HBZ Bank Limited...HBZ Bank Limited ANNUAL REPORT 2005 (A SUBSIDIARY OF HABIB BANK A G ZURICH) We dedicate ourselves always to consider the customer ﬁ rst, give full measure and

S O U T H A F R I C A

HBZ Bank Limited

ANNUAL REPORT 2005

(A SUBSIDIARY OF HABIB BANK A G ZURICH)

We dedicate ourselves always

to consider the customer

fi rst, give full measure and to

deliver more than we promise.

“ “

Isle of Man

CanadaSwitzerland

Egypt

Kenya

South Africa

UAE

United Kingdom

secure technology

Egypt

Kenya

South Africa

Pakistan

Hong KongBangladesh

Singapore

Contents

OUR MISSION

To provide a specialized range of

banking services by understanding

and fulfilling the needs of our

niche market via knowledgeable,

experienced and professional staff

who offer personal, friendly, efficient

and secure service.

Five year review 2

Profit Summary 3

Total Assets 3

Directorate 4

Executive management 5

Committees 6

Chairman’s review 8

Risk management review 9

Social investment 13

Corporate governance 14

Directors approval of the Annual Financial Statements 19

Company Secretary Certificate 20

Auditors Report 20

Report of the directors 21

Balance sheet 22

Income statement 23

Statement of changes in equity 24

Cash flow statement 25

Notes to the Annual Financial Statements 26

Capital adequacy statement 47

International network 48

List of services 49

2 | HBZ ANNUAL REPORT 2005

FIVE YEAR REVIEW

2001 2002 2003 2004 2005

PROFITS

Profi t before taxation 8.0 15.9 26.6 22.9 29.6

BALANCE SHEET

Advances 114.1 157.1 187.8 232.9 327.9

Advances growth % 41.2% 37.7% 19.6% 24.0% 40.8%

Client deposits 300.6 405.8 555.3 687.4 925.0

Deposit growth % 40.8% 35.0% 36.9% 23.8% 34.6%

Total assets 372.2 490.4 650.4 794.1 1,025.6

Total assets growth % 20.3% 31.8% 32.6% 22.1% 29.1%

PERSONNEL

Number of employees 57 56 62 71 81

Net contribution per employee 278 283 429 322 365

For the year ended 31 December 2005 R 000’s

secure fundssecure funds

HBZ ANNUAL REPORT 2005 | 3

PROFIT SUMMARY

2001 2002 2004 20052003

29.6

Year

R M

illion

s

8.0

15.9

26.6

22.9

024681012141618202224262830

TOTAL ASSETS

2001 2002 2004 20052003

Year

R M

illion

s

372.2

490.4

650.4

1 025.6

794.1

10015020025030035040045050055060065070075080085090095010001050


DIRECTORATE

NON EXECUTIVE

Muhammad H Habib (47)# - Chairman

Bus. Admin (USA)

Joint President, Habib Bank AG Zurich

Appointed to the board in 1995

Terrence H Field (74) - Vice Chairman

Institute of Bankers SA C.A.I.B. (SA)

Previously General Manager, First National Bank - Natal,

now retired


M Yakoob Chowdhury (63)^ - Executive Director

Chief Executive Vice President, Habib Bank AG Zurich


Reza S Habib (42)**

B.Sc. (USA)



Ramsay L Daly (63)

B.A. LLB

Attorney


Pierre J Neethling (61)

B.Sc & MBA

Previously Managing Director, Smith & Nephew plc,

now retired.


Hendrik F Leenstra (57)

Institute of Bankers SA C.A.I.B. (SA)

Previously Regional Executive – Nedcor Group, KZN

now retired


EXECUTIVE DIRECTORS

Zafar Alam Khan (53)* – Chief Executive Officer

and Executive Vice President

B.A.

Appointed to the board in October 2005

Chris Harvey (49) - Executive Director – Finance

and Senior Vice President

B.Com, Dip Acc

Appointed to the board in July 1998

* Pakistani ** Canadian

^ British # Swiss


Zafar Alam Khan (53)

B.A.

Chief Executive Officer / General Manager

Chris Harvey (49)

B.Com, Dip Acc

Executive Director - Finance

CORPORATE

Sikandar HI Shaikh (59)

B.Sc (Honours)

Executive Vice President (IT)

John MCG Rebelo (60)

B.Econ

Treasury Manager

EXECUTIVE MANAGEMENT

BRANCH NETWORK

KWA-ZULU NATAL DIVISION:

S Rasheed Akhtar (57) (Durban)

MSc

Senior Vice President

Shujauddin Shaikh (49) (Islamic Banking)

B.Com, Dip IBP

2-nd Vice President

GAUTENG DIVISION

Nasir Abbas (52) (Johannesburg)

B.Com

2-nd Vice President

M Ali Chaudhry (39) (Lenasia)

B.Com MBA (MIS)

Assistant Vice President

Syed AM Zaidi (42) (Laudium)

B.Com

2-nd Vice President

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AUDIT COMMITTEE

Ramsay L Daly (63) - Chairman

Director of HBZ Bank Ltd

Terrence H Field (74)


M Yakoob Chowdhury (63)

Chief Executive V-President, Habib Bank AG Zurich






Muhammad H Habib (47)*



Zafar Alam Khan (53)*

CEO/ General Manager of HBZ Bank Ltd

Chris Harvey (49)*

Executive Director - Finance of HBZ Bank Ltd

Jay Datadin (42)*

Partner of KPMG

* By invitation

COMMITTEES

DIRECTORS AFFAIRS COMMITTEE

Muhammad H Habib (47) - Chairman



Terrence H Field (74)


Ramsay L Daly (63)


M Yakoob Chowdhury (63)








RISK COMMITTEE

M Yakoob Chowdhury (63) - Chairman



Zafar Alam Khan (53)

CEO/ General Manager of HBZ Bank Ltd

Chris Harvey (49)

Executive Director - Finance of HBZ Bank Ltd

Ramsay L Daly (63)





Director of HBZ Bank Ltdsecure facilities


It gives me great pleasure to present HBZ Bank Ltd’s

annual report for the year 2005. The year 2005 was the

10th year of the Bank’s operation in South Africa and we

celebrated the completion of a decade by hosting 10th

anniversary functions in Durban and Johannesburg. The

past 10 years have been an interesting time in South Africa

and by the grace of God the Bank has performed well.

INTERNATIONAL

Global expansion continued during 2005 led mainly by the

United States and China, whereas growth in Europe and

Japan remained lackluster. Monetary policy responses in

industrial countries varied widely, with tightening phases

in the US, Canada and Europe, unchanged policies

in Japan and UK, and rate reductions in the Eastern

European economies. Although oil prices continued to

rise, hitting new highs of $70 per barrel in September, core

inflation remained low. With core inflation under control

and the up trend in headline inflation stabilizing, further

policy responses in major Western economies appear

to be ending. In the US, where rates have been hiked

for fourteen consecutive months to 4.5 %, the Federal

Reserve indication for further rate increases continues.

The rate hikes countered the large current account deficits

in the US balance of payments, but if the rate stabilizes,

sustained deficits in the US will result in dollar weakness in

the later half of 2006.

DOMESTIC

The local economy proved fairly resilient to the oil price shock

during 2005 and in fact grew at its highest level in decades.

Estimated average real economic growth was 4.9 % in

2005, compared to 4.5 % in 2004. 2005 was characterized

by surging oil prices and policy tightening across the globe

in response to higher inflation. However, the South African

Reserve Bank resisted the temptation to hike interest rates,

although it warned of its willingness to do so on several

occasions. In comparison interest rates in several major

economies across the globe were hiked in response to the

higher inflationary pressures. During the first half of 2005,

the full effect of rising oil prices was cushioned by the

strong Rand exchange rate. However as it softened in the

third quarter the Rand oil prices increased significantly to

R400 per barrel compared with R266 a year earlier.

OPERATING PERFORMANCE

HBZ Bank Ltd once again concentrated on internal growth

and on taking advantage of the positive sentiment in the

economy, which was converted into increased business

activity and growth in balance sheet. By the grace of God

the assets of the Bank grew by 29.2% to end just above

R1 billion. The major growth was in advances in Durban,

which grew by 101%, contributing significantly to the

Group growth of 40.8%. The Bank continued its integral

philosophy of high liquidity and achieved a deposit growth

of 34.6%. All branches performed well resulting in a profit

of R29.6 million.

NEW EVENTS

In November 2005 the Bank relocated its Head Office to

the Durban suburb of Westville. The Bank also opened

a new branch in the same premises offering Islamic and

Sharia banking services, a need very strongly demanded

by our niche market.

HBZ Bank Ltd also migrated smoothly to h-Plus, a new

technologically advanced banking platform.

Mr. Zafar Alam Khan who was earlier in charge of the

Gauteng branches took over as CEO of the Bank. I am

sure that Mr. Khan will exceed the expectations of the

Board, clients and shareholders.

OUTLOOK

Despite the constraints in the economy and challenges the

country faces I remain positive on the growth outlook over

the next few years and expect South Africa to maintain above

5.1 % growth. The Rand is expected to move sideways

finding some support from the commodities boom and the

anticipated weaker dollar. Should inflation conditions remain

favorable, there will be no need to increase interest rates.

