IMPORTANT NOTICE

NOT FOR DISTRIBUTION IN OR INTO THE UNITED STATES OR OTHERWISE EXCEPT TO PERSONS TO WHOM ITCAN LAWFULLY BE DISTRIBUTED.

IMPORTANT: You must read the following before continuing. The following applies to the Offering Circular following this page, andyou are therefore advised to read this page carefully before reading, accessing or making any other use of the Offering Circular. Inaccessing the Offering Circular, you agree to be bound by the following terms and conditions, including any modifications to them anytime you receive any information from Bank Audi s.a.l. (the “Bank”) and Audi Investment Bank s.a.l. (the “Placement Agent”), as aresult of such access.

NOTHING IN THIS ELECTRONIC TRANSMISSION CONSTITUTES AN OFFER OF SECURITIES FOR SALE IN THE UNITEDSTATES OR ANY OTHER JURISDICTION WHERE SUCH AN OFFER IS UNLAWFUL. NEITHER THE RIGHTS (AS DEFINEDHEREIN) NOR THE SECURITIES (AS DEFINED HEREIN) HAVE BEEN OR WILL BE REGISTERED UNDER THE U.S.SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR WITH ANY SECURITIES REGULATORYAUTHORITY OF ANY STATE OR OTHER JURISDICTION OF THE UNITED STATES, AND MAY NOT BE OFFERED ORSOLD, EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATIONREQUIREMENTS OF THE SECURITIES ACT AND IN COMPLIANCE WITH ANY APPLICABLE STATE SECURITIES LAWS.THE BANK DOES NOT INTEND TO REGISTER ANY OFFERING OR CONDUCT ANY PUBLIC OFFERING IN THE UNITEDSTATES, AND NO OFFERING OF THE SECURITIES DESCRIBED HEREIN WILL BE MADE BY THE BANK OR ANY OTHERPERSON IN THE UNITED STATES. NEITHER THE U.S. SECURITIES AND EXCHANGE COMMISSION, ANY STATESECURITIES COMMISSION NOR ANY OTHER REGULATORY AUTHORITY HAS APPROVED OR DISAPPROVED THESECURITIES, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THETRANSACTION DESCRIBED HEREIN. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENCE IN THEUNITED STATES.

THE ATTACHED OFFERING CIRCULAR MAY NOT BE FORWARDED OR DISTRIBUTED TO ANY OTHER PERSON ANDMAY NOT BE REPRODUCED IN ANY MANNER WHATSOEVER AND, IN PARTICULAR, MAY NOT BE FORWARDED TOANY U.S. PERSON OR U.S. ADDRESS. ANY SUCH FORWARDING, DISTRIBUTION OR REPRODUCTION OF THISDOCUMENT IN WHOLE OR IN PART IS UNAUTHORISED. FAILURE TO COMPLY WITH THIS RESTRICTION MAY RESULTIN A VIOLATION OF THE SECURITIES ACT OR THE APPLICABLE LAWS OF OTHER JURISDICTIONS.

To the extent that distribution of the Offering Circular is deemed to constitute an offer of Rights or Securities in any Member State of theEuropean Economic Area (the “EEA”) that has implemented Directive 2003/71/EC, as amended (together with any implementingmeasures, the “Prospectus Directive”), such offer will only be addressed to and this document is intended for distribution only to“Qualified Investors” (within the meaning of Article 2(1)(e) of the Prospectus Directive) and/or will only be available to fewer than 100or, if the relevant Member State has implemented the relevant provisions of Directive 2010/73/EU, 150 natural or legal persons (otherthan Qualified Investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, or will otherwise be made incircumstances that do not require the Bank to publish a prospectus pursuant to the Prospectus Directive.

In the United Kingdom, the Offering Circular may be only distributed to and may be directed only at persons who have professionalexperience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (FinancialPromotion) Order 2005, as amended. The Bank has not authorized any offer of the Securities to the public in the United Kingdom underthe Financial Services and Markets Act 2000 (“FSMA”). The Securities may not lawfully be offered or sold to persons in the UnitedKingdom except in circumstances which do not result in an offer to the public in the United Kingdom within the meaning of FSMA orotherwise in compliance with the applicable provisions of FSMA.

NEITHER BANQUE DU LIBAN, THE CENTRAL BANK OF LEBANON, NOR THE CAPITAL MARKETS AUTHORITY OFLEBANON HAS PASSED UPON OR TAKES ANY RESPONSIBILITY FOR THE INFORMATION CONTAINED IN THEOFFERING CIRCULAR OR FOR THE MERITS OF ANY ISSUE OR SALE OF RIGHTS OR SECURITIES HEREUNDER.

The attached Offering Circular has been delivered to you on the basis that you are a person into whose possession this Offering Circularmay be lawfully delivered in accordance with the laws of the jurisdiction in which you are located and you may not, nor are youauthorised to, deliver this Offering Circular to any other person.

The attached Offering Circular has been sent to you in electronic form. You are reminded that documents transmitted via thismedium may be altered or changed during the process of electronic transmission and consequently none of the Bank, the PlacementAgent, any person who controls them or any director, officer, employee or agent of them or affiliate of any such person accepts anyliability or responsibility whatsoever in respect of any difference between the Offering Circular distributed to you in electronic format andthe hard copy version available to you without charge on request from the Bank or the Placement Agent.

NOT FOR DISTRIBUTION INOR INTO THE UNITED STATES.

(incorporated in Lebanon with limited liability)List of Banks № 56. Commercial Registry: Beirut 11347

Offer of 50,000,000 common shares in Bank Audi S.A.L.,together with three Warrants per newly-issued common share

exercisable for common shares in Odea Bank A.Ş.

Bank Audi S.A.L., a bank incorporated in Lebanon with limited liability (the “Bank” or “Bank Audi”), is conducting a capital increase(the “Capital Increase”) by way of an offer of 50,000,000 newly-issued common shares of the Bank (the “New Shares”), which isexpected to be comprised of (i) the issuance of New Shares, initially reserved to existing shareholders by way of an issue of rights (the“Rights”), together with three warrants (the “Warrants” and, together with the New Shares, the “Securities”) per New Share (the“First Capital Increase”) and (ii) the issuance of 10,000,000 New Shares, together with three Warrants per New Share, to newinvestor(s) (the “Second Capital Increase”). The issue price of the New Shares shall be U.S.$6.00 per New Share.

In the First Capital Increase, each existing shareholder will be allocated Rights pro rata to the number of common shares held by suchshareholder as at September 1, 2014. Securities relating to unexercised Rights will be allocated by the Bank in its sole discretion,although the Bank intends to grant priority in such allocation to existing shareholders. For a description of the rights attaching to thecommon shares of the Bank, see “Description of the Share Capital of the Bank”. The First Capital Increase and the Second CapitalIncrease are not conditional on each other; the Bank may proceed with the First Capital Increase, the Second Capital Increase, both ornone.

The Bank will issue the Warrants. Each Warrant will entitle the holder thereof, during the Warrant Exercise Period, to purchase oneshare (provided that the Reverse Stock Split (as defined below) has occurred and subject to adjustment) in the Bank’s subsidiary, OdeaBank A.Ş. (“Odeabank”), from the Bank. The “Warrant Exercise Period” is expected to be a 30-day period commencing on May 15,2019. Warrants will be exercisable at an exercise price of U.S.$0.95 per share of Odeabank (each, an “Odeabank Share”) (provided thatthe Reverse Stock Split has occurred), subject to adjustment. See “Summary” and “Terms and Conditions of the Warrants”.

The Capital Increase was authorized by the shareholders of the Bank at an Extraordinary General Meeting held on August 26, 2014 andapproved by the Central Bank of Lebanon (the “Central Bank”), acting through its Central Council, on August 27, 2014.

The Securities are expected to be issued on or about September 23, 2014 (the “Issue Date”), subject to the satisfaction of certainconditions precedent. See “Summary” for a description of these conditions precedent.

Application will be made to list the New Shares on the Beirut Stock Exchange (the “BSE”). The Warrants will not be listed.

SEE “RISK FACTORS” FOR A DISCUSSION OF CERTAIN FACTORS TO BECONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SECURITIES.

This offering circular (the “Offering Circular”) does not constitute an offer to sell or an invitation to subscribe for, or the solicitation ofan offer or invitation to buy or subscribe for, Securities in any jurisdiction where such an offer or solicitation is unlawful or wouldimpose any unfulfilled registration, publication or approval requirements on the Bank. The Securities have not been, and will not be,registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”), or the securities laws of any state or otherjurisdiction of the United States or under applicable securities laws of Australia, Canada or Japan. Subject to certain exceptions, the NewShares and Warrants may not be, offered, sold, resold, transferred or distributed, directly or indirectly, within, into or in the United Statesor to or for the account or benefit of persons in the United States, Australia, Canada, Japan or any other jurisdiction where such offer orsale would violate the relevant securities laws of such jurisdiction. Certain other restrictions apply. See “Placement of the New Sharesand Warrants”.

The Warrants will only be exercisable by persons who represent, among other things, that they are outside the United States and not aU.S. person (as defined in Rule 902 promulgated under the Securities Act) or acting for the account or benefit of a U.S. person, and areacquiring shares in Odeabank upon exercise of the Warrants in reliance on an exemption from, or in a transaction not subject to, theregistration requirements of the Securities Act.

Placement Agent

The date of this Offering Circular is September 1, 2014.

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IMPORTANT NOTICE

This Offering Circular contains information provided by the Bank in connection with the Capital Increase. The Bankconfirms that all information regarding the Bank and the Capital Increase contained in this Offering Circular is true andaccurate in all material respects as at the date of this Offering Circular (or, if different, the date as at which suchinformation is stated herein to be supplied) and does not omit any material facts the omission of which would make anystatements of fact or opinion relating thereto and contained herein misleading. Audi Investment Bank S.A.L. (“AudiInvestment Bank”) has acted as placement agent (the “Placement Agent”) in connection with the Capital Increase.

This Offering Circular relates to the Securities. As part of the Capital Increase, GDRs representing New Shares(together with Warrants) (“New GDRs”) will be offered to GDR Holders. GDR Holders should refer to the Notices toGDR Holders delivered through the clearing systems for details of the procedures for subscriptions for Securities forGDR Holders.

No person has been authorized to give any information or to make any representations other than those contained in thisOffering Circular and, if given or made, such information or representations must not be relied upon as having beenauthorized. The Placement Agent has not independently verified the accuracy or completeness of any informationcontained in this Offering Circular and, accordingly, makes no representation, warranty or undertaking (express orimplied) with respect to, and does not accept any responsibility for (and hereby disclaims any liability for), the accuracyor completeness of this Offering Circular or any other information provided by the Bank or any other person, inconnection with the Capital Increase.

This Offering Circular should not be considered in itself as a recommendation by the Bank or the Placement Agent, orany of their respective officers, employees, agents or affiliates, that any recipient of this Offering Circular shouldparticipate in the Capital Increase. The Capital Increase involves substantial risks, including in respect of (i) emergingmarkets, the Lebanese Republic and the Turkish Republic in general; (ii) the Lebanese and Turkish banking sectors; and(iii) the financial condition, results of operations, business and prospects of the Bank and its corporate group.

Each prospective purchaser is advised to consult its own counsel, accountant or business advisor regarding legal, tax,regulatory and related matters concerning the purchase, holding and sale of Securities by it.

Neither the delivery of this Offering Circular nor the issue, offer, sale or delivery of any Securities shall imply that anyinformation contained in this Offering Circular is correct as at any time subsequent to the date hereof or such other dateas at which such information is stated to be given herein.

This Offering Circular does not constitute an offer to sell or the solicitation of an offer to buy any Securities in anyjurisdiction to any person to whom it is unlawful to make the offer or solicitation in such jurisdiction. The distributionof this Offering Circular and the offer or sale of Securities may be restricted by law in certain jurisdictions. No actionhas been taken by the Bank, the Placement Agent or any other person which would permit a public offering of anySecurities or distribution of this document in any jurisdiction where action for that purpose is required. Accordingly, noSecurities may be offered or sold, directly or indirectly, and neither this Offering Circular nor any advertisement orother offering material may be distributed or published in any jurisdiction, except under circumstances that will result incompliance with any applicable securities laws and regulations.

NEITHER THE CENTRAL BANK NOR THE CAPITAL MARKETS AUTHORITY OF LEBANON (THE“CMA”) HAS PASSED UPON OR TAKES ANY RESPONSIBILITY FOR THE INFORMATIONCONTAINED IN THIS OFFERING CIRCULAR OR FOR THE MERITS OF ANY OFFERING OFSECURITIES HEREUNDER.

The Securities will only be offered to non-U.S. persons in offshore transactions outside the United States in reliance onRegulation S under the Securities Act, through Audi Investment Bank, as Placement Agent, on an as-and-if issued basis,subject to prior sale or withdrawal, cancellation or modification. An eligible investor is required to sign a PurchaseApplication, substantially in the form of Exhibit A hereto or an earlier version thereof as may have been previouslymade available to it by the Bank or the Placement Agent, as a condition to making an investment in the Securities.

In accordance with applicable regulations, the Bank intends to list all of the New Shares on the BSE. It is expected thatsuch listing will be effected in October 2014. The New Shares will not be listed on any international stock exchange.The Warrants will not be listed on any domestic or international stock exchange.

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The New Shares will be issued in registered form, registered in the respective names of the purchasers thereof in theshare registry maintained by Midclear s.a.l. (“Midclear”) in respect of the Bank’s share capital. Interests in the NewShares will be shown only on, and transfers thereof may be effected (subject as provided herein) only through, thebook-entry system maintained by Midclear and its participants, including the Bank. New Shares in definitive form willnot be issued.

The Warrants will be issued in registered form and, upon issue, will be evidenced by the Global Warrant. So long as thewarrants are evidenced by the Global Warrant, interest in the warrants will be shown only on, and transfers thereof maybe effected only through, the book-entry system maintained by Midclear. Warrants in definitive form may be issued incertain circumstances. See “Description and Settlement Procedures Relating to the Warrants”.

NOTICE TO EEA AND UK INVESTORS

This Offering Circular and any offer in connection with the Capital Increase are only addressed to and directed atpersons in member states (each, a “Member State”) of the European Economic Area (the “EEA”), who are “qualifiedinvestors” within the meaning of Article 2(1)(e) of the Prospectus Directive (“Qualified Investors”) and/or will only beavailable to fewer than 100 or, if the relevant Member State has implemented the relevant provisions of Directive2010/73/EU (the “2010 PD Amending Directive”), 150 natural or legal persons (other than Qualified Investors asdefined in Directive 2003/711EC, as amended (the “Prospectus Directive”)), as permitted under the ProspectusDirective, or will otherwise be made in circumstances that do not require the Bank to publish a prospectus pursuant tothe Prospectus Directive.

In addition, in the United Kingdom, this Offering Circular is only being distributed to and is only directed at (1)Qualified Investors who are investment professionals falling within Article 19(5) of the Financial Services and MarketsAct 2000 (Financial Promotion) Order 2005 (the “Order”) or high net worth entities falling within Article 49(2)(a) to(d) of the Order or (2) persons to whom it may otherwise lawfully be communicated (all such persons together beingreferred to as “relevant persons”). The Securities are only available to, and any invitation, offer or agreement tosubscribe, purchase or otherwise acquire such securities will be engaged in only with, (i) in the United Kingdom,relevant persons and (ii) in any Member State other than the United Kingdom, Qualified Investors or fewer than 100 or150 persons (as the case may be). This Offering Circular and its contents should not be acted upon or relied upon in theUnited Kingdom, by persons who are not relevant persons.

In the case of any Securities being offered to a financial intermediary as that term is used in Article 3(2) of theProspectus Directive, such financial intermediary will also be deemed to have represented, acknowledged and agreedthat the Securities acquired by it in the offering of Securities have not been acquired on behalf of, nor have they beenacquired with a view to their offer or resale to, persons in any Relevant Member State other than Qualified Investors, orin circumstances in which the prior consent of the Bank has been given to such offer or resale. The Bank and thePlacement Agent and their respective affiliates will rely upon the truth and accuracy of the foregoing representations,acknowledgements and agreements. Notwithstanding the above, a person who is not a Qualified Investor, and who hasnotified the Bank of such fact in writing, may, with the written consent of the Bank, be permitted to purchase Securities.

The Bank may rely on the truth and accuracy of the foregoing representations, acknowledgements and agreements andwill not be responsible for any loss occasioned by such reliance.

To the extent that the Bank receives Purchase Applications for Securities from 100 (or 150 in respect of Member Statesthat have implemented the 2010 PD Amending Directive) or more prospective purchasers resident in one Member Stateof the EEA that are not Qualified Investors, all prospective holders from that Member State will be excluded fromparticipating in the Capital Increase.

For the purposes of this section, the expression “Prospectus Directive” means Directive 2003/71/EC (and anyamendments thereto, including Directive 2010/73/EU) and includes any relevant implementing measure in eachMember State.

FORWARD-LOOKING STATEMENTS

Certain statements in this Offering Circular constitute “forward-looking statements”. These statements appear in anumber of places in this Offering Circular and include statements regarding the Bank’s intent, belief or currentexpectations or those of the Bank’s Management (as defined below) with respect to, among other things:

statements regarding the Bank’s and Odeabank’s results of operations, financial condition and future economicperformance;

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statements regarding the Bank’s and Odeabank’s competitive position and the effect of such competition on itsresults of operations;

statements regarding trends affecting the Bank’s and Odeabank’s financial condition or results of operations;

statements of the Bank’s and Odeabank’s business plans, including those related to new products or services andanticipated customer demand for these products or services and potential acquisitions;

statements regarding the Bank’s and Odeabank’s growth and investment programs and related anticipated capitalexpenditure;

statements regarding the Bank’s intentions to contain costs, increase operating efficiency and promote bestpractices;

statements of assumptions;

statements regarding the impact of the on-going global financial and market crisis;

statements regarding the potential impact of regulatory actions on the Bank’s and Odeabank’s business,competitive position, financial condition and results of operations;

statements regarding the future issuance of securities by the Bank, including, inter alia, the issuance of theSecurities; and

statements regarding the possible effects of adverse determinations in litigation, investigations, contestedregulatory proceedings and other disputes.

These forward-looking statements can be identified by the use of forward-looking terminology such as “believes”,“expects”, “may”, “is expected to”, “will”, “will continue”, “should”, “approximately”, “would be”, “seeks”, or“anticipates” or similar expressions or comparable terminology, or the negatives thereof. Such forward-lookingstatements are not guarantees of future performance and involve risks and uncertainties, and actual results, performanceor achievements of the Bank or Odeabank may differ materially from those expressed or implied in the forward-lookingstatements as a result of various factors. The information contained in this Offering Circular, including, withoutlimitation, the information under “Risk Factors”, “Overview of Bank Audi.”, “Overview of Odeabank” and “TheBanking Sector and Banking Regulation in Lebanon”, identifies important factors that could cause such differences. Inaddition, many other factors could affect the Bank’s and Odeabank’s actual financial results or results of operations andcould cause actual results to differ materially from those in the forward-looking statements. The Bank does notundertake to update any forward-looking statements made herein.

PRESENTATION OF INFORMATION

Information in this Offering Circular relates to the Bank and its consolidated subsidiaries (including Odeabank), aslisted in Note 53 to the Bank’s Annual Financial Statements (as defined below). References to the “Group” shall mean,unless otherwise specified, the Bank and its consolidated subsidiaries. References to “Management” are to the Bank’ssenior management team.

Financial information included in this Offering Circular has, unless otherwise indicated, been derived from (i) theBank’s audited consolidated financial statements as at, and for the years ended, December 31, 2013, 2012 and 2011 (the“Annual Financial Statements”), (ii) the Bank’s unaudited consolidated financial statements as at, and for the sixmonths ended, June 30, 2014 and 2013 (the “Interim Financial Statements”) (iii) Odeabank’s audited unconsolidatedfinancial statements as at, and for the years ended, December 31, 2013 and 2012 (the “Odeabank Annual FinancialStatements”) and (iv) Odeabank’s reviewed unconsolidated financial statements as at, and for the six months ended,June 30, 2014 and 2013 (the “Odeabank Interim Financial Statements”).

The Bank’s Annual Financial Statements and Interim Financial Statements have been prepared in accordance withstandards issued or adopted by the International Accounting Standards Board and interpretations issued by theInternational Financial Reporting Interpretations Committee and the general accounting plan for banks in Lebanon andthe regulations of the Central Bank and the Banking Control Commission of Lebanon (the “Banking ControlCommission”) and include the results of the Bank and its consolidated subsidiaries as listed in Note 14 to the Bank’sInterim Financial Statements. Ernst & Young p.c.c. and BDO, Semaan, Gholam & Co. have audited the AnnualFinancial Statements. The Interim Financial Statements have not been audited or reviewed, are subject to year-end auditadjustments and may not be representative of year-end results.

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The Odeabank Annual Financial Statements and Odeabank Interim Financial Statements have been prepared inaccordance with Turkish Accounting Standards and Turkish Financial Reporting Standards. Güney Bağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik A.Ş., a member firm of Ernst & Young Global Limited, have audited the Odeabank Financial Statements and reviewed the Odeabank Interim Financial Statements.

As used in this Offering Circular, references to “IFRS” are to International Financial Reporting Standards.

The Bank maintains its accounts in Lebanese Pounds. Accordingly, U.S. Dollar amounts stated in this Offering Circularhave been translated from Lebanese Pounds at the rate of exchange prevailing at the relevant balance sheet date, in thecase of balance sheet data, and at the average rate of exchange for the relevant period, in the case of income statementdata, and are provided for convenience only. No such translation should be construed, however, as a representation thatthe relevant foreign currency amount actually represents such U.S. Dollar amount or could be converted into U.S.Dollars at the rate indicated or at any other rate. In each case, the relevant rate for both balance sheet data and incomestatement data was LL 1,507.5 per U.S.$1.00, as, throughout the periods covered by this Offering Circular, the CentralBank has maintained its policy of pegging the value of the Lebanese Pound to the U.S. Dollar at a fixed rate ofLL 1,507.5 per U.S.$1.00. Other currency translations are calculated at the relevant rate of exchange published by theCentral Bank as at June 30, 2014.

In this Offering Circular:

references to “CHF” are to the Swiss Franc, the lawful currency of the Swiss Confederation;

references to “EGP” are to the Egyptian Pound, the lawful currency of the Arab Republic of Egypt;

references to “€” or “Euros” are to the currency established for participating member states of the EuropeanUnion as at the beginning of stage three of the European Monetary Union on January 1, 1999;

references to “JOD” are to the Jordanian Dinar, the lawful currency of the Hashemite Kingdom of Jordan;

references to “LL” or “Lebanese Pounds” are to the Lebanese Pound, the lawful currency of the LebaneseRepublic;

references to “QAR” are to the Qatari Riyal, the lawful currency of the State of Qatar;

references to “TL” or “TRY” are to the Turkish Lira, the lawful currency of the Republic of Turkey; and

references to “U.S.$” or “U.S. Dollars” are to the U.S. Dollar, the lawful currency of the United States ofAmerica.

Certain figures included in this Offering Circular have been subject to rounding adjustments and substantially all figuresherein are approximations of the actual figures. Accordingly, figures shown as totals in certain tables may not representan exact arithmetic aggregation of the figures that precede them.

Restatements

The comparative statement of financial position as at December 31, 2012 and other primary statements for the yearended December 31, 2012 presented in the Bank’s audited consolidated financial statements as at, and for the yearended, December 31, 2013 have been restated to reflect the effect of the adoption of IAS 19R. The adoption ofIAS 19R affects the opening equity balance as at January 1, 2012, as presented in the Statement of Changes in Equityand the balance sheet as at December 31, 2013, and the comparative figures as at December 31, 2012 have beenpresented as if IAS 19R had always been applied. See Note 2.3 to the Bank’s audited consolidated financial statementsas at, and for the year ended, December 31, 2013 for a description of the effect of the adoption of IAS 19R on theassets, liabilities and equity of the Bank.

INFORMATION FROM PUBLIC SOURCES

Certain information included in this Offering Circular has been extracted from information and data publicly releasedby official sources and other sources that are believed to be reliable, including the Central Bank, Bankdata (as definedbelow) and the Turkish Banking Regulation and Supervisory Authority (the “BRSA”) figures. Throughout this OfferingCircular, the Bank has also set forth certain statistics, including market shares, from official sources and other sources itbelieves to be reliable, including its own sources and estimates. Such information, data and statistics may beapproximations or estimates or use rounded numbers. The Bank has not independently verified such information, data

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or statistics, does not guarantee their accuracy and completeness and accepts no responsibility in respect of suchinformation, data and statistics, other than that this information has been accurately reproduced and that, as far as theBank is aware and is able to ascertain from information published, no facts have been omitted that would render thereproduced information inaccurate or misleading.

Certain statistical and other information relating to the Lebanese banking sector generally and to the Bank’s competitiveposition in its market and the relative positions of its primary competitors in the sector in particular are generally basedon information made available from Bankdata Financial Services WLL (“Bankdata”), Central Bank statistics and theBank’s internal sources. Bankdata numbers may differ in certain respects from the Bank’s own financial statements.Dr. Freddie C. Baz, an executive director of the Bank, is also a General Director of Bankdata and the editor ofBilanbanques, which is published by Bankdata.

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TABLE OF CONTENTS

IMPORTANT NOTICE .............................................................................................................................................. i

NOTICE TO EEA AND UK INVESTORS................................................................................................................. ii

FORWARD-LOOKING STATEMENTS................................................................................................................... ii

PRESENTATION OF INFORMATION.................................................................................................................... iii

INFORMATION FROM PUBLIC SOURCES .......................................................................................................... iv

GLOSSARY OF DEFINED TERMS........................................................................................................................ vii

SUMMARY............................................................................................................................................................... 1

SUBSCRIPTION TIMETABLE AND PROCEDURES .............................................................................................. 4

REPRESENTATIONS AND WARRANTIES OF PURCHASERS............................................................................. 9

RISK FACTORS ..................................................................................................................................................... 10

USE OF PROCEEDS............................................................................................................................................... 23

DIVIDEND POLICY............................................................................................................................................... 24

STATEMENT OF CAPITAL, RESERVES AND SUBORDINATED LOANS OF THE BANK ............................... 26

SELECTED FINANCIAL INFORMATION OF THE BANK................................................................................... 27

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS......................................................................................................................................................... 33

OVERVIEW OF BANK AUDI ................................................................................................................................ 50

DIRECTORS, MANAGEMENT AND EMPLOYEES ............................................................................................. 78

OVERVIEW OF ODEABANK................................................................................................................................ 84

THE BANKING SECTOR AND BANKING REGULATION IN LEBANON.......................................................... 90

DESCRIPTION OF THE SHARE CAPITAL OF THE BANK ................................................................................102

TERMS AND CONDITIONS OF THE WARRANTS.............................................................................................114

DESCRIPTION AND SETTLEMENT PROCEDURES RELATING TO THE WARRANTS ..................................118

TAXATION............................................................................................................................................................121

PLACEMENT OF THE NEW SHARES AND WARRANTS..................................................................................122

GENERAL INFORMATION..................................................................................................................................124

EXHIBIT A – FORM OF PURCHASE APPLICATION ........................................................................................ A-1

INDEX TO THE FINANCIAL STATEMENTS......................................................................................................F-1

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GLOSSARY OF DEFINED TERMS

For the purposes of this Offering Circular, the following terms shall have the meanings set forth below:

“Annual Financial Statements” means the Bank’s audited consolidated financial statements as at, and for theyears ended, December 31, 2013, 2012 and 2011.

“Audi Capital” means Audi Capital (KSA).

“Audi Investment Bank” means Audi Investment Bank S.A.L.

“Audi Private Bank” means Audi Private Bank S.A.L.

“Bank” and “Bank Audi” means Bank Audi S.A.L., a bank incorporated in Lebanon with limited liability.

“Bank Audi Egypt” means Bank Audi S.A.E.

“Bank Audi Jordan” means Bank Audi S.A.L. – Jordan Branch.

“Bank Audi Monaco” means Banque Audi S.A.M.

“Bank Audi Qatar” means Bank Audi LLC.

“Bank Audi France” means Bank Audi France S.A.

“Banque Audi Suisse” means Banque Audi (Suisse) S.A.

“Bank Audi Syria” means Bank Audi Syria S.A.

“Banking Control Commission” means the Banking Control Commission of Lebanon.

“Basel Accords” means the guidelines of the Committee on Banking Regulation and Supervisory Practices ofthe Bank for International Settlements, as in effect from time to time, including the Basel I Accord, the Basel IIAccord, and the Basel III Accord.

“Board of Directors” means the Board of Directors of the Bank.

“BSE” means the Beirut Stock Exchange.

“By-laws” means the by-laws of the Bank as amended to reflect the resolutions adopted by the shareholders ofthe Bank at the Extraordinary General Meeting held on August 26, 2014 and as further amended orsupplemented from time to time.

“Capital Increase” means the issuance of 50,000,000 New Shares (together with three Warrants per New Share)to be comprised of the First Capital Increase and the Second Capital Increase.

“Central Bank” means Banque du Liban, the Central Bank of Lebanon.

“CMA” means the Capital Markets Authority of Lebanon.

“Conditions” means the terms and conditions of the Warrants.

“Confirmation EGM” means the Extraordinary General Meeting of Shareholders of the Bank held to confirmand verify the issuance of the New Shares, which is expected to be held on September 23, 2014.

“Custodian” means Midclear, as custodian of the warrants.

“Custody and Agency Agreement” means the custody and agency agreement to be entered into by the Bankand the Custodian, expected to be dated on or about the Issue Date.

“Definitive Warrants” means warrants in definitive form.

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“Deposit Agreement” means the depositary agreement entered into between the Bank and Deutsche Bank TrustCompany Americas (acting as depositary) on October 23, 1997, as amended by a supplemental depositagreement dated September 6, 2007, and as further amended and restated by an amended and restated depositagreement dated May 10, 2010, and as it may be further amended or supplemented from time to time thereafter.

“Depositary” means Deutsche Bank Trust Company Americas, or any successor depositary.

“Deposited Shares” means the shares underlying the GDRs.

“Egypt” means the Arab Republic of Egypt.

“First Capital Increase” means the issuance of New Shares, initially reserved to existing shareholders by wayof an issue of Rights, together with three Warrants per New Share.

“Formal Offering Period”, in respect of the Capital Increase, means September 1, 2014 to September 12, 2014.

“FSMA” means the Financial Services and Markets Act 2000 of the United Kingdom.

“GDR Program” means the GDR program established under the Deposit Agreement and pursuant to whichholders of Common Shares (initially Class B Common Shares) are given the option to deposit their shares,against the issuance of GDRs.

“GDRs” means global depositary receipts evidencing Common Shares of the Bank.

“Global Warrant” means the global warrant evidencing the Warrants.

“Government” means the government of Lebanon.

“Group” means the Bank and its principal subsidiaries and affiliates whose accounts are consolidated with theBank’s accounts in accordance with the relevant laws and regulations in Lebanon as at June 30, 2014.

“IAS” means the International Accounting Standards.

“IFRS” means the International Financial Reporting Standards.

“Interim Financial Statements” means the Bank’s unaudited consolidated financial statements as at and for thesix months ended June 30, 2014 and 2013.

“Issue Date” means the date on which the Securities will be issued. Subject to the satisfaction of the ConditionsPrecedent, as applicable, the Securities are expected to be issued on or before November 30, 2014.

“Issue Price” means U.S.$6.00 per New Share.

“Issuer” means Bank Audi S.A.L.

“Jordan” means the Hashemite Kingdom of Jordan.

“Law 308” means Law № 308 of Lebanon, dated April 3, 2001, relating to the issuance by banks of shares and dealings therein, the issuance by banks of bonds and the ownership by banks of real property.

“Lebanon” means the Lebanese Republic.

“LIA Insurance” means LIA Insurance S.A.L.

“LSE” means the London Stock Exchange.

“Midclear” means Midclear S.A.L., a joint stock company organised under the laws of Lebanon, which is 99%-owned by the Central Bank and which acts as the central depositary and clearing house in Lebanon.

“New Shares” means newly-issued common shares of the Bank.

“Odeabank” means Odea Bank Anonim Şirketi.

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“Odeabank Annual Financial Statements” means Odeabank’s audited unconsolidated financial statements asat and for the years ended December 31, 2013 and 2012.

“Odeabank Interim Financial Statements” means Odeabank’s reviewed unconsolidated financial statementsas at and for the six months ended June 30, 2014 and 2013.

“Odeabank Share” means a common share in Odeabank, which have a nominal value of TL 0.10 and,following the Reverse Stock Split, will have a nominal value of TL 1.00.

“Offering Circular” means this offering circular, as may be supplemented or amended.

“Placement Agent” means Audi Investment Bank, in its capacity as placement agent for the offering of theSecurities.

“Purchase Application” means a Purchase Application, in the prescribed form, for the subscription ofSecurities, a copy of which is attached to this Offering Circular as Exhibit A.

“Qatar” means the State of Qatar.

“Regulation S” means Regulation S under the Securities Act.

“Reverse Stock Split” means the 10:1 reverse stock split of the Odeabank Shares that the Bank intends toconduct prior to the beginning of the Warrant Exercise Period.

“Rescission Rights” means the rights of prospective investors who have submitted an executed PurchaseApplication and transferred subscription funds to the Escrow Account to rescind their offers to purchaseSecurities during the Rescission Period.

“Rescission Period” begins on the first business day in the Formal Offering Period and ends at the close ofbusiness, Beirut time, on the date that is three business days later.

“Rights” means the issue of rights to acquire New Shares and Warrants.

“Second Capital Increase” means the issuance of 10,000,000 New Shares, together with three Warrants perNew Share, to new investor(s).

“Securities Act” means the U.S.) Securities Act of 1933, as amended.

“Series E Preferred Shares” means the U.S.$6.00 Non-Cumulative Redeemable Series E Preferred Shares ofthe Bank issued by the Bank in May 2010, each with a par value of LL 1,225, which was increased to LL 1,254in October 2010 and was further increased to LL 1,299 in April 2013, effective upon actions approved by theBoard of Directors.

“Series F Preferred Shares” means the U.S.$6.00 Non-Cumulative Redeemable Series F Preferred Shares ofthe Bank issued by the Bank in May 2012, each with a par value of LL 1,254, which was increased to LL 1,299in April 2013, effective upon actions approved by the Board of Directors.

“Series G Preferred Shares” means the U.S.$6.00 Non-Cumulative Redeemable Series G Preferred Shares ofthe Bank, issued by the Bank in May 2013, each with a par value of LL 1,299.

“Series H Preferred Shares” means the U.S.$6.50 Non-Cumulative Redeemable Series H Preferred Shares ofthe Bank, issued by the Bank in May 2013, each with a par value of LL 1,299.

“Switzerland” means the Swiss Confederation.

“Tier I Capital” means the Bank’s Tier I capital, as determined in accordance with International FinancialReporting Standards and applicable rules and regulations of the Central Bank, which are based generally on theBasel Accords, being paid-up share capital, issue premium, shareholders’ cash contributions to capital(effectively a pre-payment of capital booked in a foreign currency until such time as it is converted into localcurrency share capital), legal and statutory reserves (including reserves for unspecified banking risks, butexcluding reserves allocated for liquidation of real properties), retained earnings non-cumulative perpetualpreferred shares, funds allocated for investment in real properties and financial instruments that (i) are issued and

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fully paid, (ii) are eligible to cover the Bank’s losses on a going concern basis, (iii) have non-cumulativerevenues and (iv) are permanent, subject to early redemption at the Bank’s discretion after five years from theirissue date and by the exchange of such instruments for equivalent financial instruments.

“Tier II Capital” means the Bank’s Tier II capital, as determined in accordance with International FinancialReporting Standards and applicable rules and regulations of the Central Bank, which are based generally on theBasel Accords, being preferred shares (other than preferred shares, which are both perpetual and non-cumulative), certain subordinated loans and any favourable change in fair value of available-for-sale securities,the revaluation surplus of the bank’s properties, subject to the Central Bank’s approval, and general provisionsfor unspecified risks.

“Turkey” means the Republic of Turkey.

“United States” and “U.S. persons” have the meanings assigned to such terms in Regulation S under theSecurities Act.

“Warrant Deed Poll” means the deed poll relating to the Warrants to be signed by the Bank, expected to bedated on or about September 23, 2014.

“Warrant Exercise Price” is U.S.$0.95 per Odeabank Share (provided that the Reverse Stock Split hasoccurred), subject to adjustment (i) as set out in the Conditions and (ii) in the event that the Reverse Stock Splithas not occurred.

“Warrant Exercise Period” means the period expected to be a 30-day period commencing on May 15, 2019.

“Warrantholder” means a holder of warrants.

“Warrants” means warrants to entitle the holder, during the Warrant Exercise Period, to purchase share(s) in theBank’s subsidiary, Odeabank.

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SUMMARY

The following is a summary of certain information pertaining to the offering of the Securities, including the principalterms thereof. This summary is indicative only, does not purport to be complete and is qualified in its entirety by themore detailed information appearing elsewhere in this Offering Circular, as well as by reference to the resolutions ofthe shareholders authorising the First Capital Increase and the Second Capital Increase, a copy of each of which isavailable, in Arabic, for review by potential purchasers at the offices of the Bank and the Placement Agent currentlylocated at the respective addresses indicated on the back cover of this Offering Circular.

Issuer ............................................... Bank Audi S.A.L.

Capital Increase .............................. The Capital Increase is expected to be comprised of the First Capital Increaseand the Second Capital Increase.

50,000,000 New Shares are expected to be issued in the Capital Increase,together with three Warrants (as defined below) per New Share.

The First Capital Increase is initially reserved to existing shareholders by wayof an issue of Rights, together with three Warrants per New Share. Eachexisting shareholder shall be allocated Rights pro rata to the number of sharesheld by such shareholder.

The Second Capital Increase is expected to be comprised of the issuance of10,000,000 New Shares, together with three Warrants per New Share, reservedto new investor(s).

The Capital Increase is subject to the Conditions Precedent set out below. TheFirst Capital Increase and the Second Capital Increase are not conditional oneach other. The Bank may proceed with the First Capital Increase, the SecondCapital Increase, both or none.

Unexercised Rights.......................... Securities relating to unexercised Rights (the “Residual Securities”) will beallocated by the Bank in its sole discretion. Existing shareholders may requestan allocation of Residual Securities and the Bank intends to grant priority tosuch existing shareholders in the allocation of any Residual Securities. Thereis, however, no assurance that any such Residual Securities will be allocated tosuch shareholders.

Issue Price........................................ U.S.$6.00 per New Share. The Warrants will be issued at no additionalconsideration.

The nominal value of the common shares is LL 1,299 per common share.

Issue Date ........................................ Subject to the satisfaction of the Conditions Precedent, the Securities areexpected to be issued on or before September 30, 2014.

Use of Proceeds................................ The net proceeds of the Capital Increase will be used to strengthen the Bank’sregulatory capital and to fund the Bank’s expansion within and outsideLebanon.

Warrants ......................................... Each Warrant will entitle the holder, during the Warrant Exercise Period, topurchase an Odeabank Share (provided that the Reverse Stock Split hasoccurred).

Warrant Exercise Price................... U.S.$0.95 per Odeabank Share (provided that the Reverse Stock Split hasoccurred, subject to adjustment (i) as set out in the Conditions and (ii) in theevent that the Reverse Stock Split has not occurred.

Warrant Exercise Period ................ Expected to be a 30-day period commencing on May 15, 2019.

Settlement of Warrants ................... The Warrants are expected to settle through the facilities of Midclear.

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Listing of Warrants......................... The Warrants will not be listed. However, the Bank is expected to appoint oneor more Lebanese financial institutions to make a market in the Warrants,although no assurance can be made that the market for the Warrants will beliquid or that a market will develop at all.

The Warrants will be in registered form. Once issued, the Warrants will bedetachable and freely tradable (subject to restrictions under applicable law).

Formal Offering Period................... In accordance with Lebanese law, there will be a Formal Offering Period inrespect of the Capital Increase, in which holders of GDRs representingcommon shares of the Bank may also participate (subject to any restrictionsunder applicable law). The Formal Offering Period is expected to begin onSeptember 1, 2014 and end on September 12, 2014.

Rescission Rights ............................. Prospective investors who have submitted an executed Purchase Applicationand transferred subscription funds to the Escrow Account will have the right torescind their offers to purchase Securities (the “Rescission Rights”) during theRescission Period.

The “Rescission Period” begins on the first business day in the FormalOffering Period and ends at the close of business, Beirut time, on the date thatis three business days later.

Escrow and Subscription Accounts. The Bank has opened accounts to receive funds in respect of the CapitalIncrease, as more fully detailed in the Purchase Application. See “SubscriptionTimetable and Procedures—Procedures for Subscription”.

Listings ............................................ Application shall be made to list the New Shares on the Beirut StockExchange. GDRs representing New Shares shall be listed on the London StockExchange under the Bank’s existing block listing, and will also be listed on theBeirut Stock Exchange.

Conditions Precedent ...................... The Conditions Precedent to the Securities being issued include:

(i) approval of the Central Bank of Lebanon and the CMA, as applicable;

(ii) confirmation by an Extraordinary General Meeting of Shareholders ofthe issuance of the New Shares; and

(iii) satisfaction of any further legal or regulatory requirements inconnection with the issuance of the Securities.

In the event that the Conditions Precedent are not met with respect to the FirstCapital Increase or the Second Capital Increase, the Bank shall return toprospective investors the relevant funds in the Escrow Account, as describedabove.

Ranking of the New Shares ............. Upon issue, the New Shares shall rank pari passu with all other issued andoutstanding common shares of the Bank. The New Shares shall rank junior toall issued and outstanding Preferred Shares of the Bank in respect of the rightto receive distributions of assets payable in respect of the net profits the Bankand the right to receive payments out of assets of the Bank upon a voluntary orinvoluntary liquidation or winding up of the Bank. The New Shares will alsorank junior to debt and other similar obligations of the Bank, such that, in theevent of the liquidation, dissolution or winding up of the Bank, the holders ofdebt instruments and other similar obligations of the Bank would be entitled tobe repaid prior to the payment of any amounts of holders of the New Shares.

Offer and Transfer Restrictions...... The Securities will be subject to restrictions on the offer, transfer and resale incertain jurisdictions.

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Governing Law................................ The Capital Increase shall be conducted pursuant to the laws of the LebaneseRepublic. The Warrants will be issued under, and governed by, the laws ofEngland and Wales.

Risk Factors..................................... Participating in the Capital Increase involves substantial risks. See “RiskFactors”.

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SUBSCRIPTION TIMETABLE AND PROCEDURES

Timetable and Authorizations

The following is a summary timetable and schedule of authorizations relating to the offering of the Securities.Prospective purchasers should note that this timetable is tentative and subject to change. Nevertheless, to the extent thatprospective purchasers have submitted a Purchase Application, subject only to the right of subscribers to rescind theirPurchase Application by giving written notice to the Bank within the Rescission Period and to acceptance by, or onbehalf of, the Bank, each such Purchase Application is final and irrevocable under all circumstances, regardless ofdelays in the closing of the transaction (subject to the cut-off date of December 15, 2014).

August 6, 2014 ............................... Receipt of the Court Expert Valuation Report in connection with the CapitalIncrease.

August 6, 2014 ............................... The CMA approved the circulation of the term sheet relating to the CapitalIncrease.

August 7, 2014 ............................... A meeting of the Board of Directors was held, inter alia, to approve the CapitalIncrease and convene an Extraordinary General Meeting of Shareholders (the“First Extraordinary General Meeting”) for the purpose of considering andapproving:

(i) the First Capital Increase and the Second Capital Increase and therespective terms thereof;

(ii) the waiver of shareholders’ pre-emptive rights in respect of (i) up to10,000,000 New Shares to be allocated to new investor(s); and (ii)Residual Securities, provided that under this sub-clause (ii),shareholders have pre-emptive rights in respect of the initial allocationof New Shares pro rata to the number of Common Shares held byeach shareholder;

(iii) the issuance of the Warrants; and

(iv) the making of consequential amendments to the Bank’s By-laws.

August 8, 2014 ............................... Publication of the date of the First Extraordinary General Meeting was made bythe Bank in Al Nahar and Al Safir, two Lebanese newspapers. Notice of thedate of the Extraordinary General Meeting of Shareholders was sent to GDRholders.

August 20, 2014 –August 29, 2014 ............................. The informal marketing period was held and certain subscribers delivered their

Purchase Applications to the Bank.

August 26, 2014.............................. The First Extraordinary General Meeting was held to approve:

(i) the First Capital Increase and the Second Capital Increase and therespective terms thereof;

(ii) the waiver of shareholders’ pre-emptive rights in respect of (i) up to10,000,000 New Shares to be allocated to new investor(s); and (ii)Residual Securities, provided that under this sub-clause (ii),shareholders have pre-emptive rights in respect of the initial allocationof New Shares pro rata to the number of Common Shares held byeach shareholder;

(iii) the issuance of the Warrants; and

(iv) the making of consequential amendments to the Bank’s By-laws.

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August 26, 2014.............................. A letter was sent by the Bank to the Governor of the Central Bank, attaching acopy of the minutes of the First Extraordinary General Meeting held toauthorize the First Capital Increase and the Second Capital Increase and seekingfinal approval for the First Capital Increase and the Second Capital Increase.

August 27, 2014.............................. The Central Bank, acting through its Central Council, approved the resolutionspassed at the First Extraordinary General Meeting.

August 29, 2014.............................. Publication of the commencement of the Formal Offering Period was made bythe Bank in Al Nahar and Al Safir.

Notices relating to the Capital Increase, including details of subscriptionprocedures, were sent to GDR holders through Euroclear and Clearstream.

September 1, 2014 .......................... Record date.

September 1, 2014 .......................... This Offering Circular is published and made available to prospectivepurchasers at the Bank’s head office and branches.

September 1, 2014 .......................... First day of the Formal Offering Period.

