591243/4 – 590240

(03) 840845

SaidaNijmeh SquareTelefax: (07) 723857 – 724369

(03) 535536

Tripoli MinaAl Mina Street - Dannaoui Bldg.Tel: (06) 200103/4/5/6

(03) 566635Fax: (06) 611555

Tripoli TallTall SquareTelefax: (06) 430460/1 – 627444

(03) 388622

TyrBuss - Jal el Baher - Main RoadTelefax: (07) 343651/2

(03) 265505

UnescoCorniche el MazraaTelefax: (01) 867144/5/6

(03) 233733

ZalkaAutostrade ZalkaTelefax: (01) 893910 – 886764 -893486

(03) 534111

OVERSEAS:

International Banking Unit - CyprusEmelle Bldg.135, Makarios AvenueP.O.Box: 56201LimassolTel: +357-25- 381290 - 381369Telefax: +357-25- 381584

Offshore Banking Unit - SyriaFree Zone AreaDamascusTel: 02-11-2134596/7/8

NetworkN

Annual Report 2003

Main CorrespondentsAmmanJordan National Bank

AmsterdamABN AMRO Bank

BrusselsFortis Bank

CopenhagenDanske Bank

DubaiMashreqBank

FrankfurtDeutsche BankCommerzBank

KuwaitNational Bank of Kuwait

LondonBarclays Bank PLC

MadridBanco Bilbao Vizcaya Argentaria

MelbourneANZ Bank

MilanoBanca Intesa SpA

MontrealNational Bank of Canada

New YorkCitibankThe Bank of New YorkJP Morgan Chase Bank

OsloDen Norske Bank

ParisBanque Saradar France

RiyadhAlbank AlSaudi Alfaransi

StockholmSkandinaviska Ensklida Bank

TokyoU.B.A.F.

ViennaBank Austria A.G.

ZurichCredit Suisse First Boston

91

Network

A

Subsidiaries1- Informatics’ Co. s.a.r.l.

A software company, that offers commercial and technical services. It was established in1980 by the bank shareholders: Mr. Toufic Assaf and Mr. Nashaat Sheikhlard. It is chairedby Mr. Ghassan Assaf; 84 % of the shares are owned by BBAC s.a.l.

2- Societe Libanaise de Service s.a.r.l.

SLS started its operations in 1980, with 91 % of its shares owned by BBAC s.a.l. Thecompany is chaired by Mr. Ghassan Assaf.

3- Capital Insurance & Reinsurance Co. s.a.l.

The company provides the full-range of insurance and re-insurance services. It is chaired byMr. Assad G. Merza. BBAC s.a.l. owns 80 % of its shares.

Documents

Annual Report 2004 Contents - BBAC · USD C/V Total Loans and Advances LL USD C/V Total Net Liquidity LL USD C/V Deposits from Customers LL USD C/V Shareholders' Equity* LL USD C/V