However, the Rand and international oil prices have proven

very volatile. These exogenous factors, which are out of the

CHAIRMANS REVIEW


SARB’s control, could prove to be crucial for interest rates

over the next year.

During 2006 HBZ Bank Ltd will continue to focus on our

core business and reinforce the conservative approach to

lending. I remain confident this approach will ensure the

bank continues to make advances and have no doubt that

HBZ Bank Ltd has the skilled people, entrepreneurial spirit

and strong culture to achieve this. The Bank has always

been driven by the keen desire to consider the customer

first and give a quality service.

APPRECIATION

I would like to show our appreciation to Mr. Terry Field who

was involved from the formation of HBZ Bank Ltd and

served more than 10 years as Vice Chairman of the Board

of Directors and Chairman of the Audit Committee of the

Bank. His contribution and wisdom has been invaluable to

the growth and soundness of HBZ Bank Ltd.

Our business depends on good relationships with our

clients and their needs are the heart of our business

philosophy and actions. I thank them for their outstanding

support and patronage. Our staff has once again shown

their ongoing commitment, dedication and passion without

which the Bank would not have been able to achieve its

objectives, goals and vision. On behalf of the Board I thank

you all for your contribution, vigour and determination. I

also extend my appreciation to the South African Reserve

Bank for its guidance and support and my fellow board

members for their continued loyalty and wisdom.

Muhammad H Habib

Chairman

RISK MANAGEMENT PHILOSOPHY

“To keep risks to a minimum through a clear policy of broad

diversification in terms of geography and product mix, and

by spreading the bank‘s credit and trade financing activities

over a wide range of customers, with the emphasis on

secured, short-term, self liquidating lending.“

Risk is anything that will cause a desired objective not to

be achieved. In fact all actions that the Bank takes have

an element of risk and the bank recognises that it is an

unavoidable consequence of banking to take calculated

business risks with the objective of creating attractive

returns from these ventures. Thus HBZ does not seek to

avoid risk, but to manage it in a controlled manner and in

the context of the reward that is being earned.

The importance of the banks risk management process is

to:

• ensure that all risks are identified, understood,

evaluated and quantified, and then

• manage them so as to achieve the desired returns

by eliminating, reducing and controlling the impact of

adverse occurrences on performance to within

acceptable parameters.

Risk management at HBZ is guided by the following

important principles:

• A strongly defined risk management structure;

• Independent review of the risk process;

• Continuous evaluation of the risk appetite of the bank

and its management through clearly defined limits; and

• Communication and coordination between the

committees, executive management and other role-

players in the risk management framework, without

compromising segregation of duties, controls or review.

RISK MANAGEMENT REVIEW


The board enforces a conservative culture with respect to

its overall appetite for risk and fully endorses and supports

efforts at the bank to attain international best practice in

risk management.

RISK MANAGEMENT FRAMEWORK

The board of directors is ultimately responsible for any

financial loss or reduction in shareholder value suffered by

the bank. It is therefore responsible for the total process

of risk management, recognising all the risks to which the

bank is exposed and ensuring that the proper mandates,

policies, authority levels, risk frameworks, internal controls

and systems are in place and functioning effectively.

The nature and size of HBZ Bank’s operations allows

for a centralised in-depth co-ordinated risk framework

that includes direct senior management and board

involvement to determine quantitative and qualitative risk

measurement, policies and procedures, control structures,

and compliance with regulations. The executive and

non-executive directors are widely represented on the

various risk management committees and processes. At

every board meeting, the Risk committee reports on the

effectiveness of the bank’s risk management and control

framework.

In line with international best practice various board

committees oversee policy formulation and implementation,

and monitor the risk management processes and

exposures. The main committees are the Board itself, the

Risk Committee, the Assets and Liabilities Committee

(ALCO) the Directors Affairs Committee, the Audit

Committee, the Remuneration Committee and various

Credit Committees.

ASSETS AND LIABILITIES COMMITTEE

An integral element in managing risk is the overall

management of the assets and liabilities of the bank. The

board set up the ALCO Committee, which is made up

of suitable competent persons to monitor the liquidity,

interest rate risk and IT risks. This committee presents a

report at each board and audit committee meeting on the

effectiveness of the management of the risks it monitors.

The committee is made up of the General Manager,

Financial Director, Risk Manager, an Operations Manager

and the various individual risk managers and met as

required during 2005.

CREDIT RISK

Credit risk is the risk of financial loss arising from the

possibility that commitments by counterparties are not

honoured either in part or totally.

The board acknowledges that credit risk management

is critical to the bank and has appointed a Credit Risk

manager to manage the group’s credit risk process. This

manager attends the holding company’s annual credit risk

conference.

The fundamental principles that HBZ Bank applies in the

management of credit risk include:

• a clear definition and in-depth understanding of our

niche client base;

• detailed credit granting procedures including rigorous

assessment of the creditworthiness of all parties;

• detailed and documented account opening procedures,

know-your-customer and due diligence requirements;

• an emphasis on diversification of the Banks client base

limiting exposures to certain industries;

• formation of various high level credit committees all with

clearly defined limits;

• detailed credit inspection, quality review and prompt

follow-up by high level management and the

independent external and internal auditors;

• the prudent assessment of advances into categories

that are in line with standard international practice;

• a high level of executive and non-executive involvement

in decision making and review;

• a clear policy on the appropriate provisioning in respect

of the estimated loss inherent in the advances book.

RISK MANAGEMENT REVIEW (CONTINUED)


To augment the prudent assessment of advances and

determination of appropriate provisioning, the bank has a

credit risk classification system. The provisioning policy is in

line with the requirements of the Accounting Standard AC

133.

MARKET RISK

Market risk represents the danger of losses occurring due

to adverse changes in the value of financial instruments

caused by fluctuations in interest and foreign currency

rates. The major market risk areas that affect the bank are

elaborated as below.

Interest rate risk is the sensitivity of profit to adverse

variations in interest rates. The Bank manages within laid

down parameters the difference between rate-sensitive

assets less rate-sensitive liabilities by effectively utilising

capital and continually matching rate-sensitive assets and

liabilities over various time horizons and various economic

and environmental scenarios. The focused range of

products offered by the bank facilitates the management of

this risk.

Currency risk arises from movements in rates of

exchange between currencies. The Bank has very little

exposure to this type of risk as it has a very conservative

policy of prohibiting foreign exchange speculation and

never having any uncovered forward positions. No long

term open positions may be maintained, while short term

open positions are only maintained on NOSTRO accounts

within extremely conservative limits stipulated by the board

for each currency.

LIQUIDITY RISK

Liquidity risk results from being unable to meet

commitments, repayments and withdrawals timeously and

cost effectively.

The bank controls liquidity at source by having strong

internal controls at that point, ensuring a wide deposit

base, simplifying the product range and centralizing the

treasury function. The Bank is extremely conservative,

with the size allowing for the direct matching of all major

deposits with inter-bank placements and by keeping

a large proportion of the funds short-term to cater for

unexpected cashflow requirements. This is enhanced

through an Asset and Liability Committee (ALCO) and an

ALM process which addresses liquidity risk proactively.

As with the management of interest rate risk, the focused

range of products offered by the bank facilitates the

management of this risk.

OPERATIONAL RISK

Operational risk is inherent in running a business. The major

risks are internal and external fraud, error, incompetence,

systems breakdown and inadequate internal control

procedures.

The Bank takes active measures to limit potential

operational losses by:

• Instilling in employees a sound culture, work ethic and

values ethos;

• Providing a healthy, safe and secure operating

environment for staff, data and information;

• Correct and meaningful staff training;

• The preparation and continual upgrading of clear

procedure manuals;

• Regularly rotating and motivating staff;

• Maintaining adequate and effective internal controls;

• Ensuring timeous and accurate processing of

transactions and monitoring unauthorised ones;

• Ensuring appropriate investment in computer

technology to support operations;

• Ensuring an adequate business continuity process in

the event of disruption;

• Internal and external independent audit checks and

internal control reviews;

• Ensuring as an additional counter to potential

operational risk that the Bank has extensive insurance

cover for any material losses.


Significant loss events and incidences are reported to the

board immediately they occur.

COUNTRY RISK

Country risk relates to the danger that the cross-border

movement of capital and/or interest could be restricted

or completely blocked by a country due to political or

economic reasons.

HBZ Bank has very little exposure at present to this

risk. However as a proactive Bank, HBZ has a strategy

to minimise this risk should this type of risk become of

concern. A central committee decides on the risk profiles

of each country; continually revises these profiles and

determines their provision ratings. In deciding risk profiles

of the countries the ratings of international credit rating

agencies and others and the opinions of local banks are

sought.

COMPLIANCE RISK

Compliance risk is the risk that the procedures

implemented by the bank to ensure compliance to relevant

statutory, regulatory, supervisory and internal control

requirements are not adhered to, or are inefficient and

ineffective.

As the numbers of statutory regulations and directives

from Central Banks increase there is a continual need to

monitor the bank’s adherence to these laws. The bank

identifies Compliance Risk as a separate risk within its risk

management framework. Compliance risk consists of two

risk areas:

Regulatory risk arises when the bank does not comply

with applicable laws and regulations or supervisory

requirements.

Reputational risk is the negative publicity the bank would

be exposed to if there were a contravention of applicable

statutory, regulatory and supervisory requirements or

providing a service that does not comply with proper

industry standards.