To the extent relevant, prospective eligible investors wishing to subscribe forSecurities in connection with the First Capital Increase, must submit dulycompleted Purchase Applications to the Bank in accordance with theinstructions contained therein, together with full payment of the purchase priceno later than 5:00 p.m., Beirut time, on the last day of the Formal OfferingPeriod (i.e., September 12, 2014).

Notwithstanding the foregoing, existing shareholders shall have the right tosubscribe for Securities in the First Capital Increase during the Formal OfferingPeriod on the terms and conditions set out at such time, which is not subject toconditional acceptance by the Bank. The Bank must accept a properlycompleted Purchase Application in respect of an existing shareholder’s Rightsinitially allocated pro rata to the number of shares held by such shareholder,provided that such Purchase Application is submitted before the end of theFormal Offering Period and is accompanied by full payment of the purchaseprice.

September 5, 2014 (tentative).......... Publication of the date of the Confirmation EGM is expected to be made by theBank in two widely distributed Lebanese newspapers.

September 12, 2014 ........................ Last day of the Formal Offering Period.

September 13, 2014 (tentative)........ A meeting of the Board of Directors is expected to be held, inter alia, toapprove the allocations of subscriptions.

September 15, 2014 (tentative)........ Notices of allotments to be sent to subscribers.

September 23, 2014 (tentative)........ Confirmation EGM is scheduled to be held.

Issue Date: The Securities are issued.

October 2014 (tentative) ................. The BSE is expected to approve the listing of the New Shares.

May 15, 2019 (tentative) ................ Warrant Exercise Period of 30 days expected to commence.

Procedures for Subscription

The following description describes the procedures for subscriptions of Securities for shareholders only. GDR Holdersshould refer to the Notices to GDR Holders dated September 1, 2014 for details of the procedures for subscriptions forNew GDRs and Warrants for GDR Holders.

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Applications for Subscription; Acceptance by the Bank

Prospective eligible investors wishing to subscribe for Securities as part of the First Capital Increase must submit aPurchase Application, substantially in the form set out in this Offering Circular as Exhibit A or an early version thereofas may have been previously made available to it by the Bank or the Placement Agent. Copies of this Offering Circularand the form of Purchase Application are also available at the head office of the Bank and the office of the PlacementAgent currently located at the respective addresses indicated on the back cover of this Offering Circular and at theBank’s branch offices.

A Purchase Application must be duly completed in full in accordance with the instructions contained therein, signed bythe prospective purchaser and submitted to the Bank or the Placement Agent. A Purchase Application submitted by acorporation must be signed by a duly authorized representative in accordance with the constitutive documents of suchcorporation. A Purchase Application shall be deemed accepted only upon execution by the prospective purchaser,payment of the purchase price (as provided therein) and acceptance by, or on behalf of, the Bank, such acceptance to beevidenced by the delivery of a fully executed copy of the Purchase Application to the prospective purchaser.

Notwithstanding the foregoing, existing shareholders shall have the right to subscribe for Securities in the First CapitalIncrease during the Formal Offering Period on the terms and conditions set out at such time, which is not subject toconditional acceptance by the Bank. The Bank must accept a properly completed Purchase Application that is submittedprior to the end of the Formal Offering Period in respect of an existing shareholder’s Rights initially allocated pro ratato the number of shares held by such shareholder.

Purchase Applications will be accepted only from eligible investors and only if submitted together with full payment ofthe purchase price.

Waiver of Pre-emptive Rights

At the First Extraordinary General Meeting, existing shareholders waived their pre-emptive rights in respect of theResidual Securities and the Second Capital Increase. Accordingly, new investors may subscribe for Securities in theCapital Increase.

Rescission Rights and Subscription Account

A prospective purchaser of Securities who has submitted a Purchase Application and deposited funds in the EscrowAccount may rescind such Purchase Application, by written notice to the Bank: (i) during the Rescission Period and(ii) in the event that the Securities are not issued and delivered to the prospective purchaser on or before December 15,2014.

If written notice of rescission is not received from a subscriber during the Rescission Period, such subscriber will bedeemed to have confirmed its offer to purchase as set forth in its Purchase Application and, upon acceptance thereof byor on behalf of the Bank, that portion of the funds in respect of the purchase price previously transferred by suchsubscriber and credited to the Bank’s escrow account, which corresponds to the par value of the New Shares covered bythe relevant Purchase Application, to the extent such Purchase Application has been accepted, will be irrevocablytransferred to the Bank’s subscription account at the Central Bank in accordance with Law 308 and the other formalitiesrelating to the Capital Increase will be effected. By completing a Purchase Application and not exercising its RescissionRights, a prospective purchaser irrevocably agrees to the transfer of funds from the escrow account to the subscriptionaccount (as described above) and authorises and directs the Bank and any of its officers to take all actions in accordancewith applicable Lebanese law and regulation in connection therewith.

If the Purchase Application shall have been deemed to have been withdrawn in accordance with (i) or (ii) above, thefunds received by the Bank from the subscriber in respect of the purchase price for the Securities covered by thePurchase Application will be promptly refunded to the subscriber, together with interest thereon, as more fully providedin the Purchase Application.

Allotment

The Securities offered in the First Capital Increase will be allotted to existing shareholders, who have submitted validPurchase Applications on a pro rata basis to the number of shares held by such existing shareholders. Existingshareholders may request an allocation of Residual Securities and the Bank intends to grant priority to such existingshareholders in the allocation of any Residual Securities. There is, however, no assurance that any such ResidualSecurities will be allocated to such shareholders.

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The Securities offered in the Second Capital Increase, will be effected pursuant to a separate agreement between theBank and the new investor(s) in respect of which the Bank may, inter alia, give certain representations and warranties,including, without limitation, in respect of environmental, sanctions and tax matters.

It is expected that all allotments of Securities will be made on or about September 13, 2014.

If the aggregate amount of Residual Securities subscribed for by an applicant and other similarly situated applicantsexceeds the maximum aggregate amount of Securities being offered in the First Capital Increase, the Securities will beallocated among the relevant applicant and such other applicants in the sole discretion of the Bank prior to the IssueDate, although the Bank intends to grant priority in such allocation to existing shareholders.

Existing shareholder will not receive fractional Rights. If the number of Common Shares held by an existingshareholder would have resulted in its receipt of fractional Rights, the number of Rights that will be issued to thatshareholder will be rounded either (i) up to the nearest whole Right, where the fractional entitlement would be equal toor greater than 0.5, or (ii) down to the nearest whole Right, where the fractional entitlement would be less than 0.5.

The Bank will send notices of allotments to subscribers promptly following the end of the Formal Offering Period oncethe final allotments have been made. Until such time, no subscriber, whether or not exercising priority subscriptionrights, shall have any right or interest in any Securities.

Payment of Purchase Price

Upon submission of a Purchase Application, a prospective purchaser is required to transfer funds, in U.S. Dollars, to theBank’s account (as specified in the Purchase Application), in an amount equal to the aggregate purchase price (i.e., theproduct of the number of New Shares being subscribed for multiplied by the Issue Price per New Share(i.e., U.S.$6.00)). Bank charges and other related fees, if any, incurred in connection with the payment amounts inrespect of the aggregate purchase price will be for the account of the relevant subscriber.

In the event that the Capital Increase or the relevant portion thereof is terminated or the prospective purchaser isotherwise not allocated the full principal amount of Securities for which it has applied under the Purchase Application(whether or not the Purchase Application was previously accepted), or in the event that the Purchase Application isrejected (in whole or in part), the funds received by the Bank in respect of the purchase price (or a correspondingportion thereof) will be promptly refunded to the relevant subscriber, together with interest earned thereon at the ratespecified in the Purchase Application.

It is expected that the Bank will invest the funds received by it in respect of the purchase price for any New Shares, inovernight U.S. Dollar deposits at standard call rates paid by the Bank for such deposits for the benefit of the respectivesubscribers. At the end of the Formal Offering Period, the Bank shall convert that portion of the funds received by it inrespect of the purchase price for the New Shares, which corresponds to the nominal value of the New Shares (i.e., LBP1,299 per New Share), into Lebanese Pounds at the U.S.$/LL spot rate of exchange applicable on the first day of theFormal Offering Period, and thereafter irrevocably transfer the Lebanese Pounds so obtained, to the relevantsubscription account at the Central Bank for application to purchase New Shares on the Issue Date, on behalf of therespective eligible investors whose Purchase Applications have been accepted. The Lebanese Pound amount transferredto the Central Bank shall be credited to the Bank’s share capital account, while the U.S. Dollar balance of thesubscription funds shall be applied to the Bank’s reserves.

In the event (or to the extent) that a Purchase Application is accepted, the relevant subscriber shall be entitled to intereston the funds paid by it to the Bank in respect of the purchase price for the Securities for which it has applied thereunder(or, if the Purchase Application is accepted only in part, the portion thereof accepted for allocation as more fully set outin the Purchase Application).

Delivery of New Shares and Warrants

New Shares

The New Shares will be issued in registered form, registered in the respective names of the purchasers thereof in theshare registry maintained by Midclear in respect of the Bank’s share capital. The New Shares will be made available fordelivery, upon issuance, by deposit to the Midclear accounts of the various custodian clients of Midclear who will holdthe New Shares in custody for the benefit of the respective purchasers in accordance with their respective standardcustody arrangements.

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Prospective purchasers irrevocably authorise and direct the Bank or any of its officers to transfer funds representing thepurchase price corresponding to the par value of the New Shares covered by the relevant Purchase Application from theBank’s escrow account to the Bank’s subscription account at the Central Bank in accordance with Law 308 and tocomplete the other formalities relating to the issuance of New Shares on its behalf.

At any time after the Issue Date, a holder of New Shares may request that the Bank arrange for the transfer of thecustody of such New Shares to another participant or sub-custodian with Midclear. New Shares in definitive form willnot be issued.

Interests in the New Shares will be shown only on, and transfers thereof may be effected (subject as provided herein)only through, the book-entry system maintained by Midclear. Neither the Bank nor the Placement Agent shall have anyresponsibility or liability for any aspect of the records relating to or payments made on account of interests in the NewShares or for maintaining, supervising or reviewing any records relating to ownership of New Shares.

Warrants

The Warrants shall be issued in registered form. The Warrants will, upon issue, be represented by the global warrant(the “Global Warrant”). The Bank shall cause the Global Warrant to be deposited with and registered in the name ofMidclear. Warrants represented by the Global Warrant may only be acquired and held through participants in Midclear.Upon the initial issuance of the Warrants, interests in the Warrants shall be credited to the account of the Bank currentlymaintained with Midclear and will be held in custody for the benefit of each Warrantholder, subject to suchWarrantholder providing know-your-client and other information required by the Bank and the Bank being satisfiedwith such information, in accordance with the standard custody arrangements of the Bank, and further subject to arequest by the relevant Warrantholder to transfer the custody thereof to another participant in Midclear at suchWarrantholder’s risk and expense. Pursuant to the Custody and Agency Agreement, Midclear shall maintain books forthe registration of the original issuance and the registration of transfer of the Warrants.

So long as Warrants are evidenced by a Global Warrant, interests in such Warrants will be shown only on, and transfersthereof may be effected only through, the book-entry system maintained by Midclear and its participants, including theBank.

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REPRESENTATIONS AND WARRANTIES OF PURCHASERS

Each prospective purchaser of Securities will be required to make the representations and warranties set forth inAnnex I to Exhibit A to this Offering Circular to, and for the benefit of, the Bank and the Placement Agent, on and as atthe date of its application to purchase Securities and on and as at the Issue Date. The Securities will be sold to suchpurchaser in reliance on such representations and warranties.

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RISK FACTORS

An investment in the Securities involves a high degree of risk and is suitable only for, and should be made only by,eligible investors that are familiar with Lebanon and Turkey in general, and with the Lebanese and Turkish bankingindustries in particular, and that have such other knowledge and experience in financial and business matters as mayenable them to evaluate the risks and merits of an investment. Accordingly, prospective investors should carefullyconsider, amongst other things, the risks described below, as well as the detailed information set out elsewhere in thisOffering Circular, and reach their own views before making an investment decision.

Prospective purchasers of Securities should make such inquiries as they think appropriate regarding the Securities, theBank, Lebanon, Turkey and the Lebanese and Turkish banking industries, without relying on the Bank, the PlacementAgent or any other person.

The risks and uncertainties described below represent the risks the Bank believes to be material but these risks anduncertainties are not the only risks and uncertainties the Bank faces. Additional risks and uncertainties not presentlyknown to the Bank or that the Bank currently believes are immaterial could also impair the Bank’s business operations.If any of the following risks actually materialises, the Bank’s business, prospects, financial condition, liquidity, cashflows or results of operations could be materially adversely affected. If that were to happen, the trading prices of theSecurities could decline and investors may lose all or part of their investment. Factors which are material for thepurpose of assessing the market risks associated with the Securities are also described below.

Considerations Relating to Lebanon

The Bank operates in Lebanon and, accordingly, its financial condition, results of operations and business prospects areclosely related to the overall political, social and economic situation in Lebanon, which, in turn, is tied to the geo-political situation in the region.

Emerging Markets

Investing in securities of issuers in emerging markets, such as Lebanon, generally involves a higher degree of risk thaninvestments in securities of sovereign or corporate issuers from more developed countries and carries risks that are nottypically associated with mature markets. Lebanon’s below investment grade credit ratings, large and growing fiscaldeficits and other weaknesses make the Lebanese economy susceptible to future adverse effects. Prospective investorsshould exercise particular care in evaluating the risks involved and must decide for themselves whether, in light of theseand other risks, their investment is appropriate. Generally, an investment in the securities of issuers in emergingmarkets, such as Lebanon, is only suitable for sophisticated investors who fully appreciate the significance of the risksinvolved.

Political Considerations

Lebanon’s financial environment is related to the overall political, social and economic situation in Lebanon, which, inturn, is tied to the absence of military conflict in Lebanon and among its neighbors, as well as continued internalstability.

A combination of internal and external factors led to a heavily militarized conflict, which lasted from April 1975 untilOctober 1990. Successive rounds of fighting took place, aggravated by two Israeli military invasions in 1978 and 1982.The conflict resulted in significant human losses, a substantial decline in GDP and reduction of economic activity, asignificant reduction of Government authority, substantial physical and infrastructure damage, and a large public sectordeficit and capital outflows.

The post-conflict era has been characterized by large reconstruction efforts, which resulted in large public sector deficitsand setbacks in the implementation of political and economical reforms due, among other matters, to differences inviews between political leaders and disagreements within the executive branch of the Government. The post-conflict erahas also witnessed a series of adverse events, which have led to significant political and social unrest and negativelyaffected, and may continue to negatively affect, the economy of Lebanon and the finances of the Government,including, inter alia:

the assassination of the former Prime Minister Rafik Hariri;

a campaign of assassinations and attempted assassinations of other political leaders and public figures;

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the adoption of a series of U.N. Security Council Resolutions, including Resolution 1757, which establishedthe Special Tribunal for Lebanon (the “STL”) to prosecute persons responsible for the bombing that killedformer Prime Minister Hariri, the indictment by the Prosecutor of the STL of four individuals, reportedlymembers of Hezbollah, and tensions surrounding this indictment and the continued financing of, andcooperation with, the STL by the Government;

armed conflicts involving Lebanon’s neighbours, including the war in July 2006 during which Israel wagedwar on Lebanon following the kidnapping by Hezbollah of two Israeli soldiers (the “July 2006 War”);

internal armed clashes, which took place in Beirut, northern Lebanon, the Bekaa Valley and the ChoufMountains in May 2008, and subsequent clashes in Tripoli and elsewhere in Lebanon;

various instances of political instability, including the resignations of ministers, the failure of Parliament toconvene and delays in forming governments;

proposed increased public sector wages, which, if adopted, would further increase the fiscal deficit;

events in Syria, which have divided the Lebanese people;

car and other suicide bombings in Lebanon, including in Beirut, in 2014; and

popular protests, demonstrations and general unrest.

The aforementioned events, as well as similar events in the surrounding region (especially Syria) that have an impact onLebanon, have, on occasion, escalated into violence, sometimes of a general nature and more often with particularpolitical or civil targets. If these or similar events recur, it could continue to materially adversely affect Lebanon’seconomy and lead to political and economic instability, as well as loss of confidence in business investment in Lebanon,which, in turn, could have a material adverse effect on the Bank’s business, prospects, financial condition, liquidity,cash flows or results of operations. Any weakening in the macroeconomic conditions or further instances of politicalinstability may also assert additional pressure on the Bank’s asset quality and profitability metrics.

Uncertainties Regarding Parliamentary and Presidential Elections

Parliamentary elections were scheduled to take place in June 2013 but were postponed until November 2014 byParliamentary vote, and there are discussions relating to further potential extensions. There are disagreements amongpolitical parties regarding the electoral law, with most parties rejecting the current law that governed the lastParliamentary elections, as well as disagreements regarding the voting system and the electoral districts. The failure toagree on a law to govern the elections, whether the current law or a new law, and delays in holding the elections mayfurther increase political tensions in Lebanon. As in the past, there may be delays in forming the post-electionGovernment. The post-election Government may pursue different policies and priorities than the current Government,reverse or alter certain reforms or take actions that make domestic or foreign investment in Lebanon less attractive.This, in turn, could have a material adverse effect on the Bank’s business, prospects, financial condition, liquidity, cashflows or results of operations. Any increase in political tensions leading up to the Parliamentary elections and theformation of the new Government may also assert additional pressure on the Bank’s asset quality and profitabilitymetrics.

In addition, President Sleiman’s term expired on 25 May 2014 and no new President has since been elected. Thecontinued failure to elect a successor to President Sleiman may negatively affect Lebanon, including investorconfidence in Lebanon, which, in turn, could have a material adverse effect on the Bank’s business, prospects, financialcondition, liquidity, cash flows or results of operations.

Regional and International Considerations; Events in Syria

Lebanon is located in a region that is and has been subject to ongoing political and security concerns. Some MiddleEastern and North African countries have experienced in the recent past, or are currently experiencing, political, socialand economic instability, extremism, terrorism, armed conflicts and war, some of which have negatively affectedLebanon in the past. In particular, since the “Arab Spring” began in January 2011, a number of Arab countries haveexperienced significant political and military upheaval, conflict and revolutions leading to the departure of long-timerulers in Tunisia, Egypt, Yemen and Libya. The continuation of such events or new events in the region could furtherstrain the general resources of the Government and the Government’s finances and negatively affect Lebanon’seconomy.

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Syria has recently been experiencing significant civil unrest and armed conflict. Although the stated policy of theGovernment has been to maintain neutrality with respect to the events in Syria in an attempt to shield Lebanon from anyrepercussions, these events have had, and are likely to continue to have, an adverse impact on the political, economicand security situation in Lebanon. These adverse consequences include, among others, a disruption to the transit ofLebanese and international goods through Syria resulting in higher transit fees for Lebanese exporters, a decline intourism from Syria and other Arab countries and potential overspill of the dispute in Syria into Lebanon.

There are divisions in Lebanon between supporters of the Syrian government and supporters of the Syrian opposition,which have, at times, led to armed clashes amongst civilians and subsequent interventions by Lebanese security forcesto restore order. The Syrian opposition has accused Hezbollah of armed intervention in the Syrian conflict on the side ofthe regime, and the Syrian government has accused the Future Party of supporting the Free Syrian Army. In August2014, armed clashes took place in the Bekaa Valley between Syrian militants and the Lebanese army, resulting in thedeaths and injury to Lebanese soldiers and the abduction of others whose fate remains unknown. In addition, a numberof other kidnappings for ransom related to the conflict in Syria have taken place in the territory of Lebanon. As a resultof such kidnappings, Turkey, Saudi Arabia, Qatar and other Gulf countries have issued travel warnings for their citizensabout travel to Lebanon.

The continuation of the conflict in Syria and the resulting repercussions in Lebanon could further strain the generalresources of the Government and the Government’s finances and negatively affect Lebanon’s economy, which, in turn,could have a material adverse effect on the Bank’s business, prospects, financial condition, liquidity, cash flows orresults of operations.

Refugees and Displaced Persons

Lebanon has traditionally hosted large numbers of refugees and displaced persons fleeing armed conflict, includingPalestinians and Syrians. The presence of these persons in Lebanon has, at times, led to political disagreements, armedclashes between such persons and Lebanese citizens, interventions by Lebanese security forces and military incursionsby Lebanon’s neighbors.

Lebanon is currently experiencing an inflow of Syrian nationals fleeing the conflict in Syria, and this trend is expectedto continue. According to statistics published by the U.N. High Commission for Refugees (the “UNHCR”), there wereover one million displaced persons from the Syrian conflict in Lebanon as at December 2013. The UNHCR haspublished estimates that a further 500,000 Syrians may arrive in Lebanon during the course of 2014 as a result of theSyrian conflict. The presence of Syrian displaced persons in Lebanon has had an impact on the economic and socialstability of Lebanon, as well as on the labor market and infrastructure. The Government has provided displaced personswith limited access to Lebanon’s education and healthcare systems and has played an active role in facilitating thecoordination of Lebanon’s response to the inflow of the Syrian displaced persons. Providing displaced persons withbasic accommodation and social services requires considerable resources, which has created an additional burden on theGovernment’s finances. The Government has made a number of appeals for international aid and support to help theGovernment partially defray the direct and indirect costs incurred by it in providing health, education and other basicservices to Syrian displaced persons in Lebanon. If the flow of Syrian displaced persons continues and the Governmentdoes not receive significant assistance from the international community to partially offset the cost of accommodatingSyrian displaced persons, this will continue to strain the general resources of the Government and the Government’sfinances and will negatively affect Lebanon’s economy, which, in turn, could have a material adverse effect on theBank’s business, prospects, financial condition, liquidity, cash flows or results of operations.

Fiscal Deficit

Lebanon has incurred large and growing fiscal deficits. Lebanon’s fiscal deficit has increased in recent years from LL3,530 billion (U.S.$2.3 billion or 5.8% of GDP ) in 2011 to LL 5,918 billion (U.S.$3.9 billion or 9.1% of GDP) in 2012and LL 6,362 billion (U.S.$4.2 billion or 9.3% of GDP) in 2013, primarily as a result of the increased expenditures dueto increases in wages spending and higher transfers to Electricité du Liban (“EDL”), which is financed in part by theTreasury and is the state-owned supplier of virtually all electricity in Lebanon. EDL is a substantial contributor to thefiscal deficit in light of its large continuing losses. Treasury transfers to EDL amounted to U.S.$1.7 billion in 2011,U.S.$2.3 billion in 2012 and U.S.$2.0 billion in 2013. In addition, if a new salary scale for public sector employees isapproved without accompanying additional revenues, the deficit is likely to increase further.

Lebanon’s fiscal deficits have led to increased levels of Government borrowing, which has, in turn, increased the publicdebt. If Lebanon is unable to control or reduce the deficit and the resulting impact on the public debt, it could raiseLebanon’s cost of funding of its debt, strain the general resources of the Government and the Government’s finances,materially impair Lebanon’s cost of funding its debt and negatively affect Lebanon’s economy. Any continuation orworsening of economic conditions in Lebanon, including any significant increases in the budget deficit, could

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materially adversely affect the Bank’s borrowers and contractual counterparties. This, in turn, could materially andadversely affect the Bank’s business, prospects, financial condition, liquidity, cash flows or results of operations.

Public Debt

In recent years, the Government has incurred significant internal and external debt, principally for the purpose offinancing the fiscal deficit. Net outstanding public debt as a percentage of estimated gross domestic product (“GDP”)increased from approximately 46% in 1992 to approximately 172% as at December 31, 2006 before decreasing to 114%as at December 31, 2012 and subsequently increasing to 118% as at December 31, 2013. The debt burden of theGovernment is significant. In 2013, interest payments represented 27.8% of total expenditures (as compared to 27.2% in2012), 40.2% of total revenues (as compared to 38.5% in 2012) and 8.4% of estimated GDP (as compared to 8.4% in2012). There is no assurance that the Government will be able to reduce the net public debt. Any failure to reduceLebanon’s net outstanding public debt could materially impair Lebanon’s capacity to service its debt, which may have anegative impact on the Lebanese economy and, in turn, materially adversely affect the Bank’s business, prospects,financial condition, liquidity, cash flows or results of operations.

Refinancing Risk

Lebanon faces significant debt maturities in the coming years, with approximately LL 20,766 billion (U.S.$13.8 billion)maturing in the period 31 January – December 31, 2014 (including approximately LL 5,779 billion (U.S.$3.8 billion) inforeign currency debt) as at December 31, 2013. While Lebanon does not currently rely on international financialassistance in order to service its debt, it has benefited from international financial assistance in the past, in particularfollowing the Paris II and Paris III Conferences. In addition, Lebanese banks, including the Bank, are major holders ofsecurities issued by the Government. These banks’ ability to continue purchasing such securities is tied, in large part, tothe continued growth of their deposits. Any net deposit outflows would adversely affect these banks’ ability topurchase securities issued by the Government, which could, in turn, limit the ability of Lebanon to refinance its debt. IfLebanon is not able to refinance its debt on favorable terms or at all, it could materially impair Lebanon’s capacity toservice its debt and, in turn, have a material adverse effect on the Bank’s financial condition.

Foreign Exchange Risk; Monetary Policy

The Lebanese Pound is convertible, and the Central Bank intervenes when necessary in order to maintain orderlyconditions in the foreign exchange market. The Central Bank’s exchange rate policy since October 1992 has been toanchor the Lebanese Pound exchange rate to the U.S. Dollar. The Central Bank has been successful during the pastseveral years in maintaining a stable exchange rate with the U.S. Dollar through the use of its foreign exchange reservesand its interest rate policy. Past instances of instability or conflict have led to significant conversions from LebanesePound denominated deposits to foreign currency (principally U.S. Dollar) denominated deposits, consequently leadingto a decline in the Central Bank’s foreign currency reserves.

Although the authorities have stated their intention to gear their monetary policy toward maintaining stability in theexchange rate and the Central Bank maintains a high level of foreign currency reserves for such purposes, there is noassurance that the Central Bank will continue to be willing or able to maintain a stable currency, through intervention inthe exchange markets or otherwise. The possible depreciation of the Lebanese Pound to the U.S. Dollar or the decline inthe level of foreign reserves as a result of the Central Bank’s intervention in the currency markets could materiallyimpair the Lebanese economy and, in turn, materially adversely affect the Bank’s business, prospects, financialcondition, liquidity, cash flows or results of operations.

Lebanon’s economy is highly dollarized. Central Bank data indicate that the proportion of foreign currency deposits ashare of total deposits were approximately 63.2% as at December 31, 2010, 65.9% as at December 31, 2011, 64.8% asat December 31, 2012 and 66.1% as at December 31, 2013.

Decline in Economic Growth

In recent years, the growth of Lebanon’s economy has slowed. Real GDP growth was 9.0% in 2009, 7.0% in 2010,1.5% in 2011 and 2.0% in 2012. GDP growth for 2013 was estimated by the IMF to be 1.5%. In addition, the tradebalance has recorded increasing deficits, increasing from U.S.$11.2 billion in 2009 to U.S.$14.6 billion in 2012, and thebalance of payments, which had been a surplus of U.S.$7.9 billion in 2009, recorded a deficit of U.S.$1.5 billion in2012 and a deficit of U.S.$1.1 billion in 2013. There can be no assurance that these trends will be reversed. If they arenot reversed, they will adversely affect Lebanon’s economy, which, in turn, could have a material adverse effect on theBank’s business, prospects, financial condition, liquidity, cash flows or results of operations.

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Prices and Inflation

Lebanon has, in the past, experienced high levels of inflation. Since 2001, however, estimated inflation has eased andLebanon’s economy enjoyed relative price stability until 2006, when inflation increased to 5.6%, mainly due toshortages of supply and consequent price increases as a result of the July 2006 War. The Central Administration ofStatistics (“CAS”) estimated inflation at 5.5% in 2008, 3.4% in 2009, 4.0% in 2010 and 3.1% in 2011 on an end-of-period basis. The year-on-year estimate for 2012 is 10.1%, however, housing costs, as a component of inflation, weresubject to a one-time adjustment in July 2012, and, accordingly, inflation figures are not indicative of year-on-yearinflation. The estimate for 2013 is 1.1% on an end-of-period basis. These changes were primarily due to fluctuations inthe exchange rate between the Lebanese Pound and the Euro (the Euro is the currency of the principal trading partnersof Lebanon) and global energy and commodity prices.

The Government is also currently considering the implementation of measures that would result in increased publicsector wages, as well as the simultaneous implementation of revenue measures to finance such increases, which couldhave an inflationary effect. An increased inflow of displaced Syrians into Lebanon, if not matched by aid andassistance, may also exert an upward pressure on prices.

There is no assurance that the inflation rates will not rise in the future. Significant inflation could have a materialadverse effect on the Lebanese economy and, in turn, materially adversely affect the Bank’s business, prospects,financial condition, liquidity, cash flows or results of operations.

Lebanon’s Sovereign Credit Rating

Each of Standard & Poor’s Credit Market Services Europe Limited, Moody’s Investor Services Limited and FitchRatings Limited, as international credit rating agencies, has indicated that the ratings and outlook assigned by them tothe Bank’s ratings remains constrained principally by the sovereign risk of Lebanon. Any downgrade of Lebanon’ssovereign credit rating or liquidity problems in Lebanon’s economy could adversely affect Lebanon’s economicdevelopment and would likely result in a downgrade of the Bank’s ratings, which could, in turn, materially andadversely affect the Bank’s business, prospects, financial condition, liquidity, cash flows or results of operations.

Considerations relating to the Bank and the Lebanese Financial Sector

Exposure to Lebanese and Other Sovereign Risks

In common with other Lebanese banks, a significant portion of the Bank’s liquidity in both Lebanese Pounds andforeign currency historically has been invested in Lebanese Government obligations or maintained as reserves with theCentral Bank. The Bank’s exposure to Lebanese sovereign risk as represented by its gross exposure to foreign currencydenominated Lebanese sovereign bonds as a percentage of foreign currency deposits was 11.4% as at June 30, 2014 (ascompared to 13.3% as at December 31, 2013, 7.8% as at December 31, 2012 and 10.0% as at December 31, 2011) andthe Bank’s net exposure to foreign currency-denominated Lebanese sovereign bonds amounted to LL 3,020 billion(approximately U.S.$2 billion) (as compared to LL 3,470 billion as at December 31, 2013, LL 1,067 billion as atDecember 31, 2012 and LL 1,350 billion as at December 31, 2011) representing 18.5% of the Bank’s total securitiesportfolio (as compared to 20.8% as at December 31, 2013, 7.0% as at December 31, 2012 and 8.8% as at December 31,2011) and 7.1% of foreign currency denominated customers’ deposits (as compared to 9.1% as at December 31, 2013,3.5% as at December 31, 2012 and 4.8% as at December 31, 2011). Such investments are generally considered to berelatively illiquid to the extent that, in the event that the Bank was to attempt to sell a significant portion of its holdings,it would likely experience a discount on the price, which could be substantial, especially in light of the Bank’s size inthe Lebanese market. As a result, any default by the Government or the Central Bank on any of its obligations or anysignificant reduction in value or liquidity of Government securities the Bank holds or in the regulatory or accountingtreatment thereof would have a material adverse effect to Bank’s business, prospects, financial condition, liquidity, cashflows or results of operations, as well as on other Lebanese banks.

In addition, the Bank also holds investments in foreign currencies comprised of placements in sovereign bonds, inparticular from Egypt and Turkey. As at June 30, 2014, the Bank’s exposure to non-Lebanese non-OECD sovereignbonds was LL 3,466 billion (U.S.$2,299 million) (as compared to LL 3,197 billion (U.S.$2,121 million) as at December31, 2013), representing, in the aggregate, 21.2% of the Bank’s total securities portfolio and 8.2% of its adjusted foreigncurrency denominated customers’ deposits. Accordingly, the Bank also bears significant exposure to the risks of othersovereign states, principally Egypt and Turkey.

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Regional and International Expansion

Many of the countries in which the Bank has existing operations, or is considering developing operations, have in thepast experienced periods of political instability and, in some cases, civil unrest and clashes or are located in regionscharacterized by instability. Such political and social unrest that may characterize the regions where the Bank has ormay commence operations has, at times, adversely affected the banking sectors in these jurisdictions and there can beno assurance that social and civil disturbances will not occur in the future. In fact, in many cases, these conditions arenot likely to be resolved quickly and, accordingly, could lead to further political and economic instability as well as lossof confidence in business investment in the regions where the Bank currently operates or may operate in the future. As aresult, particularly as the Bank expands its operations geographically, regional political and social instability bothgenerally and in local banking sectors in particular could materially adversely affect the Bank’s business, prospects,financial condition, liquidity, cash flows or results of operations. In particular, recent events in Syria have had anadverse effect on the economic conditions in Syria which, in turn, have had an adverse effect on the financial conditionof Bank Audi Syria. In 2013, the Bank was granted a license by the Central Bank of Iraq to open seven branches andlaunch banking operations in Baghdad, Irbil, Basra, Najaf, Suleymanieh, Salaheddine and Mosul. Recent events in Iraq,if such events continue, or conditions in the country deteriorate further, may affect the Bank’s current intention tolaunch banking operations in Iraq. In addition, there can be no assurance that the Bank will be able to achieve andeffectively manage the growth of its operations in foreign countries. A failure to expand and manage growth as plannedor to achieve effective marketing strategies may have a material adverse effect on the Bank’s business, prospects,financial condition, liquidity, cash flows or results of operations.

Risks relating to acquisitions and divestitures

The Bank has historically pursued and intends to continue to implement a strategic plan that envisages selectiveacquisitions to further its growth. Risks relating to recent and future acquisitions include:

difficulties in the integration of operations, technologies, products and personnel of acquired entities;

diversion of management’s attention away from other business concerns;

expenses relating to undisclosed or unknown potential liabilities of acquired entities; and

limitations on foreign ownership of banking or corporate institutions.

Moreover, the Bank’s ability to implement its acquisition strategy in certain countries may be hindered due to a scarcityof acquisition targets or competition from other potential acquirers in the acquisition process.

In addition, future acquisitions could result in the incurrence of debt and the assumption of liabilities, includingcontingent liabilities. Any of the foregoing could have a material adverse effect on the Bank’s business, prospects,financial condition, liquidity, cash flows or results of operations.

Sanctions on Sudan and Syria

The Bank owns 41.0% of the issued share capital of Bank Audi Syria, while each of Lebanon Invest and AudiInvestment Bank own an additional 3% of the issued share capital of Bank Audi Syria. The Bank also owns 76.6% ofthe issued share capital of National Bank of Sudan. Bank Audi Syria and National Bank of Sudan accounted for 0.9%and 0.3%, respectively, of the Bank’s consolidated assets as at June 30, 2014. See “Overview of Bank Audi—Subsidiaries”. Each of the Republic of Sudan (“Sudan”) and the Syrian Arab Republic (“Syria”) are subject tosanctions imposed by, among others, the United States, the United Kingdom, the European Union and the UnitedNations. It is the Bank’s policy to comply with all applicable sanctions. The Bank has put in place measures andcontrols to ensure that it does not deal, directly or indirectly, with any persons designated under applicable sanctionsand that all transactions are compliant with applicable sanctions. Such compliance can be complex as sanctions includefinancial and trading restrictions, freezes on the assets of and travel restrictions on designated persons, bans onfinancing of state-owned enterprises, prohibitions on the supply of technical, financial and other assistance and outrightprohibitions on trade. Penalties for non-compliance with such sanctions can include regulatory action, fines,confiscation of funds and custodial sentences. The failure of the Bank to comply with applicable sanctions, as well asthe fact of the sanctions, could have a material adverse effect of the Bank’s business, prospects, financial condition,liquidity, cash flows or results of operations.

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Liquidity and Maturity Mismatching

Although the Bank’s balance sheet appears to indicate a high level of liquidity, the Bank, along with other Lebanesefinancial institutions, has utilized a portion of these liquidity levels to invest in longer-term higher yielding assets,namely Lebanese treasury bills and financial papers traded in regulated markets. While much of the Bank’s investmentportfolio is funded by comparatively shorter-term customers’ deposits, the investments are comprised principally ofGovernmental securities, including, in particular, Lebanese treasury bills, which are often, in practice, characterized bylimited liquidity. As a result, although historically the Bank has been able to roll over the significant majority of itsdeposits, and these securities typically may be liquidated in times of crisis according to discount arrangements orrepurchase agreements with the Central Bank, there can be no assurance that the Bank will be able to liquidate all or aportion of its portfolio of Lebanese treasury bills if it became necessary or advisable to do so. As a result, investorsshould not assume that the Bank’s liquidity, as measured by its balance sheet, will continue to be available, but insteadshould be aware that the Bank, in common with other banks in Lebanon, may be required to rely on other moreexpensive funding sources in order to finance growth in its loan portfolio. Any failure to source funding through lessexpensive deposits, if at all, would have a material adverse effect on the Bank’s business, prospects, financial condition,liquidity, cash flows or results of operations.

Interest Rate Sensitivity

As a result of the maturity mismatch between deposits and assets, the Bank, in common with most Lebanese banks, isexposed to the risk of any sharp increase in short term interest rates. The Bank realizes income from the margin betweeninterest earned on its assets and interest paid on its liabilities. Because many of the Bank’s assets and liabilities repriceat different times, the Bank is vulnerable to fluctuations in market interest rates. Typically, the Bank’s liabilities repricesubstantially more frequently than its assets and, as a result, if interest rates rise, the Bank’s interest expense willincrease more rapidly than its interest income, which could negatively affect interest margins and result in liquidityproblems. The Bank is limited in its ability to reprice assets more frequently and to mitigate this risk since many of thesecurities held in the Bank’s investment portfolio either have fixed interest rates or longer-term variable interest rates.As a result, volatility in interest rates could have a material adverse effect on the Bank’s business, prospects, financialcondition, liquidity, cash flows or results of operations.

Ordinary Course Banking Risks

In the ordinary course of its business activities, the Bank is exposed, in common with other commercial banks, to avariety of financial, market and operational risks, including credit risk, market risk, currency risk, interest rate risk,prepayment risk, equity price risk, liquidity risk and operational risk. A detailed description of the Bank’s riskmanagement policies and procedures in respect of these risks is included at “Overview of Bank Audi S.A.L.–RiskManagement”. Whilst Management believes that these risk management policies and procedures are appropriate andsufficient to control and mitigate such risks, any failure to adequately control these risks could be greater thananticipated and could result in a material adverse effect on the Bank’s business, prospects, financial condition, liquidity,cash flows or results of operations.

Global Financial Crisis

The recent global financial crisis contributed to the failures of a number of financial institutions in the United States andEurope and unprecedented action by governmental authorities, regulators and central banks around the world. Its effectscontinue to be felt, with some countries, in particular in the E.U., experiencing difficulties with refinancing their debtobligations and maintaining solvency in their respective banking sectors. As a result of market turmoil, there issignificant price volatility in the secondary market for instruments similar to the Bank’s securities. Moreover, systemicrisk within the financial system and the related general deterioration in global economic conditions could result in adecline in the recoverability and value of the market price of the Bank’s securities.

It is difficult to predict how long the volatility in the financial sector and capital markets will persist or whether relatedconcerns about further failures of financial and other institutions will exacerbate the prevailing difficulties in the globaleconomy and, accordingly, it is not possible to foresee the specific impacts these conditions may have on the Bank.Although the Bank intends to continue its focus on controlled growth and asset quality, any contraction of its keymarkets will impact the Bank. In particular, if current global market conditions and circumstances deteriorate further, orcontinue for protracted periods of time, this could lead to a decline in available funding and credit quality and increasesin defaults and non-performing debt, which may impact the rating, investments and finances of the Bank. In particular,the global financial crisis and general slowdown in economic activity in Lebanon may have adverse effects on theBank’s assets and profitability.

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As a result of all of the foregoing, there is significant price volatility in the secondary market for instruments similar tothe Bank’s securities and the systemic risks within the financial system and the related general deterioration in globaleconomic conditions could result in a decline in the market price of the Bank’s securities.

Currency Considerations and Devaluation Risks

Although the Central Bank has been successful during the past several years in maintaining a stable rate of exchangeand the Central Bank maintains a high level of foreign currency reserves for such purposes, there can be no assurancethat the Central Bank will continue to be willing or able to maintain a stable currency, through intervention in theexchange markets or otherwise. In the event the Lebanese Pound devalues against the U.S. Dollar, the financialcondition or results of operations of Lebanese companies, including the Bank and its customers located or doingbusiness in Lebanon, would be affected. Furthermore, because a substantial portion of the loans of banks operating inLebanon, including the Bank, are denominated in U.S. Dollars, a devaluation of the Lebanese Pound would increase thedebt service burden of borrowers whose income is in Lebanese Pounds and, therefore, would be likely to increase thelevel of the Bank’s non-performing loans. In addition, a devaluation of the Lebanese Pound against the U.S. Dollar willadversely impact the Bank’s ability to generate distributable net income for the year in quantities sufficient to paydividend distributions.

Lebanese Banking Sector

United Against Nuclear Iran (“UANI”), a New York-based advocacy group that seeks to prevent Iran from obtainingnuclear weapons, has launched a campaign against the Lebanese banking sector, the Central Bank and Lebanon,alleging, inter alia, that the Lebanese banking sector and the Central Bank have been engaged in money launderingactivities and facilitating the evasion of international sanctions imposed upon Iran. UANI has called on internationalholders of Lebanese sovereign debt to divest their ownership of such securities. The Government views UANI’sallegations as being without merit.

On 10 February 2011, the U.S. Department of the Treasury designated the Lebanese Canadian Bank S.A.L. (“LCB”) as“a financial institution of primary money laundering concern” under Section 311 of the USA PATRIOT Act. In itsfinding, the U.S. Department of the Treasury noted that the Lebanese banking sector faces certain vulnerabilities. TheCentral Bank is taking measures to address the concerns raised by the U.S. Department of the Treasury. In April 2011,the U.S. Ambassador to Lebanon stated that the U.S. government is not targeting the Lebanese banking sector ingeneral and views LCB as an isolated case. The U.S. government has since filed a claim in New York against LCB andother parties seeking to attach certain assets. On 20 August 2012, the U.S. Attorney for the Southern District of NewYork and the U.S. Drug Enforcement Administration announced the seizure of U.S.$150 million from an account at aU.S. bank maintained by a Lebanese bank. The U.S. Attorney stated that the seized funds are substitutes for funds heldin an escrow account for LCB shareholders maintained at the Lebanese bank and further stated that there were noallegations of wrongdoing against the affected Lebanese bank or the correspondent U.S. bank. In June 2013, LCBentered into a settlement agreement with the U.S. government pursuant to which the U.S. government will retainU.S.$102 million of the seized funds. The agreement also specifies that the remaining monies, plus an additionalU.S.$12 million, will be paid to Société Générale de Banque au Liban, which acquired LCB in 2011.

Competition

The market for financial and banking services in Lebanon is competitive. As at June 30, 2014, there were 56 activecommercial banks (with 965 operational branches in Lebanon), 17 specialized medium- and long-term credit banks, 53financial institutions, 12 brokerage institutions, one leasing company in the financial sector and ten representativeoffices of foreign banks in Lebanon, which has a population of approximately 4.0 million people. These banks includelarge international financial institutions with access to larger and cheaper sources of funding. Competition to attractdepositors and quality borrowers and to provide fee-based services to customers has been particularly intense since theend of the civil war in 1990. Due to the intensity of such competition and the increasing number of institutions offeringfinancial and banking services in Lebanon, in common with other Lebanese banks, the Bank’s average cost of depositsand lending margins, have decreased. Depending on the continuing extent and intensity of the competition, in commonwith other Lebanese banks, the Bank’s interest expenses may increase and its revenues may decrease. The Bank is alsosubject to competition in the other countries in which it operates, including Egypt and Turkey.

Considerations relating to Odeabank and the Turkish Financial Sector

Newly-launched operations in Turkey

Odeabank’s operations are at an early stage and its assets are growing rapidly, accordingly, Odeabank’s success willdepend in large part on its ability to manage its growth, including its loan and deposit portfolios, as well as the risks

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relating thereto. Any failure to manage such growth could have a material adverse effect on Odeabank’s profitabilityand, in turn, the Bank’s business, prospectus, financial condition, liquidity, cash flows or results of operations.

Exposure to Turkish political and economic risks

As a result of the launch of the operations of Odeabank in Turkey in 2012, the Bank is exposed to Turkish political andeconomic risks. Turkey is considered by international investors to be an emerging market and, in general, operatingthere involves a higher degree of risk than in more developed countries.

Exposure to economic risks

Since the early 1980s, the Turkish economy has undergone a transformation from a highly protected and regulatedsystem to a free market system. Although the Turkish economy has responded well in general to this transformation, ithas experienced severe macro-economic imbalances and has frequently resorted to support from the InternationalMonetary Fund (the “IMF”).

In spite of its economic development progress since 2001 (when Turkey implemented its macroeconomic program),Turkey has experienced recent economic difficulties and remains vulnerable to both external and internal shocks,including escalating oil prices and terrorist activity and events in neighbouring Syria and Iraq, as well as potentialdomestic political uncertainty and changing investor opinion. A substantial current account deficit may also contributeto economic vulnerability.

The Turkish economy has experienced significant inflationary pressures in the past with year-on-year consumer priceinflation rates as high as 68.6% in the early 2000s; however, weak domestic demand and declining energy prices in2009 caused the domestic year-over-year consumer price index to decrease to 6.4% at the end of 2010, the lowest levelin many years. Consumer price inflation was 7.4% in 2013, 6.2% in 2012 and 10.5% in 2011. If the level of inflation inTurkey were to fluctuate or increase significantly, then this could have a material adverse effect on the Odeabank’sbusiness, prospects, financial condition, liquidity, cash flows or results of operations.