The Bank has a Compliance department appointed to

oversee this function. The mandate of the compliance

department includes the following:

• Co-ordinating the compliance process at the bank.

• Monitoring and reviewing this process.

• Providing a central point for advice, consultation and

non-compliance reporting.

• Facilitating compliance education and awareness

workshops and seminars to entrench a culture of

compliance at the bank.

• Setting entity wide policy and standards for

compliance.

• Providing specific focus on regulatory and reputational

risk as defined above.

When new acts, regulatory requirements and codes of

conduct are introduced compliance addresses these by

providing training and advice on these issues, developing

policies and procedures affecting regulatory issues and

regularly monitoring adherence to these policies and

procedures. Education and practical workshops form an

important part of this process. With the continued local and

international focus on anti money laundering, compliance

at the bank continues with its extensive training program

for all employees to ensure that they are aware of their

regulatory obligations.

The Compliance personnel are members of the

Compliance Institute of South Africa.

RISK MANAGEMENT REVIEW (CONTINUED)


HBZ Bank recognises the need to provide support for

various external social causes while balancing this with a

focused internal staff development program.

EXTERNAL SOCIAL INVESTMENT

It is vital to ensure lasting employment and self-enrichment

that people are properly educated and have a cultural

heritage to provide substance to their lives. It is with this in

mind that HBZ has over the years invested in a wide range

of welfare initiatives. Principle amongst them has been

projects and programmes that have provided educational

and cultural development. Preschools, primary and high

schools have all benefited from regular contributions.

Cultural events are also well supported by the bank.

INTERNAL SOCIAL INVESTMENT

In the current environment it is paramount to the success

of any business that internal empowerment programmes

for staff are in place. The Bank is conscious of this fact

and has implemented internal employment equity, training

and skills development initiatives. These initiatives focus

on providing all employees with an environment that is free

from any form of discrimination while ensuring opportunities

exist to obtain the necessary skills for career expansion.

SKILLS DEVELOPMENT

The Bank has a Skills Development Facilitator who is

registered with the BANKSETA Training Authority. A

Workplace Forum comprising of equal numbers of staff and

management meets to monitor and enhance the Bank’s

Workplace Skills Plan.

The Plan monitored by the Forum commits the bank and

employees to various training projects that include:

• focused on-the-job training;

• external training; and

• providing access to tertiary, college and university

education.

All staff have access to this plan and are entitled to benefit

from the plan. During 2005 all the goals and objectives of

the plan were achieved. To encourage continuity of the

plan the bank has set aside a separate budget to give full

measure to the Workplace Skills Plan.

EMPLOYMENT EQUITY

The Bank’s Employment Equity Plan submitted to the

Department of Labour is continually monitored and

updated to ensure it meets the changing needs of the

Bank and its employees.

As a member of an international bank group, HBZ is

proactive and has for a number of years had a sound

employment equity process. The Bank is currently training

and recruiting staff from the previously disadvantaged

groups to ensure employment equity at the Bank remains

ahead of the plan.

SOCIAL INVESTMENT

EMPLOYEE SUMMARY

MALE FEMALE

Occupational Categories African Coloured Indian White Total African Coloured Indian White Total Total

Senior managers 21 2 23 8 8 31

Professionals 1 1 1

Clerks 4 12 16 1 22 2 25 41

Service workers 3 3 5 5 8

Total 7 33 3 43 6 30 2 38 81


In essence corporate governance is the formal

maintenance of the necessary balance between

entrepreneurial thrust and prudential restraint, within the

boundaries of sound business practices and regulation.

HBZ considers this formal maintenance of the balance to

be fundamental to the sound operation of the bank. The

importance of this can be seen in the fact that the Bank

has had an entrenched corporate governance culture

emphasizing the need to conduct its affairs in accordance

with the highest standards of corporate governance prior

to this becoming law.

The directors endorse the South African King II “Code of

Corporate Practices and Conduct” and are satisfied that

the bank has in all material aspects consistently been in

conformance with the provisions and spirit of King II. In

supporting the code, the directors recognise the need to

conduct the enterprise with integrity and in accordance

with generally accepted corporate practices. The directors

realize that while compliance with form is important, greater

emphasis is placed on the substance of governance.

The corporate governance framework at the bank ensures

that the board plays a leading role in the strategic guidance

of the bank and the effective monitoring of management

in discharging their accountability to our shareholder and

responsibilities to stakeholders through meaningful and

effective disclosure.

The salient features of the bank’s corporate governance

policy are built on the characteristics of accountability,

discipline, fairness, independence, responsibility,

transparency and social integrity. The banks’ good

corporate governance revolves around the following

significant practices and processes.

BOARD OF DIRECTORS

During 2005 the bank increased the HBZ Board to nine

directors, seven of whom are non-executive directors and

two executive directors. Non-executive directors comprise

individuals of high caliber with diverse backgrounds

and expertise that enable them to bring objectivity and

independent judgement to the board deliberations and

decisions. All board members have a clear understanding

of their role in corporate governance and are not subject

to undue influence from management or outside concerns.

Both the Chairman and Vice Chairman are non-executive

members. The roles of the Chairman and the CEO are

separate with responsibilities clearly defined.

The Board meets regularly and retains full and effective

control over the Bank operations and monitors executive

management. Additional board meetings, apart from

those planned, are convened as circumstances dictate.

Where directors are unable to attend a meeting personally,

teleconferencing is made available to include them in the

proceedings and allow them to participate in the decisions

and conclusions reached. The Board is supplied with

full and timely information with a typical board agenda

including:

• A report from the CEO.

• A discussion on the Management accounts.

• Reports from the Audit committee.

• Reports from the Risk committee.

• Reports from the Directors Affairs committee.

• Reports from the Compliance officer.

• Reports on large exposures.

• Reports on significant regulatory issues

The board annually meets with management for a number

of days to debate and agree on the proposed strategy

and to consider long-term issues facing the bank, prior to

formulation of the annual financial budgets. All directors are

regularly kept abreast of statutory, regulatory, accounting,

non-financial and industry developments that may affect

the bank. Furthermore all directors have full access to

the advice of management, the company secretary and

independent professionals as well as unrestricted access

to all relevant documentation required to discharge their

duties. One-third of directors retire by rotation annually.

CORPORATE GOVERNANCE


The board is supported by various internal committees

and functions in executing its responsibilities. These are

elaborated on below. Details of the directorate are listed on

page 4 of this annual report.

DIRECTORS’ AFFAIRS COMMITTEE

The directors’ affairs committee, established by the Board

of Directors has a written charter that clearly sets out its

responsibility, authority and functions. The committee

including the Chairman consists of non-executive directors.

At least two meetings are held annually with the CEO and

financial director invited to attend when necessary.

The committee’s primary responsibilities are:

• To assist the board of directors in its determination and

evaluation of the adequacy, efficiency and

appropriateness of the corporate governance structure

and practices of the bank;

• To establish and maintain a board directorship

continuity program including planning for successors,

regularly reviewing the skills and experience of the

board, and an annual self-assessment of the board as

a whole and of the contribution of each individual

director;

• To assist the board in the nomination of successors to

key management positions and ensure that a

management succession plan is in place;

• To assist the board in determining whether the services

of any director should be terminated; and

• Assist the board in ensuring that the bank is at all times

in compliance with all applicable laws, regulation and

codes of conduct and practices.

Details of the directors affairs committee are listed on

page 6 of this annual report.

COMPANY SECRETARY

The company secretary of HBZ is suitably qualified and

experienced and was appointed by the board in 1995.

The company secretary is responsible for the duties as

stipulated in section 268G of the Companies Act. The

board recognizes the pivotal role the secretary plays in the

corporate governance process and is thus empowered by

them to ensure these duties are properly fulfilled.

In addition to his statutory duties the company secretary is

required to:

• Provide the directors of the company with guidance on

how their responsibilities should be properly discharged

in the best interests of the bank.

• Induct new directors appointed to the board.

• Assist the Chairman and Vice Chairman in determining

the annual board plan.

• Ensure that the directors are aware of legislation

relevant to the bank.

All directors have access to the advice and services of

the company secretary whose appointment is a matter for

the board as a whole. The contact details of the company

secretary are provided in the director’s report.

RISK COMMITTEE

The board acknowledges that risk management is critical

to the bank and its responsibility for the entire process of

risk management, as well as forming an opinion on the

effectiveness of the process.

The Board of Directors established the Risk committee

with a written charter that clearly sets out its responsibility,

authority and functions. The committee is made up of both

non-executive and executive directors with the Chairman

always a non-executive director. At least three meetings are

held annually.



• To assist the board in its evaluation of the adequacy

and efficiency of the risk policies, procedures, practices

and controls;

• To assist in the identification of concentration risks to

which the bank is exposed;

• To assist in developing a risk mitigation strategy;

• To assist in ensuring that a formal risk assessment is

undertaken at least annually;

• To assist in identifying and regularly monitoring all key

risks and key performance indicators;

• To facilitate and promote communication between the

board and executive officers of the bank;

• To ensure the establishment of an independent risk

management function including the training of members

of the board in the different risk areas; and

• To introduce measures that will enhance the adequacy

and efficiency of the risk management policies,

procedures, practices and controls applied.

Management is accountable for designing, implementing

and monitoring the process of risk management and

integrating it with the day-to-day activities of the group.

A comprehensive Risk Management framework is in

place that formalises the management of risk. This and

the application and reporting on risk are detailed in the

separate Risk Management section of this annual report.

Details of the risk committee are listed on page 7 of this

annual report.

AUDIT COMMITTEE

The audit committee, established by the Board of Directors

has a written charter that clearly sets out its responsibility,

authority and functions. The committee including the

Chairman consists of non-executive directors. At least

three meetings are held annually with the CEO, financial

director, compliance officer, internal and external auditors

invited to attend when necessary. The compliance officer,

internal and external auditors of the bank and the banking

supervision department of the South African Reserve Bank

have unrestricted access to this committee. In addition the

Chairman has the right to call in any other employee who is

able to assist the committee on an ad hoc basis.


• To review and assess the internal controls of the bank.

• To ensure that the necessary respect for the internal

control structure is demonstrated by management.

• To ensure that the internal audit process of the bank is

effective and in terms of the committees requirements.

• To oversee the bank’s external audit process including

the scope, fees and audit findings.

Details of the audit committee are listed on page 6 of this

annual report.

CREDIT COMMITTEES

Credit committees comprising senior management as

well as executive and non-executive directors operate

at various levels within the Bank. These committees,

operating within clearly defined exposure limits and rules

stipulated by the Board, review and approve all exposures

to clients and potential clients.

One of the primary risks in the management of credit is

concentration risk. A large concentrated exposure to a

single party or closely related group of borrowers could

place the profitability of the bank in jeopardy should

recoverability of the exposure become doubtful. The

board realizing the importance of this has itself taken

the responsibility of approving and reviewing all large

exposures.

REMUNERATION COMMITTEE

The Bank’s remuneration committee comprises non-

executive directors and members of the holding company’s

executive management. They meet annually to determine

salary structures and staff policies that ensure the

directors, executive management and staff are rewarded

fairly for their individual contributions to the bank’s overall

performance.

CORPORATE GOVERNANCE (CONTINUED)


COMPLIANCE

Compliance risk is defined as the risk that the procedures

implemented by the bank to ensure compliance to relevant

statutory, regulatory, supervisory and internal control

requirements are not adhered to, or are inefficient and

ineffective. The bank has an independent compliance

function responsible for assisting management in this

regard. The compliance department has implemented

and developed effective processes to address compliance

issues within the bank and has unrestricted access to

the Chairman of the Audit Committee and Chairman of

the Board. The role of the compliance department is

elaborated on in the Risk Management section of this

annual report.

INTERNAL CONTROL

The directors of the Bank are responsible for ensuring that

the Bank maintains accounting records and implements

effective systems of control. Management is responsible for

the implementation and maintenance of these controls.

The directors report that the bank’s internal controls are

designed to provide assurance regarding the:

• integrity, accuracy and reliability of the accounting

records,

• accountability for the safeguarding and verification of

assets,

• detection and prevention of risks associated with fraud,

potential liability, loss and material misstatement,

• effectiveness and efficiency of operations,

• compliance with applicable laws and regulations.

The internal controls within the bank concentrate on critical

risk areas. These risk areas are identified by operational

management, confirmed and monitored by the board

of directors, reviewed annually by the external auditors,

and closely monitored and subject to independent and

unimpaired review by the internal auditors.

Internal controls are based on established policies and

procedures, implemented by appropriately trained and

skilled personnel whose functions have been properly

segregated. In this process internal controls are designed

to ensure the cost does not exceed the benefit.

Processes are in place to monitor the effectiveness of

internal controls, to identify material breakdowns and to

ensure that corrective action is taken. These ongoing

processes were in place throughout the year under review.

INTERNAL AUDIT

The Bank’s independent internal audit function exists to assist

management in discharging their responsibility effectively. This

department has senior suitably qualified and experienced staff

whose functions comply with international standards.

The scope of the internal audit function is to review the:

• reliability and integrity of financial and operating

information,

• systems of internal controls,

• means of safeguarding assets,

• efficient management of the bank’s resources,

• compliance with applicable laws and regulations and

• effective conduct of its operations.

Internal audit operates independently from Executive

Management and has unrestricted access to the chairman

of the Audit Committee, all other staff and information

needed by them in the execution of their duties.

CODE OF ETHICS

HBZ Bank has a strong culture of entrenched values that

commit it to the highest standards of integrity, behavior

and ethics in dealing with all its stakeholders. These values

apply to all personnel at the Bank, with personnel expected

at all times to observe their ethical obligation in such a

way as to carry on business through fair commercial

competitive practices.


In particular staff are expected:

• not to place themselves in a position where their

personal interests conflict with their duties to the bank

and to their clients;

• to carry out their duties with due care and skill;

• to exhibit loyalty and dedication in all matters pertaining

to the bank;

• to be prudent in the use of information acquired in the

course of their duties and to respect the confidentiality

of client information; and

• not to discriminate on the basis of race, religion or

gender.

REGULATION AND SUPERVISION

The Bank is subject to external regulation and supervision

by various statutory bodies and regulators. The Bank

strives to achieve open and active communication with

these bodies specifically the Supervision and Exchange

Control Departments of the South African Reserve Bank.

Where appropriate the Bank participates in discussion

groups with the various regulators to ensure that

knowledge and insight is gained to maintain sound internal

controls to operate within the regulatory framework.

EMPLOYEE PARTICIPATION AND SKILLS

The Bank recognizes the importance of employee

participation in the maintenance of standards and general

well being of the company as ultimately our success

depends on our employees working together in the

interests of our clients.

The following principles underlie the bank’s employment

equity and skills enhancement policy:

• HBZ is committed to nurturing the employee

relationship by continued development of innovative

reward and incentive programs that focus on long- and

short-term operational and strategic goals.

• The empowerment of employees is enhanced through

emphasis on teamwork, training and a philosophy of

internal promotion.

• A policy of open, honest two-way communication has

been adopted allowing for a free exchange of positive

ideas within the work place.

• HBZ maintains a policy of non-discrimination towards

all employees, and is committed to providing

employment in an equitable manner to members of all

communities.

• The Bank endorses the philosophy of affirmative action

as an integral part of its business plan with a number of

initiatives within the Bank currently in process.

• HBZ has an ongoing workplace forum comprising

employees and management of the bank that

continually monitors and upgrades its Workplace Skills

Plan and Employment Equity Plan, which focuses and

commits the bank to skills development and continued

equity in the workplace.

CORPORATE GOVERNANCE (CONTINUED)

secure assets


DIRECTORS APPROVAL OF THE ANNUAL FINANCIAL STATEMENTS

RESPONSIBILITY FOR THE ANNUAL FINANCIAL

STATEMENTS

The board of directors is responsible for monitoring the

preparation and the reliability of the financial statements,

the underlying accounting policies and the integrity of all

information included in the annual financial statements. The

independent auditors are required to report whether the

annual financial statements fairly present the operations

and financial position of the company.

The financial statements set out in this report have

been prepared in accordance with the provisions of the

Companies Act and the Banks Act and comply with South

African Statements of Generally Accepted Accounting

Practice and practices prevailing in the banking industry.

In discharging their responsibility to ensure the financial

statements fairly present the state of the affairs of the

company, the directors are supported by an ongoing

process for identifying, evaluating and managing the

significant risks faced by the bank and rely on the systems

of internal controls, the risk management procedures

adopted and information supplied by the internal and

external auditors.

The directors are of the opinion that:

• Appropriate accounting policies have been

consistently applied;

• Proper accounting records have been maintained;

• Internal control systems are adequate to the extent

that no material breakdown in the operation of these

systems occurred during the year under review; and

• The financial statements fairly present the financial

position of the company as at the 31 December

2005.

GOING CONCERN

The financial statements in this report are prepared on the

going concern basis. Based on enquiries made and their

knowledge of the bank the directors are of the opinion that

adequate resources exist to support the bank on the going

concern basis over the next year. The external auditors

concur with this statement by the directors.

FINANCIAL STATEMENTS

The financial statements and the directors’ report

appearing on pages 21 to 46 were approved by the board

of directors on 3 March 2006 and are signed on its behalf

by:

Muhammad H. Habib

Chairman

Terrence H. Field

Vice-chairman


COMPANY SECRETARY CERTIFICATE

In terms of Section 268G(d) of the Companies Act of 1973, as amended, I hereby certify to the best of my knowledge and

belief, that the company has lodged with the Registrar of Companies all such returns as are required of the company in

terms of the Act and that all such returns are true, correct and up to date.

Chris Harvey

Company Secretary

Durban

19 April 2006

We have audited the annual financial statements of HBZ

Bank Limited set out on pages 21 to 46 for the year ended

31 December 2005. These financial statements are the

responsibility of the Bank’s directors. Our responsibility is

to express an opinion on these financial statements based

on our audit.

We conducted our audit in accordance with International

Standards on Auditing. Those Standards require that we

plan and perform the audit to obtain reasonable assurance

about whether the financial statements are free of material

misstatement. An audit includes examining, on a test

basis, evidence supporting the amounts and disclosures in

the financial statements. An audit also includes assessing

the accounting principles used and significant estimates

made by management, as well as evaluating the overall

financial statement presentation. We believe that our audit

provides a reasonable basis for our opinion.