While the Turkish economy has significantly stabilized due, in part, to IMF support, Turkey may experience a furthersignificant economic crisis in the future and there can be no assurance that Turkey will be able to remain economicallystable during any periods of renewed global economic weakness. In such circumstances, there can be no assurance thatTurkey and the IMF will enter into a new agreement in relation to macroeconomic stabilization policies and, even ifagreed upon, there can be no assurances that any such agreement would help Turkey to remain economically stableduring any current or future macroeconomic imbalances or that IMF support for Turkey would continue. Futurenegative developments in the Turkish economy could impact Odeabank’s strategy and have a material adverse effect onOdeabank’s business and profitability, which could, in turn, have a material adverse effect on the Bank’s business,prospects, financial condition, liquidity, cash flows or results of operations.

Exposure to political risks

Historically, Turkey has experienced political instability. Turkey has been a parliamentary democracy since 1923.Unstable coalition governments have been common, and in over 90 years since its formation, Turkey has had numerous,short-lived governments, with political disagreements frequently resulting in early elections. Furthermore, although itsrole has diminished in recent years, the Turkish military establishment has historically played a significant role inTurkish government and politics, intervening in the political process.

In May 2013, protests began in Istanbul and soon spread to Ankara and other major cities in Turkey against plans toreplace Gezi Park, an urban park in Istanbul’s central Taksim Square, with a commercial development. These protestsresulted in confrontations among protestors and security forces and contributed to increased volatility in the Turkishfinancial markets. Related and similar protests have occurred from time to time since these events. While the Bank’smanagement does not believe that these conflicts will have a material long-term negative impact on Turkey’s economyor the Odeabank’s business, it is possible that these (or other) protests and related circumstances could have such anegative impact or may have a negative impact on investors’ perception of Turkey and the strength of the Turkisheconomy.

Since late 2013, Turkish politics have been particularly volatile, commencing with a series of arrests of prominentbusinessmen and family members of some cabinet ministers (who have since resigned) on suspicion of corruption. TheTurkish government’s response to these events have included the removal of certain prosecutors and police from theiroffices and proposals to change the manner in which the police and judicial authorities are supervised by the nationalgovernment, which has led to concerns about the separation of powers. These events have contributed to significantdeclines in the value of the Turkish stock market and the Turkish Lira. The occurrence of these and future similar

19

events, as well as the manner in which they are resolved may have a material adverse effect on Odeabank’s businessand financial condition.

In addition, Turkey has experienced problems with domestic terrorism and ethnic separatist groups, including, forexample, the People’s Congress of Kurdistan, formerly known as the PKK (and listed as a terrorist organisation in,amongst other places, Turkey, the EU and the U.S.). The issue of civil rights for Kurdish citizens remains a potentialsource of political instability, which may be exacerbated by continuing instability in Iraq. Circumstances in Turkey’sneighboring countries, including, in particular, Syria and Iraq, may also have a significant negative effect on Turkey’seconomy and political situation. Recently, a conflict has arisen between Turkey and Iraq in respect of the sale of oil bythe Kurdistan Regional Government of Northern Iraq to Turkey, resulting in the Iraqi Ministry of Oil filing a request forarbitration against Turkey and a state-owned petroleum enterprise). Furthermore, a terrorist organisation in Iraq, theIslamic State (formerly, the Islamic State of Iraq and the Levant (ISIS)), seized the Turkish consulate in Mosul, Iraq inJune, taking 49 people as hostages. Any escalation of terrorism, unrest or heightened tensions, domestically or betweenIraq and Turkey or other organisations in Turkey, could impact the Turkish economy (including a negative impact ontourism and foreign direct investment), which could have a material adverse effect on Odeabank’s and, in turn, theBank’s business, prospects, financial condition, liquidity, cash flows or results of operations.

Loan portfolio growth

Since the launch of Odeabank’s operations in 2012, its loan portfolio has grown rapidly (from TL 1,732 billion as atDecember 31, 2012 to TL 11,344 billion as at December 31, 2013 and TL 14,327 billion as at June 30, 2014, asreported in Odeabank’s financial statements prepared in accordance with Turkish Accounting Standards and TurkishFinancial Reporting Standards). Continued rapid growth of Odeabank’s loan portfolio will increase Odeabank’s creditexposure and will require continued and improved monitoring by Odeabank’s management of its lending policies, creditquality and adequacy of provisioning levels in order to manage the risks related to such growth. Odeabank intends toincrease its loan portfolio further by focusing on SME borrowers and any such increase could further increase the creditrisk faced by the Bank. Negative developments in the Turkish economy could also affect borrowers, resulting in higherlevels of non-performing loans (“NPLs”) and, as a result, higher levels of provisioning. Any failure by Odeabank tomanage the growth of its loan portfolio and hold its assets or to manage the credit quality of its portfolio within prudentrisk parameters or to monitor and regulate the adequacy of its provisioning levels could have a material adverse effecton Odeabank’s and, in turn, the Bank’s business, prospects, financial condition, liquidity, cash flows or results ofoperations.

Competition

The Turkish banking sector is a competitive market and Odeabank may find it difficult to increase its penetration of themarket. Participants in the sector, include state-controlled and private banks in Turkey, as well as many subsidiaries andbranches of foreign banks and joint ventures between Turkish and foreign shareholders. A small number of these banksdominate the banking industry in Turkey. According to the BRSA, as at 31 March 2014, the top seven banking groupsin Turkey, three of which were state-controlled, held approximately 69.4% of the Turkish banking sector’s total loanportfolio, approximately 70.4% of total banking assets in Turkey and approximately 77.8% of total deposits in Turkey.State-controlled banks in Turkey have historically had access to inexpensive funding in the form of significant Turkishgovernment deposits, which has provided a competitive advantage over private banks. Strong competition in the marketmay make it difficult for Odeabank to implement its strategy which could have a negative impact on the Bank’sbusiness, prospects, financial condition, liquidity, cash flows or results of operations.

Pressure on Profitability

Odeabank’s profitability may be negatively affected in both the short- and long-term as a result of a number of factors,including a slowdown of economic growth in Turkey and interest rate volatility, increased competition (particularly as itimpacts net interest margins) and regulatory actions, including those that seek: (a) to limit the growth of Turkish banksthrough various conventional and unconventional policy measures, including increased reserve requirements, increasedgeneral provisioning requirements, increased capital requirements and higher risk-weighting for general purpose loans,or (b) to impose limits or prohibitions on fees and commissions charged to customers or otherwise affect paymentsreceived by Odeabank from its customers.

Volatility in the Turkish banking sector

The significant volatility in the Turkish currency and foreign exchange markets experienced in 1994, 1998 and 2001,combined with the short foreign exchange positions held by many Turkish banks at those times, affected theprofitability and liquidity of certain Turkish banks. In 2001, this resulted in the collapse of several financial institutions.Following this crisis, the government made structural changes to the Turkish banking system to strengthen the private

20

(i.e., non-governmental) banking sector and allow it to compete more effectively against the state-controlled banksTürkiye Halk Bankası (“Halkbank”), Türkiye Vakıflar Bankası T.A.O. (“Vakıfbank”) and T.C. Ziraat Bankası (“Ziraat”). Notwithstanding such changes, the Turkish banking sector remains subject to volatility and to continuedpressure on ratings. Recently, Fitch Ratings has downgraded the long-term foreign and local currency issuer defaultratings of three major banks in Turkey, İş Bankası, Garanti Bankası and Akbank to ‘BBB-’ from ‘BBB’ by addressing the increased risks from recent rapid credit growth and higher external debt. If the general macro-economic conditionsin Turkey, and the Turkish banking sector in particular, were to suffer another period of volatility, this might result infurther bank failures, reduced liquidity and weaker public confidence in the Turkish banking sector, which could have amaterial adverse effect on Odeabank’s and, in turn, the Bank’s business, prospects, financial condition, liquidity, cashflows or results of operations.

Risks Relating to the Capital Increase

Issue Price

After the date of this Offering Circular, the trading price of the Bank’s Common Shares may trade at prices above orbelow the Issue Price. In addition, the price of the Common Shares may fluctuate between the time investors exercisetheir Rights and the receipt of New Shares following conclusion of the Capital Increase. Once made, the exercise of allRights are irrevocable and, as a result, investors bear the financial risk that the price of the Bank’s Common Shares willfluctuate during that period.

Dilution

The Bank will issue approximately 50,000,000 New Shares in connection with the Capital Increase. Shareholders whochoose not to participate in the Capital Increase will be diluted following the issuance of New Shares.

Sales of New Shares

If an investor purchases New Shares in the Capital Increase, New Shares in book-entry form will be issued andshareholders’ accounts will be credited as soon as practicable after the Issue Date. Until the New Shares of the relevantinvestor have been issued in book-entry form or credited to such investor’s account, the investor may not be able to sellits New Shares. The stock price of the New Shares may decline between the time an investor decides to sell its NewShares and the time at which it is able to sell its New Shares.

Risks Relating to the Securities

Market Price

The market has from time to time experienced significant price and volume fluctuations that are not closely related tothe operating performance of particular companies. Factors including developments in the financial sector, the limitedliquidity of the BSE, increased competition, fluctuations in the Bank’s operating results, the regulatory environment,availability of reserves, general market conditions, natural disasters and war may have an adverse effect on the marketprice of the Securities.

The market price of the Securities is also influenced by economic and market conditions in Lebanon, Turkey (in thecase of the Warrants), and, to a varying degree, economic and market conditions in other countries in which the Bankoperates and the emerging markets generally. Financial turmoil in other emerging markets in the past has adverselyaffected market prices in the world’s securities markets for companies that operate in those developing economies.Financial turmoil in Lebanon, Turkey and other emerging markets could materially adversely affect the market price ofthe Securities.

Trading Market Risk

There can be no assurance as to the liquidity of any market that may develop for the Securities (if at all), the ability ofshareholders or the Warrantholders to sell their Common Shares or Warrants or the price at which such holders wouldbe able to sell their Common Shares or Warrants. Although the New Shares are intended to be listed on the Beirut StockExchange, there can be no assurance that, where such listing is obtained, an active trading market will develop or besustained. In addition, the liquidity of any market for the New Shares will depend on the number of shareholders, theinterest of securities dealers in making a market in the Common Shares and other factors. The Warrants will not belisted on any stock exchange

21

Sales

Sales, or the real or perceived possibility of sales, by the Bank or any other person, of a significant number of Securitiesin the public market could adversely affect prevailing market prices for the Securities. The Bank cannot predict theeffect, if any, that market sales of the Securities, or the availability of the Securities for future sale, will have on themarket price of the Securities, but these factors could adversely affect the price of the Securities. In addition, the Bankmay, in the future, issue additional Warrants.

Limitations on Voting

Pursuant to the Bank’s by-laws, each newly-issued Common Share confers on the owner thereof the right to one vote ata General Meeting of the Bank’s shareholders, whereas fully-paid Common Shares that have been issued and held bythe same shareholder for at least two years prior to any General Meeting carry two votes. Accordingly, each New Shareissued as part of the Capital Increase shall only carry one vote at a General Meeting for a period of at least two yearsfrom the issuance and registration of such New Shares.

Payment of Dividends

The payment of dividends, if any, by the Bank to its shareholders will depend on (in addition to applicable regulatoryrequirements), among other things, the Bank’s future profits, financial position and capital requirements, the sufficiencyof the Bank’s distributable reserves (including after the priority allocation of payment of dividends in respect of theBank’s Preferred Shares), credit terms, general economic conditions and other factors that the directors or shareholdersdeem to be important from time-to-time. Should the Bank’s shareholders decide against declaring dividends in thefuture, the price of the Common Shares may be adversely affected.

Pursuant to the Bank’s by-laws and applicable Lebanese law, payment of dividends in respect of the Bank’s Series E, F,G and H Preferred Shares, as well as payments to the Bank’s legal reserve, general banking risk reserve and the generalor special reserve will be made in priority to the payment of dividends in respect of the Common Shares.

Exercise of Warrants

The Bank intends to cause the Odeabank Shares to be consolidated at the rate of 10:1 pursuant to the Reverse StockSplit prior to the beginning of the Warrant Exercise Period. Each Warrant entitles the Warrantholders, subject to theConditions and the Warrant Deed Poll, on any business day during the Exercise Period to subscribe for one OdeabankShare, provided that the Reverse Stock Split has occurred, subject to adjustment (i) as set out in the Conditions and(ii) in the event that the Reverse Stock Split has not occurred.

To the extent a Warrantholder has not exercised its Warrants before the end of the Warrant Exercise Period thoseWarrants will lapse worthless. Any Warrants not exercised on or before the final date of the Warrant Exercise Periodwill lapse without any payment being made to the holders of such Warrants.

The market price of the Warrants may be volatile and there is a risk that they may become valueless. Investors shouldbe aware that the purchase rights attached to the Warrants are exercisable only during the Warrant Exercise Period forthe Warrant Exercise Price (subject to any prior adjustment in accordance with the terms and conditions set out in theWarrant Instrument). Prospective purchasers should note that there will be no adjustment of the Warrant Exercise Pricein the event of the issuance of new Odeabank Shares whether issued at, below or above par value.

In addition, while the Bank will use its reasonable endeavors to procure a listing of the Odeabank Shares on the IstanbulStock Exchange or another international stock exchange prior to the beginning of the Warrant Exercise Period, therecan be no assurance that such listing will be obtained.

Restrictions on the Exercise of Warrants

The Warrants will only be exercisable by persons who represent, amongst other things, that they are outside the UnitedStates and not a U.S. Person (or acting for the account or benefit of a U.S. Person), and are acquiring Odeabank Sharesupon the exercise of the Warrants in reliance on an exemption from, or in a transaction not subject to, the registrationrequirements of the Securities Act. In addition, the Warrants will not be exerciseable by residents of the TurkishRepublic.

The Warrants, in so far as they give an entitlement to subscribe for Odeabank Shares, are affected by similar risk factorsas the Common Shares, save that there is no assurance that the Odeabank Shares will be listed on any international

22

stock exchange and, accordingly, there can be no assurance that a market will develop for the Odeabank Shares or, ifsuch market does develop, as to the liquidity of such market.

Modifications to the Warrants

The Conditions contain provisions relating to the modification of the Warrants. In accordance with the Conditions, savefor the Exercise Price, all or any of the rights for the time being attached to the Warrants may be altered with theconsent in writing of the Warrantholders of not less than 66⅔% of the Warrants then outstanding. Any modification sanctioned by such majority will bind all Warrantholders, including Warrantholders who did not attend and vote at therelevant meeting and Warrantholders who voted in a manner contrary to the majority.

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USE OF PROCEEDS

The net proceeds of the Capital Increase will be used to strengthen the Bank’s regulatory capital and to fund the Bank’sexpansion within and outside Lebanon.

24

DIVIDEND POLICY

Dividend Policy

Payments of dividends in respect of the Bank’s Common Shares and of distributions in respect of the Banks preferredshares (the “Preferred Shares”) are subject to recommendation by the Bank’s Board of Directors and approval by aGeneral Meeting of the Bank’s shareholders.

Since 1996, it has been the policy of the Bank’s Board of Directors to recommend the distribution to holders ofCommon Shares of a dividend payment of at least 30% of after-tax profits in each year, subject to the approval of theBank’s shareholders and to the availability of distributable net income for the year, after payment of distributions toholders of Preferred Shares.

Pursuant to the Bank’s by-laws and applicable Lebanese law, the Bank’s annual net profits (which are payable from theBank’s standalone available-for-distribution net income) shall be distributed in the following order of priority:

to the legal reserve, in amounts equivalent to 10% of the Bank’s net profits after tax, to be transferred eachyear until such reserve reaches one-third of the Bank’s share capital. The legal reserve is distributable onlyupon the liquidation of the Bank. In 2013, the Bank and its subsidiaries transferred LL 54,881 million to thelegal reserve in accordance with applicable law;

to the general banking risks reserve; pursuant to BDL Decision № 7129, the Bank is required to set aside a minimum of 0.2% and a maximum of 0.3% of its risks-weighted assets as a reserve for unspecified bankingrisks, which forms an integral part of the Bank’s Tier I capital. The aggregate of this reserve must beequivalent to 1.25% of risk-weighted assets within ten years from the date of Decision № 7129 and 2.0% of risk-weighted assets within 20 years of such date. In addition, the Bank is required to establish a specialreserve for properties acquired in satisfaction of debts and not liquidated within the required delays;

to the payment of dividends in respect of the Series E, F, G and H Preferred Shares (or any other series ofPreferred Shares), as approved by the Ordinary General Meeting of the Bank’s shareholders;

to the Bank’s general or special reserve or profits carried forward; and

to holders of the Bank’s Common Shares.

The determination to pay any dividends in respect of the Common Shares, and the amounts thereof, will depend upon,among other things, the Bank’s earnings, its financial condition and cash requirements, priority rights for distribution,government regulations and policies and such other factors as may be deemed relevant by the Board of Directors andshareholders from time-to-time.

Dividends Paid

The following table sets forth the cash dividends paid by the Bank to shareholders on the Common Shares for theperiods indicated.

Year ended December 31,Total Dividends

Paid(1)Dividends paid

per Share(2)

(U.S.$ thousands) (U.S.$)

2013 .............................................................................................................................. 139,900 0.402012 .............................................................................................................................. 139,420 0.402011 .............................................................................................................................. 139,487 0.402010 .............................................................................................................................. 138,422 0.402009 .............................................................................................................................. 120,466 0.35_______Notes:(1) Before taxes.(2) As adjusted to reflect the 10:1 stock split on 24 May 2010.

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The following table sets forth the cash dividends paid by the Bank to shareholders on the Bank’s Preferred Shares forthe periods indicated.

Year ended December 31,Total Dividends

Paid(1)

(U.S.$ thousands)

2013 .......................................................................................................................................................... 25,8752012 .......................................................................................................................................................... 23,1882011 .......................................................................................................................................................... 17,1882010 .......................................................................................................................................................... 14,6872009 .......................................................................................................................................................... 9,687_______Note:(1) Before taxes.

As of August 19, 2014, the closing price of the Common Shares on the BSE was U.S.$6.35 per Common Share.

At the Ordinary General Meeting of the Bank’s shareholders held on April 14, 2014, the Bank’s shareholders approvedthe distribution of dividends out of the Bank’s unconsolidated net income in 2013 of U.S.$6.00 per Series E PreferredShare, U.S.$6.00 per Series F Preferred Share, U.S.$4.00 per Series G Preferred Share, U.S.$4.50 per Series HPreferred Share and LBP 603 (or U.S.$0.40) per Common Share (before withholding taxes at a rate of 5%). Totaldividends paid in respect of 2013 represented 54.4% of the Bank’s net earnings for 2013.

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STATEMENT OF CAPITAL, RESERVES AND SUBORDINATED LOANS OF THE BANK

The following table sets out the consolidated shareholders’ equity and long-term liabilities of the Bank as at the datesindicated:

As at June 30, As at December 31,2014(1) 2013 2012 2011

(U.S.$thousands) (LL millions)

(U.S.$thousands) (LL millions)

(LLmillions) (LL millions)

Shareholders’ EquityGroup ShareShare capital – Common Shares(2) ................... 301,376 454,324 301,376 454,324 438,586 438,197Share capital – Preferred Shares(2) ................... 4,308 6,495 4,308 6,495 19,124 17,243Issue premium – Common Shares(2) ................ 437,284 659,206 437,284 659,206 659,206 657,846Issue premium – Preferred Shares(2) ................ 495,692 747,255 495,691 747,255 583,876 359,633Cash contribution to capital............................. 48,150 72,586 48,150 72,586 72,586 72,586Non distributable reserves............................... 701,814 1,057,985 636,514 959,545 812,960 696,360Distributable reserves 392,120 591,121 391,060 589,523 551,406 380,215Treasury shares .............................................. (279) (420) (75,839) (114,327) (20,245) (103,912)Retained earnings ........................................... 346,438 522,255 292,803 441,400 323,697 328,515Other components of equity ............................ (211,733) (319,187) (178,494) (269,080) (79,475) 21,056

Result of the year(3)......................................... 184,640 278,345 301,573 454,621 564,737 544,239

Total Group Share........................................ 2,699,811 4,069,965 2,654,426 4,001,547 3,926,458 3,411,978

Non-Controlling Interest .............................. 42,253 63,696 41,766 62,963 96,838 141,172

Total Shareholders’ Equity .......................... 2,742,064 4,133,661 2,696,192 4,064,510 4,023,296 3,553,150

Subordinated loans and similar debts............... 507,386 764,884 356,286 537,101 — —

Total Shareholders’ Equity &Subordinated Loans ................................... 3,249,449 4,898,545 3,052,478 4,601,611 4,023,296 3,553,150

__________Notes:(1) Unaudited.(2) As at June 30, 2014, the Bank’s capital consisted of (i) 349,749,204 Common Shares, each with a nominal value of LL 1,299, of which

102,493,911 were represented by Global Depositary Receipts; (ii) 1,250,000 Series E Preferred Shares, each with a par value of LL 1,299 andwhich were issued at a price of, and may (subject to certain conditions) be redeemed by the Bank at, U.S.$100.00 per Series E Preferred Share;(iii) 1,500,000 Series F Preferred Shares, each with a par value of LL 1,299 and which were issued at a price of, and may (subject to certainconditions) be redeemed by the Bank at, U.S.$100.00 per Series F Preferred Share; (iv) 1,500,000 Series G Preferred Shares, each with a parvalue of LL 1,299 and which were issued at a price of, and may (subject to certain conditions) be redeemed by the Bank at, U.S.$100,00 perSeries G Preferred Share; and (v) 750,000 Series H Preferred Shares, each with a par value of LL 1,299 and which were issued at a price of, andmay (subject to certain conditions) be redeemed by the Bank at, U.S.$100.00 per Series H Preferred Share. As at June 30, 2014, the Bankowned 69,897,080 Global Depositary Receipts.

(3) Before distribution of dividends.

There has been no material change in the Bank’s capital since June 30, 2014.

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SELECTED FINANCIAL INFORMATION OF THE BANK

The financial information of the Bank set forth below as at and for the six months ended June 30, 2014 and 2013 and asat and for the years ended December 31, 2013, 2012 and 2011 has been extracted from and should be read inconjunction with and is qualified in its entirety by the Annual Financial Statements and the Interim FinancialStatements, including the respective notes thereto, contained elsewhere in this Offering Circular.

Prospective investors should read the selected financial and other information in conjunction with the informationcontained in the “Risk Factors”, “Overview of Bank Audi”, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and the Annual Financial Statements and the Interim Financial Statements,including the respective notes thereto, and other financial data appearing elsewhere in this Offering Circular.

Balance Sheet Data

The following table sets out the balance sheet of the Bank as at the dates indicated:

As at June 30, As at December 31,

2014(1) 2013 2012 2011(U.S.$

thousandsunless

otherwiseindicated) (LL millions)

(U.S.$thousands

unlessotherwiseindicated) (LL millions) (LL millions)

AssetsCash and balances with central banks................7,326,309 11,044,411 6,097,584 9,192,108 9,462,380 8,703,354Due from banks and financialinstitutions .......................................................2,883,059 4,346,211 2,805,676 4,229,556 4,280,978 4,562,602Loans to banks and financial institutionsand reverse repurchase agreements....................1,024,743 1,544,800 436,448 657,945 1,060,267 219,084Financial assets given as collateral .................... 1,341 2,022 — — — 17,424Derivative financial instruments........................ 80,324 121,089 90,257 136,062 51,046 82,209Financial assets measured at fair valuethrough profit or loss ................................ 251,187 378,664 271,365 409,083 510,657 823,926Loans and advances to customers atamortised cost ..................................................15,973,428 24,079,943 14,636,698 22,064,822 15,416,403 12,692,177Loans and advances to related parties atamortised cost ................................................. 60,824 91,693 76,172 114,829 304,511 263,666Debtors by acceptances................................ 196,572 296,332 174,255 262,689 182,715 280,819Financial assets classified atamortised cost ..................................................10,414,636 15,700,064 10,628,879 16,023,035 14,549,116 14,307,303Financial assets at fair value throughother comprehensive income............................. 191,605 288,844 180,746 272,475 245,793 223,984Investment in associates................................ 18,686 28,169 18,982 28,615 34,230 43,099Property and equipment................................ 380,467 573,554 381,981 575,836 528,710 511,550Intangible fixed assets ................................ 56,815 85,648 54,566 82,259 49,600 13,508Non-current assets held for sale ........................ 15,417 23,241 12,814 19,318 50,054 26,379Other assets...................................................... 248,551 374,691 184,799 278,584 241,484 288,171Goodwill.......................................................... 138,079 208,154 140,062 211,144 222,846 261,431

Total Assets ....................................................39,262,043 59,187,530 36,191,284 54,558,360 47,190,790 43,320,686

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As at June 30, As at December 31,

2014(1) 2013 2012 2011(U.S.$

thousandsunless

otherwiseindicated) (LL millions)

(U.S.$thousands

unlessotherwiseindicated) (LL millions) (LL millions)

LiabilitiesDue to central banks ................................ 236,976 357,241 167,192 252,042 133,108 133,394Due to banks and financialinstitutions .......................................................1,057,602 1,594,336 1,061,302 1,599,912 1,171,174 1,007,558Due to banks under repurchaseagreements.......................................................48,459 73,052 130,136 196,180 681,487 —Derivative financial instruments........................57,920 87,314 89,198 134,466 56,042 58,246Customers’ deposits at amortisedcost ................................................................33,519,524 50,530,682 30,592,515 46,118,217 39,718,890 37,097,210Deposits from related parties atamortised cost ..................................................440,251 663,678 502,547 757,590 689,101 285,297Debt issued and other borrowedfunds 64,277 96,897 — — — —Engagements by acceptances ............................196,572 296,332 174,255 262,689 182,715 280,819Other liabilities................................ 314,897 474,707 333,513 502,771 408,865 832,087Provisions for risks and charges ........................76,117 114,746 88,147 132,882 111,313 72,925Non current liabilities held for sale.................... — — — — 14,799 —Subordinated loans and similardebts ................................................................507,386 764,884 356,286 537,101 — —

Total Liabilities ................................ 36,519,979 55,053,869 33,495,091 50,493,850 43,167,494 39,767,536

Shareholders’ Equity – GroupShare(2)............................................................2,699,811 4,069,965 2,654,426 4,001,547 3,926,458 3,411,978Non-Controlling Interest ................................42,253 63,696 41,766 62,963 96,838 141,172

Total Shareholders’ Equity ............................2,742,064 4,133,661 2,696,192 4,064,510 4,023,296 3,553,150

Total Liabilities andShareholders’ Equity................................39,262,043 59,187,530 36,191,283 54,558,360 47,190,790 43,320,686

__________Notes:(1) Unaudited.(2) Investment Finance Opportunities Ltd. (“IFO”) and Middle East Opportunities for Structured Finance Ltd. (“MOSF”) are special purpose

vehicles, which own 14,883,530 Common Shares and 14,835,830 Common Shares in Bank Audi, respectively, representing 4.3% and 4.2% ofthe Bank’s Common Shares, respectively, as at 30 June 2014. The Bank has the right to substitute the Common Shares owned by IFO andMOSF for cash and, accordingly, to sell the Common Shares at any time. As at the date of this Offering Circular, there has been an agreement tosell or substitute certain Common Shares held by IFO and MOSF, which will reduce the Common Shares held by IFO and MOSF to 4,766,598and 4,736,582, respectively, each representing 1.4% of the Bank’s Common Shares. Each of IFO and MOSF have issued notes, which aresecured by the Common Shares and the dividend and other distributions payable in connection therewith. Payments in respect of the Notes aremade from dividends and other proceeds of the Common Shares. In the event that the proceeds of the underlying Common Shares and collateralare insufficient to repay the Notes in full, the Bank has a commitment to cover any shortfall. See also, Note 44.0 to the Bank’s auditedconsolidated financial statements as at, and for the year ended, December 31, 2013.

As at June 30, 2014, the Bank’s consolidated total contingent liabilities and guarantees were LL 2,587 billion(U.S.$1,716 million) and documentary credits and loan commitments were LL 4,334 billion (U.S.$2,875 million).

29

Off-Balance Sheet Data

The following table sets out certain off-balance sheet data of the Bank as at the dates indicated:

As at June 30, As at December 31,

2014(1) 2013 2012 2011(U.S.$

thousands) (LL millions)(U.S.$

thousands) (LL millions) (LL millions)

Letters of credit………….................................372,576 561,658 378,710 570,906 353,763 387,781Letters of guarantees given tobanks and financial institutions .........................172,704 260,351 254,511 383,675 390,904 418,781Letters of guarantees given tocustomers.........................................................1,543,224 2,326,410 1,487,325 2,242,142 1,921,292 2,254,602Assets under management................................9,363,760 14,115,868 8,367,026 12,613,291 11,519,400 10,745,573Fiduciary assets................................ 905,738 1,365,400 921,404 1,389,016 1,215,349 1,205,948__________Note:(1) Unaudited.

Income Statement Data

The following table sets out certain income statement data of the Bank for the periods indicated:

For the six months endedJune 30,(1) For the years ended December 31,

2014 2013 2013 2012 2011

(U.S.$ thousands) (LL millions) (LL millions)(U.S.$

thousands) (LL millions) (LL millions) (LL millions)

Interest and similar income ................................ 1,096,841 1,653,488 1,259,499 1,786,654 2,693,381 2,208,509 2,056,972

Interest and similar expense ................................ (705,197) (1,063,084) (818,083) (1,148,414) (1,731,234) (1,344,819) (1,268,750)

Net Interest Income ................................ 391,644 590,404 441,416 638,240 962,147 863,690 788,222

Fee and commission income ................................ 141,731 213,660 162,889 232,909 351,110 330,562 318,952

Fee and commission expense ................................ (26,571) (40,056) (30,492) (45,832) (69,092) (51,197) (50,060)

Net Fee and CommissionIncome................................................................ 115,160 173,604 132,397 187,077 282,018 279,365 268,892

Net gain on financial assets at fairvalue through profit or loss ................................ 17,401 26,232 123,822 107,666 162,307 197,456 126,171

Net gain on sale of financialassets at amortized cost ................................ 82,224 123,953 114,014 108,773 163,976 265,812 221,014

Revenues from financial assets atfair value through othercomprehensive income ................................ 11,159 16,822 16,926 19,109 28,806 30,245 27,720

Net gain on sale of subsidiariesand associates ................................ 0 0 498 514 775 0 2,024

Share of profit of associatesunder equity method ................................ 129 194 69 775 1,169 551 5,133

Other operating income ................................ 2,774 4,182 7,116 8,563 12,909 22,251 48,638

Total Operating Income................................ 620,491 935,391 836,258 1,070,717 1,614,107 1,659,370 1,487,814

Net credit losses ................................ (34,655) (52,243) (69,958) (89,792) (135,362) (182,585) (137,659)

Net Operating Income ................................ 585,836 883,148 766,300 980,925 1,478,745 1,476,785 1,350,155

Personnel expenses ................................ (196,410) (296,088) (229,468) (327,074) (493,064) (411,746) (380,856)Depreciation of property and

equipment ................................................................(21,071) (31,765) (25,713) (34,974) (52,723) (46,088) (38,796)

Amortization of intangible assets................................(7,217) (10,880) (6,342) (10,675) (16,092) (7,663) (7,045)

Impairment of goodwill ................................ 0 0 0 0 0 (21,167) 0

Other operating expenses ................................ (123,947) (186,850) (151,071) (227,610) (343,122) (291,959) (242,679)

Total Operating Expenses ................................ (348,645) (525,583) (412,594) (600,332) (905,001) (778,623) (669,376)

Operating Profit ................................ 237,191 357,565 353,706 380,593 573,744 698,162 680,779

Net gain on disposal of fixedassets ................................................................ 583 880 593 454 685 850 387

Profit Before Tax FromContinuing Operations................................ 237,774 358,445 354,299 381,047 574,429 699,012 681,166

Income tax ................................................................(48,051) (72,437) (70,846) (76,093) (114,711) (154,537) (139,514)

Profit After Tax FromContinuing Operations................................ 189,723 286,008 283,453 304,954 459,718 544,475 541,652

(Loss) profit from discontinuedoperations, net of tax................................ 32 48 0 (398) (600) 33,814 8,899

Profit For The Period ................................ 189,755 286,056 283,453 304,556 459,118 578,289 550,551

30

Attributable to:

Equity holders of the Bank:................................ 184,640 278,345 272,846 301,573 454,621 564,737 544,239

Non-controlling interests: ................................ 5,115 7,711 10,607 2,983 4,497 13,552 6,312

__________Note:(1) Unaudited.

31

Per Share Data

The following table sets out the certain per share data of the Bank as at the dates and for the periods indicated:

As at and for the six monthsended June 30,(1) As at and for the years ended December 31,

2014 2013 2013 2012 2011(U.S.$

thousands) (LL millions)(U.S.$

thousands) (LL millions)

NAV per Common ShareNet Asset Value ...............................................................2,742,064 4,133,661 4,045,559 2,696,192 4,064,510 4,023,296 3,553,150

Non controlling interest ................................42,253 63,696 62,893 41,766 62,963 96,838 141,172

Net Asset Value (Group share)(2) ................................2,699,811 4,069,965 3,982,666 2,654,426 4,001,547 3,926,458 3,411,978

Preferred shares includingdividends(3) ................................................................515,063 776,457 773,093 525,875 792,757 637,955 402,785

Common NAV (Group share) ................................2,184,748 3,293,508 3,209,572 2,128,551 3,208,790 3,288,503 3,009,193

Number of common shares net ofTreasury stock................................................................348,984,058 348,984,058 347,466,560 340,526,319 340,526,319 347,851,669 340,942,545

NAV per share (in LL) ................................ 6.26 9,437.42 9,237.07 6.25 9,423.03 9,453.75 8,826.10

Earnings per Common ShareNet earnings................................................................189,723 286,008 283,453 304,954 459,718 544,475 541,652

- Non controlling interest ................................5,114 7,710 10,607 2,987 4,502 12,759 6,211

= Net earnings (Group share)(2) ................................184,609 278,298 272,846 301,967 455,216 531,716 535,441

- Dividends on Preferred Shares(3) ................................15,063 22,707 18,500 25,875 39,007 34,955 25,910

= Common earnings (Group share) ................................169,546 255,591 254,346 276,092 416,209 496,761 509,531

Number of weighted averagecommon shares(4)..............................................................346,517,420 346,517,420 347,733,258 346,552,238 346,552,238 346,903,074 343,334,701

Common earnings pershare (Basic) (in LL)(5) ................................ 0.99 1,487.42 1,475.00 0.80 1,201.00 1,431.99 1,484.06

Common earnings pershare (Diluted) (in LL)(6)................................ 0.99 1,487.42 1,475.00 0.80 1,201.00 1,431.39 1,481.04

Price per share (at the end of period) 6.60 9,949.50 6.38 6.49 9,783.68 6.29 5.64

Price-to-earnings ratio ................................ 6.69 6.69 6.52 8.15 8.15 6.62 5.73

Price-to-book ratio................................ 1.05 1.05 1.04 1.04 1.04 1.00 0.96

Earnings per Common Share(after discontinued operations)Net earnings................................................................189,755 286,056 283,453 304,556 459,118 578,289 550,551

- Non controlling interest ................................5,115 7,711 10,607 2,983 4,497 13,552 6,312

= Net earnings (Group share)(2) ................................184,640 278,345 272,846 301,573 454,621 564,737 544,239

- Dividends on Preferred Shares(3) ................................15,063 22,707 18,500 25,875 39,007 34,955 25,910

= Common earnings (Group share) ................................169,577 255,638 254,346 275,698 415,614 529,782 518,329

Number of weighted averagecommon shares(4)..............................................................

346,517,420

346,517,420

347,733,258

346,552,238

346,552,238

346,903,074

343,334,701

Common earnings per share (Basic)(in LL)(5) ................................................................0.99 1,487.70 1,475.00 0.80 1,199.28 1,527.18 1,509.69

Common earnings per share(Diluted) (in LL)(6) ................................ 0.99 1,487.70 1,475.00 0.80 1,199.28 1,526.54 1,506.61

Price per share (at the end of period) 6.60 9,949.50 6.38 6.49 9,783.68 6.29 5.64

Price-to-earnings ratio ................................ 6.69 6.69 6.52 8.16 8.16 6.21 5.63

Price-to-book ratio................................ 1.05 1.05 1.04 1.04 1.04 1.00 0.96__________Notes:(1) Unaudited.(2) Group share refers to the share of the Group in the equity and net income of consolidated subsidiaries, excluding minority interests of

unaffiliated shareholders without voting control.(3) Preferred Shares and related dividends refer to (i) the Series E Preferred Shares that were outstanding as at December 31, 2011; (ii) the Series E

Preferred Shares and the Series F Preferred Shares outstanding as at each of December 31, 2012 and June 30, 2013; and (iii) the Series EPreferred Shares, the Series F Preferred Shares, the Series G Preferred Shares and the Series H Preferred Shares outstanding as at each ofDecember 31, 2013 and June 30, 2014.

(4) Weighted average Common Shares refers to the weighted average number of Common Shares over the period, excluding Global DepositaryReceipts evidencing the Bank’s Common Shares bought back over the same period and held as treasury shares.

(5) Basic earnings per Common Share are calculated based on the weighted average number of Common Shares actually issued.(6) Diluted earnings per Common Share are calculated by reference to the weighted average number of Common Shares, including the Common

Shares which could be issued under the Employee Stock Option to cover grants not yet exercised as at June 30, 2014 and 2013 and December31, 2013, 2012 and 2011, respectively.

32

Selected Returns and Ratios(1)(2)

The following table sets out certain ratios and other figures in respect of the Bank as at the dates and for the periodsindicated:

As at and for the six monthsended June 30, As at and for the years ended December 31,

2014 2013 2013 2012 2011

(%), (unless otherwise indicated)ProfitabilityReturn on average assets(3)(4) ................................ 1.02 1.16 0.91 1.32 1.27Return on average common equity(3)(4) ................ 15.86 15.89 12.59 16.51 16.73

LiquidityPrimary liquidity(5) / total assets ........................... 28.62 27.73 25.81 31.37 31.17Central banks / total assets................................ 18.66 19.12 16.85 20.05 20.09Deposits with banks / total assets ......................... 9.96 8.61 8.96 11.32 11.08Primary liquidity(5) to deposits ............................. 33.08 32.04 30.04 36.64 36.12Net primary liquidity(5) to deposits ....................... 29.13 27.57 25.67 31.72 33.07Portfolio securities(6) / total assets ........................ 27.65 31.64 30.62 32.43 35.45Loans to assets .................................................... 40.84 37.72 40.65 33.31 29.91Loans to deposits................................................. 47.22 43.58 47.32 38.91 34.66Loans / deposits (in LL)................................ 24.59 20.42 22.54 16.74 14.76Loans / deposits (in foreign currencies) ................ 50.73 48.28 51.68 44.45 39.89

Capital Adequacy as per Basel IIAverage equity to average assets(3) ....................... 7.29 7.99 7.92 8.66 8.14Tier I over risk weighted assets............................ 9.79 10.34 10.15 13.40 12.18Central Bank BIS risk asset ratio (profitincluded) as per Basel II ................................ 12.23 10.57 12.09 13.67 12.46

Asset QualityGross doubtful loans / gross loans ........................ 2.53 2.27 2.79 2.70 2.90Loan loss provisions to gross doubtfulloans ................................................................ 65.21 78.23 64.25 76.26 77.16Collective provisions / net loans........................... 1.06 0.90 0.89 1.06 1.17Net doubtful loans / gross loans ........................... 0.88 0.49 1.00 0.64 0.66Net doubtful loans / equity................................ 5.28 2.40 5.60 2.58 2.50

Management EfficiencyInterest paid over interest received ....................... 65.07 63.51 63.11 59.85 60.49Spread over average assets(3)................................ 2.04 1.92 2.00 2.05 1.91Non-interest income to operating income ............. 39.06 43.84 37.16 45.66 44.32Net commissions over average assets(3) ................ 0.62 0.54 0.56 0.64 0.62Asset utilisation ratio(7) ........................................ 3.34 3.42 3.18 3.85 3.46Cost to income ratio ............................................ 56.13 49.26 56.07 45.96 44.71Cost to average assets.......................................... 1.88 1.69 1.78 1.77 1.55Footings per branch (LL millions) ........................ 426,391 414,664 418,037 400,615 392,144Footings per staff (LL millions)............................ 14,118 13,597 13,405 12,801 12,560

Network and StaffBranches............................................................. 204 177 189 162 154Staff employed.................................................... 6,161 5,398 5,894 5,070 4,808__________Notes:(1) The selected financial ratios and statistical information appearing above have been prepared by the Bank and have not been submitted to, or

reviewed or validated by, third parties or governmental agencies, including the Central Bank(2) Unaudited.(3) Average assets and average common equity are computed as the average of period-beginning and period-ending balances.(4) Based on net income.(5) Primary liquidity is calculated as the sum of cash and balances with Central Banks, amounts due from banks and financial institutions and

financial assets given as collateral and reverse repurchase agreements. Net primary liquidity is calculated as primary liquidity minus amountsdue to banks and financial institutions.

(6) Portfolio securities are comprised of financial assets held at fair value through profit and loss, financial assets designated at fair value throughother comprehensive income and financial assets classified at amortized cost.

(7) The asset utilisation ratio is calculated as total operating income divided by average assets.

33

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS

Basis of Presentation

The following discussion and analysis has been prepared by the Bank’s Management based upon the Annual FinancialStatements and the Interim Financial Statements, which are included in this Offering Circular. The selected financialand operating data set forth below, which, subject to rounding, has been extracted without material adjustment from theAnnual Financial Statements and the Interim Financial Statements, together with the related discussion and analysis,should be read in conjunction with, and is qualified in its entirety by reference to, the Annual Financial Statements andthe Interim Financial Statements, as well as the information set forth under the captions “Selected FinancialInformation of the Bank” and “Overview of Bank Audi” included elsewhere in this Offering Circular. Unless otherwiseindicated, all figures are expressed in or derived from amounts in Lebanese Pounds.

The Bank’s Annual Financial Statements have been prepared in accordance with standards issued or adopted by theInternational Accounting Standards Board and interpretations issued by the International Financial ReportingInterpretations Committee, the general accounting plan for banks in Lebanon and the regulations of the Central Bankand the Banking Control Commission. Such Annual Financial Statements, as well as the Interim Financial Statements,include the results of the Bank and its consolidated subsidiaries as listed in Note 53 to the Bank’s Annual FinancialStatements. Ernst & Young p.c.c. and BDO, Semaan, Gholam & Co. have audited the Annual Financial Statements. TheInterim Financial Statements have not been audited or reviewed, are subject to year-end audit adjustments and may notbe representative of year-end results. See “Presentation of Information”.

The Bank maintains its accounts in Lebanese Pounds. Accordingly, U.S. Dollar amounts stated in this Offering Circularhave been translated from Lebanese Pounds at the rate of exchange prevailing at the relevant balance sheet date, in thecase of balance sheet data, and at the average rate of exchange for the relevant period, in the case of income statementdata, and are provided for convenience only. In each case, the relevant rate for both balance sheet data and incomestatement data was LL 1,507.5 per U.S.$1.00; throughout the periods covered by this Offering Circular, the CentralBank has maintained its policy of pegging the value of the Lebanese Pound to the U.S. Dollar at a fixed rate of LL1,507.5 per U.S.$1.00. Banking sector information in relation to the Lebanese banking sector has been derived fromCentral Bank statistics, Bankdata and the Bank’s internal sources and banking sector information in relation to theTurkish banking sector has been derived from statistics published by the Central Bank of the Turkish Republic, theBRSA and Odeabank’s internal sources.

Operating Environment

The Bank operates principally in Lebanon, with an increasing contribution being made by its operations outsideLebanon, including in Europe and the MENA region and, since October 2012, in Turkey. Accordingly, its financialcondition, results of operations and business prospects are closely related to the overall political, social and economicsituation in Lebanon, which, in turn, is tied to the geo-political situation in the region, as well as in the MENA region,Turkey and Europe.

34

Lebanese Economy and the Banking Sector

The following table sets forth certain key economic indicators for Lebanon as at the dates and for the periods indicated:

As at and for the years ended December 31,Percentage

Change2013 2012 2011 (2012-2013)

(%)

GDP (at market prices in LL billions)................................ 68,119 64,752 60,419 5.2Growth of Real GDP (%)......................................................... 1.5 2.5 2.0 (40.0)Inflation(1) (%)................................................................ 1.1 10.1 3.1 (89.1)Balance of payments (U.S.$ millions)................................ (1,128) (1,537) (1,996) (26.1)Trade deficit (U.S.$ millions) ................................................... (17,292) (16,797) (15,893) 2.9Government Overall Deficit (LL billions)................................ (6,362) (5,918) (3,530) 7.5LL/U.S.$1.00 ................................................................ 1,507.5 1,507.5 1,507.5 —Gross public debt (as a % of GDP) ................................ 140 134 134 4.5Gross foreign currency reserves (excluding goldreserves) (U.S.$ million)(2) ....................................................... 31,713 29,972 30,815 5.8Banking sector assets (LL billions)........................................... 248,468 228,963 211,918 8.5__________Notes:(1) CAS estimates on and end-of-period basis.(2) As at June 30, 2014, gross foreign currency reserves (excluding gold reserves) were U.S.$35,848 million and gold reserves were U.S.$12,113

million.Sources: IMF, CAS, Central Bank. Lebanese Customs Administration, Higher Council of Customs and Ministry of Finance

Real GDP growth in Lebanon for 2013 was estimated to be 1.5%. As estimated by CAS, real GDP growth was 2.5% in2012 and 2.0% in 2011.