In our opinion, the financial statements present fairly, in all

material respects, the financial position of the company as

of 31 December 2005, and of the results of its operations

and cash flows for the year then ended in accordance

with South African Statements of Generally Accepted

Accounting Practice, and in the manner required by the

Banks Act and the South African Companies Act.

With the written consent of the shareholders, we have

performed certain accounting and secretarial duties.

KPMG Inc

Registered Accountants and Auditors

Chartered Accountants (SA)

per J Datadin

Director

19 April 2006

AUDITORS REPORT


REPORT OF THE DIRECTORS

The Board of Directors takes pleasure in presenting the

Annual Financial Statements of the bank for the year ended

31 December 2005.

HOLDING COMPANY

HBZ Bank Limited is a wholly owned subsidiary of Habib

Bank AG Zurich, which is incorporated in Switzerland.

NATURE OF BUSINESS

HBZ Bank Limited is a registered bank, which in line with

its holding company, Habib Bank AG Zurich’s business

strategy, specialises in trade finance and retail banking.

FINANCIAL RESULTS

The results of the company are set out in the

accompanying financial statements and notes.

AUTHORISED AND ISSUED SHARE CAPITAL

No additional shares were authorised or issued during the

year.

DIVIDENDS AND GENERAL RESERVE

The Directors have proposed that the following

appropriations be made in 2005/2006:

POST BALANCE SHEET EVENTS

There were no material post balance sheet events.

DIRECTORS AND SECRETARY

Details of the directors are reflected on page 4 of this

report.

In accordance with the Company’s articles of association,

Section 85, Messrs M Habib, MY Chowdhury and RL Daly

retired by rotation, but being eligible, offer themselves for

re-election at the forthcoming annual general meeting.

Mr Nisar Chowdhari and Mr Terry Field resigned from the

board with effect from the 31 July 2005 and 31 December

2005 respectively. Mr Henk Leenstra and Mr Zafar Khan

were appointed to the board on the 1 July 2005 and 1

October 2005 respectively. The secretary of the company

is Mr C Harvey whose business and postal address is

135 Jan Hofmeyr Road, Westville, 3630, PO Box 1536,

Wandsbeck, 3631.

DIRECTORS’ EMOLUMENTS

Directors’ emoluments in respect of the company’s

directors are disclosed in note 24 to the annual financial

statements.

GENERAL RESERVE 2006 2005

Transfer proposed 2006 / 2005 R 8,000,000 R 7,000,000

DIVIDEND

Proposed dividend for distribution in 2006 / 2005 R 9,300,000 R 5,700,000

Secondary taxation on companies R 1,162,500 R 712,500

Terrence H. Field

Vice-chairman

19 April 2006

Muhammad H. Habib

Chairman

19 April 2006


Notes 2005 2004

R R

ASSETS

Cash and short-term funds 1 492 523 536 443 450 098

Investment securities 2 187 006 289 92 266 401

Other assets 3 4 336 087 15 535 152

Deferred tax 4 309 826 422 455

Advances 5 327 926 356 232 894 888

Property and equipment 7 13 499 349 9 580 234

1025 601 443 794 149 228

EQUITY AND LIABILITIES

Capital and reserves

Ordinary share capital 8 10 000 000 10 000 000

Share premium 40 000 000 40 000 000

Regulatory reserve 9 6 029 982 4 461 506

General reserve 17 000 000 10 000 000

Retained earnings 17 895 439 12 705 296

Total shareholders’ funds 90 925 421 77 166 802

LIABILITIES

Deposits and other accounts 10 924 974 346 687 387 149

Other liabilities 11 9 701 676 29 595 277

1025 601 443 794 149 228

For the year ended 31 December 2005

BALANCE SHEET


Notes 2005 2004

R R

Interest received 72 305 230 53 163 204

Interest paid (28 405 547) (16 526 632)

Net interest income 43 899 683 36 636 572

Provision for bad and doubtful advances 6.3 (170 183) (1 733 449)

43 729 500 34 903 123

Other income 12 25 237 078 23 516 495

68 966 578 58 419 618

Operating expenses 13 (39 402 103) (35 557 674)

Profit before taxation 29 564 475 22 861 944

Taxation 14.1 (10 105 856) (8 586 301)

Net income attributable to shareholders 19 458 619 14 275 643

Dividends per share (cents) 57.00 77.00

Earnings per share (cents) 18 194.59 142.76

Earnings and headline earnings per share (cents) 18 194.58 142.26


INCOME STATEMENT


Notes Ordinary

share capital

Share

premium

Regulatory

reserve

General

reserve

Retained

earnings

Total

R R R R R R

Balance at 31 Dec 2003 10,000,000 40,000,000 4,016,676 2,000,000 14,574,483 70,591,159

Net profit for the year 0 0 0 0 14,275,643 14,275,643

Transfer to regulatory reserve 0 0 444,830 0 (444,830) 0

Ordinary dividends 15 0 0 0 0 (7,700,000) (7 700 000)

Transfer to general reserve 0 0 0 8,000,000 (8,000,000) 0

Balance at 31 Dec 2004 10,000,000 40,000,000 4,461,506 10,000,000 12,705,296 77,166,802

Net profit for the year 0 0 0 0 19,458,619 19,458,619

Transfer to regulatory reserve 0 0 1,568,476 0 (1,568,476) 0

Ordinary dividends 15 0 0 0 0 (5,700,000) (5,700,000)

Transfer to general reserve 0 0 0 7,000,000 (7,000,000) 0

Balance at 31 Dec 2005 10,000,000 40,000,000 6,029,982 17,000,000 17,895,439 90,925,421


STATEMENT OF CHANGES IN EQUITY


Notes 2005 2004

R R

Cash receipts from customers 16.1 97 542 308 76 679 699

Cash paid to customers, employees and suppliers 16.2 (67 504 668) (51 039 225)

Cash available from operating activities 16.3 30 037 640 25 640 474

Taxation paid 16.4 (10 109 005) (15 608 165)

Dividends paid (5 700 000) (7 700 000)

Net cash inflow from operating activities 14 228 635 2 332 309

Changes in operating activities

Increase in income-earning funds and other assets 16.5 (178 242 163) (66 450 949)

Increase in deposits and other creditors 16.6 217 693 596 143 847 997

Net increase in operating funds 39 451 433 77 397 048

Cash utilised in investing activities

Capital expenditure on property and equipment (4 623 521) (7 031 305)

Proceeds on disposal of property and equipment 16 891 306 540

Net cash utilised in investing activities (4 606 630) (6 724 765)

Increase in cash and cash equivalents 49 073 438 73 004 592

Cash and short-term assets at the beginning of year 443 450 098 370 445 506

Cash and short-term assets at end of year 492 523 536 443 450 098


CASH FLOW STATEMENT


SIGNIFICANT ACCOUNTING POLICIES

HBZ Bank Limited is a company domiciled in the Republic

of South Africa. The financial statements were authorised

for issue by the Directors on 3rd March 2006.

(a) STATEMENT OF COMPLIANCE

The financial statements have been prepared in

accordance with Statements of Generally Accepted

Accounting Standards (SA GAAP) and its interpretations

adopted by the International Accounting Standards Board

(IASB).

(b) BASIS OF PREPARATION

The financial statements are presented in South African

Rands. They are prepared on the historical cost basis,

except for derivative financial instruments, which are stated

at their fair value.

The preparation of financial statements in conformity with

SA GAAP requires management to make judgements,

estimates and assumptions that affect the application of

policies and reported amounts of assets and liabilities,

income and expenses. The estimates and associated

assumptions are based on historical experience and

various other factors that are believed to be reasonable

under the circumstances, the results of which form the

basis of making the judgements about carrying values of

assets and liabilities that are not readily apparent from other

sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on

an ongoing basis. Revisions to accounting estimates are

recognised in the period in which the estimate is revised

if the revision affects only that period, or in the period of

the revision and future periods if the revision affects both

current and future periods.

The accounting policies set out below have been applied

consistently to all periods presented in these financial

statements.

(c) DERIVATIVE FINANCIAL INSTRUMENTS

The Bank uses derivative financial instruments to hedge

its exposure to foreign exchange arising from operational

activities. The Bank holds and issues derivative financial

instruments for trading purposes.

Derivative financial instruments are recognised initially at

cost. Subsequent to initial recognition, derivative financial

instruments are stated at fair value. The gain or loss on

remeasurement to fair value is recognised immediately in

profit or loss.

(d) PROPERTY AND EQUIPMENT

(i) Owned assets

Items of property and equipment are stated at cost less

accumulated depreciation.

Where parts of an item of property and equipment have

different useful lives, they are accounted for as separate

items of property and equipment.

(ii) Subsequent costs

The Bank recognises in the carrying amount of an item of

property and equipment the cost of replacing part of such

an item when that cost is incurred if it is probable that the

future economic benefits embodied in the item will flow to

the Bank and the cost of the item can be measured reliably.

All other costs are recognised in the income statement as

an expense as incurred.


NOTES TO THE ANNUAL FINANCIAL STATEMENTS


(iii) Depreciation

Depreciation is charged to the income statement on

a straight-line basis over the estimated useful lives of

each part of an item of property and equipment. The

depreciation rates are as follows:

• Leasehold improvements 20% per annum

• Furniture 15% per annum

• Computer and office machines 25% per annum

• Motor vehicles 20% per annum

The residual value, if not insignificant, is reassessed

annually.