Inflation in 2013 was estimated by CAS at 1.1% on an end-of-period basis (3.5% according to the IMF’s estimate), ascompared to 10.1% (10.1% according to the IMF’s estimate) in 2012 and 3.1% (3.1% according to the IMF’s estimate)in 2011. On a period average basis, inflation in 2013 was CAS estimated by CAS at 5.5% (6.3% according to the IMF’sestimate), as compared to 6.4% (6.5% according to the IMF’s estimate) in 2012 and 5.1% (5.0% according to the IMF’sestimate) in 2011. These fluctuations were primarily due to fluctuations in the exchange rate between the LebanesePound and the Euro (the Euro is the currency of the principal trading partners of the Republic), housing prices andglobal energy and commodity prices

The balance of payments registered a deficit of U.S.$1,128 million as at December 31, 2013 and a decrease in thedeficit of 27%, as compared to the deficit of U.S.$1,537 million as at December 31, 2012. The decrease in the deficit in2013 was principally due to a U.S.$1.85 billion increase in the net position of the Central Bank. The deficit ofU.S.$1,537 million as at December 31, 2012 represented a decrease of 23%, as compared to a deficit of U.S.$1,996million as at December 31, 2011. The decrease in the deficit in 2012 was principally due to a reduction in the currentaccount deficit due to increased internal demand for goods, principally driven by displaced persons from Syria, andincreased internal demand for services, as well as increased income from foreign investments.

The fiscal balance registered a deficit of LL 6,362 billion in 2013, as compared to a deficit of LL 5,918 billion in 2012,representing an increase of 7.5%. The primary balance registered a deficit of LL 361 billion in 2013, as compared to adeficit of LL 166 billion in 2012, representing a 117.5% increase. The fiscal balance registered a deficit of LL 5,918billion in 2012, as compared to a deficit of LL 3,530 billion in 2011, representing an increase of 67.6%. The primarybalance registered a deficit of LL 166 billion in 2012, as compared to a surplus of LL 2,505 billion in 2011.

The trade deficit was U.S.$15,893 million in 2011, U.S.$16,797 million in 2012 and U.S.$17,292 million in 2013,according to figures published by the Lebanese Customs Administration. Lebanon is a predominantly importing countrycharacterised by large trade deficits; however, these deficits are generally offset by capital account inflows, as well asby inflows from remittances, income earnings, tourism and other services.

Gross foreign currency reserves (excluding gold reserves) at the Central Bank were U.S.$31,713 million as at December31, 2013, as compared to U.S.$29,972 million as at December 31, 2012 and U.S.$30,815 million as at December 31,2011. As at 31 May 2014, gross foreign currency reserves at the Central Bank were U.S.$33,264 million. Foreigncurrency reserves are generally placed by the Central Bank outside Lebanon with other central banks or with highly-rated international banks; they include a limited amount of highly-rated foreign debt securities.

The performance of the Lebanese banking sector continued to improve in 2013. Total banking sector assets in Lebanonincreased by 8.5% in 2013, as compared to 2012, after having increased by 8.0% in 2012, as compared to 2011. Total

35

private sectors loans increased by 9.0% in 2013, as compared to 2012, after having increased by 10.4% in 2012, ascompared to 2011. Similarly, private sector customers’ deposits increased by 9.0% in 2013, as compared to 2012, afterhaving increased by 8.0% in 2012, as compared to 2011. As at December 31, 2013, 66.1% of total customers’ depositswere held in U.S. Dollars, as compared to 64.8% and 65.9% as at December 31, 2012 and 2011, respectively.

As a substantial portion of the Bank’s loans are denominated in U.S. Dollars, a devaluation of the Lebanese Poundwould increase the debt service burden of borrowers whose income is in Lebanese Pounds and, therefore, would likelyincrease the level of the Bank’s non-performing loans. See “Risk Factors—Considerations Relating to the LebaneseBanking Industry—Currency Considerations and Devaluation Risks”.

The combined value of the securities listed on the BSE (excluding Eurobonds of the Lebanese Republic) increased in2013 to U.S.$10.8 billion as at 31 January 2014, from U.S.$10,421 million as at December 31, 2012, after havingincreased from U.S.$10,285 million as at December 31, 2011. Liquidity on the BSE decreased in 2013, as the tradingvolume declined by 15.6% to 3.4% of market capitalisation as at December 31, 2013. In the first six months of 2014,prices at the BSE rose 5.5% as a result of stronger trading activity. The trading value rose by 54% to reach U.S.$204million in the first six months of 2014.

MENA Region

Over three years after the onset of the “Arab Spring”, many countries in the MENA region continue to experiencecomplex political, social and economic transitions and related unrest. As a result, economic performance across theregion in 2013 was mixed, with oil-importing countries, including jurisdictions where the Bank has a significantpresence, generally experiencing relatively low levels of economic growth or economic contraction, and oil-exportingcountries experiencing higher growth due to relatively stable international oil prices and, in most cases, high levels ofpublic spending on infrastructure and similar projects.

In the first six months of 2014, oil-exporting countries have continued to experience growth as production and exportactivity increased in line with a general improvement in global economic conditions. Oil-importing countries have alsoexperienced modest growth in the first six months of 2014 due to improved consumption, as a result of increased levelsof remittances and public sector wage increases.

Turkey

Despite political tensions in 2013, Turkey’s economy grew, with GDP growth estimated at 3.8% by the IMF, ascompared to 2.2% for 2012. This growth is principally due to increased domestic demand, in turn, led by an increase inhousehold consumption. According to IMF estimates, domestic demand grew by 4.8% in 2013. The contribution ofprivate sector fixed capital investment, however, remained weak in 2013.

Continued increased activity in the Turkish banking sector led to an overall increase in total assets of banks operating inTurkey by 5.4% in 2013, while deposits grew by 1.7% and loans grew by 11.0%. Foreign currency deposits, as apercentage of total deposits, increased from 31.1% as at December 31, 2012 to 34.3% as at December 31, 2013,primarily due to the depreciation of the Turkish Lira in 2013. Domestic banks’ equity, however, decreased by 10.6% in2013 and net profits in the sector decreased by 5.4%.

In the six months ended June 30, 2014, the total assets of banks operating in Turkey increased by 7.4%, as compared toas at December 31, 2013, while deposits grew by 5.6% and loans grew by 9.1% (in U.S. Dollar terms). Foreigncurrency deposits, as a percentage of total deposits, increased from 31.8% as at June 30, 2013 to 37.1% as at June 30,2014 (peaking at 39.6% as at March 31, 2014).

Consolidated Financial Condition and Results of Operation

The Bank recorded positive asset growth in each of the year ended December 31, 2013 and the six months ended June30, 2014, as a result of the Bank’s transformation strategy, the availability of business opportunities, as well as theBank’s risk management policies, the combination of which has permitted the Bank to adapt to the challengingeconomic environment.

The following trends drove the Bank’s overall performance in 2013 and the six months ended June 30, 2014:

Lebanon - the Bank’s Lebanese operations grew in 2013 and during the first six months of 2014, as the Bankcontinued to adopt a strategy of consolidating its leading position in the domestic market while challengingeconomic conditions in Lebanon continued. The Bank’s strategy in Lebanon focuses on decreasing the costsof deposits, improving loan spreads and reducing operating expenses. Accordingly, the Bank has continued

36

to achieve positive results from its Lebanese operations while reducing its short term risk appetite during thedifficult market conditions. As the largest bank in Lebanon, the Bank continues to maintain a leadershipposition in most business segments.

Turkey - the Bank’s Turkish subsidiary, Odeabank, recorded solid activity growth in 2013, its first full yearof operations, and in the first six months of 2014. After 20 months of operations, Odeabank was ranked as the13th largest commercial bank in Turkey (among 33 operating commercial banks) with a market share ofapproximately 1% of total assets. The Bank intends to continue to strengthen its position in the Turkishmarket, which it expects will continue to be a growth market;

Egypt - Bank Audi Egypt also contributed to the Bank’s growth in terms of activities and earnings despitepersisting on-going political uncertainties in Egypt. This performance was principally driven by the Bank’sasset and liability management policy, which allowed Bank Audi Egypt to take advantage of certainopportunities in 2013 and the first six months of 2014; and

Private Banking - the Bank accelerated its restructuring plan for its private banking business pursuant towhich its private banking entities will form a unified group able to leverage on existing synergies and poolresources.

The following table sets forth certain consolidated data as at the dates and for the periods indicated:

As at and for the six months endedJune 30,(1)

As at and for the year ended December 31,2014 2013 2013 2012 2011

(LL billions) (LL billions)

Assets ............................................ 59,188 50,789 54,558 47,191 43,321Deposits ......................................... 51,194 43,963 46,876 40,408 37,383Loans to customers andrelated parties 24,172 19,158 22,180 15,721 12,956AUMs and Fiduciary Assets ........... 15,481 13,218 14,002 12,735 11,952Outstanding Letters of Credit .......... 562 400 571 354 388Outstanding Letters ofGuarantees ................................ 2,587 2,508 2,626 2,312 2,673Net Income beforediscontinued operations .................. 286 283 460 544 542Net Income afterdiscontinued operations .................. 286 283 459 578 551

Branches ........................................ 204 177 189 162 154Employees 6,161 5,398 5,894 5,070 4,808Customers 702,836 557,863 685,825 555,133 544,873Accounts......................................... 1,313,454 989,146 1,245,520 972,502 923,394

__________Note:(1) Unaudited.

The Bank’s consolidated assets are comprised principally of its liquid securities portfolio, loans to customers andprimary liquidity.

The Bank’s consolidated assets increased by 8.5% to LL 59,188 billion (U.S.$39.3 billion) as at June 30, 2014 fromLL 54,558 billion (U.S.$36.2 billion) as at December 31, 2013, after having increased by 15.6% from LL 47,191 billion(U.S.$31.3 billion) as at December 31, 2012 and by 8.9% from LL 43,321 billion (U.S.$28.7 billion) as at December31, 2011. The increase in consolidated assets since 2011 is primarily due to growth in the Bank’s Lebanese, Egyptianand, since 2012, Turkish operations. The contribution of non-Lebanese entities to consolidated assets increased from32.4% as at December 31, 2012 to 42.6% as at December 31, 2013 and 45.4% as at June 30, 2014 (of which 31.4% wasbooked in investment grade countries as at June 30, 2014, as compared to 28.6% as at December 31, 2013 and 15.1% asat December 31, 2012), in line with Management’s objective to achieve a more balanced distribution of assets andprofits within and outside of Lebanon, as well as to reinforce the Bank’s overall asset quality and rating.

Management believes that the growth in the Bank’s balance sheet reflects the Bank’s generally strong businessdynamics, including, in particular, its capacity to attract new customers, as well as to expand services provided toexisting customers. Both the number of the Bank’s customers and the total number of the Bank’s accounts continued toincrease, with 130,692 new customers and 273,018 new accounts in 2013, 10,260 new customers and 49,108 new

37

accounts in 2012 and 22,573 new customers and 49,161 new accounts in 2011. In the first six months of 2014, the Bankattracted 17,011 new customers and 67,934 new accounts.

Results across Operations

The Bank’s growth has been driven by its Lebanese operations, its Turkish operations (through Odeabank, launched inNovember 2012), its Egyptian operations (through Bank Audi Egypt) and its private banking business. The Bankconsiders these four areas to be its main development pillars.

38

The table below sets forth breakdowns of the Bank’s assets, deposits, loans to customers and net earnings, by thesedevelopment pillars, as at the dates and for the periods indicated:

As at and for the sixmonths ended June 30,

2014(1)

As at and for the year ended December 31,

2013 2012 2011(LL

billions)(% oftotal)

(LLbillions)

(% oftotal)

(LLbillions)

(% oftotal)

(LLbillions)

(% oftotal)

AssetsLebanon(2) .................................... 35,711 60.3 34,567 63.3 33,912 71.9 32,913 76.0Turkey......................................... 14,409 24.3 11,380 20.9 3,058 6.5 — —Egypt ........................................... 5,459 9.2 4,925 9.0 5,162 10.9 4,492 10.3Private Banking(3)......................... 5,073 8.6 5,053 9.3 5,209 11.0 5,424 12.5Other entities(4)............................. 4,245 7.2 4,085 7.5 4,460 9.5 5,186 12.0

Consolidation adjustment.............. (5,710) (9.6) (5,451) (10.0) (4,611) (9.8) (4,693) (10.8)

Total assets ................................. 59,188 100.0 54,558 100.0 47,191 100.0 43,321 100.0

Deposits(5)

Lebanon(2) .................................... 27,597 53.9 27,086 57.8 27,219 67.4 25,622 68.5Turkey......................................... 11,971 23.4 8,737 18.6 2,117 5.2 — —Egypt ........................................... 4,839 9.5 4,332 9.2 3,983 9.9 3,952 10.6Private Banking(3)......................... 3,811 7.4 3,984 8.5 4,214 10.4 4,339 11.6Other entities(4)............................. 3,125 6.1 2,860 6.1 3,000 7.4 3,755 10.0

Consolidation adjustment.............. (149) (0.3) (122) (0.2) (126) (0.3) (285) (0.7)

Total deposits.............................. 51,194 100.0 46,876 100.0 40,408 100.0 37,383 100.0

Loans to customers(5)

Lebanon(2) .................................... 8,485 35.1 8,705 39.3 8,776 55.8 7,630 58.8Turkey......................................... 10,141 42.0 7,992 36.0 1,457 9.3 — —Egypt ........................................... 2,403 9.9 2,354 10.6 2,303 14.6 1,983 15.3Private Banking(3)......................... 1,413 5.8 1,331 6.0 1,291 8.2 1,212 9.4Other entities(4)............................. 1,713 7.1 1,773 8.0 1,882 12.0 2,173 16.8

Consolidation adjustment.............. 15 0.1 24 0.1 12 0.1 (41) (0.3)

Total loans to customers............. 24,172 100.0 22,180 100.0 15,721 100.0 12,956 100.0

Net earnings beforediscontinued operationsLebanon(2) .................................... 185 64.5 360 78.3 347 63.7 443 81.7Turkey......................................... (8) (2.9) (67) (14.6) (1) (0.2) — —Egypt ........................................... 45 15.7 74 16.1 57 10.4 0 0.1Private Banking(3)......................... 31 10.9 49 10.7 50 9.2 46 8.5Other entities(4)............................. 34 11.8 45 9.8 82 15.0 52 9.6

Consolidation adjustment.............. (0) (0.0) (1) (0.3) 10 1.9 1 0.1

Total net earnings beforediscontinued operations.............. 286 100.0 460 100.0 544 100.0 542 100.0

Net earnings afterdiscontinued operationsLebanon(2) .................................... 185 64.5 360 78.5 405 70.0 460 84Turkey......................................... (8) (2.9) (67) (14.6) (1) (0.2) — —Egypt ........................................... 45 15.7 74 16.1 57 9.8 0 0Private Banking(3)......................... 31 10.9 49 10.6 20 3.5 38 7Other entities(4)............................. 34 11.8 45 9.9 87 15.1 52 9

Consolidation adjustment.............. (0) (0.0) (2) (0.5) 10 1.8 0 0

Total net earnings afterdiscontinued operations.............. 286 100.0 459 100.0 578 100.0 551 100.0

__________Notes:(1) Unaudited.(2) Lebanese entities include the Bank, Audi Investment Bank, Solifac, Infi Gamma and other Lebanese entities, but exclude Audi Private

Bank. See “Overview of Bank Audi —Subsidiaries”.(3) Private Banking entities include Audi Private Bank, Banque Audi (Suisse), Bank Audi Monaco, Bank Audi Qatar and Audi Capital-KSA.(4) Other entities include Bank Audi France, other European entities, BASY, BAJO, BASU, Aolb and other MENA entities.(5) Includes related parties.

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The contribution from the Group’s Lebanese entities to the Bank’s consolidated assets decreased in the six monthsended June 30, 2014, as well as in 2013, primarily as a result of the contribution of the newly-launched Odeabank inTurkey and the increase in the contribution by Bank Audi Egypt. As at June 30, 2014, 60.3% of the Group’sconsolidated assets were held by Lebanese entities, as compared to 63.3% as at December 31, 2013, 24.3% byOdeabank (as compared to 20.9% as at December 31, 2013), 9.2% by Bank Audi Egypt (as compared to 9.0% as atDecember 31, 2013), 8.6% by private banking entities (as compared to 9.3% as at December 31, 2013) and 7.2% byother entities (as compared to 7.5% as at December 31, 2013).

For the six months ended June 30, 2014, 64.5% of the Bank’s consolidated net earnings were contributed by the Bank’soperations in Lebanon, as compared to 78.5% in 2013, 15.7% by Bank Audi Egypt (as compared to 16.1% in 2013),10.9% by private banking entities (as compared to 10.6% in 2013), and 11.8% by other entities, as compared to 9.9% in2013. Odeabank provided a negative contribution to net earnings in each of the six months ended June 30, 2014 and theyear ended December 31, 2013.

As a result of its continued growth from January 1, 2011 through to June 30, 2014, the Bank retained its status as theleading bank in Lebanon by deposits, profitability, assets, shareholder’s equity and loans to customer and is one of thetop 15 largest Arab banking institutions. See “The Banking Sector and Banking Regulation in Lebanon—BankingSector”.

Lebanon

In the six months ended June 30, 2014, assets of the Bank’s Lebanese entities (excluding Audi Private Bank) increasedby LL 1,144 billion (U.S.$759 million) to LL 35,711 billion (U.S.$23.7 billion) as at June 30, 2014 from LL 34,567billion (U.S.$22.9 billion) as at December 31, 2013, after having increased from LL 33,912 billion (U.S.$22.5 billion)as at December 31, 2012 and LL 32,913 (U.S.$21.8 billion) as at December 31, 2011. This increase was primarily dueto a LL 511 billion (U.S.$339 million) increase in customers’ deposits to LL 27,597 billion (U.S.$18.3 billion) as atJune 30, 2014, as compared to LL 27,086 billion (U.S.$18.0 billion) as at December 31, 2013, LL 27,219 billon(U.S.$18.1 billion) as at December 31, 2012 and LL 25,622 (U.S.$17.0 billion) as at December 31, 2011.

In the six months ended June 30, the loan portfolio of the Bank’s Lebanese entities decreased by LL 220 billion(U.S.$146 million) as a result of Management’s limited short-term risk appetite as a result of difficult macroeconomicconditions in Lebanon. Total loans to customers of the Bank’s Lebanese entities was LL 8,485 billion (U.S.$5.6billion) as at June 30, 2014, as compared to LL 8,705 billion (U.S.$5.8 billion) as at December 31, 2013, LL 8,776billon (U.S.$5.8 billion) as at December 31, 2012 and LL 7,630 billion (U.S.$5.1 billion) as at December 31, 2011. Asat June 30, 2014, the ratio of gross doubtful loans to gross loans was 3.7%, representing an improvement on the ratio of4.0% as December 31, 2013. As at December 31, 2012, the ratio of gross doubtful loans to gross loans of the Bank’sLebanese entities was 2.2%. The deterioration of the ratio in 2013 was primarily due to Management’s decision todowngrade a number of corporate loans in Lebanon unrelated to Lebanese risk but booked in Lebanon for non-residentborrowers. The ratio of gross doubtful loans to gross loans of the Bank’s Lebanese entities was 2.2% as at December31, 2011.

In the six months ended June 30, 2014, the Bank’s Lebanese entities recorded net profits (after provisions and taxes) ofLL 184.6 billion (U.S.$122.5 million), reflecting a decrease of LL 23.5 billion (U.S.$15.6 million), as compared to thesix months ended June 30, 2013. This decrease was primarily due to an increase in general operating expenses, mainlyadditional one-off staff expenses. In 2013, the Bank’s Lebanese entities recorded net profits (after provisions and taxes)of LL 360.3 billion (U.S.$239.0 million), as compared to LL 404.8 billion (U.S.$268.5 million) in 2012 and LL 460.3billion (U.S.$305.3 million) in 2011.

Bank Audi Egypt

The Bank’s operations in Egypt are conducted through Bank Audi Egypt. In the six months ended June 30, 2014, BankAudi Egypt’s assets increased by LL 534 billion (U.S.$354.2 million), to LL 5,459 billion (U.S.$3.6 billion) from LL4,925 billion (U.S.$3.3 billion) as at December 31, 2013, after having decreased from LL 5,162 billion (U.S.$3.4billion) as at December 31, 2012 and having increased from LL 4,492 billion (U.S.$3.0 billion). The increase in assetsin the six months ended June 30, 2014 was primarily due to a LL 507 billion (U.S.$336.3 million) increase incustomers’ deposits to LL 4,839 billion (U.S.$3.2 billion) as at June 30, 2014 from LL 4,332 billion (U.S.$2.9 billion)as at December 31, 2013, LL 3,983 billion (U.S.$2.6 billion) as at December 31, 2012 and LL 3,952 billion (U.S.$2.6billion) as at December 31, 2011.

In the six months ended June 30, 2014, Bank Audi Egypt had total loans to customers of LL 2,403 billion (U.S.$1.6billion), as compared to LL 2,354 billion (U.S.$1.6 billion) as at December 31, 2013, LL 2,303 billion (U.S.$1.5 billion)as at December 31, 2012 and LL 1,983 billion (U.S.$1.3 billion) as at December 31, 2011. As at June 30, 2014, the ratio

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of gross doubtful loans to gross loans was 2.7%, as compared to 2.5% as December 31, 2013, 2.2% as at December 31,2012 and 3.2% as at December 31, 2011.

In the six months ended June 30, 2014, Bank Audi Egypt recorded net profits (after provisions and taxes) of LL 45billion (U.S.$29.9 million), reflecting an increase of LL 2.0 billion (U.S.$1.3 million), as compared to the six monthsended June 30, 2013 despite the recording of LL 10.3 billion (U.S.$6.8 million) of non-recurrent revenues in the sixmonths ended June 30, 2013. In 2013, Bank Audi Egypt recorded net profits (after provisions and taxes) of LL 74.1billion (U.S.$49.2 million), as compared to LL 56.6 billion (U.S.$37.5 million) in 2012 and LL 432 million (U.S.$0.3million) in 2011.

Odeabank

The Bank’s operations in Turkey are conducted through Odeabank. In the six months ended June 30, 2014, Odeabank’sassets increased by LL 3,029 billion (U.S.$2 billion) to LL 14,409 billion (U.S.$9.6 billion) from LL 11,380 billion(U.S.$7.5 billion) as at December 31, 2013, after having increased from LL 3,058 billion (U.S.$2 billion) as atDecember 31, 2012. The increase in assets in the first half of 2014 was due to continued growth since the launch ofOdeabank and, in particular, a LL 3,234 billion (U.S.$2.1 billion) increase in customers’ deposits to LL 11,971 billion(U.S.$7.9 billion) as at June 30, 2014, from LL 8,737 billion (U.S.$5.8 billion) as at December 31, 2013 and LL 2,117billion (U.S.$1.4 billion) as at December 31, 2012.

In the six months ended June 30, 2014, Odeabank’s loans to customers increased by LL 2,149 billion (U.S.$1.4 billion)to LL 10,141 billion (U.S.$6.7 billion) as at June 30, 2014 from LL 7,992 billion (U.S.$5.3 billion) as at December 31,2013 and LL 1,457 billion (U.S.$966.5 million) as at December 31, 2012. Odeabank’s loan to deposits ratio was 84.7%as at June 30, 2014, as compared to 91.5% as at December 31, 2013 and 68.8% as at December 31, 2012.

In the six months ended June 30, 2014, Odeabank recorded net losses (after provisions and taxes) of LL 8.4 billion(U.S.$5.6 million), as compared to LL 27.6 billion (U.S.$18.3 million) in the six months ended June 30, 2013. Thedecrease in net losses is primarily the result of Odeabank’s increased revenue generation, enabling the Bank to reducethe effect of immediate development expenses, as well as the evolution of Odeabank’s balance sheet since June 30,2013. In the second quarter of 2014, Odeabank recorded net profits of LL 4.6 billion (U.S.$3.1 million), representingthe first quarter in which Odeabank has recorded net profits since the launch of Odeabank’s operations in 2012.

Private Banking Entities

The Bank’s private banking entities comprise Audi Private Bank, Banque Audi Suisse, Bank Audi Monaco, Bank AudiQatar and Audi Saudi Arabia. In the six months ended June 30, 2014, the private banking entities’ assets undermanagement and fiduciary deposits increased by LL 732 billion (U.S.$485 million) to LL 8,324 billion (U.S.$5.5billion) as at June 30, 2014 from LL 7,592 billion (U.S.$5.0 billion) as at December 31, 2013, after having increasedfrom LL 6,851 billion (U.S.$4.5 billion) as at December 31, 2012 and LL 6,779 billion (U.S.$4.5 billion) as atDecember 31, 2011. The increase in assets under management and fiduciary deposits in the six months ended June 30,2014 was primarily due to increases in the assets under management of Banque Audi Suisse, Audi Saudi Arabia andAudi Private Bank, which was only partially offset by a decrease in fiduciary deposits. The continuing increases inassets under management resulted in a 29.5% increase in net profits in the six months ended June 30, 2014, as comparedto the corresponding period in 2013. In 2013, the private banking entities recorded net profits of LL 48.7 billion(U.S.$32.3 million), as compared to LL 20 billion (U.S.$13.3 million) in 2012 and LL 37.7 billion (U.S.$25.0 million)in 2011.

Securities Portfolio

The Bank’s portfolio of securities, comprised principally of Lebanese Pound-denominated treasury bills, foreigncurrency-denominated sovereign bonds (principally U.S. Dollar-denominated Eurobonds issued by the LebaneseRepublic), certificates of deposits issued by central banks where the Bank conducts its operations, non-Lebanesesovereign bonds, other fixed income instruments and equity securities, decreased to LL 16,368 billion (U.S.$10.9billion) as at June 30, 2014 from LL 16,705 billion (U.S.$11.1 billion) as at December 31, 2013, after having increasedfrom LL 15,306 billion (U.S.$10.2 billion) as at December 31, 2012 and LL 15,355 billion (U.S.$10.2 billion) as atDecember 31, 2011. As a percentage of total assets, the Bank’s securities portfolio represented 27.7% as at June 30,2014, as compared to 30.6% as at December 31, 2013, 32.4% as at December 31, 2012 and 35.4% as at December 31,2011.

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The following table shows the distribution of the Bank’s securities portfolio, by type of security, as at the datesindicated:

As at June 30, 2014(1)As at December 31,

2013 2012 2011(LL billions) (LL billions)

Central Bank Certificates of Deposit................................ 4,360 4,868 5,020 5,424LL-denominated................................................................ 4,346 4,854 2,884 3,358Foreign currency-denominated................................ 14 14 2,136 2,066

Net Government Treasury Bills andEurobonds(2)................................................................ 5,090 5,350 4,495 4,577

LL-denominated................................................................ 2,070 1,880 3,428 3,227Foreign currency-denominated................................ 3,020 3,470 1,067 1,350

Risk-ceded Government Eurobonds ................................ 2,033 1,812 1,464 1,618LL-denominated................................................................Foreign currency-denominated................................ 2,033 1,812 1,464 1,618

Other government securities(3) ................................ 3,466 3,197 2,793 2,210LL-denominated................................................................Foreign currency-denominated................................ 3,466 3,197 2,793 2,210

Equity securities ................................................................ 351 337 298 276LL-denominated................................................................ 61 51 47 6Foreign currency-denominated................................ 290 286 251 270

Other securities(4)................................................................ 1,068 1,141 1,235 1,250LL-denominated................................................................Foreign currency-denominated................................ 1,068 1,141 1,235 1,250

__________Notes:(1) Unaudited.(2) Lebanese Government securities.(3) Excludes Lebanese Government securities.(4) Other securities include principally Lebanese and international corporate bonds.

In common with other Lebanese banks, a significant portion of the Bank’s placements in both Lebanese Pounds andforeign currency historically has been invested in Government obligations or maintained as reserves with the CentralBank. The Bank’s gross exposure to foreign currency-denominated Lebanese sovereign bonds, as a percentage offoreign currency deposits decreased to 11.4% as at June 30, 2014 (as compared to 13.3% as at December 31, 2013,7.8% as at December 31, 2012 and 10.0% as at December 31, 2011). The Bank’s exposure to foreign currency-denominated Lebanese sovereign bonds (net of securities whose risk has been transferred to customers) amounted toLL 3,020 billion (U.S.$2 billion) as at June 30, 2014 (as compared to LL 3,470 billion (U.S.$2.3 billion), as atDecember 31, 2013, LL 1,067 billion (U.S.$0.7 billion) as at December 31, 2012 and LL 1,350 billion (U.S.$0.9billion) as at December 31, 2011), representing 18.5% of the Bank’s total securities portfolio as at June 30, 2014 (ascompared to 20.8% as at December 31, 2013, 7.0% as at December 31, 2012 and 8.8% as at December 31, 2011) and7.1% of foreign currency denominated customers’ deposits (as compared to 9.1% as at December 31, 2013, 3.5% as atDecember 31, 2012 and 4.8% as at December 31, 2011). The above exposure excludes the Bank’s foreign currencyexposure to the Central Bank through certificates of deposits and deposits, as well as through compulsory reservesmaintained with the Central Bank and other banks.

Investments in Lebanese sovereign bonds are generally considered to be relatively illiquid to the extent that, in the eventthat the Bank were to attempt to sell a significant portion of its holdings, it would likely experience a discount on theprice, which could be substantial. As a result, any default by the Government or the Central Bank on any of theirrespective obligations, or any significant reduction in value or liquidity of Government securities the Bank holds, or inthe regulatory or accounting treatment thereof, would have a material adverse effect to the Bank’s business, liquidity,results of operations, financial condition and prospects, as well as on other Lebanese banks.

In addition, primarily as a result of the Bank’s operations in Egypt and Turkey, the Bank holds investments in Egyptianand Turkish sovereign bonds, as well as certain other non-Lebanese Sovereign bonds. As at June 30, 2014, the Bank’sexposure to non-Lebanese sovereign bonds was LL 3,466 billion (U.S.$2,299 million) (as compared to LL 3,197 billion(U.S.$2,121 million) as at December 31, 2013), representing, in aggregate, 21.2% of the total securities portfolio and8.2% of adjusted foreign currency denominated customers’ deposits (as compared to 19.1% and 8.4%, respectively, as

42

at December 31, 2013). As at June 30, 2014, the Bank’s exposure to Egyptian sovereign bonds was LL 1,892 billion(U.S.$1,255 million) while its exposure to Turkish sovereign bonds was LL 868 billion (U.S.$576 million).

See “Risk Factors—Considerations Relating to the Lebanese Banking Industry—Exposure to Lebanese and OtherSovereign Risks”

Loan Portfolio

The Bank’s loans to customers (including to related parties) increased in the six months ended June 30, 2014 byLL 1,992 billion (U.S.$1.3 billion) to LL 24,172 billion as at June 30, 2014, from LL 22,180 billion (U.S.$14.7 billion)as at December 31, 2013, after having increased by LL 6,459 billion (U.S.$4.3 billion) from LL 15,721 billion(U.S.$10.4 billion) as at December 31, 2012 and by LL 2,765 billion (U.S.$1.8 billion) from LL 12,956 billion(U.S.$8.6 billion) as at December 31, 2011, in each case reflecting lending growth in Lebanon and Egypt,notwithstanding the difficult market conditions in these jurisdictions, and, since 2012, reflecting continued growth inthe lending activity of Odeabank.

As at June 30, 2014, as compared to December 31, 2013, loans to Turkish customers increased by LL 2,149 billion(U.S.$1.4 billion), loans to customers in the MENA region increased by LL 79 billion (U.S.$52 million), loans tocustomers in Europe increased by LL 57 billion (U.S.$38 million) and loans to customers in the Lebanese private sector(including loans booked at Audi Private Bank) increased by LL 29 billion (U.S.$19 million). These increases werepartially offset by a decrease in loans booked in Lebanon for non resident customers of LL 322 billion (U.S.$214million).

As at June 30, 2014, loans to the Lebanese private sector represented 30.6% of the Bank’s total loan portfolio (33.2% asat December 31, 2013), as compared to 42% for loans booked in Turkey (36% as at December 31, 2013), 5.8% forloans booked in Lebanon for non-residents (7.8% as at December 31, 2013), 6.8% for loans booked by the Bank’sEuropean entities (7.2% as at December 31, 2013) and 14.8% for loans booked by the Bank’s MENA entities (15.8% asat December 31, 2013).

As a result of the continuing political and economic turmoil in the region, the Bank’s trade finance activities havegenerally declined over the period, although, since the beginning of 2013, certain activities have increased. Outstandingletters of credit remained relatively stable at LL 562 billion (U.S.$373 million) as at June 30, 2014, after havingincreased by 61.3% in 2013 to LL 571 billion (U.S.$379 million) as at December 31, 2013 from LL 354 billion(U.S.$235 million) as at December 31, 2012, and decreasing by 8.8% from LL 388 billion (U.S.$257 million) as atDecember 31, 2011. Outstanding letters of guarantee decreased by 1.5% in the first half of 2014 to LL 2,587 billion(U.S.$1.7 billion) as at June 30, 2014, from LL 2,626 billion (U.S.$1.7 billion) as at December 31, 2013, after havingincreased by 13.6% from LL 2,312 billion (U.S.$1.5 billion) as at December 31, 2012 and after having decreased fromLL 2,673 billion (U.S.$1.8 billion) as at December 31, 2011.

Primary Liquidity

The Bank has consistently maintained a highly-liquid position, including throughout the recent global financial crisisand the Arab Spring. The Bank’s overall primary liquidity (comprised principally of amounts held at the Central Bank,excluding Central Bank certificates of deposits and placements with banks) increased to LL 16,937 billion (U.S.$11.2billion) as at June 30, 2014 from LL 14,080 billion as at December 31, 2013, after having decreased from LL 14,804billion (U.S.$9.8 billion) as at December 31, 2012, and having increased from LL 13,502 billion (U.S.$9.0 billion) as atDecember 31, 2011, representing 33.1% of customers’ deposits as at June 30, 2014, 30.0% of customers’ deposits as atDecember 31, 2013, 36.6% of customers’ deposits as at December 31, 2012 and 36.1% as at December 31, 2011.

The Bank’s primary liquid assets in Lebanese Pounds are essentially composed of cash and deposits with the CentralBank. The ratio of Lebanese Pound-denominated liquid assets to Lebanese Pound-denominated customers’ deposits was7.1% as at June 30, 2014, 9.0% as at December 31, 2013, 26.5% as at December 31, 2012 and 20.3% as at December31, 2011.

The Bank’s primary liquid assets denominated in foreign currency consist of cash and short-term deposits placed at theCentral Bank and other central banks, excluding certificates of deposits, and placements in prime banks (rated A3 andabove by Moody’s) in OECD countries. Primary liquidity in foreign currencies was LL 16,447 billion (U.S.$10.9billion) as at June 30, 2014, as compared to LL 13,448 billion (U.S.$8.9 billion) as at December 31, 2013, LL 12,662billion (U.S.$8.4 billion) as at December 31, 2012 and LL 11,921 billion (U.S.$7.9 billion) as at December 31, 2011,representing 37.1%, 33.7%, 39.2%, and 40.3%, respectively, of consolidated deposits in foreign currencies.

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As at June 30, 2014, primary liquidity in foreign currency comprised principally placements with central banks in thecountries in which the Bank has operations, which accounted for 24.0% of consolidated deposits in foreign currency (ascompared to 21.8% as at December 31, 2013, 23.0% as at December 31, 2012 and 24.3% as at December 31, 2011).Foreign-currency placements with OECD banks represented 13.1% of consolidated deposits in foreign currency as atJune 30, 2014 (as compared to 11.9% as at December 31, 2013, 16.2% as at December 31, 2012 and 15.9% as atDecember 31, 2011). Since the last quarter of 2010, placements with OECD banks have been redeployed in relativelylarge, geographically-diverse, international banks, which have been relatively insulated from the recent credit crisis.

Sources of Funding

The Bank’s primary source of funding is customers’ deposits, which accounted for 86.5% of the Bank’s total liabilitiesand shareholders’ equity as at June 30, 2014. Other sources of funding include bank deposits (3.4% of total liabilities),other liabilities (1.8% of total liabilities), subordinated debt (1.3% of total liabilities) and shareholders’ equity (7.0% oftotal liabilities).

Customers’ Deposits

The Bank’s consolidated customers’ deposits (including from related parties) increased by 9.2% to LL 51,194 billion(U.S.$34.0 billion) as at June 30, 2014, as compared to LL 46,876 billion (U.S.$31.1 billion) as at December 31, 2013,LL 40,408 billion (U.S.$26.8 billion) as at December 31, 2012 and LL 37,383 billion (U.S.$24.8 billion) as atDecember 31, 2011. The increase in the six months ended June 30, 2014, was primarily due to an increase in time andsavings deposits, which accounted for 81.8% of the total increase, as compared to 89.8% as at December 31, 2013.

The higher levels of customers’ deposits as at June 30, 2014, as compared to previous periods, largely reflects thecontinuing growth in deposits held by Odeabank, as well as increased levels of deposits at Bank Audi Egypt, the Bank’sLebanese entities and at Bank Audi Jordan. In particular, customers’ deposits held at Odeabank increased by 37.0% inthe six months ended June 30, 2014 to LL 11,971 billion (U.S.$7.9 billion) and comprised 23.4% of total customers’deposits, as at June 30, 2014, as compared to 18.6% of total customers’ deposits as at December 31, 2013 and 5.2% oftotal customers’ deposits as at December 31, 2012 (and zero as at December 31, 2011 as this date pre-dates the launchof Odeabank operations).

Customers’ deposits held at Bank Audi Egypt grew by 11.7% to LL 4,839 billion (U.S.$3.2 billion) in the six monthsended June 30, 2014 and comprised 9.5% of total customers’ deposits as at June 30, 2014, as compared to 9.2% of totalcustomers’ deposits as at December 31, 2013, 9.9% of total customers’ deposits as at December 31, 2012 and 10.6% oftotal customers’ deposits as at December 31, 2011.

Customers’ deposits in Lebanon increased by LL 511 billion (U.S.$339 million) in the six months ended June 30, 2014to LL 27,597 billion (U.S.$18.3 billion) as at June 30, 2014, as compared to LL 27,086 billion (U.S.$18.0 billion) as atDecember 31, 2013, LL 27,219 billion (U.S.$18.0 billion) as at December 31, 2012 and LL 25,620 billion (U.S.$17.0billion) as at December 31, 2011. Customers’ deposits denominated in foreign currency in Lebanon increased by LL644 billion (U.S.$427 million) in the six months ended June 30, 2014 to LL 20,914 billion (U.S.$13.9 billion) as at June30, 2014, as compared to LL 20,270 billion (U.S.$13.4 billion) as at December 31, 2013, LL 19,416 billion (U.S.$12.9billion) as at December 31, 2012 and LL 18,108 billion (U.S.$12 billion) as at December 31, 2011. Local currencycustomers’ deposits in Lebanon decreased by LL 133 billion (U.S.$88 million) in the six months ended June 30, 2014 toLL 6,683 billion (U.S.$4.4 billion) as at June 30, 2014, as compared to LL 6,816 billion (U.S.$4.5 billion) as atDecember 31, 2013, LL 7,803 billion (U.S.$5.2 billion) as at December 31, 2012 and LL 7,512 billion (U.S.$5.0billion) as at December 31, 2011. The decrease in average balances of Lebanese pound-denominated deposits over theperiod is in line with Management’s strategy to focus on improving margins, rather than growth, by decreasing theaverage cost of deposits to offset decreasing yields on assets in local currency.

Deposits held in Bank Audi Jordan increased by 21.7% to LL 1,695 billion (U.S.$1,124 million) as at June 30, 2014, ascompared to LL 1,393 billion (U.S.$924 million) as at December 31, 2013, LL 1,228 billion (U.S.$814 million) as atDecember 31, 2012 and LL 1,283 billion (U.S.$851 million) as at December 31, 2011. Customers’ deposits held atother entities in the MENA region remained relatively stable over the period.

Subordinated Debt

In September 2013, the Bank issued its U.S.$350 million subordinated unsecured bonds, which are expected to berepaid on October 16, 2023, unless previously accelerated or redeemed by the Bank. The subordinated notes bearinterest at a rate of 6.75% per annum, payable on a quarterly basis, subject to the availability of free profits inaccordance with the Central Bank Basic Circular № 6830 as applicable at the time of the issuance. See Note 39 to the Annual Financial Statements.

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The issuance of the subordinated notes, which are included as part of the Bank’s Tier two capital, is in line withManagement’s efforts to maintain current and projected capital ratios comfortably within regulatory limits and in lightof high growth in the Bank’s risk-weighted assets. On May 7, 2014, the Bank entered into agreements with the IFC andthe IFC Capitalization Fund (managed by the IFC Asset Management Company) to issue U.S.$150 million insubordinated loans to further strengthen the Bank’s capital base. These subordinated loans were issued on March 27,2014.

Profitability

The following table sets forth an overview of the Bank’s consolidated financial results for the periods indicated:

As at and for the six months endedJune 30,(1)

As at and for the year ended December 31,2014 2013 2013 2012 2011

(LL billions) (LL billions)

Interest income(2).............................. 571 470 1,015 902 829

Non-interest income ............ 366 367 600 758 660

Total income ...................... 936 837 1,615 1,660 1,488

Operating expenses ............. 526 412 905 779 669Loan loss provisions............ 53 70 136 182 138Net other provisions ............ (0) 0 (1) 0 (0)

Tax ..................................... 72 71 115 155 140

Total costs.......................... 650 553 1,155 1,116 947

Net income.......................... 286 283 460 544 542

Net profit fromdiscontinued operations ....... 0 0 (1) 34 9

Net income after tax anddiscontinued operations ....... 286 283 459 578 551

__________Notes:(1) Unaudited.(2) Includes interest revenues from financial assets at fair value through profit and loss.

Net income is comprised of total income offset by total costs. Total operating income includes net interest income andnon-interest income. Total costs include net credit losses, impairment loss on financial statements, income tax expenseand general operating expenses.

The Bank’s total income increased by 11.8% to LL 936 billion (U.S.$621 million) for the six months ended June 30,2014, as compared to LL 837 billion (U.S.$555 million) for the six months ended June 30, 2013, primarily as a result ofa 21.5% increase in interest income. Total income decreased by 2.7% to LL 1,615 billion (U.S.$1.1 billion) for the yearended December 31, 2013 from LL 1,660 billion (U.S.$1.1 billion) for the year ended December 31, 2012, after havingincreased by 11.6% from LL 1,488 billion (U.S.$987 million) for the year ended December 31, 2011.

Total costs increased by 17.5% to LL 650 billion (U.S.$431 million) for the six months ended June 30, 2014 fromLL 553 billion (U.S.$367 million) for the six months ended June 30, 2013, primarily as a result of an increase in generaloperating expenses in Lebanon and Turkey. Total costs increased by 3.5% to LL 1,155 billion (U.S.$766 million) forthe year ended December 31, 2013 from LL 1,116 billion (U.S.$740 million) for the year ended December 31, 2012,after having increased by 17.8% from LL 947 billion (U.S.$628 million) for the year ended December 31, 2011.

The Bank’s net income after tax increased by 1.1% to LL 286 billion (U.S.$190 million) for the six months ended June30, 2014, as compared to LL 283 billion (U.S.$188 million) for the six months ended June 30, 2013, primarily as aresult of sustained levels of profitability across the Bank’s entities, including the recording by Odeabank of net profitsin the second quarter of 2014. There were no discontinued operations in the six months ended June 30, 2014 or the sixmonths ended June 30, 2013. The Bank’s net income after tax and discontinued operations from operating activitiesdecreased by 20.6% to LL 459 billion (U.S.$305 million) in 2013 from LL 578 billion (U.S.$384 million) in 2012, afterhaving increased by 4.9% from LL 551 billion (U.S.$365 million) in 2011. The decrease in 2013 was primarily due tocontinued expenditure relating to the launch of Odeabank’s activities (including the opening of 31 branches andemploying 1,100 over a 14-month period).

After deducting adjustments for discontinued operations, reflecting the sale of a majority of the Bank’s shares in LIAInsurance and the closing of Bank Audi Monaco in 2012, the Bank’s net profits after tax would have been LL 460

45

billion (U.S.$305 million) in 2013, as compared to LL 544 billion (U.S.$361 million) in 2012 and LL 542 billion(U.S.$359 million) in 2011.

Interest income

For the six months ended June 30, 2014, interest income increased by 21.5% to LL 571 billion (U.S.$378 million), ascompared to LL 470 billion (U.S.$312 million) for the six months ended June 30, 2013. This increase in interestincome was principally attributable to a 14.6% increase in average assets and an increase in the Bank’s consolidatedinterest spread by 11 basis points in the six months ended June 30, 2014, as compared to the six months ended June 30,2013.

Interest income increased by 12.5% to LL 1,015 billion (U.S.$673 million) for the year ended December 31, 2013, ascompared to LL 902 billion (U.S.$598 million) for the year ended December 31, 2012, after having increased by 8.8%from LL 829 billion (U.S.$550 million) for the year ended December 31, 2011. Average assets increased by 15.4% toLL 50,711 billion (U.S.$33.6 million) as at December 31, 2013 from LL 43,959 billion (U.S.$29.2 billion) as atDecember 31, 2012, after having decreased by 1.6% from LL 43,284 billion (U.S.$28.7 billion) as at December 31,2011. The Bank’s consolidated interest spread increased from 1.91% in 2011 to 2.05% in 2012 and decreased to 2.00%in 2013. The overall improvement in the spread since 2011 was primarily due to the launch of Odeabank’s operations in2012, as well as Management’s focus on reducing the cost of deposits and improving the spread on assets to offset theimpact of low interest rate environments during the period.

Non-interest income

For the six months ended June 30, 2014, non-interest income remained stable at LL 366 billion (U.S.$243 million), ascompared to LL 367 billion (U.S.$243 million) for the six months ended June 30, 2013. This was mainly attributable toa 31.1% increase in net commissions, which offset a 61.5% decrease in net profits on foreign exchange and a 41.2%decrease in other operating income. For the six months ended June 30, 2014, non-interest income represented 39.1% oftotal operating income and 1.3% of average assets, while net commissions represented 0.6% of average assets.