The Bank has estimated residual value on buildings and

found that it is greater than cost. Depreciation has therefore

not been raised on these assets.

(e) INVESTMENTS

(i) Investments in debt and equity securities

The Bank has the positive intent and ability to hold

government bonds to maturity, and they are therefore

stated at amortised cost less impairment losses (see

accounting policy h).

( f ) TRADE AND OTHER RECEIVABLES

(i) Advances and deposits

These financial instruments are classified as loans and

receivables. Subsequent to initial measurement, they are

measured at amortized cost calculated using the effective

interest method.

(ii) Other trade and other receivables

Trade and other receivables are stated at their cost less

impairment losses (see accounting policy h).

(g) CASH AND CASH EQUIVALENTS

Cash and cash equivalents comprise cash balances, short

notice and call deposits.

(h) IMPAIRMENT

The carrying amounts of the Bank’s assets are reviewed at

each balance sheet date to determine whether there is any

indication of impairment. If any such indication exists, the

asset’s recoverable amount is estimated (see accounting

policy (h) (i)).

An impairment loss is recognised whenever the carrying

amount of an asset or its cash-generating unit exceeds its

recoverable amount. Impairment losses are recognised in

the income statement.

Impairment losses are recognised in respect of cash-

generating units to reduce the carrying amount of other

assets in the unit on a pro rata basis.

(i) Calculation of recoverable amount

The recoverable amount of the Bank’s investments in

held-to-maturity securities is calculated as the present

value of estimated future cash flows, discounted at the

original effective interest rate (i.e. the effective interest rate

computed at initial recognition of these financial assets).

Receivables with a short duration are not discounted.

The recoverable amount of other assets is the greater of

their net selling price and value in use. In assessing value

in use, the estimated future cash flows are discounted

to their present value using a pre-tax discount rate that

reflects current market assessments of the time value of

money and the risks specific to the asset. For an asset that

does not generate largely independent cash inflows, the

recoverable amount is determined for the cash-generating

unit to which the asset belongs.


(ii) Reversals of impairment

An impairment loss in respect of a receivable carried at

amortised cost is reversed if the subsequent increase in

recoverable amount can be related objectively to an event

occurring after the impairment loss was recognised.

In respect of other assets, an impairment loss is reversed

if there has been a change in the estimates used to

determine the recoverable amount.

An impairment loss is reversed only to the extent that the

asset’s carrying amount does not exceed the carrying

amount that would have been determined, net of

depreciation or amortisation, if no impairment loss had

been recognised.

(iii) Specific impairment

The Bank creates a specific impairment against advances

when there is objective evidence that it will not be able to

collect all amounts due. The amount of such impairment

is the difference between the carrying amount and the

recoverable amount, calculated as the present value of

expected future cash flows, including amounts recoverable

from guarantees and collateral, discounted at the effective

interest rate at the inception of the advance.

(iv) Portfolio impairment

The Bank creates a portfolio impairment against advances

where there is objective evidence that the advances

portfolio contains probable losses at the balance sheet

date, which will only be identified in the future, or where

there is insufficient data to reliably determine whether such

losses exist. The estimated probable losses are based

on historical information and take into account historical

patterns of losses and the current economic climate in

which the borrowers operate.

(i) INTEREST-BEARING BORROWINGS

Interest-bearing borrowings are recognised initially at fair

value less attributable transaction costs.

( j ) EMPLOYEE BENEFITS

(i) Defined contribution plans

Obligations for contributions to defined contribution

pension plans are recognised as an expense in the income

statement as incurred.

(k) PROVISIONS

A provision is recognised in the balance sheet when the

Bank has a present legal or constructive obligation as a

result of a past event, and it is probable that an outflow of

economic benefits will be required to settle the obligation.

(l) TRADE AND OTHER PAYABLES

Trade and other payables are stated at cost.

(m) INTEREST INCOME

(i) Interest income

Interest income is recognised in the income statement as it

accrues, using the effective interest method.

(ii) Interest paid

Interest paid comprises interest payable on borrowings.

(n) EXPENSES

(i) Operating lease payments

Payments made under operating leases are recognised in

the income statement on a straight-line basis over the term

of the lease. Lease incentives received are recognised in

the income statement as an integral part of the total lease

expense.


NOTES TO THE ANNUAL FINANCIAL STATEMENTS (CONTINUED)


(o) INCOME TAX

Income tax on the profit or loss for the year comprises

current and deferred tax. Income tax is recognised in

the income statement except to the extent that it relates

to items recognised directly in equity, in which case it is

recognised in equity.

Current tax is the expected tax payable on the taxable

income for the year, using tax rates enacted or substantially

enacted at the balance sheet date, and any adjustment to

tax payable in respect of previous years.

Deferred tax is provided using the balance sheet liability

method, providing for temporary differences between

the carrying amounts of assets and liabilities for financial

reporting purposes and the amounts used for taxation

purposes. The following temporary differences are not

provided for: the initial recognition of assets or liabilities that

affect neither accounting nor taxable profit. The amount of

deferred tax provided is based on the expected manner of

realisation or settlement of the carrying amount of assets

and liabilities, using tax rates enacted or substantively

enacted at the balance sheet date.

A deferred tax asset is recognised only to the extent that

it is probable that future taxable profits will be available

against which the asset can be utilised. Deferred tax assets

are reduced to the extent that it is no longer probable that

the related tax benefit will be realised.

Additional income taxes that arise from the distribution of

dividends are recognised at the same time as the liability to

pay the related dividend.

(p) CONTINGENCIES AND COMMITMENTS

Transactions are classified as contingencies where the

Bank’s obligations depend on uncertain future events and

principally consist of third party obligations underwritten by

banking operations.

Items are classified as commitments where the Bank

commits itself to future transactions or if the items will

result in the acquisition of assets.


2005 2004

R R

1. CASH AND SHORT-TERM FUNDS

Balances with other Banks 492 523 536 443 450 098

Maturity analysis

On demand to one month 447 948 536 416 748 523

One month to six months 44 425 000 25 951 575

Greater than six months 150 000 750 000

492 523 536 443 450 098

2. INVESTMENT SECURITIES

Interest bearing Government bonds 187 006 289 92 266 401

Treasury bills 0 0

187 006 289 92 266 401

Maturity analysis

On demand to one month 0 0


Greater than six months 97 026 042 68 107 147

187 006 289 92 266 401

3. OTHER ASSETS

Forward exchange contracts 2 206 518 10 617 309

Taxation overpaid 235 815 120 037

Other assets 1 893 754 4 797 806

4 336 087 15 535 152




2005 2004

R R

4. DEFERRED TAXATION

Tax effect of timing differences between tax and book values of

-provisions for doubtful advances (102 981) 87 022

-other accruals and provisions 429 120 168 128

-fixed asset allowances (16 313) 167 305

Deferred taxation asset 309 826 422 455

Deferred taxation reconciliation

Balance at beginning of year 422 455 243 815

Reduction in tax rate (14 082) 0

Income statement charge (98 547) 178 640

Balance at end of year 309 826 422 455

5. ADVANCES

Overdrafts 189 468 315 137 996 780

Loans 122 380 842 91 761 493

Staff loans 741 860 885 374

Commercial loans 90 826 598 73 694 233

Trust receipts 30 812 384 17 181 886

Bills receivable 3 500 000 1 122 000

Foreign bills purchased 14 791 788 4 443 554

330 140 945 235 323 827

Specific impairment (1 446 503) (1 724 752)

Portfolio impairment (768 086) (704 187)

327 926 356 232 894 888

Maturity analysis




327 926 356 232 894 888

Interest rates range between 5.25% and 13.5%


2005 2004

R R

6. IMPAIRMENT OF ADVANCES

6.1 Specific impairment

Balance at beginning of year 1 724 752 433 127

Amounts written off, net of recoveries and other transfers 100 043 1 291 625

Write-offs (378,292) 0

Balance at end of year 1 446 503 1 724 752

6.2 Portfolio impairment

Balance at beginning of year 704 187 259 966

Amounts written off, net of recoveries and other transfers 71 655 444 221

Write-offs (7,756) 0

Balance at end of year 768 086 704 187

6.3 Income statement charge

Provisions raised during the year

-Specific provision 100 043 1 291 625

-General provision 71 655 444 221

171 698 1 735 846

-Write-offs 0 0

-Recoveries (1 515) (2 397)

170 183 1 733 449




7. PROPERTY AND EQUIPMENT

Accumulated Net carrying

Cost depreciation value

R R R

2005

Buildings 8 408 751 0 8 408 751

Furniture & fittings 4 383 981 (2 747 864) 1 636 117

Office equipment 2 400 252 (1 367 357) 1 032 895

Motor vehicles 1 386 032 (708 749) 677 283

Computers 4 710 875 (2 966 572) 1 744 303

21 289 891 (7 790 542) 13 499 349

Accumulated Net carrying

Cost depreciation value

R R R

2004

Buildings 6 904 595 (546 732) 6 357 863

Furniture & fittings 3 689 863 (2 427 063) 1 262 800

Office equipment 1 594 418 (1 192 106) 402 312

Motor vehicles 1 254 029 (470 330) 783 699

Computers 3 239 856 (2 466 296) 773 560

16 682 761 (7 102 527) 9 580 234

Opening Closing

carrying carrying

value Additions Disposals Depreciation value

R R R R R

2005 movements

Buildings 6 357 863 1 504 156 546 732 8,408,751

Furniture & Fittings 1 262 800 694 118 (320 801) 1,636,117

Office equipment 402 312 805 834 (175 251) 1,032,895

Motor vehicles 783 699 132 003 (238 419) 677,283

Computers 773 560 1 487 410 (16 144) (500 523) 1,744,303

9 580 234 4 623 521 (16 144) (688 262) 13 499 349


Opening Closing

carrying carrying

value Additions Disposals Depreciation value

R R R R R

2004 movements

Buildings 1,663,908 4 801 227 0 (107 272) 6,357,863

Furniture & Fittings 684,008 944 404 (1 477) (364 135) 1,262,800

Office equipment 149,040 344 465 (7 117) (84 076) 402,312

Motor vehicles 767,457 487 255 (248 757) (222 256) 783,699

Computers 633,741 453 954 0 (314 135) 773,560

3,898,154 7,031,305 (257,351) (1,091,874) 9,580,234

Buildings comprise the following:

1. Erf no. 1246, Jan Hofmeyr Road, Westville.

2. 39 Rooikoppies, 23 Leander Crescent, Westville.