Non-interest income decreased by 20.8% to LL 600 billion (U.S.$398 million) for the year ended December 31, 2013,from LL 758 billion (U.S.$503 million) for the year ended December 31, 2012, after having increased by 14.8% fromLL 660 billion (U.S.$438 million) for the year ended December 31, 2011. The decrease in non-interest income in 2013was principally due to a LL 82 billion (U.S.$54.3 million) decrease in net gains from financial instruments as a result ofpoor market conditions, in particular, for Lebanese fixed income securities, as well as a LL 71 billion (U.S.$46.9million) decrease in net gains from foreign exchange as a result of the recording of non-recurrent revenues in 2012relating to foreign exchange gains recognised on the Bank’s capital investment on its subsidiaries in Syria, Egypt andTurkey following currency fluctuations in such countries in 2012. This decrease was partially offset by an increase innon-interest income from operations, in particular, from retail and individual banking activities, which increased by LL14 billion (U.S.$9 million) in 2013. The increase in non-interest income in 2012 was driven primarily by an increase incommissions across all lines of business, as well as higher net profits on financial and treasury operations followingactive trading for Lebanese and regional bonds and increased dividends from investments in associates over the period.

In the six months ended June 30, 2014, the breakdown of non-interest income over the different lines of the Bank’sbusiness reflected a relatively balanced operational structure, with commercial and corporate banking activitiescontributing 16.3%, retail banking contributing 23.6%, private banking contributing 13.6%, treasury and capital marketscontributing 40.4% and other activities contributing 6.1% of non-interest income for the period. In 2013, the breakdownof non-interest income over the different lines of the Bank’s business also reflected a relatively balanced operationalstructure, with commercial and corporate banking activities contributing 19.4%, retail banking contributing 23.7%,private banking contributing 13.1%, treasury and capital markets contributing 32.3% and other activities contributing11.5% of non-interest income for the year.

Cost of credit

In the six months ended June 30, 2014, the Bank’s cost of credit (net of loan loss provision charges) decreased by24.3% to LL 53 billion (U.S.$35.0 million), as compared to LL 70 billion (U.S.$46.4 million) for the six months endedJune 30, 2013.

The Bank’s cost of credit (net of loan loss provision charges) decreased to LL 136 billion (U.S.$90.3 million) for theyear ended December 31, 2013 from LL 182 billion (U.S.$121.0 million) for the year ended December 31, 2012, afterhaving increased from LL 138 billion (U.S.$91.3 million) for the year ended December 31, 2011.

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Total operating expenses

The Bank’s total operating expenses increased by 27.5% to LL 526 billion (U.S.$348.6 million) for the six monthsended June 30, 2014, as compared to LL 412 billion (U.S.$273.5 million) for the six months ended June 30, 2013. Thisincrease was primarily attributable to an increase in Odeabank’s operating expenses, reflecting its continuing growth,which accounted for 45.5% of the increase, as a result of the opening of 14 additional branches and the hiring 178additional staff in the six months ended June 30, 2014. Non-recurrent expenses and adjustments recorded by the Bank’sLebanese entities also contributed to this increase.

The Bank’s total operating expenses increased by LL 126 billion (U.S.$83.8 million) for the year ended December 31,2013 from LL 779 billion (U.S.$516.5 million) for the year ended December 31, 2012, reflecting a 16.2% year-on-yearincrease, primarily as a result of expenditure at Odeabank in connection with the opening of 25 branches, the hiring of703 new employees and investments in credit cards and IT systems in 2013, which was partially offset by decreases inoperating expenses from the Bank’s Lebanese entities as a result of non-recurrent expenses recorded in 2012.

Total operating expenses for the year ended December 31, 2012, increased by LL 110 billion (U.S.$72.5 million) for theyear ended December 31, 2012 from LL 669 billion (U.S.$444 million) for the year ended December 31, 2011,reflecting a 16.3% year-on-year increase, primarily as a result of costs relating to the setup and launch of Odeabank in2012, and increases in staff expenses both in Turkey and across the Group’s operations.

The Bank’s cost-to-income ratio increased to 56.1% for the six months ended June 30, 2014, as compared to 49.3% forthe six months ended June 30, 2013, primarily to due to costs relating to the early operations of Odeabank. The Bank’scost-to-income ratio increased from 44.7% in 2011 to 46.0% in 2012 and 56.1% in 2013 principally due to the costs ofthe launch of Odeabank. The ratio of costs to average assets increased from 1.55% in 2011 to 1.77% in 2012, 1.78% in2013 and 1.88% in the six months ended June 30, 2014.

Income tax

For the six months ended June 30, 2014, income taxes increased by 2.3% to LL 72 billion (U.S.$48.1 million), ascompared to LL 71 billion (U.S.$47.0 million) for the six months ended June 30, 2013.

Income taxes decreased by 25.8% to LL 115 billion in 2013 from LL 155 billion in 2012, after having increased by10.7% from LL 140 billion for the year ended December 31, 2011. The decrease in 2013 was principally due to theyear-on-year decrease in the Bank’s profit before tax, where as the increase in 2012 was principally due to the year-on-year increase in the Bank’s profit before tax.

Net profits from discontinued operations

There were no discontinued operations in the six months ended June 30, 2014 or the six months ended June 30, 2013.

In 2013, the Bank reported net losses of LL 600 million from discontinued operations, as compared to net profits fromdiscontinued operations of LL 33,814 in 2012. Net profits in 2012 reflected U.S.$42.4 million of net profits arising fromthe sale of 81% of the Bank’s stake in LIA Insurance Company in June 2012 as a result of Management’s decision toreduce the Bank’s exposure to the insurance industry due to regulatory restrictions on such operations, which waspartially offset by a loss of U.S.$19.9 million from the liquidation of Bank Audi Monaco. Bank Audi Monaco also hadoperating losses of U.S.$5.6 million for the first nine months of 2012 until the date of its liquidation.

At the date of its sale, LIA Insurance held assets of U.S.$298 million (as compared to U.S.$289 million as at December31, 2011). These assets were deconsolidated from the Group’s balance sheet effective June 30, 2012. As at the date ofits liquidation, Bank Audi Monaco held assets of U.S.$148 million (as compared to U.S.$202 million as at December31, 2011). These assets were deconsolidated from the Group’s balance sheet effective September 30, 2012.

There were no significant divestitures in 2013 or in the six months ended June 30, 2014.

Asset Quality

In light of volatile regional conditions, the Bank continued to adopt conservative risk management policies with a viewto maintaining good asset quality. See “Risk Management”.

Gross doubtful loans decreased to LL 627 billion (U.S.$416 million) as at June 30, 2014 from LL 637 billion (U.S.$422million) as at December 31, 2013, after having increased from LL 437 billion (U.S.$290 million) as at December 31,2012 and from LL 389 billion (U.S.$258 million) as at December 31, 2011.

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The increase in gross doubtful loans in 2013 was primarily due to Management’s decision in December 2013 todowngrade a number of corporate loans in Lebanon, as well as increases in gross doubtful loans in Bank Audi Egyptand Bank Audi Jordan. The Bank made specific provisions in respect of such loans (including interest in suspense) ofLL 409 billion (U.S.$271 million) in each of the first half of 2014 and in the year ended December 31, 2013, LL 333billion (U.S.$221 million) in 2012 and LL 300 billion (U.S.$199 million) in 2011. As a result, net doubtful loans wereLL 218 billion (U.S.$145 million) as at June 30, 2014, LL 228 billion (U.S.$151 million) as at December 31, 2013, LL104 billion (U.S.$69 million) as at December 31, 2012 and LL 89 billion (U.S.$59 million) as at December 31, 2011.

The Bank made further collective provisions of LL 257 billion (U.S.$170 million) in the six months ended June 30,2014 (corresponding to 1.1% of the consolidated net loan portfolio), LL 198 billion (U.S.$131 million) in 2013(corresponding to 0.9% of the consolidated net loan portfolio), LL 167 billion (U.S.$111 million) in 2012(corresponding to 1.1% of the consolidated net loan portfolio) and LL 152 billion (U.S.$101 million) in 2011(corresponding to 1.2% of the consolidated net loan portfolio).

Gross doubtful loans represented 2.5% of gross loans as at June 30, 2014, 2.8% of gross loans as at December 31, 2013,2.7% as at December 31, 2012 and 2.9% as at December 31, 2011. Net doubtful loans represented 0.9% of gross loansas at June 30, 2014, 1.0% of gross loans as at December 31, 2013 and 0.6% as at December 31, 2012 and 0.7% as atDecember 31, 2011. Gross substandard loans decreased to LL 12 billion (U.S.$8 million) as at each of June 30, 2014and December 31, 2013 from LL 18 billion (U.S.$12 million) as at December 31, 2012 and LL 133 billion (U.S.$88million) as at December 31, 2011. The significant decrease in 2012 resulted from a transfer of substandard loans in2012 to doubtful loans. Net substandard loans represented 0.04% of gross loans as at each of June 30, 2014 andDecember 31, 2013, 0.1% as at December 31, 2012 and 0.9% as at December 31, 2011.

Based on published data, Management believes that these ratios compare favourably to the Bank’s regional peers and itspeers in other emerging markets.

Capital Adequacy

The table below shows the calculation of the Bank’s capital adequacy ratios as at the dates indicated:

As at June 30, 2014(1)As at December 31,

2013(1) 2012(1)(2) 2011(1)(2)

(LL billions, except as indicated)

Risk weighted assets ................................................................ 35,186 32,312 24,556 23,436Of which credit risk ................................................................ 32,212 29,243 21,651 20,838Of which market risk ................................................................ 505 599 654 623Of which operation risk ............................................................. 2,469 2,469 2,251 1,975

Core tier I capital................................................................ 2,685 2,525 2,687 2,687

Tier I capital.............................................................................. 3,446 3,279 3,290 2,855

Total capital................................................................ 4,303 3,905 3,356 2,920

Risk-asset ratio(3) ................................................................Core tier I ratio................................................................ 7.63 7.82 10.94 11.46

Tier I ratio................................................................................. 9.79 10.15 13.40 12.18

Total capital ratio ................................................................ 12.23 12.09 13.67 12.46

__________Notes:(1) Unaudited.(2) Restated to reflect the requirements of the Banking Control Commission’s Intermediary Circular № 358. (3) Including net income, but excluding dividends (dividends for 2014 are estimated).

As at June 30, 2014, the Bank’s shareholders’ equity was LL 4,134 billion (U.S.$2.7 billion), the highest in the Lebanesebanking sector, according to figures published by Bankdata, as compared to LL 4,065 billion (U.S.$2.7 billion) as atDecember 31, 2013, LL 4,023 billion (U.S.$2.7 billion) as at December 31, 2012 and LL 3,553 billion (U.S.$2.4billion) as at December 31, 2011. As at June 30, 2014, shareholders’ equity represented 7.0% of total assets, ascompared to 7.4% as at December 31, 2013, 8.5% as at December 31, 2012 and 8.2% as at December 31, 2011. TheBank’s capital adequacy ratio (in line with the requirements under the Basel III Accord) was 12.23% as at June 30,2014, as compared to 12.09% as at December 31, 2013, 13.67% as at December 31, 2012 and 12.46% as at December31, 2011, in each case, above the regulatory minimum ratio imposed by the Central Bank of 11.5% as at June 30, 2014,10.5% as at December 31, 2013, 10.0% as at December 31, 2012 and 8.0%, as at December 31, 2011.

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The Bank’s Common Tier I ratio, being the ratio of Tier I Capital (less regulatory deductions and preferred capital) torisk weighted assets, was 7.63% as at June 30, 2014 (as compared to 7.82% as at December 31, 2013), while additionaltier I, being the ratio of preferred capital to risk weighted assets) was 9.77% as at June 30, 2014 (as compared to10.15% as at December 31, 2013).

Components of ROAA and ROAE

The Bank’s return on average assets (“ROAA”) for the year ended December 31, 2013 decreased to 0.91%, ascompared to 1.32% for the year ended December 31, 2012, primarily reflecting the impact of the launch of Odeabank inthe fourth quarter of 2012. The Bank’s ROAA for the year ended December 31, 2011 was 1.27%. The Bank’s return onaverage equity (“ROAE”), decreased to 11.43% for the year ended December 31, 2013, as compared to 15.18% for theyear ended December 31, 2012 and 15.29% for the year ended December 31, 2011, as the Bank’s average equityincreased at a higher rate than net profit. The Bank’s return on average common equity decreased to 12.59% as atDecember 31, 2013, as compared to 16.51% as at December 31, 2012 and 16.73% as at December 31, 2011. See “—Consolidated Financial Condition and Results of Operation—Profitability”.

For the six months ended June 30, 2014, the Bank’s ROAA was 1.02%, its ROAE was 14.01% and its return on averagecommon equity was 15.86%, as compared to 1.16%, 14.51% and 15.89%, respectively, for the six months ended June30, 2013.

Earnings per Common Share

As a result of the foregoing, basic earnings per Common Share decreased by 21.5% to LL 1,199.28 (U.S.$0.80) for theyear ended December 31, 2013, as compared to LL 1,527.18 (U.S.$1.01) for the year ended December 31, 2012, afterhaving increased by 1.2% from LL 1,509.69 (U.S.$1.00) for the year ended December 31, 2011. The decrease in basicearnings per Common Share in 2013 was primarily attributable to the impact of the launch of Odeabank’s operations inthe fourth quarter of 2012. Based on net profits before discontinued operations, the Bank’s basic common earnings pershare were LL 1,201.00 (U.S.$0.80) for the year ended December 31, 2013, as compared to LL 1,431.99 (U.S.$0.95)for the year ended December 31, 2012 and LL 1,484.06 (U.S.$0.98) for the year ended December 31, 2011.

Basic earnings per Common Share were LL 1,487.70 (U.S.$0.99) (on an annualised basis) for the six months endedJune 30, 2014, as compared to LL 1,475.00 (U.S.$0.98) (on an annualised basis) for the six months ended June 30,2013.

Net asset value per Common Share decreased to LL 9,437.42 (U.S.$6.26) as at each of June 30, 2014 and December 31,2013 from LL 9,453.75 (U.S.$6.27) as at December 31, 2012, after having increased from LL 8,826.10 (U.S.$5.85) asat December 31, 2011.

As at June 30, 2014, the Common Shares were trading at a market price of LL 9,949.50 (U.S.$6.60) per CommonShare, reflecting a price-to-earnings ratio of 6.69 (as compared to 8.16 as at December 31, 2013, 6.21 as at December31, 2012 and 5.63 as at December 31, 2011), and a price-to-book ratio of 1.05 as at June 30, 2014 and 1.04 as atDecember 31, 2013 (as compared to 1.00 as at December 31, 2012 and 0.96 as at December 31, 2011).

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Shareholders

The following table sets out the composition of the holders of the Common Shares as at June 30, 2014:

Shareholders/Groups of ShareholdersCountry (ultimate economic

ownership)Percentage

Ownership(1)

(%)

Audi Family(2) ................................................................................ Lebanon 7.0Al-Homaizi Family(2) ...................................................................... Kuwait 6.1Saradar Family................................................................................ Lebanon 5.4Sheikh Dhiab Bin Zayed Al-Nehayan............................................... United Arab Emirates 5.1FRH Investment Holding SAL......................................................... Lebanon 4.9Al-Sabbah Family(2) ........................................................................ Kuwait 4.8Investment Finance Opportunities Ltd.............................................. Lebanon 4.3Middle East Opportunities For Structured Finance Ltd...................... Lebanon 4.2Investment and Business Holding S.A.L........................................... Lebanon 3.9Al-Hobayeb Family(2) ...................................................................... Kingdom of Saudi Arabia 2.6Said El-Khoury Family.................................................................... Lebanon 2.4Executive and Employees(3) ............................................................ Lebanon 4.7Others............................................................................................. — 15.3Deutsche Bank Trust Company Americas(4)...................................... — 29.3

Total Shareholding(5) ..................................................................... 100.0__________Notes:(1) Percentage ownership figures represent Common Shares owned by the named Shareholders and are expressed as a percentage of the total

number of Common Shares issued and outstanding.As at June 30, 2014, the Bank (and its affiliates) is the custodian of shares and/or GDRs representing 78.3% of the Bank’s Common Shares.

(2) The Audi Family, Al Homaizi Family, Al Sabbah Family, and Al-Hobayeb Family include the following members of the Board: (i) RaymondWadih Audi and Marc Jean Audi (ii) Suad Hamad Al Saleh Al Homaizi (iii), Mariam Nasser Sabbah Al Nasser Al Sabbah, and (iv) Abdallah AlHobayeb, respectively.

(3) Excluding members of the Audi family, accounted for in a separate row above.(4) As at June 30, 2014, Deutsche Bank Trust Company Americas, in its capacity as depositary under the Bank’s GDR Program, owned

102,493,911 Common Shares represented by GDRs.(5) As at June 30, 2014, the total number of common shares was 349,749,204.

IFO and MOSF are special purpose vehicles, which owned 14,883,530 Common Shares and 14,835,830 CommonShares in Bank Audi, respectively, representing 4.3% and 4.2% of the Bank’s Common Shares, respectively, as at 30June 2014. The Bank has the right to substitute the Common Shares owned by IFO and MOSF for cash and,accordingly, to sell the Common Shares at any time. As at the date of this Offering Circular, there has been anagreement to sell or substitute certain Common Shares held by IFO and MOSF, which will reduce the Common Sharesheld by IFO and MOSF to 4,766,598 and 4,736,582, respectively, each representing 1.4% of the Bank’s CommonShares. Each of IFO and MOSF have issued notes, which are secured by the Common Shares and the dividend andother distributions payable in connection therewith. Payments in respect of the Notes are made from dividends andother proceeds of the Common Shares. In the event that the proceeds of the underlying Common Shares and collateralare insufficient to repay the Notes in full, the Bank has a commitment to cover any shortfall.

See Note 44.0 to the Bank’s audited consolidated financial statements as at, and for the year ended, December 31, 2013.

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OVERVIEW OF BANK AUDI

Introduction

Founded in 1830, the Bank was incorporated in its present form in 1962 as a private joint stock company with limitedliability (société anonyme libanaise) with a duration of 99 years. The Bank is registered on the Beirut CommercialRegistry under number 11347 and on the Lebanese List of Banks under number 56. In January 2014, the name of theBank was changed from Bank Audi S.A.L. – Audi Saradar Group to Bank Audi S.A.L.

The initial shareholders of the Bank were members of the Audi family, together with certain Kuwaiti investors. Since1983, the shareholder base has expanded and currently is comprised of more than 1,500 holders of Common Shares andGlobal Depositary Receipts (representing Common Shares). The Global Depositary Receipts evidencing the CommonShares are listed on both the Beirut Stock Exchange and the London Stock Exchange and the Bank’s Common Sharesare listed on the Beirut Stock Exchange.

The Bank’s head office and registered address is Bank Audi Plaza, Omar Daouk Street, Bab Idriss, Beirut 2021 8102,P.O. Box: 11-2560, Beirut, Lebanon.

The Bank is a universal bank with a presence in 13 countries. It operates principally in Lebanon, the MENA region and,since November 1, 2012, Turkey, offering a full range of products and services that principally cover commercial andcorporate banking, retail and individual banking and private banking, as well as ancillary activities such as investmentbanking and on-line brokerage. As at and for the six months ended June 30, 2014, according to figures published byBankdata based on unaudited financial statements of banks operating in Lebanon provided to Bankdata by such banks,the Bank ranked first among Lebanese banks in terms of total assets (LL 59,188 billion), shareholders’ equity (LL 4,127billion), customers’ deposits (LL 51,194 billion) and loans and advances (LL 24,172 billion). In addition to its historicpresence in Lebanon, Switzerland and France, the Group currently operates in (among other places) Jordan, Egypt,Saudi Arabia, Qatar, Abu Dhabi (through a representative office), Monaco and, since November 1, 2012, Turkey.

As at June 30, 2014, the Bank had one of the largest branch networks in Lebanon, with 80 branches (75 operating)covering the Greater Beirut area and other strategic regions in Lebanon, as well as, through its foreign subsidiaries, anetwork of 76 branches in the MENA region (outside of Lebanon), including 13 branches in Jordan and 45 branches inTurkey. The Bank has two principal subsidiaries in Lebanon, two principal subsidiaries in Europe, as well as an assetmanagement company in Monaco, six principal subsidiaries in the MENA region outside Lebanon and a principalsubsidiary in Turkey.

Since 2005, the Bank has undertaken significant regional expansion and has the fourth largest coverage among the top15 Arab banking institutions in the MENA region with operations in 13 countries, excluding Lebanon, through anetwork of branches and subsidiaries developed mainly through green-field operations. As a result of this regionalexpansion, an increasing percentage of the Bank’s assets are contributed by its operations outside Lebanon.Management intends to continue to seek growth opportunities both in Lebanon and abroad over the medium term. In2013, the Bank was granted a licence by the Central Bank of Iraq to open seven branches and launch banking operationsin Baghdad, Irbil, Basra, Najaf, Suleymanieh, Salaheddine and Mosul. Subject to political and economic conditions, theBank currently intends to launch banking operations in Iraq in the coming years. Despite the short-term uncertaintiesrelated to current political and security developments, Management still believes that banking and economic growthpotential in the South East Mediterranean region, Egypt and Turkey present the Bank with potential opportunities.

The long-term foreign-currency debt of the Bank is currently rated B- with a stable outlook by Standard & Poor’s CreditMarket Services Europe Limited, B1 with a negative outlook by Moody’s Investor Services Limited and B with a stableoutlook by Fitch Ratings Limited. Each of these international credit rating agencies has indicated that the outlookassigned by it to the Bank’s ratings remains constrained principally by the sovereign risk of Lebanon. On a domesticlevel, the Bank was assigned Aa1.lb, the highest national rating awarded by Moody’s in Lebanon under Moody’sNational Scale Ratings to reflect the relative ranking of creditworthiness within a country (but not globally). A rating isnot a recommendation to buy, sell or hold securities and may be subject to revision, suspension, reduction or withdrawalat any time by the assigning rating organisation.

As at June 30, 2014, the Bank and its consolidated subsidiaries had 6,161 employees, including 2,920 persons employedin Lebanon and 1,279 persons employed at Odeabank in Turkey.

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Principal Business Activities

Commercial & Corporate Banking

The Bank has a strong commercial and corporate banking franchise with a diversified loan portfolio covering corporateclients in Lebanon, the MENA region, Africa, Turkey and Europe from its headquarters in Lebanon and its subsidiariesin Turkey, Egypt, Jordan, Saudi Arabia, Qatar, Sudan, France, Switzerland and Syria. The Bank offers a wide range oftraditional banking products and services to SMEs, as well as to larger corporate clients. These products and servicesgenerate both interest and fee-based income, with a focus on granting working capital and other loan products,providing services in areas such as collection, trade finance, performance bonds, guarantees, letters of credit and cashmanagement, advising on international trade, providing correspondent banking and financial consulting services andpreparing feasibility studies across a broad spectrum of industry sectors. As at June 30, 2014, the Bank had a corporateloan portfolio of LL 19,589 billion (U.S.$13.0 billion), which was the largest corporate loan portfolio among Lebanesebanks.

Retail Banking

The Bank offers a full range of retail products and services, including conventional checking and savings accounts,fixed-term deposits, loans and residential mortgages, credit cards, bancassurance products and internet banking, as wellas a host of innovative retail products and services developed in association with leading partners. As at June 30, 2014,the Bank offered 145 retail products and services to more than 600,000 retail accounts inside and outside of Lebanon.Retail banking activity is supported by the Group’s 175-branch network (comprised of an 80-branch network inLebanon (including 75 operating branches and comprising one of the largest in Lebanon), a 76-branch networkspanning across the MENA region and a 45 branch-network in Turkey. The Bank estimates that it provides retailproducts and services to 28% of Lebanese households as at June 30, 2014. The Bank’s dynamic customer-focusapproach, which aims at enhancing the customer penetration rate with existing products in addition to enlarging the coreproduct offering with the launch of new products, translated into improved results from the Bank’s cross-sellingactivities to a total of 4.6 products per customer as at each of June 30, 2014 and December 31, 2013, as compared to 4.5products per customer as at December 31, 2012 and 4.2 products per customer as at December 31, 2011. Consolidatedloans in the retail banking segment increased by 26.9% in the six months ended June 30, 2014 and by 13.6% in the yearended December 31, 2013, principally due to the commencement of operations at Odeabank and the expansion of theBank’s Lebanese retail mortgage loan portfolio.

Private Banking

Bank Audi’s private banking arm provides services to high net worth individuals through its network in Europe(Geneva and Monaco) and the Middle East (Beirut, Riyadh, Abu Dhabi, Amman and Doha). Audi Private Bank, BankAudi Qatar, Audi Capital and Banque Audi Suisse, as well as, since 1 March 2013, Audi Capital Gestion (whoseactivities were formerly conducted by Bank Audi Monaco), collectively comprise the Bank’s private banking arm. InLebanon, the Bank provides private banking services, comprised primarily of wealth management products andservices, through Audi Private Bank, the only banking subsidiary in Lebanon entirely dedicated to private banking.Furthermore, since 1976, the Bank been developing an important private banking franchise in Switzerland throughBanque Audi Suisse, the second largest Arab private bank in Switzerland. In 2011, the Bank expanded its offering ofprivate wealth management services to Monaco. In parallel, the Bank has wide coverage of the private banking marketin the broader MENA region through its subsidiaries in Saudi Arabia and Qatar, and its representative office in theUnited Arab Emirates, offering its clients trading capabilities, advisory services and traditional discretionary portfolio,as well as asset management services.

Following a strategic review of the Group, management has identified the private banking and wealth managementbusiness as a key growth driver, leveraging its regional footprint, its strong brand and global presence. The group is inthe process of consolidating its private banking activities under Banque Audi Suisse. Under this new structure, the Bankintends to continue to offer the full range of private banking and wealth management services, including“discretionary”, “advisory” and “execution only” services, to its clients in accordance with best practices and global andregional standards. In 2013, this plan was accelerated with efforts made to converge the entities as a unified group. In2013, the private banking arm expanded its footprint covering Turkey, Africa, Latin America and the Middle East andimproved its customer service offering, providing trading capabilities until the close of business in New York andoffering MENA portfolio management capabilities. A revised business model was also introduced in 2013, whichallows customers to use a dedicated relationship manager to bank at the entity within the group that best suits its needs.In the six months ended June 30, 2014, the private banking arm increased its revenue by 19.9%, as compared to the sixmonths ended June 30, 2013, having increased its revenue by 0.3% in 2013, as compared to 2012.

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As at June 30, 2014, on a consolidated basis, the Bank had assets under management, custody accounts and fiduciarydeposits aggregating LL 15,481 billion (U.S.$10.3 billion), which Management believes compares competitively withportfolios managed by other leading banks in the GCC.

Investment Banking and Capital Markets

The Bank offers capital markets and investment banking products and services, including securities trading activities.The Bank is leveraging its regional presence to further develop its securities services and brokerage platform,consolidating the business towards increased intra-group synergies.

Since 1996, the Bank has developed a substantial capital markets franchise. In Lebanon, the Bank is a market maker onthe Beirut Stock Exchange and, as at December 31, 2013, had a 38.8% market share of Beirut Stock Exchange equitiestrading volumes by value. The Bank also has a significant share of the Government Eurobond and treasury notesmarkets, with an annual trading volume exceeding U.S.$7.3 billion in 2013. The Bank is also active in the equitiesmarkets, with a particular focus on Saudi Arabia and Egypt, as well as in fixed income markets. In Lebanon and theMENA region, the Bank’s activities are supported by the Bank’s sovereign, fixed income and corporate researchcoverage businesses.

Through the Bank’s institutional fixed income desk, which was established in 2012, the Bank continues to develop andmaintain new and existing coverage of Lebanese securities for international non-bank financial institutions in order tocater to international appetite for higher yielding instruments.

The Bank’s asset management, corporate finance and advisory businesses are also particularly active in the SaudiArabian market, where they are supported by the Bank’s equity research coverage.

For the six months ended June 30, 2014, on a consolidated basis, the Bank’s investment banking and capital marketsactivities generated total income of LL 457 billion (U.S.$303 million), as compared to LL 487 billion (U.S.$323million) for the six months ended June 30, 2013. In 2013, on a consolidated basis, the Bank’s investment banking andcapital markets activities generated total income of LL 850 billion (U.S.$564 million), as compared to LL 968 billion(U.S.$642 million) in 2012.

Competitive Strengths

As a result of the Bank’s restructuring and expansion program, which has been on-going since 2005, the Bank hassignificantly reinforced its presence in Lebanon, throughout the MENA region and in Turkey, as well as diversified therange of its products and services to cover all the activities traditionally carried out by a universal bank. In particular,the Bank believes that it benefits from:

a strong franchise in commercial banking activities, with a diversified loan portfolio, including borrowerscomprising leading enterprises in Lebanon, as well as a number of leading corporates from the MENA region andTurkey;

a strong franchise in retail banking, with a full range of retail products and services offered in the countries inwhich the Bank has retail banking operations;

a leading position in private banking, servicing the needs of high net-worth individuals through its subsidiaries inSwitzerland, Monaco, Lebanon, Qatar and Saudi Arabia and its representative office in the United Arab Emirates;and

a leading position in domestic and regional capital markets activities, with strong trading operations in Lebanonand Egypt.

Strategy

Within the context of the changing operating conditions in the Bank’s markets, particularly in the MENA region, thefundamentals of the Bank’s diversification and expansion strategy launched more than a decade ago have not changed.

Since 2005, the Bank has pursued a regional expansion strategy, capitalising on the region’s economic growth andwealth potential. As a result, the Group has enjoyed a wide regional presence in Lebanon and in Egypt, Jordan, Qatar,Saudi Arabia and Sudan, as well as benefiting from operations in France, Switzerland and Monaco. In addition, theBank launched operations in Turkey on 1 November 2012 through the establishment of Odeabank.

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Overall, the Bank remains focused on the key objective of further developing the Bank as a fully-integrated, pan-regional group, which will continue to rank among the largest regional players. The Bank’s strategy is focused aroundits main business lines of commercial and private banking. Management’s current short-term development strategy isbased around the following strategic aims:

Lebanon — The Bank is the largest universal bank headquartered in Lebanon, with a presence in 13 differentcountries. The Bank’s strategy aims to consolidate and reinforce its position in Lebanon, in particular,through the strengthening of existing corporate and SME client relationships, as well as through takingadvantage of growth opportunities.

Egypt — In Egypt, Management plans to reinforce its market position, in particular, through non-organicgrowth opportunities available in the Egyptian market. In late 2013, the Bank launched a growth plan for itsEgyptian operations for the period from 2014 to 2016, which aims to increase the Bank’s franchise in Egypt,which is, in turn, expected to have a positive impact on the Bank’s net income growth. This growth plan waslaunched as a result of Bank Audi Egypt’s financial resilience since 2010, including a 26% increase in netprofits since 2010 despite challenging market conditions,.

Turkey — Odeabank’s rapid growth since the launch of operations in 2012, as well as the expected growth oftrade, financial and human flows between Turkey and Arab countries where the Bank has existing operationshave rendered Turkey as a key growth market for the Bank. Management expects significant growth in linewith the trend of the overall growth of the Turkish banking sector, which has grown on average by 11% perannum (in terms of assets) over the last four and a half years.

Private Banking — Management intends to leverage co-operation and synergies across its private bankingentities in Europe, the near-East and the GCC, while also actively working to restructure the private bankingentities to form a unified group able to continue such leverage, pool resources and to act as a foundation forthe sustained development of the Bank’s private banking arm for the medium-term.

Sub-Saharan Africa — The Bank is considering establishing a presence in Sub-Saharan Africa, capitalisingon (i) an existing franchise turnover in excess of U.S.$1.6 billion in 2013 from a total of 19 countries in theregion (including Nigeria, Cote d’Ivoire, Senegal, Guinea and Gabon); (ii) the presence of a large Lebanese,Turkish and broader MENA region diaspora in those countries and increasing trade between the region andthe countries where the Bank currently operates; (iii) the economic growth in Africa over the last ten years,as well as Africa’s growing importance in the global economy; and (iv) the expected increase in tradebetween Turkey and Africa. As the Turkish market becomes more interested in Africa, in particular,establishing a presence in Sub-Saharan Africa would offer Odeabank an advantage over its competitors.

Management believes that completion of above strategic aims by 2016 will improve the Bank’s competitive regionalmarket position.

In addition, in the longer-term, Management is considering further regional expansion, including (i) establishing apresence in London, in particular, to service the Bank’s private banking clients; and (ii) establishing a platform in LatinAmerica, in order to capitalise on and provide private banking services to the large Lebanese diaspora in the region; aLatin American platform is expected to build upon the business currently generated by the Bank’s Latin Americandesks at the Bank and at Banque Audi Suisse, which generated a turnover of U.S.$2.1 billion from Latin Americanclients in 2013.

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Subsidiaries

The following table sets forth certain information about the Bank’s principal subsidiaries:

Activity CountryEstablishment

DatePercentageOwnership

SupervisoryAuthority(1)

(as of December 31,2013)

LebanonAudi Private BankS.A.L(2). ................................

Private banking Lebanon 1948 100.00%(3) Central Bank

Audi Investment BankS.A.L(4). ................................

Investmentbanking

Lebanon 1974 100.00%(3) Central Bank

EuropeBank Audi (France)S.A.(5) ................................

Commercialbanking

France 1979 100.00%(3) Central Bank of France

Banque Audi (Suisse)S.A. ................................

Private banking Switzerland 1976 100.00% Swiss Federal BankingCommission

Audi Capital GestionS.A.M. ................................

Private Banking Monaco 2012 98.80%(6) Central Bank of France

TurkeyOdeabank A.S. ........................Commercial and

retail BankingTurkey 2012 100.00% Turkish Bank

Regulation andSupervisory Authority

Middle EastBank Audi Syria S.A. ..............Commercial

bankingSyria 2005 47.00%(7) Central Bank of Syria

Bank Audi S.A.E.....................Commercialbanking

Egypt 2006 100.00% Central Bank of Egypt

National Bank of Sudan...........Islamic banking Sudan 2006 76.56% Central Bank of SudanAudi Capital (KSA).................Investment

companySaudi Arabia 2006 99.99% Saudi Capital Market

AuthorityBank Audi LLC.......................Corporate and

private bankingQatar 2007 100.00% Qatar Financial Centre

____________Notes:(1) The Central Bank of Lebanon is responsible for the Bank’s supervision on a consolidated basis.(2) Previously named Audi Saradar Private Bank S.A.L.(3) Including nominal shares held by certain designees of the Bank in accordance with local law requirements.(4) Previously named Audi Saradar Investment Bank S.A.L.(5) Previously named Bank Audi Saradar (France) S.A.(6) The shares in Audi Capital Gestion S.A.M. are directly held by Banque Audi Suisse S.A.(7) Although the Bank owns 47.00% of Bank Audi Syria, the Bank consolidates Bank Audi Syria because it has signed a technical assistance

agreement.

Audi Investment Bank

The Bank owns 99.9% of the issued share capital of Audi Investment Bank. Audi Investment Bank was established in1974 under the name of “Investment and Finance Bank S.A.L.” (INFI) as a “specialised bank” under Decree Law№ 22/67 (as amended by Decree Law № 50 of July 15, 1983 and by Decree Law № 85 of September 16, 1983); it changed its name to “Audi Saradar Investment Bank S.A.L.” in October 2004 following the merger of Banque AudiS.A.L. with Banque Saradar S.A.L. as a “specialised bank”, Audi Investment Bank is subject to certain restrictions onits funding and lending activities, but benefits from exemptions from reserve requirements in Lebanese Poundsotherwise applicable to commercial banks and from other regulatory advantages. Since March 31, 1997, specialisedbanks, including Audi Investment Bank, have been exempted from Central Bank reserve requirements, provided thatthey maintain a ratio of at least 1:1 between loans to the private sector and loans to the public sector (includinginvestments in Lebanese treasury bills). Specialised banks can invest up to 50.0% of their aggregate deposits with amaturity of at least five years in equity and other similar securities without being subject to limits on such investmentsapplicable to commercial banks. As a “specialised bank”, Audi Investment Bank is not permitted to take short-termdeposits or make short-term loans, all deposits being required to have a minimum maturity of six months and all loansbeing required to have a minimum tenor of two years. In January 2014, the name of Audi Saradar Investment BankS.A.L. was changed to Audi Investment Bank S.A.L.

Audi Investment Bank currently serves a dual purpose within the Group: it has a medium- and long-term lendingportfolio and it serves as the main entity through which traditional investment banking activities are undertaken.

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Audi Investment Bank is an active member of the BSE, accounting for trades in equity representing approximately38.8% by value of all trades on the BSE in 2013 and 34.3% in 2012. In addition, because of regulatory advantages,which Audi Investment Bank enjoys as a “specialized bank”, Audi Investment Bank acts as the booking entity for someof the Bank’s long-term credit facilities.

Audi Investment Bank had shareholders’ equity of LL 314 billion (U.S.$208 million) as at June 30, 2014, as comparedto LL 295 billion (U.S.$196 million) as at December 31, 2013. As at June 30, 2014, Audi Investment Bank had totalassets of LL 677 billion (U.S.$449 million) and total liabilities of LL 363 billion (U.S.$241 million), as compared to LL681 billion (U.S.$452 million) and LL 386 billion (U.S.$256 million), respectively, as at December 31, 2013. AudiInvestment Bank’s total liabilities consisted principally of deposits from customers of LL 360 billion (U.S.$239 million)as at June 30, 2014, as compared to LL 383 billion (U.S.$254 million) as at December 31, 2013. Audi Investment Bankhad off-balance sheet assets under management of LL 4,251 billion (U.S.$2.8 billion) as at June 30, 2014, as comparedto LL 4,085 billion (U.S.$2.7 billion) as at December 31, 2013.

Audi Investment Bank’s net income after tax was LL 9 billion (U.S.$5.9 million) for the six months ended June 30,2014, as compared to LL 7 billion (U.S.$4.6 million) for the six months ended June 30, 2013. Audi Investment Bank’snet income after tax was LL 9.8 billion (U.S.$6.5 million) for the year ended December 31, 2013, as compared toLL 1.7 billion (U.S.$1.1 million) for the year ended December 31, 2012.

Audi Investment Bank employed 15 persons as at June 30, 2014.

The registered office of Audi Investment Bank is at Bank Audi Plaza, Omar Daouk Street, Bab Idriss, P.O. Box: 16-5110, Beirut, Lebanon.

Audi Private Bank

The Bank owns 99.9% of the issued share capital of Audi Private Bank. Audi Private Bank was established in 1956under the name of “Banque Saradar SAL”. Audi Private Bank changed its name to “Audi Saradar Private Bank SAL” inOctober 2004. In January 2014, Audi Private Bank changed its name to Audi Private Bank S.A.L. Audi Private Bankacts as the local private banking arm of the Group.

Audi Private Bank offers its customers tailor-made products to complement their portfolios and investment strategies,as well as access to a number of leading world-class multi-manager funds and hedge funds, structured products,fiduciary services and local and international investments that provide attractive wealth preservation, asset managementand asset diversification opportunities. Audi Private Bank also provides its customers with real estate investmentopportunities in Lebanon and Europe

As at June 30, 2014, Audi Private Bank had shareholders’ equity of LL 281 billion (U.S.$187 million) and customers’deposits of LL1,936 billion (U.S.$1.3 billion), as compared to LL 267 billion (U.S.$177 million) and to LL 1,903billion (U.S.$1.3 billion), respectively, as at December 31, 2013. As at June 30, 2014, Audi Private Bank had totalassets of LL 2,300 billion (U.S.$1.5 billion) and total liabilities of LL 2,018 billion (U.S.$1.3 billion), as compared toLL 2,201 billion (U.S.$1.5 billion) and LL 1,934 billion (U.S.$1.3 billion) respectively, as at December 31, 2013. AudiPrivate Bank had off-balance sheet assets under management of LL 2,285 billion (U.S.$1.5 billion) as at June 30, 2014,as compared to LL 2,055 billion (U.S.$1.4 billion) as at December 31, 2013.

Audi Private Bank’s net income after tax was LL 14.5 billion (U.S.$9.6 million) for the six months ended June 30,2014, as compared to LL 11.5 billion (U.S.$7.7 million) for the six months ended June 30, 2013. Audi Private Bank’snet income after tax was LL 22.6 billion (U.S.$15.0 million) for the year ended December 31, 2013, as compared toLL 22.0 billion (U.S.$14.6 million) for the year ended December 31, 2012.

Audi Private Bank employed 88 persons as at June 30, 2014.

The registered office of Audi Private Bank is at Bank Audi Plaza, Block D, Bab Idriss P.O. Box 11-1121 & 11-3312Beirut, 1107 2070 & 1107 2130, Lebanon.

Bank Audi France

The Bank owns 99.9% of the issued share capital of Bank Audi France. Bank Audi France was established on May 7,1979, under the name “Banque Audi (France) S.A.”, as a French joint stock company with the objective of performinggeneral banking operations, including operations and undertakings relating to commercial banking, real estate, merchantbanking and investment banking. Bank Audi France changed its name from Banque Audi (France) S.A. to Bank Audi

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Saradar France S.A. on February 21, 2005 following its merger with Banque Saradar France S.A. In January 2014,Bank Audi France changed its name to its current name.

Bank Audi France is principally a commercial bank, taking deposits mainly from non-French residents and lending toMiddle-Eastern entrepreneurs. In accordance with its policy to maintain a high liquidity ratio at all times, the majorityof loans extended by Bank Audi France are short-term with the exception of real estate loans in Europe and tradefinance facilities, often in the form of letters of credit and letters of guarantee. Since 2003, Bank Audi France has alsodeveloped significant treasury and foreign exchange operations and provided value added services, such as structuredfinance products and financial advisory services.

Bank Audi France had shareholders’ equity of €84 million (U.S.$115 million) and total customers’ deposits of €452million (U.S.$617 million) as at June 30, 2014, as compared to €82 million (U.S.$113 million) and €458 million(U.S.$630 million), respectively, as at December 31, 2013. As at June 30, 2014, Bank Audi France had total assets of€670 million (U.S.$915 million) and total liabilities of €586 million (U.S.$800 million), as compared to €665 million(U.S.$915 million) and €582 million (U.S.$802 million), respectively, as at December 31, 2013. Bank Audi France hadoff-balance sheet assets under management of €14 million (U.S.$19 million) as at June 30, 2014, as compared to €14million (U.S.$20 million) as at December 31, 2013.

Bank Audi France had net profit after tax of €1.8 million (U.S.$2.4 million) for the six months ended June 30, 2014, ascompared to €1.7 million (U.S.$2.2 million) for the six months ended June 30, 2013. Bank Audi France had net profitafter tax of €2.8 million (U.S.$3.8 million) for the year ended December 31, 2013, as compared to €2 million (U.S.$2.5million) as at December 31, 2012.

Bank Audi France employed 59 persons as at June 30, 2014.

The registered office of Bank Audi France is at 73, Champs Elysees Ave., 75008 Paris, France.

Banque Audi Suisse

The Bank owns 100.0% of the issued share capital of Banque Audi Suisse. Banque Audi Suisse, which was establishedin Switzerland since 1976, is dedicated to international private banking. It serves the asset management needs ofwealthy individuals through a broad spectrum of investment products. The services offered to clients includediscretionary investment management, transaction executions, foreign exchange, fiduciary deposits, current accountsand Lombard lending facilities. Banque Audi Suisse provides customers with access to the international equity andbond markets whilst offering personalised investment advisory services.

Banque Audi Suisse is a fully licensed bank in Switzerland. As such, it is subject to Swiss banking regulations and isregulated by the Swiss Financial Market Supervisory Authority (FINMA). It is also subject to capital adequacy ratios incompliance with the Basel Accords, as well as country specific liquidity and interest rate exposure requirements.

Further to its strategic goal to develop international private banking, Banque Audi Suisse created a wholly owned assetmanagement subsidiary in Monaco, Audi Capital Gestion SAM, which conducts the activities formerly conducted byBank Audi Monaco. The new company commenced business on March 1, 2013.

As at June 30, 2014, Banque Audi Suisse had shareholders’ equity totalling CHF 156 million (U.S.$175 million) andcustomers’ deposits of CHF 993 million (U.S.$1,115 million), as compared to CHF 149 million (U.S.$168 million) andCHF 1,124 million (U.S.$1,261 million), respectively, as at December 31, 2013. As at June 30, 2014, Banque AudiSuisse had total assets of CHF 1,358 million (U.S.$1,526 million) and total liabilities of CHF 1,203 million (U.S.$1,351million), as compared to CHF 1,427 million (U.S.$1,601 million) and CHF 1,278 million (U.S.$1,433 million),respectively, as at December 31, 2013. As at June 30, 2014, Banque Audi Suisse conducted asset-under-managementand fiduciary operations valued at CHF 3.4 billion (U.S.$3.8 billion) as compared to CHF 3.1 billion (U.S.$3.5 billion)as at December 31, 2013.

Banque Audi Suisse had net profit after tax of CHF 6.4 million (U.S.$7.2 million) for the six months ended June 30,2014, as compared to CHF 5.5 million (U.S.$5.9 million) for the six months ended June 30, 2013. Banque Audi Suissehad net profit after tax of CHF 10.6 million (U.S.$11.5 million) for the year ended December 31, 2013, as compared toCHF 12.6 million (U.S.$13.6 million) for the year ended December 31, 2012.

Banque Audi Suisse employed a total of 91 persons as at June 30, 2014.

The registered office of Banque Audi Suisse is at 18 Cours des Bastions, 1211, Geneva, Switzerland.

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Odeabank A.Ş.

See “Description of Odeabank”

Bank Audi Syria

The Bank owns 41.0% of the issued share capital of Bank Audi Syria, while each of Lebanon Invest and AudiInvestment Bank owns an additional 3% of the issued share capital of Bank Audi Syria. Bank Audi Syria wasestablished in the Syrian Arab Republic as a joint stock company on August 30, 2005 and is licensed as a conventionalbank engaged in corporate, retail and treasury activities with a network of 22 branches.