3. Section numbers 15 and 28, Cedar Ridge, Jan Hofmeyr Road, Westville.

4. Section 11, Arbor Glade, Musgrave, Durban

5. Section 22, Berkley Close, Johannesburg

6. Section 4, The Patio, Linden, Standerton.

2005 2004

R R

8. ORDINARY SHARE CAPITAL

Authorised

10 000 000 Ordinary shares of R1 each 10,000,000 10,000,000

Issued

10 000 000 Ordinary shares of R1 each 10,000,000 10,000,000




2005 2004

R R

9. NON-DISTRIBUTABLE RESERVES

Regulatory reserve 6 029 982 4 461 506

Due to the requirements of Regulation 28 of the Banks Act of 1990, that specifies the minimum general and

specific provisions to be held, a Regulatory Reserve has been created, by re-allocating distributable reserves to

non-distributable reserves.

General reserve 17 000 000 10 000 000

The reserve has been created specifically for the retention of capital.

10. DEPOSITS AND OTHER ACCOUNTS

Deposits and loans from banks 56 522 245 4 013 915

Demand deposits 361 369 733 344 092 503

Savings deposits 60 858 513 50 713 209

Fixed deposits 144 586 545 75 788 373

Notice deposits 301 637 310 212 779 149

924 974 346 687 387 149

Maturity analysis




924 974 346 687 387 149

11. OTHER LIABILITIES

Creditors and other accounts payable 7 495 158 18 977 968

Forward exchange contracts 2 206 518 10 617 309

9 701 676 29 595 277


2005 2004

R R

12. OTHER INCOME

Commissions and fees 25 237 078 23 516 495

13. OPERATING EXPENSES

Operating expenses include :

Directors emoluments (see note 24) 2 437 132 2 283 862

-for services as directors 853 500 670 000

-for other services 1 583 632 1 613 862

Auditors remuneration 407 950 340 957

-audit 382 940 273 200

-for other services 23 410 25 200

-underprovision prior year 1 600 42 557

Depreciation 688 262 1 091 875

Profit on sale of fixed assets 747 49 191

Management fee 7 176 771 6 702 984

Retirement benefit costs 1 384 842 1 259 674

Operating leases 1 633 186 1 195 699

-premises 1 350 323 1 056 942

-equipment 282 863 138 757

Staff costs 12 645 500 10 776 035

The management fee is paid to Habib Bank AG Zurich, the bank’s holding company.




2005 2004

R R

14. TAXATION

14.1 South African normal taxation

Current 8 162 573 6 709 277

Deferred 112 629 (178 640)

Secondary taxation on companies 712 500 962 500

8 987 702 7 493 137

Other taxation

-unclaimable value added tax 922 635 901 089

-skills development levy 31 275 65 217

-regional services council levy 164 244 126 858

1 118 154 1 093 164

Total taxation 10 105 856 8 586 301

14.4 Reconciliation of tax charge

SA Normal taxation 29.00% 30.00%

Standard rate affected by :

- non-deductable expenses (1.00%) 0

- secondary taxation on companies 2.40% 4.42%

Effective rate - taxation on income 30.40% 34.42%

Effective rate - total taxation 34.18% 37.56%

14.3 Secondary tax on companies

A contingent liability exists for the payment of STC on future distributions of retained earnings to shareholders of

R 1 988 382 (2004: R 1 411 670). This has been calculated based on the reserves at the end of the year at the

current rate of STC taxation of 12.5%.


2005 2004

R R

15. ORDINARY DIVIDENDS

Final dividend of 57 cents per share

(2004: 77 cents per share) 5 700 000 7 700 000

16. CASH FLOW INFORMATION

16.1 Cash receipts from customers

Interest income 72 305 230 53 163 204

Other income 25 237 078 23 516 495

97 542 308 76 679 699

16.2 Cash paid to customers, employees and suppliers

Interest expenses (28 405 547) (16 526 632)

Other payments (39 099 121) (34 512 593)

(67 504 668) (51 039 225)

16.3 Cash available from operating activities

Net income before tax 29 564 475 22 861 944

Adjusted for non-cash items

-Specific debt provision (278 249) 1 291 625

-General debt provision 63 899 444 221

-Depreciation 688 262 1 091 875

-Profit on disposal of property and equipment (747) (49 191)

30 037 640 25 640 474

16.4 Taxation paid

Amounts over / (unpaid) at beginning of year 120 037 (6 723 187)

Income statement charge (9 993 227) (8 764 941)

Amounts (over)/ unpaid at end of year (235 815) (120 037)

(10 109 005) (15 608 165)




2005 2004

R R

16.5 Increase in income-earning funds and other assets

Loans and advances (94 817 118) (46 830 167)

Government securities and money market assets (94 739 888) (13 456 179)

Other assets 11 314 843 (6 164 603)

(178 242 163) (66 450 949)

16.6 Increase in deposits and other liabilities

Deposits 237 587 197 132 115 335

Creditors and other liabilities (19 893 601) 11 732 662

217 693 596 143 847 997

17. CONTINGENT LIABILITIES

Letters of credit 86 978 034 53 589 058

Guarantees issued on behalf of customers 79 731 847 50 995 017

166 709 881 104 584 075

18. EARNINGS AND HEADLINE EARNINGS PER SHARE

The calculation of earnings per ordinary share is based on net income attributable to ordinary shareholders of

R19 458 619 (2004 : R14 275 643) and a weighted average of 10 000 000 (2004 : 10 000 000) ordinary shares

in issue during the year. The calculation of headline earnings per ordinary share is based on headline earnings of

R19 457 872 (2004 : R14 226 452) and a weighted average of 10 000 000 (2004: 10 000 000) ordinary shares in

issue during the year.

19. PRINCIPAL FOREIGN CURRENCY CONVERSION RATES

One South African rand equals

Swiss franc 0.208 0.201

United States dollar 0.158 0.176

Pound sterling 0.092 0.092


2005 2004

R R

20. FINANCIAL INSTRUMENTS

20.1 Credit risk management

Significant credit exposures at

31 December 2005 are:

Advances 327 926 356 232 894 888

Contingent liabilities 166 709 881 104 584 075

494 636 237 337 478 963

Credit risk is managed by the Bank by ensuring that advances are made to reputable customers and exposures

are reviewed on a regular basis by management.

20.2 Currency risk management

The Bank did not have any significant foreign currency exposure at 31 December 2005.

20.3 Derivative instruments

Nominal value of forward exchange

contracts sold to customers 131,412,110 125,908,340

Nominal value of forward exchange

contracts sold to banks 475,645 4,543,815

Nominal value of forward exchange contracts

purchased from customers 475,250 4,533,110

Nominal value of forward exchange contracts

purchased from banks 131,091,357 125,561,421




Greater than

On demand 1-6 months 6 months Total

R R R R

20.4 Liquidity risk management

Assets

Investment securities 0 89 980 247 97 026 042 187 006 289

Advances 214 500 065 57 960 476 55 465 815 327 926 356

Other assets 4 105 154 0 230 933 4 336 087

Cash and short term funds 447 948 536 44 425 000 150 000 492 523 536

666 553 755 192 365 723 152 872 790 1011 792 268

Liabilities

Deposits and other accounts (887 975 138) (32 715 632) (4 283 576) (924 974 346)

Other liabilities (5 305 373) (3 399 603) ( 996 700) (9 701 676)

(893 280 511) (36 115 235) (5 280 276) (934 676 022)

Net liquidity gap (226 726 756) 156 250 488 147 592 514 77 116 246

20.5 Interest rate risk management

The Bank is exposed to interest rate cash flow risk on its cash and short-term funds, investment securities,

advances and deposits and other accounts. The Bank is exposed to floating and fixed rates as follows:

Total book

value

Short-

term

Medium-term Long-term

0 - 31

days

32 - 91

days

92 - 181

days

182 - 365

days

Other Total

R’000 R’000 R’000 R’000 R’000 R’000

Fixed rate items

Assets 410,461 174,805 135,470 3,010 150 97,026 410,461

Liabilities (149,645) (110,623) (33,129) (1,610) (4,283) 0 (149,645)

260,816 64,182 102,341 1,400 (4,133) 97,026 260,816

Variable items

Assets 580,015 580,015 580,015

Liabilities (395,105) (395,105) (395,105)

184,910 184,910 0 0 0 0 184,910

Net repricing gap 445,726 249,092 102,341 1,400 (4,133) 97,026 445,726


20.6 Sensitivity analysis

In managing interest rate risk the Bank aims to reduce the impact of short-term fluctuations on the bank’s

earnings. Over the longer term however, permanent changes in interest rates would have an impact on earnings.

It is estimated that a general increase or decrease of 1% in the interest rate would increase or decrease the

bank’s profit by R268 000 for the year ended 31 December 2005. (2004: R250 000).

20.7 Fair values

The fair values together with the carrying amounts shown in the balance sheet are as follows:

Government bonds

Carrying Carrying

value Fair value value Fair value

2005 2005 2004 2004

R R R R

187 006 289 188 443 102 92 265 401 94 645 142

Net gain / (loss) 1 436 813 2 379 741

Effective interest rates vary between 7.6% and 11.3%.

Advances and deposits

The fair value of these financial instruments cannot be reliably measured as they are unquoted.

21. RETIREMENT BENEFIT COSTS

All full-time permanent employees are members of the Old Mutual Orion Provident Fund, which is a defined

contribution fund, and is governed by the Pension Funds Act of 1956. Membership of this fund has been

compulsory since the incorporation of the Bank in November 1995.




22. OPERATING LEASE COMMITMENTS

Buildings Equipment Total

R R R

2005

Not later than 1 year 961 017 316 282 1,277,299

Between 1 and 5 years 2 264 679 1 546 559 3,811,238

Later than 5 years 892 223 892,223

4,117,919 1,862,841 5,980,760

2004

Not later than 1 year 986,516 175,092 1,161,608

Between 1 and 5 years 2,322,200 906,943 3,229,143

Later than 5 years 340,105 0 340,105

3,648,821 1,082,035 4,730,856

23. RELATED PARTIES

23.1 Identity of related parties

The holding company of HBZ Bank Limited is Habib Bank AG Zurich, incorporated in Switzerland which holds

100% (2004 : 100%) of the company’s ordinary shares.

The directors are listed under the section entitled Directorate.

All related party transactions were made on terms equivalent to those that prevail in an arm’s length transaction.


2005 2004

R R

23.2 Material related party transactions

Material transactions with the company

Dividends paid to the holding company - see the directors’ report

Directors’ emoluments - see note 24

Material transactions with the group

Receivables due from group companies:

- Zurich 747 4 508

- UK 297 447 316 664

- Hong Kong 3 382 929

- Canada 4 211 3 608

305 787 325 709

These receivables all relate to short-term receivables with no fixed terms of repayments.

Payables due to group companies:

- Zurich (358 088) (335 927)

- UK (55 836 333) (1 271 411)

- Kenya (100 123) (219 596)

- Isle of Man (1 415) (100 359)

(56 295 959) (1 927 293)

These payable balances related to short-term payables with no fixed terms of repayment.

Interest and charges received from group companies:

- UK 661 16 287

Interest and charges paid to group companies:

- Zurich 32,913 654

- UK 3,294,645 106,569

- Kenya 4,465 0

- Isle of Man 56 0

- Canada 0 23

3,332,079 107,246




24. DIRECTORS’ REMUNERATION

Executive Non-executive Total

2005 2004 2005 2004 2005 2004

R R R R R R

Directors’ emoluments 1,657,132 1,683,862 780,000 600,000 2,437,132 2,283,862

- For services as directors of

the company 73,500 70,000 780,000 600,000 853,500 670,000

- For other services 1,583,632 1,613,862 0 0 1,583,632 1,613,862

Pensions to directors 0 0 0 0 0 0

- For services as directors of

the company

0 0 0 0

Total directors’ remuneration

(see note 13) 1,657,132 1,683,862 780,000 600,000 2,437,132 2,283,862

The directors do not have service contracts with HBZ Bank.

25. LOANS TO DIRECTORS

Staff Loans

C Harvey N Chowdhari Z Khan

(Financial Director) (Former General

Manager)

(General Manager)

Balance 1 January 2005 26,629 36,106 40,000

Advance 67,971 93,144 0

Interest charged 4,528 3,102 346

Repayment (37,200) (44,267) (40,346)

Balance 31 December 2005 61,928 88,085 0


26. EFFECT OF STANDARDS ISSUED BUT NOT YET EFFECTIVE

IFRS 7 - Financial instruments

The disclosures provided in respect of financial instruments in the financial statements of the Bank for the period

ending 31 December 2007, as well as comparative information, will be compliant with IFRS 7. The disclosure

requirements of IFRS 7 require additional disclosure compared to that required in terms of existing IFRS in respect

of the following:

· Credit risk;

· Market risk;

· Liquidity risk; and

· Capital objecties and policies.

The adoption of IFRS 7 will not have an impact on the accounting policies adopted for financial instruments.




Relocation of

assets

secured Risk

Risk Off-balance by pledge of weighted Credit risk

weightings Assets items deposits assets Credit risk exposure

2005 2005 2005 2005 2005 2004

R’000 R’000 R’000 R’000 R’000 R’000

0% 196 590 86 978 64 759 348 327 0 0

5% 0 0 0

10% 0 0 0

20% 350 295 0 350 295 70059 54 426

50% 146 240 146 240 73120 0

100% 391 336 80 290 ( 64 759) 406 867 406 867 305 968

0 0 0

938 221 313 508 0 1 251 729 550 046 360 394

Counterparty risk exposure 365 278

Large exposure risk 0 5021

550 411 365 693

Risk weighted capital requirement - 10% 55 041 36 569

Qualifying share capital and unimpaired reserve funds 72 193 63 331

Qualifying share capital and unimpaired reserve funds as a

percentage of risk weighted assets 13% 17%

Note: The assets and off balance sheet items indicated in this statement are the average for the quarter ended 31

Decemebr 2005, as per regulation 23 of the Banks Act of 1990.


CAPITAL ADEQUACY STATEMENT


INTERNATIONAL NETWORK

1. UNITED ARAB EMIRATES Habib Bank AG Zurich 8 Branches 5 in Dubai,

2 in AbuDhabi, Sharjah

2. UNITED KINGDOM Habib Bank AG Zurich 9 Branches 5 in London,

Manchester, Glasgow,

Leicester, Birmingham

3. PAKISTAN Habib Bank AG Zurich 22 Branches 16 in Karachi, 4 in Lahore,

Faisalabad, Rawalpindi

4. KENYA Habib Bank AG Zurich 4 Branches 3 in Nairobi, Mombasa

5. SWITZERLAND Habib Bank AG Zurich 2 Branches 2 in Zurich

6. SOUTH AFRICA HBZ Bank (Pty) Ltd 5 Branches 2 in Durban, Johannesburg,

Lenasia, Laudium

7. ISLE OF MAN Habib European Bank Ltd 1 Branch Douglas

8. CANADA Habib Canadian Bank 1 Branch Mississauga

(Greater Toronto Area)

9. HONG KONG HBZ Finance Ltd 5 Branches 5 in Hong Kong

10. SINGAPORE HBZ Int Exchange Co 1 Branch Singapore

11. EGYPT Habib Bank AG Zurich Representative Office Cairo

12. BANGLADESH Habib Bank AG Zurich Representative Office Dhaka


LIST OF SERVICES

THE RANGE OF SERVICES PRESENTLY AVAILABLE

IN SOUTH AFRICA INCLUDE:• Savings Accounts

• Current Accounts

• Term Deposit Accounts

• Overdraft Facilities

• Commercial Loans

• Bill Discounting

• Letters of Guarantee

• Foreign Exchange

• Foreign Drafts

• Import and Export Letter of Credit

• Documentary Collections

• Trade Finance

• Travellers Cheques

OTHER SERVICES AVAILABLE THROUGH THE GLOBAL NETWORK

INCLUDE:

Personal and Private Banking Services:

• International Portfolio Management

• Financial Advisory Services

• Trustee Services

• Credit Cards

• Travellers Cheques

• Safe Deposit Lockers and Custodial Services

Corporate Banking Services:

• Overdraft Facilities

• Commercial Loans

• Foreign Exchange Dealings

• Trade Finance

• Import and Export Letter of Credit

• Bills Discounting

• Global Remittances

• Bullion and Silver Dealing

• Dealings in Securities, Bonds and Stocks

• Treasury Services

With the benefi t of decades of experience in understanding and satisfying the varied fi nancial needs of customers spread across

the globe, the Group has developed a wide spectrum of quality products and services throughout its global network of branches,

subsidiaries and affi liates.

• Treasury Services

secure service

6493 Photography by Dave Dancer, Lock collection courtesy of Tim Simpkin - A.A. Locksmith & Grinding Specialists, Design by www.growgraphics.co.za

HBZ Bank Limited(A SUBSIDIARY OF HABIB BANK A G ZURICH)

Documents

HBZ Bank Limited...HBZ Bank Limited ANNUAL REPORT 2005 (A SUBSIDIARY OF HABIB BANK A G ZURICH) We dedicate ourselves always to consider the customer ﬁ rst, give full measure and