Bank Audi Syria’s shares were listed on the Damascus Security Exchange on March 10, 2009. As a listed joint stockcompany, Bank Audi Syria is subject to the rules and regulations of the Syrian Commission of Financial Markets andSecurities, as well as those of the Damascus Securities Exchange. The Bank is also regulated by the Central Bank ofSyria.

Syria is subject to sanctions imposed by, among others, the United States, the United Kingdom, the European Unionand the United Nations. It is the Bank’s policy to comply with all applicable sanctions. The Bank has put in placemeasures and controls to ensure that it does not deal, directly or indirectly, with any persons designated underapplicable sanctions and that all transactions are compliant with applicable sanctions.

Due to the conditions in Syria, since the second quarter of 2011, Bank Audi Syria’s business activities were reduced tominimise the Group’s exposure to related rising credit risks. Such activities continued in 2013 and, as at each ofDecember 31, 2013 and June 30, 2014, Bank Audi Syria’s assets, loans and deposits each represented less than 1% ofthe Bank’s consolidated total assets, loans and deposits.

As at June 30, 2014, Bank Audi Syria had shareholders’ equity of SYP 8.5 billion (U.S.$52.0 million) and customers’deposits of SYP 46.7 billion (U.S.$284.3 million) as compared to SYP 7.2 billion (U.S.$50.1 million) and SYP 44.3billion (U.S.$308.9 million), respectively, as at December 31, 2013. Bank Audi Syria had total assets of SYP 57.1billion (U.S.$347.8 million) and total liabilities of SYP 48.6 billion (U.S.$295.8 million) as at June 30, 2014, ascompared to SYP 54.2 billion (U.S.$377.8 million) and total liabilities of SYP 47.0 billion (U.S.$327.7 million),respectively, as at December 31, 2013. As at June 30, 2014, Bank Audi Syria held assets under management valued atSYP 0.1 million (U.S.$0.6 million), as compared to SYP 0.1 million (U.S.$0.7 million) as at December 31, 2013. Theincreases in Bank Audi Syria’s shareholders’ equity and assets as at June 30, 2014, as compared to December 31, 2013,were primarily due to the impact of foreign currency fluctuations.

Bank Audi Syria had net profit after tax of SYP 1,355 million (U.S.$8.3 million) for the six months ended June 30,2014, as compared to SYP 2,176 million (U.S.$11.8 million) for the six months ended June 30, 2014. Bank Audi Syriahad net loss of SYP 307.3 million (U.S.$2.1 million) for the year ended December 31, 2013, as compared to SYP 7million (U.S.$0.1 million) for the year ended December 31, 2012. References in this section to SYP are to the SyrianPound.

Bank Audi Syria employed 317 employees as at June 30, 2014.

The registered office of Bank Audi Syria is at Kafarsouseh, Cham City Centre, Plaza 86 Bldg., Street № 2, Kafarsouseh, Damascus, P.O. Box 6228 Damascus, Syria.

Bank Audi Egypt

The Bank owns 100.0% of the issued share capital of Bank Audi Egypt. Bank Audi Egypt was established in 2006 inEgypt as a commercial bank and offers corporate banking services, SME services, mortgage and retail banking servicesand a wide range of asset and liability management products and services, as well as treasury and trade finance services.Bank Audi Egypt also offers Shar’ia-compliant financial solutions and products.

As at June 30, 2014, Bank Audi Egypt had a network of 34 branches, including two branches fully dedicated to Islamicbanking, through which it offers its wide array of asset and liability products and services to 173,241 account holders.

Bank Audi Egypt is subject to Egyptian banking regulations and is regulated by the Central Bank of Egypt. It is alsosubject to capital adequacy ratios in compliance with the Basel Accords, as well as country specific liquidity andinterest rate exposure requirements.

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As at June 30, 2014, Bank Audi Egypt had shareholders’ equity of EGP 2.0 billion (U.S.$276.2 million) and customers’deposits of EGP 23.0 billion (U.S.$3,209.8 million), as compared to EGP 2.1 billion (U.S.$299.8 million) and EGP 20.0billion (U.S.$2,873.4 million), respectively, as at December 31, 2013. As at June 30, 2014, Bank Audi Egypt had totalassets of EGP 25.9 billion (U.S.$3,621.0 million) and total liabilities of EGP 23.9 billion (U.S.$3,344.8 million), ascompared to EGP 22.7 billion (U.S.$3,266.7 million) and EGP 20.6 billion (U.S.$2,966.8 million), respectively, as atDecember 31, 2013. Bank Audi Egypt is ranked seventh among private sector banks in Egypt in terms of total assets(according to published financial statements for private sector banks in Egypt).

Bank Audi Egypt had net profit after tax of EGP 209.4 million (U.S $ 29.8 million) for the six months ended June 30,2014, as compared to EGP 192.5 million (U.S $28.5 million) for the six months ended June 30, 2013. Bank Audi Egypthad net profit after tax of EGP 335.9 billion (U.S $ 49.1 million) for the year ended December 31, 2013, as compared toEGP 354.9 billion (U.S $58.4 million) for the year ended December 31, 2012.

Bank Audi Egypt employed 1,020 persons as at June 30, 2014.

The registered office of Bank Audi Egypt is at Pyramids Heights Office Park, Cairo- Alexandria Desert Road, Km 22,Sixth of October City.

National Bank of Sudan

The Bank owns 76.6% of the issued share capital of National Bank of Sudan. The National Bank of Sudan wasestablished in Sudan in 1981 by various prominent Sudanese businessmen and families. In September 2006, the Bankacquired its shareholding in National Bank of Sudan through a capital injection of SDG 112.5 million (U.S.$53.6million), which increased the bank’s capital to SDG 150 million (U.S.$71.4 million).

National Bank of Sudan is the first Islamic bank within the Group dedicated to offering Shar’ia-compliant products andservices to both corporate and retail customers. A Shar’ia supervisory board has been established to ensure that alloperations, products and services are Shar’ia-compliant.

Sudan is subject to sanctions imposed by, among others, the United States, the United Kingdom, the European Unionand the United Nations. It is the Bank’s policy to comply with all applicable sanctions. The Bank has put in placemeasures and controls to ensure that it does not deal, directly or indirectly, with any persons designated underapplicable sanctions and that all transactions are compliant with applicable sanctions.

As at June 30, 2014, National Bank of Sudan had shareholders’ equity of SDG 371.5 million (U.S.$62.4 million) andcustomers’ deposits of SDG 280.8 million (U.S.$47.2 million), as compared to of SDG 383.4 million (U.S.$64.3million) and SDG 202.9 million (U.S.$34.0 million), respectively, as at December 31, 2013. As at June 30, 2014,National Bank of Sudan had total assets of SDG 732.1 million (U.S.$123.0 million) and total liabilities of SDG 360.5million (U.S.$60.6 million), as compared to SDG 732.9 million (U.S.$123.0 million) and SDG 349.6 million (U.S.$58.6million), respectively, as at December 31, 2013.

National Bank of Sudan generated net income after tax of SDG 16.1 million (U.S.$2.7 million) for the six months endedJune 30, 2014, as compared to SDG 10.1 million (U.S.$1.8 million) for the six months ended June 30, 2013. NationalBank of Sudan generated net income after tax of SDG 35.9 million (U.S.$6.3 million) for the year ended December 31,2013, as compared to SDG 179.5 million (U.S.$33.5 million) for the year ended December 31, 2012. References in thissection to SDG are to the Sudanese Pound.

National Bank of Sudan employed 66 persons as at June 30, 2014.

The registered office of National Bank of Sudan is at Kasr Avenue, PO Box 1183 Khartoum Sudan.

Audi Capital

The Bank owns 99.9% of the issued share capital of Audi Capital. Audi Capital was established in the Kingdom ofSaudi Arabia on January 8, 2007 under the name of “Audi Saudi Arabia” and changed its name to Audi Capital (KSA)on 20 July 2009. Audi Capital is licensed and regulated by the Capital Market Authority in the Kingdom of SaudiArabia.

Audi Capital offers Saudi corporate and individual clients premium investment banking, wealth management, assetmanagement and brokerage services.

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Audi Capital’s strategy is to take advantage of the expected growth in the Saudi economy, as well as the fast-pacedeconomic and regulatory changes affecting the MENA region in general and the GCC region in particular.

Audi Capital had shareholders’ equity of SAR 336.4 million (U.S.$89.7 million) as at June 30, 2014, as compared toSAR 326.7 million (U.S.$87.1 million) as at December 31, 2013. As at June 30, 2014, Audi Capital had total assets ofSAR 347.3 million (U.S.$92.6 million) and total liabilities of SAR 11.0 million (U.S.$2.9 million), as compared to SAR342.1 million (U.S.$91.2 million) and SAR 15.5 million (U.S.$4.1 million), respectively, as at December 31, 2013. Asat June 30, 2014, Audi Capital had assets under management of SAR 3.8 billion (U.S.$1,011.6 million) as compared toSAR 3.1 billion (U.S.$821.3 million) as at December 31, 2013.

Audi Capital had net profit before income taxes of SAR 8.5 million (U.S.$2.3 million) for the six months ended June30, 2014, as compared to net profit before income taxes of SAR 3.5 million (U.S.$0.9 million) for the six months endedJune 30, 2013. Audi Capital had net profit before income taxes of SAR 5.8 million (U.S.$1.5 million) for the year endedDecember 31, 2013, as compared to net profit before income taxes of SAR 6.4 million (U.S.$1.7 million) for the yearended December 31, 2012.

Audi Capital employed 34 persons as at June 30, 2014.

The registered office of Audi Capital is Centria Bldg, 3rd Floor, Prince Mohammad Bin Abdul Aziz Road (Tahlia),Riyadh, Kingdom of Saudi Arabia.

Bank Audi Qatar

The Bank owns 100.0% of the issued share capital of Bank Audi Qatar. Bank Audi Qatar, which began operations onNovember 14, 2007, is a fully licensed bank incorporated and registered as a limited liability company in the QatarFinancial Centre (the “QFC”) under license number 00027. As such, the Bank is subject to QFC and Qatar FinancialCentre Regulatory Authority (the “QFCRA”) rules and regulations and is regulated by the QFCRA.

QFC regulations require that each individual customer have at least U.S.$1 million in liquid assets and each corporatecustomer have at least U.S.$5 million in net assets in order to be eligible to open a bank account with a bank. BankAudi Qatar, which has a customer-base comprised of both resident and non-resident customers, performs both on-shoreand off-shore banking activities.

Bank Audi Qatar provides its customers with diversified banking services, mainly focused on corporate banking, tradefinance and private banking. By its charter, Bank Audi Qatar’s authorised activities comprise deposit taking, arrangingand providing credit facilities, advising on, dealing in and arranging deals in investments and arranging for andproviding custody services.

As at June 30, 2014, Bank Audi Qatar had customers’ deposits of QAR 468.7 million (U.S.$128.7 million), ascompared to QAR 434.2 million (U.S.$119.2 million) as at December 31, 2013. Bank Audi Qatar had a loan portfolioof QAR 616.3 million (U.S.$169.3 million), outstanding letters of guarantee totalling QAR 573.6 million (U.S.$157.5million) and assets under management of QAR 1,090.8 million (U.S.$299.6 million) as at June 30, 2014, as comparedto QAR 438.3 million (U.S.$120.4 million), QAR 601.8 million (U.S.$165.3 million) and QAR 1,036.0 million(U.S.$284.5 million), respectively, as at December 31, 2013. As at June 30, 2014, Bank Audi Qatar had total assets ofQAR 784.0 million (U.S.$215.3 million) and total liabilities of QAR 583.7 million (U.S.$160.3 million), as comparedto QAR 706.2 million (U.S.$193.9 million) and QAR 503.1 million (U.S.$138.2 million), respectively, as at December31, 2013.

Bank Audi Qatar had net profit of QAR 7.1 million (U.S.$2.0 million) for the six months ended June 30, 2014, ascompared to QAR 6.1 million (U.S.$1.7 million) for the six months ended June 30, 2013. Bank Audi Qatar had netprofit of QAR 12.2 million (U.S.$3.4 million) for the year ended December 31, 2013, as compared to QAR 13 million(U.S.$3.6 million) for the year ended December 31, 2012.

Bank Audi Qatar employed 11 persons as at June 30, 2014.

The registered office of Bank Audi Qatar is Qatar Financial Centre, Office 1801, 18th Floor, Qatar Financial CentreTower, Diplomatic Area, Doha, P.O. Box: 23270 Doha, Qatar.

Bank Audi Jordan

Bank Audi Jordan is a 100%-owned subsidiary of the Bank and was established in 2004. Bank Audi Jordan is primarilya retail and commercial bank, with a network of 12 branches in Amman, Irbid and Aqaba. It offers a range of banking

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products and services including deposit taking, personal (including auto and housing) loans, insurance products and e-banking. The Bank has a dedicated corporate and commercial relationship team and provides cash managementservices, as well as various treasury products.

As at June 30, 2014, Bank Audi Jordan had shareholders’ equity of JOD 97.2 million (U.S.$137.1 million) andcustomers’ deposits of JOD 797.3 million (U.S.$1,124.3 million), as compared to JOD 91.3 million (U.S.$128.9million) and JOD 654.1 million (U.S.$924.0 million), respectively, as at December 31, 2013. As at June 30, 2014,Bank Audi Jordan’s total assets and liabilities were JOD 982.5 million (U.S.$1,385.6 million) and JOD 885.3 million(U.S.$1,248.5 million), respectively, as compared to JOD 884.5 million (U.S.$1,249.5 million) and JOD 793.3 million(U.S.$1,120.6 million), respectively, as at December 31, 2013.

Bank Audi Jordan had net profit after tax of JOD 5.9 million (U.S.$8.4 million) for the six months ended June 30,2014, as compared to JOD 5.7 million (U.S.$8.1 million) for the six months ended 31 June 2013. Bank Audi Jordan hadnet profit after tax of JOD 12.1 million (U.S.$17.0 million) for the year ended December 31, 2013, as compared to JOD10.7 million (U.S.$15.1 million) for the year ended December 31, 2012.

Bank Audi Jordan employed 249 persons as at June 30, 2014.

The head office of Bank Audi Jordan is located at Building 26, Suleiman Al-Nabulsi Street, Abdali, Amman, Jordan.

Investments

The Bank holds a portfolio of trading and investment securities, consisting of both debt and equity securities andcharacterised by an exposure to the Government and the Central Bank.

Exposure to the Government and the Central Bank

The Bank’s portfolio of Lebanese treasury bills increased to LL 2,070 billion as at June 30, 2014 from LL 1,880 billionas at December 31, 2013, after having decreased from LL 3,428 billion as at December 31, 2012 and LL 3,227 billionas at December 31, 2011. In addition, as at June 30, 2014, the Bank held LL 3,020 billion in aggregate principal amountof net sovereign Eurobonds issued by Lebanon (i.e., net of those securities whose risk have been transferred to theBank’s customers) and LL 4,346 billion in certificates of deposit issued by the Central Bank, as compared to LL 3,470billion and LL 4,854 billion, respectively, as at December 31, 2013, LL 1,067 billion and LL 2,884 billion, respectively,as at December 31, 2012 and LL 1,350 billion and LL 3,358 billion, respectively, as at December 2011. In addition, inlight of the Bank’s continuing operations in Turkey and Egypt, the Bank has important exposure to the sovereign risksof Turkey and Egypt. As at June 30, 2014, the Bank’s exposure to non-Lebanese sovereign bonds was LL 3,466 billion(U.S.$2,299 million) (as compared to LL 3,197 billion (U.S.$2,121 million) as at December 31, 2013), representing, inaggregate, 21.2% of the total securities portfolio and 8.2% of adjusted foreign currency denominated customers’deposits (as compared to 19.1% and 8.4%, respectively, as at December 31, 2013). See “Management’s Discussion andAnalysis of Financial Conditions and Results of Operations—Consolidated Financial Condition and Results ofOperation—Securities Portfolio” for further information relating to the distribution of the Bank’s securities portfolio, bytype of security, as at June 30, 2014 and December 31, 2013, 2012 and 2011, respectively.

Branch Network

As at June 30, 2014, the Bank had 80 branches in its local network, of which 75 were operational, covering the GreaterBeirut area and other strategic regions in Lebanon. As at the date of this Offering Circular, one of the Bank’s non-operating branches is under construction, while the others are dormant. In addition, the Group’s branch networkincludes 76 branches in the MENA region (outside Lebanon), including 13 branches in Jordan and a representativeoffice in Abu Dhabi, as well as a network of 45 branches in Turkey. In 2013, the Bank was granted a licence by theCentral Bank of Iraq to open seven branches and launch banking operations in Baghdad, Irbil, Basra, Najaf,Suleymanieh, Salaheddine and Mosul. Subject to political and economic conditions, the Bank currently intends tolaunch banking operations in Iraq in the coming years.

As at June 30, 2014, the Bank operated a network of more than 398 ATMs, including 199 ATMs in Lebanon and 199ATMs in other countries.

The “NOVO” concept, a banking experience created by the Bank in December 2011, integrates multiple channels in ahigh-tech modular structure, which the Bank intends to install across its network, including in malls in Lebanon andabroad. Since its launch, “NOVO” has increased efficiency by reducing over the counter transactions and providingcustomers with video conferencing and virtual product application facilities. As at the date of this Offering Circular, the

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Bank operates seven “NOVO” structures in Lebanon, of which three are operated at off-site locations and four areoperated within existing branches.

Property

Of the Bank’s 75 branches in Lebanon as at the date of this Offering Circular, 56 are owned by the Bank and 19 arelocated on premises that are leased from other companies.

The Bank also has office space (apart from its branches) in Beirut Central District, Riad-el-Solh, Sofil, Verdun, Dora,Zouk Mikhael and Kfour where it conducts regional management or specialised services. Out of these seven locations,five are owned and two are leased.

The Bank owns its head office building, which was opened in July 2001 and is located in the Beirut Central Districtwith floor space of approximately 20,256 square meters.

Outside Lebanon, and aside from its own subsidiaries, the Bank is operational in Jordan with twelve rented branchesand one owned. It also owns its headquarters there.

The Loan Portfolio

The following is a discussion of the Bank’s loan portfolio and lending activities on a consolidated basis as at June 30,2014 and December 31, 2013, 2012 and 2011, respectively.

The majority of the Bank’s lending consists of working capital finance and trade finance to small and medium-sizedbusinesses in Lebanon and abroad. Working capital financing is provided by way of credit lines, overdraft facilities andshort-term loans (with terms of less than one year).

Following limited growth in 2011, the Bank’s lending activity increased by 21.46% in 2012 and by 43.1% in 2013despite challenging regional market conditions. This overall growth resulted in part from the launch of the Bank’snewly launched operations at Odeabank in Turkey, which accounted for 11.2% of the overall increase (U.S.$966million) in the size of the Bank’s loan portfolio as at December 31, 2012, as compared to December 31, 2011, and33.9% of the overall increase (U.S.$4.3 billion) in the size of the Bank’s loan portfolio as at December 31, 2013.

In recent years, the maturity profile of the Bank’s loan portfolio has shifted towards medium and long-term loans, as aresult of the stickiness of the Bank’s short-term deposits. The Bank also offers structured medium- and long-term loans,as well as medium- and long-term receivables discounting, to corporate clients and medium and long-term project loanson a full recourse basis.

Analysis of Loans by Class of Borrower

The following table shows the distribution of the Bank’s loan portfolio by class of borrower, as at the dates indicated:

As at June 30, 2014(1)As at December 31,

2013 2012 2011(LL

millions) (%)(LL

millions) (%)(LL

millions) (%)(LL

millions) (%)

Corporate clients(2) ................................11,662,700 48.4 11,463,079 52.0 9,574,320 62.1 7,824,282 61.7

Small and medium-sizedinstitutions ................................

6,992,373 29.1

5,926,603 26.9 2,470,816 16.0 1,918,067 15.1

Retail and personalbanking................................

5,255,367 21.8

4,397,625 19.9 3,237,924 21.0 2,770,893 21.8

Public sector ................................169,503 0.7 277,515 1.2 133,343 0.9 178,935 1.4

Total ................................................................24,079,943 100.0 22,064,822 100.0 15,416,403 100.0 12,692,177 100.0

____________Notes:(1) Unaudited.(2) Corporate clients are established companies with turnover exceeding U.S.$5 million.

The distribution of the Bank’s consolidated loan portfolio by customer continues to reflect a concentration of corporateclients, although this decreased to 48.4% of the loan portfolio as at June 30, 2014 as compared to 52.0% as at December31, 2013, 62.1% as at December 31, 2012 and 61.7% as at December 31, 2011, as well as an important proportion ofSME clients, which represented 29.1% as at June 30, 2014, 26.9% as at December 31, 2013, 16.0% as at December 31,

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2012 and 15.1% as at December 31, 2011. This distribution continues to reflect the Bank’s strategy to target well-established corporate clients with sound financial standing, while consolidating its SME client base, as Managementbelieves that SME customers continue to constitute a potential profitable market and offer a greater diversification ofrisk. The increase in loans granted to SMEs in the six months ended June 30, 2014 and in 2013 was primarily due to theBank’s growing operations in Turkey. Management anticipates that loans to SMEs will be among the key priorities forthe Lebanese, Turkish and Egyptian markets in the coming years.

Analysis of Loans by Size

The following table shows the distribution of the Bank’s loan portfolio by size, as at December 31, 2013, the datesindicated:

As at June 30,2014(1)

As at December 31,

2013 2012 2011

(LLmillions) (%)

(LLmillions) (%)

(LLmillions) (%)

(LLmillions) (%)

Less than LL 40 million............................................. 1,603,869 6.6 921,719 4.2 1,898,103 12.3 723,068 5.7Between LL 40 million and LL 300 million............. 1,511,499 6.3 1,503,830 6.8 449,481 3.0 701,314 5.5Between LL 300 million and LL 750 million .......... 988,210 4.1 899,680 4.1 509,291 3.3 478,850 3.8Between LL 750 million and LL 1,500million ......................................................................... 1,020,389 4.2 958,378 4.3 574,915 3.7 461,649 3.7Between LL 1,500 million and LL 7,500million .........................................................................

4,429,914 18.34,228,814 19.2 2,535,216 16.4 2,172,128 17.1

Between LL 7,500 million and LL 15,000million .........................................................................

3,042,056 12.62,840,605 12.9 2,016,921 13.1 1,855,686 14.6

Greater than LL 15,000 million................................11,575,483 47.9 10,711,796 48.5 7,432,476 48.2 6,299,482 49.6

Total............................................................................24,171,421 100.0 22,064,822 100.0 15,416,403 100.0 12,692,177 100.0

____________Note:(1) Unaudited.

The distribution of the Bank’s consolidated loan portfolio by amount reflects a concentration of loans in amountsgreater than LL 15,000 million, with such loans constituting 47.9% of the loan portfolio as at June 30, 2014, ascompared to 48.5% as at December 31, 2013, 48.2% as at December 31, 2012 and 49.6% as at December 31, 2011. Asa result of cross-selling and the development of higher retail products, as well as the retail strategy implemented by theBank, as at June 30, 2014, the distribution of loans in amounts less than LL 40 million and loans in amounts betweenLL 40 million and LL 300 million was relatively even, in particular, in Lebanon and Turkey.

Analysis of Loans by Number of Borrowers

The following table shows the distribution of the Bank’s loan portfolio by number of borrowers, as at the datesindicated:

As at June 30,2014(1)

As at December 31,

2013 2012 2011

(Number ofborrowers) (%)

(Number ofborrowers) (%)

(Number ofborrowers) (%)

(Number ofborrowers) (%)

Less than 40.................................................343,912 93.6 227,928 83.1 175,379 95.6 164,637 94.1Between 40 and 300 ................................ 16,172 4.4 39,097 14.3 4,668 2.6 7,431 4.3Between 300 and 750 ................................

2,805 0.8 3,044 1.1 1,284 0.7 1,137 0.6Between 750 and 1,500................................1,575 0.4 1,441 0.5 679 0.4 570 0.3Between 1,500 and 7,500..............................2,283 0.6 2,171 0.8 991 0.5 814 0.5Between 7,500 and 15,000............................ 468 0.1 384 0.1 227 0.1 198 0.1Greater than 15,000................................ 440 0.1 369 0.1 230 0.1 191 0.1Total ................................................................367,655 100.0 274,434 100.0 183,458 100.0 174,978 100.0

____________Note:(1) Unaudited.

The average loan per borrower decreased to LL 65.7 million as at June 30, 2014 from LL 80.4 million as at December31, 2013, LL 84 million as at December 31, 2012 and LL 72.5 million as at December 31, 2011, primarily as a result ofthe increase in the number of borrowers.

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Analysis of Loans by Type of Loan

The following table shows the distribution of the Bank’s consolidated loan portfolio by type of loan, as at the datesindicated:

As at June 30,2014(1)

As at December 31,

2013 2012 2011

(LLmillions) (%) (LL millions) (%)

(LLmillions) (%)

(LLmillions) (%)

Overdrafts ................................................................ 4,248,120 17.2 4,045,704 17.8 3,872,925 24.3 3,401,860 25.8Term loans(2) ...............................................................20,276,351 81.9 18,389,425 81.1 11,835,976 74.4 9,499,608 72.2Other advances ........................................................... 224,318 0.94 238,768 1.1 209,429 1.3 258,687 2.0

Sub-Total ................................................................ 24,748,789 100.0 22,673,897 100.0 15,918,330 100.0 13,160,155 100.0

Impairment allowance ............................................... (569,508) (524,640) (441,743) (368,538)Unrealised interest...................................................... (99,338) (84,435) (60,184) (99,440)

Sub-Total ................................................................ (668,846) (609,075) (501,927) (467,978)

Net loans and advances............................................24,079,943 22,064,822 15,416,403 12,692,177

__________Notes:(1) Unaudited.(2) Term loans include medium- and long-term debt (including government subsidised loans and housing loans)

Since December 31, 2011, there has been a shift towards medium- and long-term financing and term loans (includingvarious structured products) have increased as a proportion of the Bank’s consolidated loan portfolio, although thebroad distribution between overdrafts and term loans has remained relatively stable during the six months ended June30, 2014, and for the years ended December 31, 2013, 2012 and 2011. Term loans represented 81.9% of the gross loanportfolio as at June 30, 2014, as compared to 81.1% as at December 31, 2013, 74.4% as at December 31, 2012 and72.2% as at December 31, 2011. The increase in term loans is primarily due to Odeabank’s activities where thepresence of a high proportion of term loans is consistent with Turkish market practice. Overdraft facilities represented17.2% of the gross loan portfolio as at June 30, 2014, as compared to 17.8% as at December 31, 2013, 24.3% as atDecember 31, 2012 and 25.8% as at December 31, 2011.

Analysis of Loans by Economic Sector

The following table shows the distribution of the Bank’s loan portfolio by economic sector, as at the dates indicated:

As at June 30,2014(1)

As at December 31,

2013 2012 2011

(LLmillions) (%) (LL millions) (%) (LL millions) (%)

(LLmillions) (%)

Agriculture................................... 297,590 1.2 229,081 1.0 129,501 0.8 53,764 0.4Extractive industry ....................... 227,205 0.9 205,035 0.9 19,784 0.1 31,902 0.3Manufacturing industries ............. 4,300,516 17.9 3,982,166 18.0 3,091,234 20.1 2,167,091 17.1Electricity, gas, water andtelecommunication ....................... 639,991 2.7 782,676 3.5 304,378 2.0 362,352 2.9Construction................................ 3,826,630 15.9 3,348,179 15.2 1,142,268 7.4 1,038,408 8.2Wholesale and retail trade............. 3,317,843 13.8 3,255,933 14.8 2,278,118 14.7 1,843,934 14.5Hotels and restaurants................... 963,481 4.0 827,027 3.7 451,869 2.9 364,126 2.9Transportation andwarehousing................................ 1,086,640 4.5 945,456 4.3 1,134,051 7.4 970,876 7.6Financial services andbrokerage ..................................... 1,360,403 5.6 1,466,945 6.6 1,671,096 10.8 1,502,606 11.8Real estate services....................... 1,583,021 6.6 1,433,561 6.5 1,222,188 7.9 885,883 7.0Professional services .................... 999,977 4.2 708,184 3.2 292,191 1.9 238,013 1.9Individuals (excludinghousing)(2) .................................... 4,103,791 17.0 3,167,243 14.4 2,528,147 16.4 2,276,419 17.9Individuals – housing ................... 1,224,137 5.1 1,544,568 7.0 1,030,297 6.8 853,001 6.7Others.......................................... 148,718 0.6 168,768 0.8 121,281 0.8 103,802 0.8Total ........................................... 24,079,943 100.0 22,064,822 100.0 15,416,403 100.0 12,692,177 100.0

__________Notes:(1) Unaudited.(2) Includes retail products and private banking clients.

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The distribution of the Bank’s consolidated loan portfolio by economic sector is well diversified with the largest sectorsbeing manufacturing (17.9%), construction (15.9%), wholesale and retail trade (13.8%) and individuals (22.1%). Theincrease in loans granted to the construction industry as a percentage of total loans was due to loans granted byOdeabank. The decrease in loans granted to the financial services and brokerage sector in each of the first six months of2014 and the year ended December 31, 2013 was due to the settlement of loans to borrowers in this sector during theperiods. There were no other significant changes in terms of portfolio distribution.

Analysis of Loans by Maturity

The following table shows the maturity profile of the Bank’s loan portfolio as at the dates indicated:

As at June 30,2014(1)

As at December 31,

2013 2012 2011

(LLmillions) (%)

(LLmillions) (%)

(LLmillions) (%)

(LLmillions) (%)

Less than 1 year(2)................................9,406,482 39.1 9,102,157 41.3 7,790,609 50.5 6,611,886 52.11 to 5 years...................................................10,009,263 41.6 9,136,285 41.4 6,727,452 43.7 4,954,365 39.0Over 5 years................................ 4,664,198 19.4 3,826,380 17.3 898,342 5.8 1,125,926 8.9Total ...........................................................24,079,943 100.0 22,064,822 100.0 15,416,403 100.0 12,692,177 100.0

__________Notes:(1) Unaudited.(2) Maturities of less than 1 year incorporate bridge loans in the process of being converted to medium- and long-term tenors upon full withdrawal

or ending withdrawal period.

The Bank’s consolidated loan portfolio is primarily composed of short-term facilities, which represent financing ofworking capital and trade finance needs of the Bank’s customer base. Short-term facilities having a maturity of less thanone year represented 39.1% of the Bank’s consolidated loan portfolio as at June 30, 2014, as compared to 41.3% as atDecember 31, 2013, 50.5% as at December 31, 2012 and 52.1% as at December 31, 2011. Medium-term facilities withmaturities between one and five years increased represented 41.6% of the Bank’s consolidated loan portfolio as at June30, 2014, as compared to 41.4% as at December 31, 2013, 43.7% as at December 31, 2012 and 39.0% as at December31, 2011.

Loans with maturities over five years increased by 326% in 2013, representing 17.3% of the Bank’s consolidated loanportfolio as at December 31, 2013, as compared to 5.8% and 8.9% as at December 31, 2012 and 2011, respectively. Theincrease in loans with maturities over five years in 2013 was primarily due to maturity structure of Odeabank’s loanportfolio, as well as sharp increases in housing products across a number of the Bank’s subsidiaries. This increase inlong-term loans was also a result of the stickiness of the group’s short-term deposits, whereby short-term deposits aretypically rolled over following expiry of their term, as well as a variety of long-term products offered by the CentralBank, including subsidised and environmental loans.

Analysis of Loans by Currency

The following table shows the distribution of the Bank’s loan portfolio by currency, as at the dates indicated:

As at June 30,2014(1)

As at December 31,

2013 2012 2011

(%)

Lebanese Pound .................................................................................... 7.0 7.1 8.7 8.9Foreign currencies, of which ................................................................ 93.0 92.9 91.3 91.1

U.S. Dollars .................................................................................... 47.2 49.7 59.0 60.6Euros .............................................................................................. 11.1 11.1 8.2 8.0TRY................................................................................................ 22.3 18.9 4.6 —Other............................................................................................... 12.4 13.2 19.5 22.5

__________Note:(1) Unaudited.

Loans in U.S. Dollars continued to comprise the largest portion of the loan book in each of the six months ended June30, 2014 and the years ended December 31, 2013, 2012 and 2011, in line with the dollarization rate of the Bank’sbalance sheet. Loans in Turkish Lira increased as a percentage of total loans to 18.9% as at December 31, 2013, as

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compared to 4.6% as at December 31, 2012, reflecting the commencement of Odeabank’s operations in 2012 andcontinued growth in 2013.

Analysis of Loans by Type of Collateral

The following table shows the distribution of the Bank’s loan portfolio by type of collateral, as at the dates indicated:

As at June30, 2014(1)

As at December 31,

2013 2012 2011

(%)

Secured................................................................................................ 48.9 51.5 54.3 57.7of whichCash collateral and margins(2) ......................................................... 12.3 12.4 17.9 18.8Securities......................................................................................... 3.9 4.7 11.1 11.8Guarantees received from banks and financialinstitutions....................................................................................... 1.5 1.6 2.3 3.0Real estate....................................................................................... 28.4 25.2 18.8 18.4

Other guarantees (mainly personal/corporate guarantees) ...................... 2.8 7.6 4.2 5.7Unsecured............................................................................................. 51.1 48.5 45.7 42.3Total ................................................................................................ 100.0 100.0 100.0 100.0

__________Notes:(1) Unaudited.(2) Comprising cash collateral, letters of credit, letters of guarantee and other off-balance sheet assets.

The Bank believes that its consolidated loan portfolio is adequately collateralised. As at June 30, 2014, secured lendingrepresented 48.9% of the Bank’s consolidated loan portfolio, as compared to 51.5% as at December 31, 2013, 54.3% asat December 31, 2012 and 57.7% as at December 2011. The principal types of collateral securing the Bank’s loanscomprise cash collateral and real estate mortgages, in addition to securities such as bonds and shares and bankguarantees. Unsecured loans represented 51.1% of the Bank’s consolidated loan portfolio as at June 30, 2014.

Analysis of Loans to Related Parties

The following table shows the distribution of the Bank’s loans to related parties (as defined by Article 152 of the Codeof Money and Credit) as at the dates indicated:

As at June 30,2014(1)

As at December 31,2013 2012 2011

(LL millions)Related parties(2)

Direct facilities................................................................ 91,693 114,829 304,511 263,666

Indirect facilities ................................................................ 4,013 3,732 3,957 2,807

Total(3)(4)...................................................................................... 95,706 118,561 308,468 266,473

Secured as follows:Cash collateral and margins and securities(5) ............................ 34,702 50,786 221,979 221,978Guarantees received from banks and financialinstitutions ............................................................................. 0 1,085 225 388Real estate.............................................................................. 17,606 21,993 33,705 15,870

Other guarantees ................................................................ 1,680 1,834 1,314 304

Total secured .............................................................................. 53,988 75,698 257,223 238,540

Unsecured.............................................................................. 37,705 39,131 47,288 25,126__________Notes:(1) Unaudited.(2) Loans to related parties are recorded in the financial statements of the Bank as advances to related parties, related party commercial loans and

off-balance sheet items.(3) Total loans to related parties include off-balance sheet items.(4) Excess of facilities over cash collateral are within the threshold limit authorised by applicable law and regulations.(5) Comprising cash collateral, letters of credit, letters of guarantee and other off-balance sheet assets.

Article 152 of the Code of Money and Credit and Central Bank Basic Decision № 7776 dated 21 February 2001, as amended, provides that advances and credit facilities to directors or managers of banks or to companies having commondirectors with a bank: (i) must be authorized by the shareholders of the bank; (ii) must not exceed in aggregate 5% of

66

the bank’s shareholders’ equity; and (iii) must be made on arms-length commercial terms. Management believes thatthe Bank is in compliance with applicable regulations.

Lending Rates

The large majority of the Bank’s lending in both foreign currencies and Lebanese Pounds is at floating rates of interest,which are recalculated monthly or quarterly. Base rates utilised for the calculation of interest on U.S. Dollar facilitiesare the relevant London Interbank Offered Rate (“LIBOR”) or New York Prime Rate, in each case, plus an appropriatemargin and subject to a floor. The Bank also introduced the Beirut Risk Rate (the “BRR”) plus a margin for U.S. Dollarand Lebanese Pound facilities. The BRR is fixed by the Association of Banks in Lebanon. In all cases, the Bank takesinto account local market conditions and reserves the right to adjust its rates by reference to changes in marketconditions and rates charged by its competitors.

The interest charged on housing loans is calculated monthly under the formula provided by the relevant authority (i.e.,Housing Loan guidelines or Central Bank circulars). Under such formula, the rates for Lebanese pound facilities arelinked to the Lebanese treasury bills at a coefficient factor of 40.0% plus a maximum margin ranging between 3.0-3.5%, with a pricing recalculated annually or biennially depending on the product. Interest on U.S. Dollar facilities arelinked to the cost of funds plus a maximum margin of 2.0%, re-priced annually.

Funding Sources

The following shows the distribution of the Bank’s sources of funding as at the dates indicated:

As at June 30, 2014(1)As at December 31,

2013 2012 2011(LL millions) (LL millions)

Central Banks' deposits......................................... 430,293 448,222 374,418 133,394Sight deposits........................................... — — — —Time deposit ............................................ 357,241 252,042 133,108 133,394Repurchase Agreements ........................... 73,052 196,180 241,310 —

Banks’ deposits .................................................... 1,594,336 1,599,912 1,611,351 1,007,558Sight deposits........................................... 382,454 282,592 180,579 308,920Time deposits........................................... 1,211,882 1,317,320 990,595 698,638Repurchase Agreements ........................... — — 440,177 —

Customers and related parties deposits .................. 51,194,360 46,875,807 40,407,991 37,382,507Sight deposits........................................... 7,763,221 7,155,325 6,704,737 5,703,781Time deposits, saving accounts andcertificates of deposit............................... 42,555,915 39,044,903 32,979,860 30,789,594Collateral and margins ............................ 875,224 675,579 723,394 889,132

Provisions for risks, charges and end of serviceindemnities .......................................................... 114,746 132,882 111,313 72,925Engagement by acceptances and other liabilities.... 858,353 899,926 662,421 1,171,152Debt issued and other borrowed funds................... 96,897 — — —Subordinated loans ............................................... 764,884 537,101 — —

Shareholders’ equity............................................. 4,133,661 4,064,510 4,023,296 3,553,150

Total ................................................................... 59,187,530 54,558,360 47,190,790 43,320,686

__________Note:(1) Unaudited.

The primary source of funds for the banking sector in Lebanon, including the Bank, is customers’ deposits. The Bankalso regularly resorts to the Beirut Lebanese Pound interbank market in order to borrow or place excess liquidity inlocal currency.

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Analysis of Funding Sources by Maturity

The following table shows the maturity profile of the Bank’s funding as at the dates indicated:

As at June 30, 2014(1)

As at December 31,

2013 2012 2011

(LLmillions) (%)

(LLmillions) (%)

(LLmillions) (%)

(LLmillions) (%)

Short-term(2) ................................................................ 9,004,028 15.2 8,337,843 15.3 7,547,737 16.0 7,183,854 16.6Medium-term(3) ...........................................................45,073,314 76.3 41,486,024 76.0 35,508,444 75.2 32,510,758 75.0

Long-term(4) ................................................................ 5,110,188 8.5 4,734,493 8.7 4,134,609 8.8 3,626,074 8.4

Total............................................................................59,187,530 100.0 54,558,360 100.0 47,190,790 100.0 43,320,686 100.0

_________Notes:(1) Unaudited.(2) Short-term means demand deposits and miscellaneous credits, engagements by acceptances and regularisation accounts.(3) Medium-term means: time deposits, saving accounts, certificates of deposit and collateral and margins.(4) Long-term means shareholders’ equity and provisions for losses and contingencies.

The Bank maintained relative stability in the maturities of its funding as medium-term funding increased to 76.3% oftotal funding as at June 30, 2014 from 76.0% as at December 31, 2013, 75.2% as at December 31, 2012 and 75.0% as atDecember 31, 2011. Short term funding represented 15.2% of total funding as at June 30, 2014, as compared to 15.3%as at December 31, 2013, 16.0% as at December 31, 2012 and 16.6% as at December 31, 2011.

Analysis of Funding Sources by Currency

The following table shows the distribution of the Bank’s funding, by currency, as at the dates indicated:

As at June 30, 2014(1)As at December 31,

2013 2012 2011(LL millions) (LL millions)

Lebanese Pounds.......................................... 9,580,312 9,496,345 10,314,754 9,993,764Foreign currencies........................................ 49,607,218 45,062,015 36,876,036 33,326,922of which:

U.S. Dollars ........................................... 32,403,034 30,159,877 25,075,256 23,352,731Euros ..................................................... 4,038,139 4,139,531 3,211,778 3,396,841Other ..................................................... 13,166,045 10,762,607 8,589,002 6,577,350

_________Note:(1) Unaudited.

The Bank’s funding in Lebanese Pounds increased from LL 9,994 billion as at December 31, 2011, to LL 10,314 billionas at December 31, 2012 before decreasing to LL 9,496 billion as at December 31, 2013 and LL 9,580 billion as atJune 30, 2014 while the Bank’s funding in U.S. Dollars increased over the same period from LL 23,353 billion as atDecember 31, 2011 to LL 25,075 billion as at December 31, 2012, LL 30,160 billion as at December 31, 2013 andLL 32,403 billion as at June 30, 2014. The increasing trend in the Bank’s funding in foreign currencies is principallydue to the increase in the Bank’s customers’ deposits, driven by the overall increase in customers’ deposits in theLebanese banking sector, and the increase in customers’ deposits at the Bank’s regional affiliates.

Lebanese Pound-denominated deposits decreased by 2.3% in the six months ended June 30, 2014, as compared to adecrease of 13.3% in 2013, an increase of 3.2% in 2012 and a decrease of 12.2% in 2011, while foreign currency-denominated deposits grew by 11.7% in the six months ended June 30, 2014, 23.5% in 2013, 8.1% in 2012 and 3.5% in2011.

In particular, as at June 30, 2014, 86.6% of the Bank’s total customers’ deposits (including related parties) weredenominated in foreign currency (including 55.0% in U.S. Dollars and 31.6% in other foreign currencies), as comparedto 85% (including 55.8% in U.S. Dollars and 29.2% in other foreign currencies) as at December 31, 2013, 80.0%(including 54.7% in U.S. Dollars and 25.3% in other foreign currencies) as at December 31, 2012 and 79.2% (including55.4% in U.S. Dollars and 23.8% in other foreign currencies) as at December 31, 2011.

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Capital Expenditure

Since December 31, 2010, the Bank has incurred LL 483 billion (U.S.$320 million) in capital expenditures, reflectingcapital expenditures of LL 65 billion in the year ended December 31, 2011, LL 183 billion in the year ended December31, 2012, LL 186 billion in the year ended December 31, 2013 and LL 49 billion in the six months ended June 30, 2014.These capital expenditures, which were funded from internal sources, principally related to the establishment ofOdeabank in Turkey, as well as the continued development of existing operations, principally in Lebanon and Egypt.

Risk Management

The process of risk management at the Bank is comprised of five activities: identification; measurement; monitoring;controlling/mitigating; and reporting. These activities are part of the framework of controls and limits established by theBoard of Directors which reflects the risk appetite, business strategy and market environment of the Bank, as well as thelevels of risk that the Bank is willing to accept in pursuit of its strategic objectives. These limits include credit limits,which are set by country, industry and instrument type, minimum liquidity requirements, interest rate and exchange raterisk limits and operational risk tolerances, as well as limits on other material risks.

Information is independently compiled from all business lines and risk taking units, which is examined and processed inorder to identify and measure risk exposures. The results are reported and presented monthly or more frequently toManagement and at least bi-annually to the Board of Directors.

The Bank has set the following risk management objectives: (i) support the growth of the Bank and the implementationof the Bank’s strategy; (ii) preserve and contribute to the Bank’s financial strength by ensuring that risks and rewardsare balanced and by minimizing the impact of events on capital and profits; (iii) define the risk boundaries within whichthe Bank operates; and (iv) continually monitor the Bank’s risk profile to ensure that it is operating in compliance withthe Bank’s internal risk limits.

In order to achieve these objectives, the Bank’s approach is comprised of four pillars:

Risk Governance: ensuring a clear and effective organisational structure with proper accountability andresponsibility at the Management and Board levels as it relates to risk;

Risk Institutionalization: through the setting of risk limits, Internal Capital Adequacy Assessment Process(“ICAAP”) and policies and procedures;

Risk Infrastructure: with state of the art IT systems that enable better data aggregation, monitoring andreporting; and

Risk Methodologies: using the most appropriate and advanced measurement techniques to assess risk.

Risk Governance

The Risk Department at the Bank operates independently from the business and provides oversight on risk managementand controls. The Risk Department is headed by the Chief Risk Officer, who is a non-voting member of the GroupExecutive Committee and reports directly to the Chief Executive Officer. The Chief Risk Officer has access to theBoard of Directors through the Board Group Risk Committee.

The Bank has defined the following guiding principles that underpin its approach to risk management, which include:

a three-line risk management structure (i) along business lines, (ii) by the Risk and Compliance Departmentand (iii) by internal and external auditors;

risks being properly disclosed to various internal and external stakeholders in a transparent, systematic,structured, timely and accurate manner, in order to allow various prompt and informed decision-making; and

maintain independence of the risk management function from the Bank’s business lines and Management.

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Risk Institutionalization

Risk Charter

The Risk Charter is a Board-approved set of guiding principles underpinning the responsibilities, authority andfunctioning of Risk Management across the Bank. The purpose of the Risk Charter is to set out consistent and unifiedRisk Management practices across the Group by defining the mission, scope, principles, risk management framework,risk management process, internal governance, as well as roles and responsibilities of the Bank’s risk function designedto support the Bank’s strategic objectives.

Risk Appetite

The risk appetite, which is set on an annual basis, is meant to provide the boundaries within which business linesoperate. The Risk Department, the Bank’s various business departments, Management and the Board Group RiskCommittee work together to determine the risk appetite of the Bank. The risk appetite, which is also approved by theBoard of Directors, is expressed in both qualitative and quantitative statements. The latter includes a set of metricscovering risk targets, tolerances and limits. The Bank maintains constant communication of the risk appetite to itsbusiness lines and monitors the risk profile to ensure that it always remains within the Board of Directors’ approvedlimits.

Stress Testing

Stress testing is used by the Bank to measure the Bank’s vulnerability to exceptional but plausible events. The Bank hasformalized stress testing with a Board of Directors-approved document and conducts regular stress testing for materialrisks to which it is exposed and resulting from both on- and off-balance sheet transactions. The results of stress tests,which are considered an integral part of the ICAAP, also feed into the yearly capital planning and budgeting process.

The selection of stress testing scenarios is the result of discussions between the Risk Department, Group Finance andthe Bank’s business lines, in consultation with the Group Research Department. The results are reported to the GroupExecutive Committee, Board Group Risk Committee and the Board of Directors depending on the materiality andrelevance of the stress test at hand.

Risk Infrastructure

The Risk Department and Group Finance have set out to create an analytical and reporting platform for the Group froma unified set of data. This project was named “Integrated Finance and Risk Management Framework” (the “IFRMProject”) and will facilitate data aggregation in a timely, consistent and consolidated manner. It will also allow theBank to rely on advanced analytical tools as part of its decision-making process.

The Bank is proceeding with the implementation of the various phases of the IFRM Project, while continuing to rely onexisting tools and systems to address its current risk reporting and risk aggregation requirements.

Risk Methodologies

The Bank has made a strategic decision to move towards advanced approaches in risk management, which require bothcompetent quantitative skills and adequate analytical tools. The Bank has strengthened its risk management frameworkby adopting best practices for the design, calibration, validation and maintenance of various risk-related models. Suchmodels will facilitate the quantification of the Bank’s risk, but also support the Bank in its decision-making processes.

Relevant Risks

As a growing financial institution with operations across three continents, the Bank faces a frequently changing array ofrisks, including, but not limited to, credit risk, market risk, currency risk, interest rate risk, equity price risk, prepaymentrisk, liquidity risk and operational risk. In addition, the Bank is exposed to legal and reputational risks.

Credit Risk

Credit risk is the risk that the Bank will incur a loss because its customers or counterparties fail to discharge theircontractual obligations. Each commercial transaction of the Bank is accompanied with an independent risk assessmentthat identifies the key risks, as well as the return on a risk-adjusted basis within the underlying transaction.

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Measurements are performed to effectively assess the probability of risk occurrence and to make assumptions as to theirpotential severity. Depending on the nature of the obligor, the Bank employs various credit rating models.

Measurement models and related assumptions are routinely subject to internal model review, empirical validation andbenchmarking with the goal of ensuring that the Bank’s risk estimates are reasonable and reflective of the risk of theunderlying positions.

The Bank controls credit risk by setting limits on the amount of risk it is willing to accept for individual counterpartiesand for geographical and industry concentrations (among others), and by monitoring exposures in relation to suchlimits.

Credit concentrations arise when a number of counterparties are engaged in similar business activities in the samegeographic region, or have similar economic features that would cause their ability to meet contractual obligations to besimilarly affected by changes in economic, political and other conditions.

The Bank has established limits for exposures within and to various asset classes including loans and advances tocustomers, financial institutions, sovereign exposure and other financial instruments and retail products.

Lending Policies

Lending Limits

While Lebanese regulatory authorities impose no special lending limits on banks relating to economic sectors, Lebanesebanks are subject to regulatory lending limits by reference to geographic sectors or countries. Central Bank Decision№ 7055 dated 13 August 1998, as amended by Decision № 11309 dated December 20, 2012, sets the maximum allowable weighted credit limit for loans to a single borrower (or a group of related borrowers) at: (i) 20.0% of thecombined shareholders’ equity of the bank’s domestic and foreign banking operations with respect to loans extended toa single borrower (or a group of related borrowers) the proceeds of which are to be used in Lebanon or outsideLebanon, or (ii) 10.0% of the combined shareholders’ equity of the bank’s domestic and foreign banking operationswith respect to loans extended to a single borrower (or a group of related borrowers) the proceeds of which are to beused in countries with sovereign ratings, subject to the following:

for countries with a rating above BBB: (x) the aggregate exposure of a bank to borrowers in all such countriesmay not exceed 400% of the combined shareholders’ equity of the bank’s domestic and foreign bankingoperations; and (y) the aggregate exposure of a bank to borrowers in any one such country may not exceed50.0% of the combined shareholders’ equity of the bank’s domestic and foreign banking operations;

for countries with a rating below BBB: (x) the aggregate exposure of a bank to borrowers in all such countriesmay not exceed 100.0% of the combined shareholders’ equity of the bank’s domestic and foreign bankingoperations; and (y) the aggregate exposure of a bank to borrowers in any one such country may not exceed25.0% of the combined shareholders’ equity of the bank’s domestic and foreign banking operations; and

the relevant country limit imposed on a bank’s foreign banking operations may be increased by an additional25% of the combined shareholders’ equity of the bank’s domestic and foreign banking operations with respectto loans granted and to be used in the country in which the relevant foreign banking operation conducts itsprincipal business; provided such loans are financed by local deposits.

In any event, pursuant to Intermediary Decision № 11309, exposure to any single borrower or group of borrowers cannot exceed 20% of the bank’s consolidated shareholders’ equity.

In view of its regional expansion, the Bank has established specific Key Risk Indicators pertaining to asset quality andconcentration, as well as internal limits and guidelines that are defined based on an updated risk profile and theapproved risk appetite of the Group. The output is generated through a risk assessment report, which is revised semi-annually and presented to the Group Executive Committee prior to its submission for approval to the Risk Committee ofthe Board and then the Board.

Loan Approval Procedures

The Bank has clearly established processes related to loan origination, documentation and maintenance of credits filesacross the Group. The on-going review and accounting for loans are the responsibility of the credit department of therelevant business lines, which undertook the initial evaluation. Renewal of facilities is subject to the same approvalprocedures as the initial granting of facilities. The Corporate Credit Risk Department within the Risk Department

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oversees the review and follow-up procedures initiated by the bank’s various business departments. The CorporateCredit Risk Department may adjust loan ratings of particular borrowers based on its review and follow up as it sees fit.

The Bank’s loan approval process normally begins at the branch level where credit applications are usually received.Applications are submitted to different credit committees for approval (as more fully described below), depending onthe size and nature of the applicant’s total borrowings with the Group and entities of the Bank.

The credit analysis report follows a specific methodology aimed at identifying all the risks involved in the proposedtransaction as well as its advantages. In preparing the report, the credit officer or relationship manager examinesqualitative, as well as quantitative risks, including the history of the borrower, details of the purpose of the requestedfacility, the proposed source and method of repayment, the proposed schedule for repayment, the borrower’s cash flow,the proposed collateral and an estimate of the value of the total assets and liabilities, and of the overall business andfinancial risk, of the borrower and any guarantor, and undertakes a thorough SWOT analysis. The Bank has variouslevels of credit approval authorities, depending on the nature and limit of the requested facilities, namely: the Board ofDirectors; the Executive Committee; and other credit committees, with authorities defined by limit and region.

The following table sets forth credit amounts that can be approved at the various decision-making levels for facilitiesbooked in Lebanon:

Committee Lending Limit

Board of Directors................................................................... Greater than U.S.$50,000,000(1)

Executive Committee .............................................................. Up to U.S.$50,000,000(2)(3)

Corporate Credit Committee .................................................... Up to U.S.$25,000,000(3)

Commercial Credit Committee................................................. Up to U.S.$2,000,000(3)

Network Credit Committees .................................................... Up to U.S.$1,000,000(3)(4)

Sub- Network Credit Committees ............................................ Up to U.S.$25,000(5)

_________Notes:(1) Weighted according to Central Bank Decision № 7055 dated August 13, 1998, as amended by Decision № 11309 dated December 31, 2012. (2) The Executive Committee is required to send notice to the Board of Directors of any credit approval of a weighted facility in an amount greater

than U.S.$25,000,000. Furthermore, Central Bank Circular № 81 as amended in June 2005, stipulates that all weighted facilities in amounts of U.S.$1 million or more or exceeding 1% of a bank’s net capital, whichever is smaller; which are granted to a single borrower or group ofborrowers (as defined in applicable Central Bank regulations) must be presented to the Board of Directors for its information.

(3) Weighted according to the Bank’s internal ratios.(4) The lending limit for approval by the Network Credit Committee ranges between U.S.$200,000 and U.S.$1,000,000 depending on authorities

granted to the relevant commercial or corporate branch. For credits that are not within network management authority, the approval of theCommercial Credit Committee is required.

(5) Some branch managers have the authority to grant loans within a credit limit set at U.S.$5,000, U.S.$10,000 or U.S.$25,000, depending on thebranch size and profile.

Credit committees are responsible for the approval of facilities, up to the limit assigned to them. Once approved by therelevant credit committee, a facility is disbursed when all requirements set by the latter are met and documents intendedas collateral are reviewed and verified by the credit administration department.

As part of its credit approval process, the Bank continues to monitor and control the environmental and social impact ofits activities through refraining from financing certain activities, including the production of products or activitiesdeemed to be illegal or subject to international bans, as well as activities causing pollution or potential environmentaldamage.

Collateral

The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelinesare implemented regarding the acceptability of types of collateral and valuation parameters. The main types of collateralobtained from customers include but are not limited to pledges of bank accounts, pledges of securities portfolio, realestate mortgages, and bank guarantees.

Management monitors the market value of collateral and triggers margin calls in accordance with the terms of the creditfacility being secured and the implicated collateral.

Loan Classification

On April 27, 2011, the Central Bank amended its basic Circular № 58 (“Circular 58”), intermediary decision № 7159, by modifying the system of loan classifications for supervisory procedures, which requires all banks and financial

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institutions in Lebanon to classify loans and facilities according to six categories of risk: (i) ordinary/regular accounts;(ii) follow-up accounts; (iii) accounts to be followed-up and regularized; (iv) sub-standard accounts; (v) doubtfulaccounts; and (vi) bad or ailing accounts. The Bank continuously monitors its loan portfolios to ensure compliance withall applicable requirements and requests the entities to report accordingly.

In addition, in Circular 58, the Central Bank introduced a more expanded Loan Grading System to be applied internallyfor the classification of loans suggesting the use of a scale from 1-10 as follows: (1) excellent; (2) strong; (3) good; (4)satisfactory; (5) adequate; (6) marginal; (7) vulnerable; (8) substandard; (9) doubtful; and (10) loss. This scale isexpected to be mapped to the above mentioned six categories across the Group.

In line with Management’s decision to adopt advanced approaches to capital requirements for credit risk, in May 2007,the Bank acquired an internal rating model from Moody’s Risk Analyst. This rating model formalizes the risk ratingprocess, combining and analyzing financial and non-financial data in a flexible, objective and structured framework.The model is applied across all the Bank’s entities to provide a homogenous internal rating assessment across theGroup.

During 2012, the Bank initiated a modeling workshop through which two fully integrated internal rating models forSMEs were designed and rolled out in April 2012. One of these rating models is utilized for SMEs, which haveadequate financial information available, while the second provides a scorecard for SMEs with limited or no financialdata. In addition, in 2013, the Bank introduced a new, internal rating model for Project Finance customers, which ratesand ranks project finance obligors.

The Bank benefits from managing its financial portfolio through classifications, records and techniques aiming toconsider all risk aspects. Financial assets bearing minimum exposure to credit risk (including credit facilities granted toentities with an excellent risk profile) are classified as “High” grade assets. Financial assets in respect of which allcontractual commitments have been met and which did not suffer a permanent decrease in value are classified as“Standard” quality.

Credit Monitoring

The Bank maintains continuous monitoring of its portfolio to assess credit quality. Reports are sent to the GroupExecutive Committee and to the Board of Directors detailing credit risk profiles, including follow-up accounts, largeexposures, risk ratings and concentration by industry, geography and related obligors.

Individually assessed impaired loans are determined by evaluating the exposure to loss on a case-by-case basis,compared to defined limits and parameters. Impaired loans are directly managed by the Recovery and RestructuringDepartment, which is responsible for formulating a workout strategy in coordination with the Legal and ComplianceDepartment. Credit Committees are responsible for approving workout strategies.

Loan Restructurings

The Bank attempts to restructure problem loans, with a view to managing customer relationships, maximizing collectionopportunities and, if possible, avoiding foreclosure or repossession. Restructuring activities include, inter alia, modifiedor extended payment arrangements pending a change in circumstances and deferred foreclosure or enforcement action.

Restructuring policies and practices are based on indicators or criteria which, in the judgment of management, indicatethat repayment will probably continue but not on agreed terms. The application of these policies varies according to thenature of the market and the type of the facility.

Provisioning and Write-Off Policies

An evaluation of loan loss provisions is made on a quarterly basis in order to sustain the quality of the Bank’s loanportfolio. As such, all classified accounts are reviewed on a quarterly basis (or more frequently if needed) and theRecovery and Restructuring Department makes recommendations for specific provisions against these accounts. Theserecommendations are submitted to the Remedial Committee for approval. Specific provisions in excess of U.S.$1million for a classified obligor require the approval of the Executive Committee. Impairment is also assessed on acollective basis to cover expected losses for loans not subject to individual assessment and for groups of similar loans,which may not be considered significant individually.

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The following table shows the level of the Bank’s doubtful loans, and the provisions taken by the Bank in respectthereof, in each case, as at the dates indicated:

As at June 30,2014(1)

As at December 31,2013 2012 2011

(LL millions)Doubtful loans................................ 627,409 636,765 437,235 389,401Unrealised interest................................ (96,706) (82,285) (58,350) (83,451)Provisions ............................................... (312,457) (326,839) (275,091) (217,015)

Net doubtful loans ................................ 218,246 227,641 103,794 88,935

Gross sub-standard loans ...................... 12,314 12,161 17,750 133,414of which unrealized interest ................. 2,633 2,150 1,835 15,989

Collective provisions .............................. 257,050 197,801 166,652 151,523_________Note:(1) Unaudited.

Monitoring of the ratios relating to non-performing loans and the substandard portfolio is performed regularly in orderto ensure its compliance with the agreed limits set by the Board of Directors at any time.

Loans deemed unrecoverable are required to be partially or fully written-off after taking into consideration thefollowing guidelines: (i) all efforts to recover the bad debt have failed; (ii) the borrower’s bankruptcy or inability torepay has been established beyond any doubt; and (iii) legal remedies have proven to be futile or cost prohibitive.

Requests for write-offs are submitted to the Remedial Committee for approval. Approved write-offs are notified to theExecutive Committee and the Board of Directors.

Market Risk

Market risk is defined as the potential loss in both on- and off-balance sheet positions resulting from movements inmarket risk factors, such as foreign exchange rates, interest rates and equity prices.

The market risk function identifies, measures, monitors, controls, mitigates and reports actual and potential market risksto which the Bank is exposed, using consistent and comprehensive risk measurements, aggregation, management andanalysis. The Bank continuously monitors market risk in order to ensure that the risk profile of the Bank remains withinthe Board of Directors-approved risk tolerances and limits.

Currency Risk

Currency risk is the risk that the value of a portfolio will fall as a result of changes in foreign exchange rates. The majorsources of this type of risk are imperfect correlations in the movements of currency prices and fluctuations in interestrates. The Bank is subject to currency risk on financial assets and liabilities that are listed in currencies other than theLebanese Pounds.

The Central Bank permits the Bank to maintain a net open foreign currency exchange position not exceeding at anytime 1% of total net equity, provided that the global currency exchange position does not exceed 40% of total netequity. In addition to regulatory limits, the Board of Directors has set limits on positions by currency, which aremonitored regularly.

Interest Rate Risk

Interest rate risk is the risk that changes in interest rates will affect the future profitability or fair value of financialinstruments. The Bank is exposed to interest rate risk as a result of mismatches of interest rate re-pricing of assets andliabilities. Positions are monitored on a regular basis by management and, whenever possible, hedging strategies areused to ensure positions are maintained within established limits.

Since no single measure can reflect all aspects of interest rate risk, the Bank uses various measurement methodologies,including net interest income sensitivity and economic value sensitivity.

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Equity Price Risk

Equity price risk is the risk that the value of a portfolio will fall as a result of changes in market prices. Risk factorsunderlying this type of risk include a range of equity and index pricing factors corresponding to different markets,currencies and maturities.

The Bank sets limits on equity exposures and the types of equity instruments in which traders are allowed to holdpositions. Equity risk is measured in cash terms, such as the market value of a stock or index position, and also againstprice sensitivity constraints, such as the sensitivity of the value of a portfolio to changes in the underlying asset price.These measures may be applied to an individual position or to a portfolio of equities. The Bank has a very low toleranceto market risk stemming from changes in equity prices.

Prepayment Risk

Prepayment risk is the risk that the Bank will incur a financial loss due to early unscheduled repayment or repaymentrequests from counterparties. The Bank’s assets subject to prepayment predominantly bear interest at floating rates, and,accordingly, Management believes that the Bank’s prepayment risk is not material.

Liquidity Risk

Liquidity risk is the risk that the Bank will be unable to meet its payment obligations when they fall due under normaland stressed circumstances. Liquidity risk can manifest itself in the following two forms: (i) funding liquidity risk,which is the risk that the Bank’s financial condition is adversely affected as a result of its inability to meet bothexpected and unexpected current and future cash flow and collateral needs in a timely and cost-efficient manner; and(ii) market liquidity risk, which is the risk that the Bank cannot easily offset or eliminate a position at the market pricebecause of inadequate market depth or market disruption ultimately leading to loss.

The Bank maintains pools of liquid unencumbered securities and short-term placements. The Bank also activelymonitors the availability of funding across various geographic regions and in various currencies. Its ability to generatefunding from a range of sources in a variety of geographic locations and in a range of tenors is intended to enhancefinancial flexibility and limit funding concentration risk.

The monitoring and setting of the Bank’s risk appetite for liquidity occur independently for each entity. Given theBank’s operating environment, the Bank monitors liquidity adequacy in each currency separately, especially forsignificant currency positions.

The liquidity risk policy for identifying, measuring, monitoring, and reporting liquidity risk, as well as the contingencyfunding plan, are recommended by the Risk Department, reviewed by the Asset Liability Committee (“ALCO”),approved by the Group Executive Committee and ratified by the Bank’s Board of Directors. Measurement, monitoringand reporting of liquidity risk is primarily performed by either the Treasury or the Risk Department, each of whichreport to the ALCO and may escalate matters to ALCO based on set key risk indicators and regulatory and internallimits. The Treasury is responsible for executing the Bank’s liquidity policy, as well as maintaining the Bank’s liquidityrisk profile in accordance with directives set by the ALCO and the risk appetite set by the Bank’s Board of Directors.

The Bank employs a variety of metrics to monitor and manage liquidity. One set of analyses used by the Bank relates tothe timing of liquidity sources versus liquidity uses (e.g., liquidity gap analysis). A second set of analyses focuses onratios of funding and liquid assets and collateral (e.g., measurements of the Bank’s reliance on short-term unsecuredfunding as a percentage of total liabilities, as well as analyses of the relationship of short-term unsecured funding tohighly liquid assets, the loans-to-deposits ratio and other balance sheet measures).

Operational Risk

Operational risk is the risk of loss arising from system failure, human error, fraud or external events. Operational riskexists in all activities and can materialize in various ways such as errors, frauds, or business interruptions that can resultin direct and indirect loss of income, such as reputational damage.

At the Bank, the primary responsibility for the management of operational risk resides with the business lines. Tomaintain operational risk within the Board of Directors-approved risk tolerances, operational risks are assessed on aregular basis by evaluating the effectiveness of the control design against risk registries and implementing correctiveactions where needed. These risk registries are organized within standardized categories used for reporting tomanagement and to the Board of Directors. In addition, a system of incident reporting and a set of risk indicators helpmanage ex-ante risk assessments and improve controls in order to prevent a loss of income exceeding tolerances.

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As an additional layer of mitigation against operational events, the Bank purchases comprehensive insurance coveragefrom highly rated reinsurers. This coverage is purchased when economically feasible and includes coverage againstpolitical violence, strikes, riots and terrorism in countries that experience unrest.

Capital Management

By maintaining an actively managed capital base, the Bank’s objectives are to cover risks inherent to the business, toretain sufficient financial strength and flexibility to support new business growth and to meet national and internationalregulatory capital requirements at all times.

Regulatory Capital

The adequacy of the Bank’s capital is monitored using, among other measures, the rules and ratios established by theCentral Bank. These ratios measure capital adequacy by comparing the Bank’s eligible capital with its balance sheetassets and off-balance sheet commitments at a weighted amount to reflect their relative risk

In 2011 and in line with requirements under the Basel III Accord, the Central Bank issued Intermediary Circular № 282, which amended the minimum total capital adequacy ratio from the current 8% to 12% to be achieved gradually until2015. The limit of the common equity Tier I ratio is expected to increase to 8%, the Tier I ratio to 10% and the totalcapital ratio to 12% by the end of 2015. The 2015 figures include a capital conservation buffer of 2.5%. As at December31, 2013, the Bank’s common equity Tier I ratio was 7.8%, the Tier I ratio was 10.1% and the total capital ratio was12.1%, (including profits for 2013, but excluding dividends).

Internal Capital

In 2014, the Bank submitted the consolidated ICAAP report to the Central Bank, which was reviewed by the GroupExecutive Committee and the Board Group Risk Committee and approved by the Board of Directors.

ICAAP includes the process and measures designed to ensure the following: (i) all material risks are appropriatelyidentified and measured; (ii) internal capital is allocated to cover the various material risks and risk profile; (iii) currentand future capital needs have been considered with regard to the risk profile, risk appetite, strategy, stress tests,governance and other factors.

As a principle, the Bank views the ICAAP as a fundamental internal initiative, as opposed to a simple regulatorycompliance submission. In preparation for advanced approaches in the Basel framework, the Bank adopted theFoundation-IRB approach within the internal credit risk capital charges calculations for certain assets classes in order tobetter capture the quality and risk levels of the portfolios. The result of the ICAAP indicates that, when taking allrelevant and material risks to the Bank, including various stress testing scenarios, the Bank’s various capital adequacyratio remained well above the minimum requirement.

Capital adequacy requirements applicable to each of the Bank’s banking subsidiaries are set and monitored by theirrespective local banking supervisor.

Risk Management Structure

Board of Directors

The Board of Directors’ responsibilities with regards to risk management are to ensure that the risk managementframework is designed in a way to enhance and facilitate the Bank’s ability to pursue its strategic objectives whileensuring that no excessive risk is taken beyond the Bank’s approved risk appetite and tolerance. The Board ofDirector’s responsibilities also include defining the Bank’s risk appetite, establishing limits and reviewing the Bank’srisk framework and policies. These activities are conducted primarily through the Board Group Risk Committee.

Group Executive Committee

The Group Executive Committee is a senior committee nominated by the Board of Directors whose mandate is tosupport the Board of Directors in the implementation of its strategy, to support the Group Chief Executive Officer in theday-to-day management of the Bank, to develop and implement business policies for the Bank and to issue guidance forthe Group within the strategy approved by the Board of Directors. The Group Executive Committee is involved inreviewing and submitting the risk policies to the Board of Directors through the Board Group Risk Committee.

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The Group Executive Committee reviews all risk reports and is responsible for approving credit and provisions over acertain threshold. The Group Executive Committee is a forum where emerging risk issues are discussed, decisionsregarding risk are made and risk-related matters are periodically reviewed. In 2013, the Group Executive Committeeheld 24 meetings.

Board Group Risk Committee

The Board Group Risk Committee is a subcommittee of the Board of Directors. The majority of its members areindependent members of the Board of Directors. The Board Group Risk Committee’s function is to monitor and overseeall of the Bank’s risk activities, risk-related reports issued and Group-wide stress testing scenarios, examine the riskcontrol framework, escalate key issues to the Board of Directors, review the risk appetite, the ICAAP and the Bank’srisk profile. In 2013, the Board Group Risk Committee held six meetings.

Asset Liability Committee

The ALCO is a management committee responsible in part for managing market risk exposures, liquidity, fundingneeds and contingencies. The ALCO is responsible for defining the Bank’s strategies for managing market riskexposures and ensuring that those strategies are implemented by the Treasury Department so that exposures aremanaged within approved limits and in a manner consistent with the risk policies and limits approved by the Board ofDirectors.

Internal Audit Department

All risk management processes are independently audited by the Internal Audit Department at least annually. Thisincludes the examination of both the adequacy and effectiveness of the risk management framework. The Internal AuditDepartment discusses the results of its assessments with senior management and reports its findings andrecommendations to the Audit Committee of the Board of Directors.

Risk Management Department

The Risk Management Department is responsible for ensuring that risks are properly identified, measured, monitored,controlled and reported to heads of business lines, senior management, ALCO, Board Group Risk Committee and theBoard of Directors. In addition, the Risk Management Department: (i) works closely with and assists seniormanagement in establishing the risk limits and ensuring that proper controls are in place to mitigate various risks; (ii)defines the policies and procedures to be adopted; (iii) monitors risks across the Group and aggregates such risks; and(iv) constructs, manages, tests and revises risk models and administers model implementation and training programs.

Local Risk Management Functions

Local risk management functions vary in size and scope. Local risk managers are responsible for: (i) complying withthe Risk Department’s policies and guidelines; (ii) assessing risks using methodologies developed at the Group leveland adapted to local circumstances; and (iii) reporting the risk profile to their respective senior management and Boardof Directors, as well as to the Risk Department.

Compliance and Anti-Money Laundering

The Bank has established a Group Compliance Department, which is responsible for overseeing the network ofcompliance departments across the Group in Lebanon and abroad. Its main functions are to:

verify that an adequate regulatory compliance process is in place with the aim of ensuring that the Group’sbusiness operations meet all applicable legal and regulatory obligations in a timely, effective and efficient manner;

effectively manage the Group Anti-Money Laundering & Combating the Financing of Terrorism (“AML/CFT”)program and meet all related legal and regulatory requirements;

inform the Board of Directors and Management of key compliance risks and their consequences, as well as howthese risks are adequately coordinated and mitigated at the Group level;

verify that Compliance Departments across the Group are properly constituted, staffed and trained;

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monitor the effectiveness of Compliance Departments and resources across the Group and provide as needed,advice and support on critical country matters, issues with franchise implications, the interpretation of legal andregulatory requirements and the application of international standards and best practices;

develop group policies and procedures covering AML/CFT, and of the regulatory and operational complianceissues in line with international standards, best practices and applicable laws;

monitor the implementation of the above policies and procedures across the Group and verify that ComplianceDepartments have all necessary methods and tools (including software systems) for that purpose; and

verify that Compliance Departments conduct compliance training and awareness covering AML/CFT (includingKYC, customer due diligence and transaction monitoring) and other compliance topics as needed.

The Bank has also established an anti-money laundering management committee, which oversees compliance with anti-money laundering regulations and procedures.

Competition

In Lebanon, the Bank considers the other 13 banking institutions in the Alpha Bank Group, which are ranked byBankdata, to constitute its main competitors. According to Bankdata’s 2013 rankings, which are based on unauditedresults as reported by the various banks, the Bank ranked first among all Lebanese banks in terms of total assets,shareholders’ equity, customers’ deposits, loans and advances and net profit. According to its Research Department, theBank also ranked among the top 25 banking groups in the MENA region by assets, deposits and shareholders’ equity.See “The Banking Sector and Banking Regulation in Lebanon—Banking Sector”.

Legal Proceedings

While the Bank is party to various legal proceedings in its ordinary course of business, there are no governmental, legalor arbitration proceedings (including any such proceedings which are pending or threatened of which the Bank is aware)which may have or have had in the recent past (covering the 12 months immediately preceding the date of this OfferingCircular) a significant effect on the financial position or profitability of the Bank.

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DIRECTORS, MANAGEMENT AND EMPLOYEES

Board of Directors

The Bank is governed by its Board of Directors. The By-laws of the Bank provide that the number of Directorsconstituting the Bank’s Board of Directors shall not be less than three nor more than 12, that all Directors must beshareholders of the Bank and that a majority of the Directors must be of Lebanese nationality. As at the date of thisOffering Circular, the Board of Directors consists of ten members, seven of whom are Lebanese citizens.

The members of the Board of Directors are elected by the General Meeting of Shareholders for a period of three years,renewable at the end of the term of office. Under certain conditions, the General Meeting of Shareholders is empoweredto relieve members of the Board of Directors of their functions. Members of the Board of Directors are not permitted tocarry out similar functions in another bank without the authorization of the General Meeting of Shareholders, suchauthorization to be renewed annually.

Members of the Board of Directors elect a Chairman from among themselves. The Chairman of the Board of Directors,in his capacity as General Manager, has extensive powers to execute resolutions adopted by the General Meeting ofShareholders, undertake operations necessary for the daily functioning of the Bank and generally represent the Bank inits commercial activities. In the event that he is temporarily unable to perform his functions, the Chairman may delegatesome or all of his authority to a member of the Board of Directors for a stated period of time, provided that thedelegation is published in Lebanon’s Register of Commerce. Additionally, the Chairman may, under certaincircumstances, delegate some of his managerial responsibility to another General Manager or managers, under hispersonal responsibility and subject to the approval of the full Board of Directors.

The table below sets forth certain information regarding the members of the Board of Directors of the Bank as at thedate of this Offering Circular:

Title Name AgeDate of Initial Appointment

as a Director of the Bank

Chairman ...............................................H.E. Mr. Raymond W. Audi(Chairman)

81 February 1962

Member .................................................Dr. Marwan M. Ghandour(Vice-Chairman)(Independent)

70 March 2000

Member .................................................Mr. Samir N. Hanna (GroupChief Executive Officer)

69 August 1990

Member .................................................Sheikha Suad H. Al-Homaizi 71 February 1962Member .................................................Mr. Marc J. Audi 56 March 1996

Member .................................................Dr. Freddie C. Baz 61 March 1996Member .................................................Sheikha Mariam N. Al-

Sabbah (Independent)65 March 2001

Member .................................................Dr. Imad I. Itani 52 June 2002Member .................................................Sheikh Abdullah I. Al-

Hobayb (Independent)71 April 2010

Member .................................................Dr. Khalil M. Bitar(Independent)

71 April 2010

Secretary of the Board ............................Mr. Farid F. Lahoud

The business address for each member of the Board of Directors and the Secretary of the Board is Bank Audi S.A.L.,Bank Audi Plaza, Omar Daouk Street, Bab Idriss, Beirut 2021 8102, P.O. Box 11-2560, Beirut, Lebanon.

On April 8, 2013, the Ordinary General Meeting of the Bank’s shareholders resolved to elect the above members of theBoard of Directors for a three-year term.

H.E. Mr. Raymond W. Audi

Raymond Audi has acted as Chairman of the Board of Directors and General Manager since December 2009. He alsoserved as Chairman of the Board of Directors and General Manager from 1998 through to 2008, resigning from thisposition when he was appointed Minister of the Displaced. Mr. Audi resumed his position as Chairman of the Board ofDirectors effective December 22, 2009.

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He started his banking career in 1962, when, together with his brothers and with prominent Kuwaiti businessmen, hefounded the Bank, building on a successful long-standing family business.

Raymond Audi has played an active role in leading the Bank through both prosperous and challenging times to itscurrent status as a widely recognized leading Lebanese and regional bank. He served as President of the Association ofBanks in Lebanon in 1994.

Raymond Audi is the recipient of several honors and awards, including, in July 2007, an Honorary Doctorate inHumane Letters from the Lebanese American University.

Dr. Marwan M. Ghandour

Marwan Ghandour has been an independent member of the Board of Directors since March 2000 and the Vice-Chairman of the Board of Directors since December 2009. He is a previous Vice-Governor of the Central Bank ofLebanon. He held this position between January 1990 and August 1993, with primary responsibilities in the area ofmonetary policy. During this period, he was also a member of the Higher Banking Commission and various othergovernment committees involved in economic policy. In this capacity, he liaised with various international institutionssuch as the International Monetary Fund (the “IMF”), the World Bank and the Bank for International Settlements(BIS).

From 1995 until July 2011, Marwan Ghandour served as Chairman and General Manager of Lebanon Invest sal, aleading financial services group in the region whose holding company merged with the Bank in 2000. He also served asChairman of the Board of Directors of Audi Investment Bank sal, a wholly-owned subsidiary of the Bank, from 2005until December 2011. He was elected Chairman of the Board of Directors of Banque Audi (Suisse) SA in March 2011and Vice-Chairman of the Board of Directors of Odeabank in June 2012. He also serves as member of the Board ofDirectors of several affiliates of the Bank.

Marwan Ghandour holds a PhD in Economics (Econometrics) from the University of Illinois (post-doctorate research atStanford University).

Mr. Samir N. Hanna

Samir Hanna joined the Bank in January 1963. He has held several managerial and executive positions across variousdepartments of the Bank. He was appointed General Manager of the Bank in 1986 and member of its Board of Directorsin 1990. In the early 1990s, he initiated and managed the restructuring and expansion strategy of the Bank, transformingit into a strong banking powerhouse offering universal banking products and services including corporate, commercial,retail, investment, and private banking.

He grew the Bank to its current position as the largest bank in Lebanon (and among the top 20 Arab banking groups),with a presence in 13 countries, consolidated assets exceeding U.S.$39 billion, consolidated deposits exceeding U.S.$33billion and group staff headcount exceeding 6,000 employees.

Samir Hanna is also the Chairman of Odeabank and member of the Board of Directors of several other affiliates of theBank. He currently serves as the Group Chief Executive Officer and the Chairman of the Group Executive Committee,and heads all aspects of the Bank’s Executive Management.

Sheikha Suad H. Al-Homaizi

Sheikha Suad Al Homaizi has been a member of the Board of Directors of the Bank since February 1962 and is one ofthe founders of the Bank. She is the widow of late Sheikh Jaber Al Sabbah, a prominent figure of the ruling family ofKuwait. Sheikha Suad Al Homaizi serves as Chairman of the Commercial Kuwaiti Company Hamad Saleh Al Homaizi,which owns international licenses for pharmaceutical products, and is a member of the Board of Directors of severalother Kuwaiti companies.

Mr. Marc J. Audi

Marc Audi started his banking career at Bank Audi France in 1981. He then moved to Bank Audi California where hewas appointed Director and Executive Vice-President. He later returned to Lebanon to join the Bank in 1993, and wasappointed member of its Board of Directors in 1996. He has held executive responsibilities successively in CommercialLending and Capital Markets divisions. Marc Audi served as General Manager of Banque Audi Suisse, the PrivateBanking arm of the Bank, until 2005 and remains a member of its Board of Directors. He also serves as member of the

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Board of Directors of several affiliates of the Bank, and has been General Manager of the Bank since 2004 where hecurrently acts as the Lebanon Country Manager.

Marc Audi holds a Master’s of Business Administration from the University of Paris IX – Dauphine.

Dr. Freddie C. Baz

Freddie Baz joined the Bank in 1991 as Advisor to the Chairman and founded the Secretariat for Planning andDevelopment at the Bank. As the Group Chief Financial Officer and Strategy Director of the Bank, he has overall authorityover the finance and accounting, MIS and budgeting functions throughout the Group, and is responsible for thedevelopment of the Group strategy. He is also the Chairman of the Board of Directors of Bank Audi France, a whollyowned subsidiary of the Bank and is a member of the Board of Directors of several affiliates of the Bank. Freddie Baz isthe Managing Director of Bankdata Financial Services WLL which publishes Bilanbanques, the only reference inLebanon that provides an extensive structural analysis of all banks in Lebanon.

Freddie Baz holds a State PhD degree in Economics from the University of Paris I (Panthéon – Sorbonne).

Sheikha Mariam N. Al-Sabbah

Sheikha Mariam Al Sabbah is the daughter of late Sheikh Nasser Sabah Al Nasser Al Sabbah and the widow of the lateSheikh Ali Sabah Al Salem Al Sabbah, who was the son of the former Prince of Kuwait and who held severalministerial positions in Kuwait, notably Minister of Interior. Sheikh Nasser Al Sabbah was one of the founders of theBank. Sheikha Mariam Al Sabbah is a member of the Board of Directors of several Kuwaiti companies.

She has been a member of the Board of Directors since March 2001.

Dr. Imad I. Itani

Prior to joining the Bank, Imad Itani held several key positions in Corporate Finance for major energy companies inCanada. In parallel, he taught economics and finance to graduate students at the American University of Beirut. Hejoined the Bank in 1997 and headed the team that successfully launched the Bank’s retail business line, currently amajor pillar of the Bank’s innovative and leading position. In 2002, Imad Itani was appointed Deputy General Managerand member of the Board of Directors. He was later appointed General Manager - Head of Group Retail Banking. ImadItani is also the Chairman of the Bank’s Sudanese Islamic Banking subsidiary, the Chairman of Audi Investment Bank,a wholly owned subsidiary of the Bank and member of the Board of Directors of Odeabank, in addition to hisresponsibilities as Head of Group Retail Banking and Head of Group Islamic Banking.

Imad Itani holds a PhD in Economics from the University of Chicago.

Abdullah I. Al-Hobayb

Abdullah Al-Hobayb is the Chairman of Audi Capital and was, until July 2014, a member of the Boards of Directors ofBank Audi Egypt and Odeabank. He was also an advisor to the previous Board of Directors of the Bank. He is theChairman of several leading companies in Saudi Arabia comprising ABB Saudi Arabia (a leader in power andautomation technologies), General Lighting Company Ltd (one of the largest manufacturers in the Middle East lightingindustry), Ink Products Company Ltd (manufacturer of industrial ink) and United Industrial Investments Company Ltd(a leading paint manufacturing company).

Abdullah Al-Hobayb holds a Master’s degree in Electrical Engineering from Karlsruhe University in Germany.

Khalil M. Bitar

Khalil Bitar is a current Professor of Physics and a former Dean of the Faculty of Arts and Sciences of the AmericanUniversity of Beirut (AUB). He held this last position from 1997 until 2009, playing an instrumental role in advocatingAUB’s strengths and regional position as the premier centre for higher education, and in re-establishing its PhDprograms. Throughout his career, he held several academic and administrative positions, including Associate Directorof the Supercomputer Computations Research Institute – Florida State University (between the years 1994 and 1997)and visiting Professor at leading academic institutes in Europe and North America (including the EuropeanOrganisation for Nuclear Research in Geneva, the International Centre for Theoretical Physics in Italy, The Institute forAdvanced Study in New Jersey, the Fermi National Accelerator Laboratory (Fermilab) in Illinois, the University ofIllinois, Brookhaven National Lab. in New York, the Max Planck Institute in Munich, and the Rockefeller University inNew York). He also served two mandates as member of The Institute for Advanced Study in Princeton, New Jersey,

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between 1968 and 1972. Khalil Bitar is also a member of the Board of Directors of Audi Private Bank and Chairman ofits Risk Committee. He also served as a member of the Board of Directors of Audi Investment Bank and Chairman ofits Risk Committee from March 2012 until November 2013, and continues to serve as advisor to the Board of Directorsof Audi Investment Bank on Risk Committee matters.

Khalil Bitar holds a Bachelor of Science degree in Physics from the American University of Beirut, a Master’s ofScience degree in Physics, and a PhD in Theoretical Physics from Yale University in the United States.

Changes to the Board of Directors during 2013

Mr. Mario J. Saradar, who had been a member of the Board of Directors since October 2004, resigned as a Directoreffective July 11, 2013. In line with applicable governance principles and Lebanese law, Mr. Saradar decided to resignfollowing his acceptance of a Board Chairmanship position at an external financial institution in which he acquired acontrolling stake.

Changes to the Board of Directors during 2012

Dr. Georges A. Achi (87), who had been a member of the Board of Directors since August 2008 (and previously amember of the Board from 1998 until 2004), retired from his position as a member of the Board of Directors on April10, 2012.

Mr. Youssef A. Nasr, who was elected as a member of the Board in replacement of Dr. Georges A. Achi, resigned inNovember 2012.

Senior Management

H.E. Mr. Raymond W. Audi acts as Chairman and General Manager of the Bank.

The Group Executive Committee of the Bank is comprised as follows:

Name Position

Mr. Samir N. Hanna ..................................................................... General Manager-Group Chief Executive OfficerDr. Freddie C. Baz........................................................................ General Manager-Group Chief Financial Officer & Strategy

DirectorMr. Marc J. Audi.......................................................................... General Manager-Country Manager LebanonDr. Imad I. Itani ........................................................................... General Manager-Head of Group Retail BankingMr. Chahdan E. Jebeyli ................................................................ General Manager-Group Chief Legal & Compliance OfficerMr. Adel N. Satel ......................................................................... General Manager-Group Chief Risk Officer

The business address for each member of the Bank’s Group Executive Committee is the registered office of the Bank atBank Audi Plaza, Omar Daouk Street, Bab Idriss, Beirut 2021 8102, P.O. Box: 11-2560, Beirut, Lebanon.

Employees

The Bank and its consolidated subsidiaries employed 6,161 persons as at June 30, 2014, 5,894 as at December 31, 2013,5,070 as at December 31, 2012 and 4,808 as at December 31, 2011.

The aggregate compensation (including bonuses) of employees ranked senior manager and above, who were directlyemployed by the Bank, on a standalone basis, was LL 56.2 billion (U.S.$37.2 million) for the year ended December 31,2013, and constituted 28% of the Bank’s total employee compensation for that year, as compared to LL 60.8 billion(U.S.$40.3 million) and 31% of total employee compensation for year ended December 31, 2012. Upon retirement, allemployees are entitled to a payment equal to their last monthly salary times the number of years of their service at theBank.

The collective bargaining agreement that governs working conditions of all Bank employees (other than generalmanagers) is a contract between the Federation of Bank Employee Syndicate and the Lebanese Association of Banks.The stipulations of this agreement must conform to minimum requirements of the Labor Code, although greater benefitsmay be provided to employees than those available under the Labor Code. Some of the major provisions covered by thecollective bargaining agreement include employee hierarchy and minimum salary scale, allowances and other benefits,base salary increases, vacation and leave entitlement, health care, maximum work week, general discipline and end-of-service payment. To date, the Bank’s experience with the Federation of Bank Employee Syndicate has always been one

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of favourable co-operation. Currently the Lebanese Association of Banks is working with the Federation of BankEmployee Syndicate on a new collective agreement.

See also, “—Service Contracts” and “Description of the Share Capital of the Bank—General—Management IncentiveScheme”.

Corporate Governance

As a company incorporated in Lebanon and a London Stock Exchange listed GDR issuer, the Bank is not required toadopt the U.K. Corporate Governance Code issued by the Financial Reporting Council. As a matter of best practice,however, the Bank has adopted and intends to comply with certain corporate governance structures and procedures. TheBank’s corporate governance framework encompasses a number of policies, charters, and terms of reference covering awide range of issues including risk supervision, compliance, audit, remuneration, evaluation, succession planning,ethics and conduct, budgeting, and capital management. The policies identify clear lines of responsibility andaccountability and strategic objectives setting corporate values and promoting high standards of conduct have beenestablished and widely communicated throughout the Bank. See also “Risk Management—Risk Management Structure”.

The Board of Directors has established four standing committees that assist the Bank’s Board of Directors in fulfillingits corporate governance responsibilities.

Group Audit Committee

The mission of the Group Audit Committee is to assist the Bank’s Board of Directors in fulfilling its oversightresponsibilities in respect of (i) the adequacy of accounting and financial reporting policies, internal control andcompliance system; (ii) the integrity of the Bank’s financial statements and the reliability of disclosures; (iii) theappointment, remuneration, qualifications, independence and effectiveness of the external auditors; and (iv) theindependence and effectiveness of the internal audit function. In 2013, the Group Audit Committee held sevenmeetings.

The Group Audit Committee consists of Dr. Marwan M. Ghandour (Chairman), Skeikha Mariam N. Al Sabbah and Mr.Abdullah I. Al Hobayb.

Corporate Governance and Remuneration Committee

The mission of the Corporate Governance and Remuneration Committee is to assist the Bank’s Board of Directors inmaintaining an effective institutional governance framework for the Group, an optimal Board composition, effectiveBoard process and structure and a set of values and incentives for executives and employees that are focused onperformance and promote integrity, fairness, loyalty and meritocracy. In 2013, the Corporate Governance andRemuneration Committee held two meetings.

The Corporate Governance and Remuneration Committee consists of H.E. Mr. Raymond W. Audi (Chairman), Dr.Marwan M. Ghandour and Mr. Abdullah I. Al Hobayb.

Group Risk Committee

The mission of the Group Risk Committee is to assist the Board of Directors in discharging its risk-relatedresponsibilities. The Committee is expected to (i) consider and recommend the Group’s risk policies and risk appetite tothe Board of Directors, (ii) monitor the Group’s risk profile for all types of risks, and (iii) oversee the managementframework of such risks and assess its effectiveness. In 2013, the Group Risk Committee held six meetings.

The Group Risk Committee consists of Dr. Khalil M. Bitar (Chairman), Dr. Marwan M. Ghandour and Dr. Freddie C.Baz.

See “Description of Bank Audi - Risk Management—Risk Management Framework—Group Risk Committee”.

Group Executive Committee

The mission of the Group Executive Committee is to develop and implement business policies for the Bank and to issueguidance for the Group in accordance with the strategy approved by the Board of Directors. The Group ExecutiveCommittee also supports the Group Chief Executive Officer in the day-to-day running of the Bank and in guiding theGroup. In 2013, the Group Executive Committee held 24 meetings.

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The Group Executive Committee consists of Executive Directors (voting members) Mr. Samir N. Hanna (Chairman),Dr. Freddie C. Baz (Deputy Chairman), Mr. Marc J. Audi and Dr. Imad I. Itani and Non Directors (non-votingmembers) Mr. Chahdan E. Jebeyli and Mr. Adel N. Satel.

See “Description of Bank Audi Risk Management—Risk Management Framework—Group Executive Committee”.

Service Contracts

Five of the directors of the Bank, Raymond Audi, Samir Hanna, Marc Audi, Freddie Baz and Imad Itani, have servicecontracts with the Bank and all of the members of senior management have service contracts with the Bank.

See also, “—Employees” and “Description of the Share Capital of the Bank—General—Management IncentiveScheme”.

Interests of Directors

The following table sets forth information on the direct holdings of the members of the Board of Directors in the Bankas at June 30, 2014.

Name Percentage Ownership (%)(1)

Raymond Wadih Audi (Chairman and General Manager).................................................... 0.0Marwan Moukhtar Ghandour (Vice-Chairman) .................................................................... 0.0Samir Nicolas Hanna (Group Chief Executive Officer).......................................................... 1.0Souad Hamad Al-Saleh Al-Homaizi..................................................................................... 5.7Mariam Nasser Sabbah Al-Nasser Al-Sabbah....................................................................... 0.9Marc Jean Audi ................................................................................................................... 0.3Freddie Charles Baz ............................................................................................................ 0.4Imad Ibrahim Itani............................................................................................................... 0.3Abdullah Ibrahim Al-Hobayb .............................................................................................. 0.4Khalil Michel Bitar.............................................................................................................. 0.0

__________Note:(1) Excluding directors’ qualifying shares, the ownership of which is legally required for membership on the Board of Directors.

Conflicts of Interest

There are no actual or potential conflicts of interest between any duties owed by members of the Board of Directors orthe Bank’s senior management to the Bank and their private interests or other duties.

Litigation Statement about Members of the Board of Directors and Senior Management

As at the date of this Offering Circular, no member of the Board of Directors or the Bank’s senior management for atleast the previous five years:

have had any convictions in relation to fraudulent offences;

have held an executive function in the form of a senior manager or a member of the administrative,management or supervisory body of any company at the time of, or preceding, a bankruptcy, receivershipor liquidation of such company; or

have been subject to any official public incrimination and/or sanction by any statutory or regulatoryauthority (including any designated professional body) or has been disqualified by a court from acting as amember of an administrative, management or supervisory body of a company or from performing amanagement role at any company.

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OVERVIEW OF ODEABANK

Overview

The Group owns 99.8% of the issued share capital of Odeabank A.Ş., 93.9% of which is owned by the Bank and 17.1% of which is owned by Audi Private Bank.

Odeabank was established in March 2012 with an initial capital of U.S.$300 million. It obtained its operating licencefrom the BRSA on 28 September 2012 as a universal bank to provide a full range of banking services, includingcorporate banking, commercial banking, retail banking, alternative distribution channels and cash and processmanagement, project and structured finance and investment banking, financial institutions and correspondent bankingand treasury and capital markets. Odeabank’s licence, obtained in October 2011, was the first license granted by theBRSA for the establishment of a full-service deposit taking bank in Turkey in 15 years. Odeabank commenced bankingoperations in November 2012. Odeabank’s capital has since been increased to U.S.$1,100 million as at June 30, 2014(of which U.S.$300 million of perpetual, interest free subordinated loans were accounted for as additional Tier 1equity). Odeabank is subject to Turkish banking regulations and is regulated by the Central Bank of Turkey and theBRSA.

As at June 30, 2014, after 20 months of operations, Odeabank was ranked as the 13th largest commercial bank inTurkey (among 33 operating commercial banks) with a market share of approximately 1% of total assets. In July 2013,Global Banking and Finance Review named Odeabank as “The Most Innovative Bank of Turkey” and “The NewestBest Bank of Turkey”. In November 2013, Odeabank was also named as “The Most Innovative Bank” at theInternational Finance Magazine Awards 2013.

As at June 30, 2014, Odeabank had 45 operating branches and employed 1,282 persons.

Principal Business Activities

Corporate Banking

Odeabank offers a wide range of corporate banking products to clients and benefits from the Group’s regional strengthand network of corporate banking operations, particularly in the MENA region. In 2013, Odeabank launched corporatebanking services in five locations in Turkey, Maslak, Güneşli, Kozyatağı, Izmir and Ankara and opened representative offices in Bursa and Gaziantep. As at June 30, 2014, Odeabank had a corporate loan portfolio of TL 6.1 billion(U.S.$2.9 billion) and a corporate deposit portfolio of TL 4.8 billion (U.S.$2.3 billion).

Commercial Banking

Odeabank offers commercial banking services to customers with an annual turnover of up to U.S.$75 million. As atJune 30, 2014, Odeabank had a commercial loan portfolio of over TL 5 billion (U.S.$2.3 billion) and a commercialdeposit portfolio of more than TL 1.8 billion (U.S.$0.9 billion). As at June 30, 2014, Odeabank had almost 3,000commercial clients and operated from 25 locations in Turkey, including seven centres, of which three are in Istanbuland one is located in each of Ankara, Izmir, Bursa and Adana, as well as through 18 commercial and retail branches.

Odeabank also launched commercial banking activities targeting the SME sector, including, in December 2013,entering into a U.S.$50 million cash facility with the IFC, to finance SME investment. As at June 30, 2014, Odeabankhad a SME loan portfolio of over TL 1.7 billion (U.S.$0.8 billion) and a SME deposit portfolio of TL 0.8 billion(U.S.$0.4 billion). Odeabank intends to continue to grow its commercial banking services offered to SMEs.

Retail Banking

Odeabank offers a full range of retail products and services, including conventional checking and savings accounts,fixed-term deposits, loans and housing loans, credit cards and bancassurance products. Odeabank’s retail bankingactivities are offered through three principal divisions: wealth management, debt and credit cards and consumer loans.As at June 30, 2014, Odeabank’s retail banking division operated from 45 branches and had more than 130,000customers. As at June 30, 2014, Odeabank had a retail deposit portfolio of TL 9.3 billion (U.S.$4.4 billion).

Wealth Management

Odeabank’s wealth management divisions invests customer’s savings in fixed income instruments, such as deposits andbonds or Eurobonds, mutual funds, equities and alternative investment vehicles, such as derivative products. As at June30, 2014, Odeabank offered wealth management services to more than 18,000 term deposit and investment clients.

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Debit and Credit Cards

As at June 30, 2014, Odeabank had issued approximately 210,000 credit cards and 100,000 debit cards. The Bankcurrently offers its no-fee Bank’O card credit card, its Bank’O Card Axess credit card (with credit limits up to TL200.000) and its Bank’O debit card.

Consumer Loans

As part of its consumer loan activities, Odeabank offers various consumer loan products, including low-interest, low-feeand no-fee general purpose loans, ready-cash fast loans, overdraft accounts for emergency use, mortgage products andhousing loans and car loans. As at June 30, 2014, Odeabank had a retail loan portfolio of TL 1.3 billion (U.S.$0.6billion).

Direct Banking

Odeabank’s direct banking unit is responsible for ensuring that banking transactions and services are delivered in aquick, easy and secure manner. Odeabank’s direct banking channels include internet banking, mobile and SMS banking,a customer contact centre, a network of ATMs, self-service channels and social media services.

Odeabank’s internet banking services includes facilities to complete credit cards applications and transactions, loanapplications, mobile signature, bill and tax payments and bond-bill and mutual fund transactions. In the six monthsended June 30, 2014, more than 292,000 financial transactions, worth an aggregate of TL 1.8 billion, were conductedusing Odeabank’s internet banking services.

Odeabank’s contact centre is available 24 hours a day and enables customers to conduct card transactions, loan andcredit card applications, bond-bill and mutual fund transactions and bill and tax payments. The services offered by thecontact centre are provided in Turkish and English.

As at June 30, 2014, Odeabank had a network of 54 ATMs through which customers may, among other things,withdraw cash, deposit cash, view their account activity, buy and sell foreign exchange currency and perform moneytransfers, as well as, since 2013, complete credit card and loan applications, credit card transactions, companypayments, mutual fund transactions and give back change in bill payments.

Treasury and Capital Markets

Odeabank conducts treasury and capital markets activities through its balance sheet management unit (which isresponsible for ensuring that the domestic and foreign currency liquidity levels of Odeabank are maintained in asustainable and healthy way in compliance with applicable laws and regulations), markets unit (which trades ininterbank markets in line with the profit goals and limits determined by Odeabank’s Board of Directors), and treasurysales unit (which prices transactions, including spot foreign exchange, forward foreign exchange, arbitrage, forwardarbitrage, foreign exchange/interest rate swaps, treasury bills, government bonds, Eurobonds and cross currency swaps,as well as designs and offers structured products).

Project and Structured Products

Odeabank’s project and structured products division offers long-term financing to corporate and commercial customers,as well as to private equity funds.

Other Activities

Odeabank also conducts activities through its business solutions, transaction banking, technology for customers andemployees, information technologies, financial institutions and funding, foreign trade, economic research and strategicplanning, central operations, organisation, corporate communications and marketing, legal and human resources units.

Results of Operations of Odeabank

The figures and summary financial information of Odeabank set forth below as at June 30, 2014 and as at December 31,2013 and December 31, 2012 has been summarised without material adjustment and extracted from the translatedunconsolidated financial statements and independent auditor’s report, originally issued in Turkish, included inOdeabank’s annual report, published by Odeabank for the year ended December 31, 2013, as well as from Odeabank’sInterim Financial Statements. This financial information has been prepared in accordance with Turkish AccountingStandards and Turkish Financial Reporting Standards and, accordingly, may differ from financial information prepared

86

and presented in accordance with International Financial Reporting Standards. The full text of Odeabank’s financialstatements are set out in “Financial Statements”.

Odeabank had shareholders’ equity of TL 1.3 billion (U.S.$0.6 billion) and additional Tier 1 equity in the form ofperpetual and interest-free subordinated loans of TL 0.6 billion (U.S.$0.3 billion) as at June 30, 2014, as compared toTL 1.3 billion (U.S.$0.6 billion) as at December 31, 2013. As at June 30, 2014, Odeabank had total deposits of TL 16.8billion (U.S.$7.9 billion), as compared to TL 12.4 billion (U.S.$5.8 billion) as at December 31, 2013. As at June 30,2014, Odeabank had total assets of TL 20.3 billion (U.S.$9.6 billion) and total liabilities of TL 18.4 billion (U.S.$8.7billion), as compared to TL 16.1 billion (U.S.$7.5 billion) and TL 14.8 billion (U.S.$6.9 billion), respectively, as atDecember 31, 2013. Odeabank had net losses after tax of TL 31.0 million (U.S.$14.4 million) for the six months endedJune 30, 2014, as compared to TL 78.4 million (U.S.$36.4 million) for the same period of the previous year. Odeabankhad net loss after tax of TL 137.0 million (U.S.$71million) for the year ended December 31, 2013, as compared to TL19.6 million (U.S.$9 million) as at December 31, 2012.

When calculated in accordance with IFRS, Odeabank had net loss after tax of TL 12.0 million (U.S.$5.6 million) for thesix months ended June 30, 2014, as compared to TL 33.4 million (U.S.$18.3 million) for the six months ended June 30,2013.

Balance Sheet

The following table sets out certain balance sheet data of Odeabank as at the dates indicated:

As at June 30, As at December 31,

2014(1) 2013 2012(U.S.$ thousandsunless otherwise

indicated) (TL thousands)

(U.S.$ thousandsunless otherwise

indicated) (TL thousands)

AssetsCash and balances with the centralbank................................................................1,173,569 2,492,540 832,486 1,777,178 409,777Financial assets measured at fairvalue through profit and loss (Net)................................25,650 54,479 47,397 101,183 5,611

Banks................................................................257,616 547,150 538,623 1,149,844 387,412

Money market placements ................................ 635,804 1,350,383 215,524 460,098 935,738Financial assets available for sale(Net) ................................................................ 447,063 949,516 441,511 942,532 78,132

Loans and receivables................................ 6,745,625 14,327,017 5,314,103 11,344,470 1,731,688

Held to maturity investments ................................130,305 276,754 — — —

Tangible assets (Net) ................................ 51,632 109,661 48,922 104,438 41,342

Intangible assets (Net) ................................ 23,024 48,901 22,600 48,246 17,790

Tax asset................................................................9,222 19,586 14,125 30,154 7,100Assets held for sale & discontinuedoperations (Net) ................................................................2,700 5,735 — — —

Other assets................................................................82,024 174,210 71,039 151,653 19,589

Total assets .......................................... 9,584,234 20,355,932 7,546,331 16,109,796 3,634,179

Liabilities and equity

Deposits................................................................7,929,655 16,841,774 5,795,411 12,371,958 2,517,146Derivative financial liabilities heldfor trading................................................................36,654 77,849 48,415 103,355 4,390

Funds borrowed ................................................................412,888 876,932 546,834 1,167,373 360,942

Money market balances ................................ 48,459 102,922 103,736 221,454

Marketable securities issued (Net)................................64,277 136,517 0 — —

Miscellaneous payables ................................ 4,432 9,414 1,287 2,748 1,226

Other liabilities................................................................90,744 192,730 60,053 128,200 21,439

Provisions ................................................................65,099 138,264 56,286 120,159 33,398

Tax liability................................................................14,116 29,981 11,389 24,313 3,974

Subordinated loans ................................ 299,774 636,690 299,425 639,209 177,849

Shareholders’ equity................................ 618,137 1,312,859 623,495 1,331,027 513,815

Total liabilities and equity ................................9,584,234 20,355,932 7,546,331 16,109,796 3,634,179

__________Note:(1) Unaudited.

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Income Statement

The following table sets out certain income statement data of Odeabank for the periods indicated.

For the six months ended June 30,(1) For the year ended December 31,

2014 2013 2013 2012(U.S.$

thousandsunless

otherwiseindicated) (TL thousands)

(U.S.$thousands

unlessotherwiseindicated) (TL thousands)

Statement of incomeInterest income................................................................337,360 727,371 220,088 352,316 673,175 44,145

Interest expense................................................................(233,509) (503,462) (194,899) (279,931) (534,868) (12,518)

Net interest income ................................................................103,851 223,909 25,189 72,385 138,307 31,627

Net fees and commissions income................................ 6,727 14,503 704 3,723 7,114 5,280Net trading income ................................................................(9,493) (20,468) 36,041 22,628 43,236 24,922

Other operating income ................................................................862 1,860 415 675 1,289 0

Net operating income................................................................101,947 219,804 62,349 99,411 189,946 61,829

Provision for loan losses and other receivables ................................(27,130) (58,494) (49,412) (43,038) (82,233) (18,489)

Other operating expenses................................................................(89,338) (192,618) (98,651) (136,463) (260,741) (63,073)

Profit / (loss) from continued operationsbefore taxes................................................................(14,521) (31,308) (85,714) (80,089) (153,028) (19,733)

Tax provision for continued operations ................................135 291 7,344 8,386 16,023 161

Net profit / (loss) ................................................................(14,386) (31,017) (78,370) (71,704) (137,005) (19,572)

__________Note:(1) Unaudited.

Odeabank’s financial results are consolidated in the Bank’s Interim Financial Statements and the Annual FinancialStatements, which are prepared in accordance with International Financial Reporting Standards. See “FinancialStatements”.

Loan Portfolio

The following table sets out certain information in respect of Odeabank’s loan portfolio as at the dates indicated:

As at June 30, 2014(1)

As at December 31,

2013 2012(U.S.$

thousandsunless

otherwiseindicated) (TL thousands)

(U.S.$thousands

unlessotherwiseindicated) (TL thousands)

Loans and receivables................................................................6,745,625 14,327,017 5,314,103 11,344,370 1,731,688Of which:

Domestic loans................................................................6,664,679 14,155,096 5,266,837 11,243,566 1,573,273Foreign loans................................................................54,786 116,359 29,734 63,475 158,415Non-performing loans................................................................43,767 92,958 21,634 46,186 —Specific provisions................................................................(17,607) (37,396) (4,102) (8,757) —

__________Note:(1) Unaudited.

As at each of June 30, 2014 and December 31, 2013 and 2012, 100% of Odeabank’s loans and receivables were grantedto private sector borrowers.

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Funding Sources

The following table sets out certain information in respect of Odeabank’s principal sources of funding as at the datesindicated:

As at June 30, 2014(1)

As at December 31,

2013 2012(U.S.$

thousandsunless

otherwiseindicated) (TL thousands)

(U.S.$thousands

unlessotherwiseindicated) (TL thousands)

Deposits................................................................ 7,929,655 16,841,774 5,795,411 12,371,958 2,517,146Of which:

Savings deposits ................................................................2,293,041 4,870,184 1,833,015 3,913,094 1,348,747Foreign currency deposits ................................ 3,725,260 7,912,071 2,907,019 6,205,862 374,998Public sector deposits................................................................34,297 72,844 4,436 9,470 —Commercial deposits ................................................................1,465,978 3,113,587 776,205 1,657,030 787,759Other institutions deposits ................................ 249,126 529,118 118,753 253,512 5,642Fiduciary deposits ................................................................161,952 343,970 155,983 332,990 —

Funds borrowed ................................................................412,888 876,932 546,834 1,167,373 360,942Of which:

Borrowings from domestic banks andinstitutions ................................................................ 4,495 9,546 2,311 4,934 —Borrowings from foreign banks, institutionsand funds ................................................................ 408,394 867,386 544,523 1,162,439 360,942

Marketable securities issued 64,276 136,517 — — —Subordinated loans(2)(3) ................................................................299,774 636,690 299,425 639,209 177,849

__________Notes:(1) Unaudited.(2) On 27 December 2012, Odeabank entered into a subordinated loan agreement with the Bank, as its parent shareholder, for an amount of

U.S.$100 million. The loan was originally scheduled to mature in December 2022 and had an interest rate of 3% for the first five years and 4%for the second five years. On April 1, 2014, pursuant to a resolution of the Board of Directors of Odeabank and Article 7 of the Regulation onEquity of Banks, the terms of the loan were amended to be perpetual and interest-free and, accordingly, the loan was recognized and approvedby the BRSA as additional principal capital.

(3) On 24 September 2013, Odeabank entered into a subordinated loan agreement with the Bank, as its parent shareholder, for an amount ofU.S.$200 million. The loan was originally scheduled to mature in December 2023 and had an interest rate of 6%. Odeabank has an option torepay the loan after five years. On April 1, 2014, pursuant to a resolution of the Board of Directors of Odeabank and Article 7 of the Regulationon Equity of Banks, the terms of the loan were amended to be perpetual and interest-free and, accordingly, the loan was recognized andapproved by the BRSA as additional principal capital.

The primary source of funds for Odeabank is customer deposits which increased from TL 12.4 billion (U.S.$5.8 billion)as at December 31, 2013 to TL 16.8 billion (U.S.$7.9 billion) as at June 30, 2014, an increase of TL 4.5 billion(U.S.$2.1 billion), or 36.1%, reflecting the growth of Odeabank’s deposit portfolio in line with the development of itsoperations.

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Management and Corporate Governance

Odeabank is governed by its Board of Directors. The table below sets forth certain information regarding the membersof Odeabank’s Board of Directors, as well as certain information regarding Odeabank’s senior management:

Title Name Date of Appointment

Board Chairman, Shareholder of Odeabank Samir Hanna May 2012Deputy Chairman of the Board................ Marwan Ghandour May 2012Board Member, Shareholder of Odeabank Raymond Audi May 2012Board Member, Shareholder of Odeabank Freddie Baz June 2012Board Member ....................................... Hatem Ali Sadek May 2012Board Member ....................................... Imad Itani May 2012

Board Member, General Manager ........... Hüseyin Özkaya June 2012Board Member ....................................... Ayşe Korkmaz June 2012Board Member Khalil Debs March 2014Board Member Elia Samaha May 2014Assistant General Manager in charge ofCommercial BankingDeputy General Manager........................ Erol Sakallıoğlu June 2012Assistant General Manager in charge of DirectBanking,Business Solutions and Transactional Banking Fevzi Tayfun Küçük June 2012Assistant General Manager in charge of EconomicResearch and Strategy ............................ Serkan Özcan June 2012Assistant General Manager in charge of RetailBanking ................................................. Cem Muratoğlu June 2012Assistant General Manager in charge of FinancialInstitutions and

Investment Banking................................ Alpaslan Yurdagül June 2012Assistant General Manager in charge of CorporateBanking ................................................. Yalçın Avcı June 2012Assistant General Manager in charge of Treasuryand Capital Markets................................ Gökhan Erkıralp June 2012Assistant General Manager in charge of Finance Naim Hakim June 2012Assistant General Manager in charge of Operationsand Central Administration. .................... Aytaç Aydin January 2014

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THE BANKING SECTOR AND BANKING REGULATION IN LEBANON

Role of the Central Bank

The Central Bank was created by the Law implemented by Decree № 13513 dated August 1, 1963 and is a legal public entity with administrative and financial autonomy. It is considered a commercial institution in its relations with thirdparties. It is headquartered in Beirut and has branches in Tripoli, Jounieh, Saida, Zahle, Bikfaya, Aley, Tyre, Nabatiyeand Baalbek. The Central Bank is managed by a Governor assisted by four Vice-Governors, collectively constitutingthe Governorship of the Central Bank. The Board of the Central Bank is chaired by the Governor and composed of theVice-Governors, the Director-General of the Ministry of Finance and the Director-General of the Ministry of Economyand Trade.

The Governor is appointed for six calendar years by decree from the Council of Ministers, acting on the proposal of theMinister of Finance. The Vice-Governors are appointed for five calendar years by decree from the Council of Ministerson the proposal of the Minister of Finance, after consultation with the Governor.

The Central Bank’s primary role is to safeguard the currency and promote monetary stability, thereby creating a soundenvironment for economic and social progress. The Central Bank also advises the Government on various economic andfinancial matters. In conducting its monetary management function, the Central Bank utilises a wide range ofinstruments, including reserve requirements on Lebanese Pound deposits with commercial banks, liquidity requirementson U.S. Dollar deposits with commercial banks and treasury bill repurchase and swap agreements with commercialbanks, as well as Lebanese Pound and U.S. Dollar-denominated certificates of deposit issued by the Central Bank.

As a result of high inflation prior to 1992, the Lebanese economy became substantially dollarized. Despite the declinein the rate of inflation, the proportion of foreign currency deposits (primarily in U.S. Dollars) remains high as a share oftotal deposits, at 66.1% as at December 2013.

Banking Sector

As at June 30, 2014, there were 56 active commercial banks (with 965 operational branches in Lebanon), 17 specializedmedium-and long-term credit banks, 53 financial institutions, 12 brokerage institutions, one leasing company in thefinancial sector and ten representative offices of foreign banks in Lebanon. Foreign banks have traditionally establishedthemselves in Lebanon, with either receiving a banking license or operating through a representative office or acquiringparticipations in the capital of Lebanese banks.

The banking sector offers services related to short-term and, increasingly, medium-term financing. As medium-termfunds become available to Lebanese banks (by way of loans from international organisations, such as the InternationalFinance Corporation, the EIB and Proparco / Agence Française de Développement, or the issuance of debt securities onthe international capital markets), commercial banks have begun to offer a variety of medium-term loans, such asresidential mortgage loans, other consumer loans and several types of loans to corporate investors.

From March 1995, commercial banks were required to meet a minimum capital adequacy ratio of 8.0% in line with theBasel II Accord. In September 1999, the Central Bank required banks to raise their capital adequacy ratios to 10.0% byDecember 31, 2000 and 12.0% by December 31, 2001. Law № 192 dated January 4, 1993 facilitated bank mergers by, among other things, making banks eligible for soft loans from the Central Bank. Such law was renewed until the year2003. Pursuant to Law № 675 dated February 14, 2005 published in the Official Gazette № 8 dated February 24, 2005, the law facilitating bank mergers was reinstated for an indefinite period. The mechanism and criteria for granting softloans to banks in accordance with Article 6 of Law № 192 were set out by Decree № 1423 dated February 26, 2009. During the past years, the capital of commercial banks in Lebanon has increased substantially. On December 31, 2013,the total capital adequacy ratio of the banking system stood at 12.2%, which is above the levels required by the Basel IIIAccord.

In addition, Parliament passed legislation to revitalize specialized banks (for housing, agriculture and industry). TheLebanese Republic’s participation in the shareholding of these banks has been reduced to a minority stake. In addition,Parliament passed laws relating to the listing of bank shares on stock exchanges and several banks list their eligibleshares on the Beirut Stock Exchange.

The following tables set forth the rankings for selected criteria of the Alpha Group banks in Lebanon as at December31, 2013 and 2012, respectively:

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Ranking by Customers’ Deposits(1)

March 31, 2014 December 31, 2013

(LBP millions) (%) (Rank) (LBP millions) (%) (Rank)

Bank Audi S.A.L. ........................................................ 48,722,351 21.7 1 46,875,187 21.1 1BLOM Ban k S.A.L. ..................................................... 34,687,124 15.5 2 34,027,407 15.3 2Byblos Bank S.A.L. ...................................................... 22,522,406 10.0 3 22,234,348 10.0 3Fransabank S.A.L.......................................................... 21,431,579 9.6 4 21,287,561 9.6 4BankMed S.A.L............................................................. 15,671,203 7.0 5 16,648,862 7.5 5Bank of Beirut S.A.L. ................................................... 15,288,694 6.8 7 15,646,827 7.1 6Société Générale de Banque au Liban (SGBL)S.A.L. ............................................................................

15,555,220 6.96

15,322,020 6.97

Banque Libano-Française S.A.L. ................................ 14,188,733 6.3 8 14,266,300 6.4 8Credit Libanais S.A.L. .................................................. 10,994,643 4.9 9 10,790,958 4.9 9BBAC S.A.L................................................................. 6,739,034 3.0 10 6,791,732 3.1 10IBL Bank S.A.L............................................................. 6,619,890 3.0 11 6,503,157 2.9 11First National Bank Sal. ................................................ 4,538,592 2.0 12 4,442,809 2.0 12

Lebanon and Gulf Bank ................................................ 3,777,699 1.7 13 3,564,319 1.6 13

Creditbank S.A.L........................................................... 3,550,876 1.6 14 3,435,984 1.5 14

Total...............................................................................224,288,044 100.0 221,837,471 100.0

Source: Bankdata._________Note:(1) Certain figures in this table may differ from the Bank’s audited financial information set forth elsewhere in this Offering Circular because the

figures used by Bankdata are unaudited.

Ranking by Net Profits(1)

March 31, 2014 December 31, 2013(LBP

millions) (%) (Rank) (LBP millions) (%) (Rank)

BLOM Bank S.A.L ......................................................... 131,938 20.4 1 531,835 20.5 1Bank Audi S.A.L. ......................................................... 129,278 20.0 2 459,118 17.7 2Byblos Bank S.A.L. ....................................................... 46,298 7.2 6 236,903 9.1 4Fransabank S.A.L............................................................ 50,756 7.8 5 242,310 9.4 3BankMed S.A.L............................................................... 44,433 6.9 7 193,165 7.5 7Bank of Beirut S.A.L. ..................................................... 55,456 8.6 4 219,245 8.5 5Société Générale de Banque au Liban (SGBL)............. 60,416 9.3 3 206,736 8.0 6Banque Libano-Française S.A.L. ................................... 36,388 5.6 8 151,071 5.8 8Credit Libanais S.A.L. .................................................... 23,560 3.6 9 103,218 4.0 9BBAC S.A.L.................................................................. 19,145 3.0 11 64,327 2.5 11IBL Bank S.A.L. ........................................................... 20,826 3.2 10 80,783 3.1 10First National Bank ....................................................... 9,440 1.5 13 38,454 1.5 12Lebanon and Gulf Bank S.A.L ....................................... 10,589 1.6 12 34,227 1.3 13Creditbank S.A.L............................................................. 8,117 1.3 14 28,116 1.1 14

Total................................................................................. 646,640 100.0 2,589,508 100.0

Source: Bankdata._________Note:(1) Certain figures in this table may differ from the Bank’s audited financial information set forth elsewhere in this Offering Circular because the

figures used by Bankdata are unaudited.

92

Ranking by Total Assets(1)

March 31, 2014 December 31, 2013(LBP millions) (%) (Rank) (LBP millions) (%) (Rank)

Bank Audi S.A.L ......................................................... 57,003,604 21.1 1 54,446,806 20.5 1BLOM Bank S.A.L. ...................................................... 40,280,242 14.9 2 39,421,358 14.8 2Byblos Bank S.A.L. ...................................................... 28,010,243 10.4 3 27,868,037 10.5 3Fransabank S.A.L.......................................................... 26,190,488 9.7 4 25,642,978 9.6 4BankMed S.A.L............................................................. 20,049,424 7.4 7 20,789,021 7.8 5Bank of Beirut S.A.L .................................................... 20,148,539 7.5 5 20,527,430 7.7 6Société Générale de Banque au Liban (SGBL) .......... 20,122,462 7.5 6 19,612,534 7.4 7Banque Libano-Française S.A.L. ................................ 16,363,146 6.1 8 16,685,621 6.3 8Credit Libanais Sal ........................................................ 12,893,245 4.8 9 12,602,250 4.7 9BBAC S.A.L. ................................................................ 7,549,311 2.8 10 7,701,941 2.9 10IBL Bank S.A.L. ........................................................... 7,311,364 2.7 11 7.157,179 2.7 11First National Bank ......................................................... 5,515,629 2.0 12 5,348,379 2.0 12Lebanon and Gulf Bank S.A.L ....................................... 4,326,067 1.6 13 4,093,583 1.5 13

Creditbank S.A.L............................................................. 4,090,913 1.5 14 3,985,552 1.5 14

Total............................................................................... 269,854,677 100.0 265,882,670 100.0

Source: Bankdata._________Note:(1) Certain figures in this table may differ from the Bank’s audited financial information set forth elsewhere in this Offering Circular because the

figures used by Bankdata are unaudited.

Ranking by Shareholders’ Equity(1)

March 31, 2014 December 31, 2013(LBP

millions) (%) (Rank) (LBP millions) (%) (Rank)

Bank Audi S.A.L.(2) ..................................................... 4,215,741 17.8 1 4,066,589 17.6 1BLOM Bank S.A.L. ...................................................... 3,696,546 15.6 2 3,541,084 15.4 2Byblos Bank S.A.L ....................................................... 2,518,826 10.6 4 2,509,993 10.9 3Fransabank S.A.L.......................................................... 2,540,652 10.7 3 2,490,223 10.8 4BankMed S.A.L............................................................. 2,029,081 8.6 6 2,032,735 8.8 6Bank of Beirut S.A.L. ................................................... 2,384,696 10.1 5 2,302,757 10.0 5Société Générale de Banque au Liban (SGBL)........... 1,599,495 6.8 7 1,540,316 6.7 7Banque Libano-Française S.A.L. ................................ 1,388,595 5.9 8 1,351,830 5.9 8Credit Libanais S.A.L. .................................................. 1,057,266 4.5 9 1,034,800 4.5 9BBAC S.A.L................................................................. 642,095 2.7 10 622,951 2.7 10IBL Bank S.A.L. ........................................................... 520,717 2.2 11 500,108 2.2 11First National Bank ......................................................... 390,016 1.6 12 376,498 1.6 12Lebanon and Gulf Bank S.A.L ....................................... 379,237 1.6 13 368,749 1.6 13

Creditbank S.A.L............................................................. 319,598 1.3 14 313,269 1.4 14

Total............................................................................... 23,682,561 100.0 23,051,902 100.0

Source: Bankdata.__________Notes:(1) Certain figures in this table may differ from the Bank’s audited financial information set forth elsewhere in this Offering Circular because the

figures used by Bankdata are unaudited.(2) Based on the calculation of Bankdata, revaluation variance of other fixed assets and subordinated loans are not included in shareholders’ equity

for purposes of these rankings.

93

Ranking by Loans and Advances(1)

March 31, 2014 December 31, 2013(LBP

millions) (%) (Rank) (LBP millions) (%) (Rank)

Bank Audi S.A.L. ........................................................ 23,090,387 27.7 1 22,213,544 27.3 1BLOM Bank S.A.L. ...................................................... 9,815,790 11.8 2 9,564,918 11.7 2Byblos Bank S.A.L ....................................................... 6,909,142 8.3 4 6,803,528 8.4 4Fransabank S.A.L.......................................................... 8,085,332 9.7 3 7,959,433 9.8 3BankMed S.A.L............................................................. 6,860,666 8.2 5 6,765,955 8.3 5Bank of Beirut S.A.L. ................................................... 5,494,826 6.6 7 5,723,646 7.0 6Société Générale de Banque au Liban (SGBL)........... 4,744,743 5.7 8 4,669,446 5.7 8Banque Libano-Française S.A.L .................................. 5,698,735 6.8 6 5,539,655 6.8 7Credit Libanais S.A.L. .................................................. 4,023,713 4.8 9 3,918,607 4.8 9BBAC S.A.L................................................................. 1,983,710 2.4 11 2,032,265 2.5 10IBL Bank S.A.L. ........................................................... 1,387,173 1.7 13 1,377,281 1.7 13First National Bank ....................................................... 1,342,564 1.6 14 1,340,143 1.6 14Lebanon and Gulf Bank S.A.L ....................................... 1,728,903 2.1 12 1,596,134 2.0 12

Creditbank S.A.L............................................................. 2,090,006 2.5 10 1,958,541 2.4 11

Total............................................................................... 83,255,690 100.0 81,463,096 100.0

Source: Bankdata._________Note:(1) Certain figures in this table may differ from the Bank’s audited financial information set forth elsewhere in this Offering Circular because the

figures used by Bankdata are unaudited.

Banking Regulations

Banking activities in Lebanon are governed by the Lebanese Code of Commerce, the Code of Money and Credit andCentral Bank Decisions. Regulations are set out by the Central Bank and the Banking Control Commission, which wasestablished in 1967 and has the responsibility of supervising banking activities and ensuring compliance withregulations and legislation.

The Banking Control Commission undertakes both off-site reviews and on-site examinations of Lebanese banks toassess, inter alia, compliance with banking laws and regulations, reliability of bank reporting, levels of liquidity andcapital adequacy and loan-to-deposit ratios.

The Capital Markets Authority, established pursuant to Law 161 dated 17/8/2011, is an independent body that regulatesthe capital Markets in Lebanon and promotes investment in financial instruments. The Capital Markets Authority ispresided by the Governor and is comprised of the Board; the Secretariat; the Capital Markets Control Unit; and theSanction Committee. The Capital Markets Authority coordinates and cooperates with its counterparts, as well as withthe Central Bank and any other concerned authority or institution in Lebanon or abroad. The Capital Markets Authorityissued its first regulations on June 11, 2013. The majority of the Capital Markets Authority’s regulations relating to thecapital markets and financial instruments released to date are adapted from circulars issued previously by the CentralBank.

Banks regularly submit reports to the Central Bank, including daily lists of foreign exchange transactions undertaken,weekly reports on the portfolio of treasury bills held, periodic financial information on customers and interbank depositsand audited financial statements. Banks also submit regular reports to the Banking Control Commission mainly on theirlending portfolio and on some details of their financial statements. Furthermore, banks, like all joint stock companiesregistered in Lebanon, must have their by-laws and minutes of certain shareholders’ meetings, as well as minutes ofBoard of Directors meetings whose objects relate to, or otherwise affect, third parties, registered with the Register ofCommerce. Banks are also required to provide certain reports, including semi-annual financial statements, monthlyfinancial instruments reports, insider lists and details of operations undertaken by insiders to the Capital MarketsAuthority.

Related Party Transactions

Transactions with related parties are governed by the Lebanese Code of Commerce, the Code of Money and Credit andthe newly issued Central Bank Decision № 11717 dated March 8, 2014 (“Decision № 11717”), that deleted theprovisions related to this issue in Central Bank Decision № 7776 dated February 21, 2001.

Decision № 11717 defines related parties in accordance with Article 152 (4) of the Code of Money and Credit as follows: “(a) major shareholders who own or are part of a connected group of shareholders who own directly orindirectly (i) 5% or more of the Company’s shares or voting rights, whichever is greater; or (ii) less than 5% of the

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company’s shares but have influence on the Company’s decisions as a result of the share distribution amongshareholders; (b) members of the Board of (i) the Company, (ii) its subsidiaries and associates in Lebanon and abroad,and (iii) companies holding directly or indirectly 20% or more of the Company’s shares or their related voting rightswhichever is greater, or having a significant influence on the Company’s decisions as a result of the share distributionamong shareholders even if they own less than 20% of the Company’s shares; (c) the Company’s management,meaning any employee holding the title of Manager and above (i) in the Company, (ii) in any Company’s subsidiariesin Lebanon and abroad, and (iii) in companies holding directly or indirectly 20% and above of the Company’s shares ortheir related voting rights whichever is greater, or having a significant influence on the Company’s decisions as a resultof the share distribution among shareholders even if they own less than 20% of the Company’s shares; (d) familymembers of the above mentioned related parties under (a), (b) and (c) meaning their spouse, parents, children andsibling who are financially dependent on them; (e) companies related directly or indirectly to the parties previouslymentioned under (a), (b), (c) and (d) meaning companies in which any of such persons directly or indirectly holds morethan 20% of the shares or their related voting rights whichever is greater or have a significant influence on thecompanies’ decision or with which such persons have common interests in the opinion of the Banking ControlCommission; (f) individuals and companies having directly or indirectly the guarantee of the previous mentioned partiesunder (a), (b), (c), (d) and (e); (g) the non financial Company’s subsidiaries and associates in Lebanon and abroad.”

Pursuant to Article 152 of the Code of Money and Credit, the Board of Directors of the Bank must authorise all creditfacilities granted directly or indirectly to major shareholders, Board members and Management, as well as to theirrespective family members and related companies. The authorisation of the Board of Directors must specify the amountand terms of the facilities granted, which should thereafter be submitted to the General Assembly for approval asrequired.

Central Bank Decision № 11717 sets out the details of the application of Article 152, as follows: (i) loans granted by branches of a company in Lebanon and abroad, as well as its bank and financial institutions subsidiaries in Lebanon,and (ii) to consolidated shareholders’ equity of those entities identified in (i) after deduction of the company’s totalinvestments in the banks and financial institutions subsidiaries abroad.

Central Bank Intermediary Decision № 10621, dated December 30, 2010, amending Decision № 7776, prohibits lending and deposits made by commercial banks with “specialised banks” and “Islamic banks” belonging to the sameeconomic group. These restrictions do not apply to deposits made by “specialised banks” and “Islamic banks” incommercial banks belonging to the same economic group.

Central Bank Decision № 7156, dated November 10, 1998, provides that net inter-bank deposits and placements among banks and foreign affiliated companies (whether or not financial institutions) may not exceed 25.0% of a bank’s Tier ICapital.

Reserve Requirements

Pursuant to Decision № 7835, dated June 2, 2001, as amended, all banks operating in Lebanon, except investment banks and commercial banks making medium- and long-term loans, must maintain a compulsory reserve in cash with theCentral Bank equal to (i) 25.0% of the weekly average of the sum of Lebanese Pound-denominated demand depositsand (ii) 15.0% of the weekly average of the sum of Lebanese Pound-denominated term deposits. Certain exemptionsand deductions are available against specified loans, i.e., certain environmentally friendly loans or higher educationloans.

On September 27, 2001, the Central Bank issued Decision № 7935, as amended, implementing Decision № 7926, dated September 20, 2001, pursuant to which all banks operating in Lebanon must maintain in cash with the Central Bank aninterest-bearing deposit to the extent of 15.0% of all foreign currency-denominated deposits, in addition to notes,certificates of deposit, banks’ certificates and other debt instruments and loans granted by the financial sector with aremaining time to maturity of one year or less, against payment of interest at the rate applied by the Central Bank onforeign currency-denominated deposits.

Pursuant to Central Bank Decision № 6101 dated February 8, 1996, as amended, the Central Council of the Central Bank may grant, on a case-by-case basis, to commercial banks making medium- and long-term loans the sameconcessions and exemptions as those granted to “specialised banks” governed by Decree Law № 50 dated 15 July 1983.

Properties Acquired in Settlement of Debts

Pursuant to Central Bank Decision № 7740, dated December 21, 2000, as amended, banks are required to establish a special reserve for properties acquired in satisfaction of debts and not liquidated within the required delays. TheBanking Control Commission Circular № 4/2008 provides that banks must establish such special reserve at the end of

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the fiscal year during which the acquired property should have been liquidated. This special reserve shall be withheldfrom the annual profits and shall not be accounted for as an expense in the profit and loss account in accordance withIFRS.

Liquidity

Central Bank Decision № 7693 dated October 18, 2000, as amended, provides that all banks operating in Lebanon must maintain a minimum of 10.0% of all foreign currency-denominated deposits, in addition to debt securities, certificatesof deposits, banks’ certificates and other debt instruments and loans granted by the financial sector with a remainingtime-to-maturity of one year or less, in liquid assets consisting of (i) cash in a bank’s vaults, (ii) cash deposited with theCentral Bank and (iii) cash deposited with other banks with a remaining time-to-maturity less than or equal to one year.

Central Bank Decision № 7694 dated October 18, 2000, as amended, provides that all banks operating in Lebanon must also maintain at all times a minimum of 40.0% of their Tier I Capital denominated in Lebanese Pounds, in particularafter provisions and distribution of profits, in liquid assets, consisting of (i) cash in the bank’s vaults, (ii) cash depositedwith the Central Bank, (iii) cash deposited with other banks with a remaining time-to-maturity equal to or less than oneyear and (iv) Lebanese treasury bills with a remaining time-to-maturity equal to or less than one year.

Capital Adequacy

Pursuant to Central Bank Decision № 6939, dated March 25, 1998, since December 31, 2001, all banks operating in Lebanon have been required to maintain a minimum capital adequacy ratio, initially set at 12.0% since December 31,2001. Central Bank Decision № 9302, dated April 1, 2006 (“Decision № 9302”) required Lebanese banks to phase inapplication of the Basel II Accord from January 1, 2008 in accordance with the standards set out in Decision № 9302 and any subsequent decisions or implementing regulations.

On December 7, 2011, Decision № 6939 was amended by Decision № 10848 to define three minimum levels of capital adequacy ratios in order to be adopted by all banks operating in Lebanon progressively as follows: (i) Common EquityTier I Ratio (5% as at December 31, 2012, 6% as at December 31, 2013, 7% as at December 31, 2014, 8% as atDecember 31, 2015); (ii) Tier I Ratio (8% as at December 31, 2012, 8.5% as at December 31, 2013, 9.5% as atDecember 31, 2014, 10% as at December 31, 2015); and (iii) Total Capital Ratio (10% as at December 31, 2012, 10.5%as at December 31, 2013, 11.5% as at December 31, 2014, 12% as at December 31, 2015), taking into consideration inthe year 2015 a capital conservation buffer of 2.5%.

On March 6, 2014, the Central Bank issued Intermediary Decision № 11714, which renamed Decision № 6939 as the “Capital Adequacy Regulatory Framework for Banks Operating in Lebanon” and amended Decision № 6939 through the restructuring of certain provisions and introducing a definition of free earnings, subsidiaries and associates, as wellas a definition of the conditions to classify financial instruments in respective capital categories (Tier I common equityand additional Tier II) with a detailed list of acceptable elements in each category. In addition, Decision № 11714 established rules to preserve capital adequacy, mainly through two conditions: (i) preserving an acceptable capitalconservation buffer equivalent to 2.5% of a bank’s risk-weighted assets; and (ii) obtaining preliminary approval fromthe Central Bank to consider a bank’s general provisions as Tier II Capital, provided such provisions do not exceed1.25% of the risk-weighted assets used for calculating capital adequacy.

During the three years ending December 31, 2013, the capital of commercial banks in Lebanon has increasedsubstantially. On December 31, 2013, the total capital adequacy ratio of Lebanese banks was 14.5%, which is above thelevels required by the Basel III Accord.

Pursuant to Central Bank Decision № 9957, dated July 21, 2008, relating to the assessment of the capital adequacy of Lebanese banks, the senior executive management of Lebanese banks is required, in addition to meeting the Pillar Irequirements (i.e., minimum capital levels under the Basel II Accord), to establish a documented mechanism for theassessment of the bank’s capital adequacy (ICAAP or Internal Capital Adequacy Assessment Process). The assessmentof such capital adequacy is to be carried out in accordance with certain guidelines, including, inter alia, (i) the risks towhich the bank is exposed, such as credit risk, market risk, operational risk, interest rate risk, credit concentration risk,liquidity risk and strategic risk; (ii) the future capital needs of the bank; and (iii) the periodic monitoring of thesufficiency of the bank’s capital to cover the minimum requirements to counter any risks or potential negative changes.

The Banking Control Commission periodically ensures that the assessment of a bank’s capital adequacy is carried out inaccordance with Decision № 9957 by reviewing and evaluating all the qualitative (i.e., corporate governance, riskmanagement and internal control regulations) and quantitative (i.e., the calculation of the capital requirements inaccordance with Pillar I and Pillar II) elements adopted by a bank in its capital adequacy assessment process. TheBanking Control Commission has the right to instruct the bank to increase its shareholders’ equity should it deem the

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foregoing qualitative and quantitative elements to be weak or inadequate, although any such increase of shareholders’equity shall not exempt the bank from rectifying such weaknesses or inadequacies.

Corporate Governance

Central Bank Decision № 7737, issued on December 15, 2000, as amended, establishes an internal control and internal audit framework for banks, depending on the size of the relevant bank and the nature of risks it is or might be exposedto and taking into consideration several basic components.

Central Bank Decision № 7776, issued on February 21, 2001, as amended, requires all decisions concerning credit granting, liquid asset investments, real estate investments, shareholding, participations, and operations performed ontheir own account on structured or derived financial instruments to be taken by banks operating in Lebanon to besubmitted to the prior approval of one or more committees, as needed and as per a pre-defined structure and framework,specialised in the setting of efficient strategies for the management, follow-up and development of the bank’s activities,whether at the level of the bank or the banking group, as applicable.

Central Bank Decision № 9286, dated March 9, 2006, as amended, requires employees in specified regulated functions within the bank to meet certain qualifications and to acquire certain certificates (depending on the type of functionconcerned) in order to hold such positions.

Central Bank Decision № 9382 dated July 26, 2006, as modified on April 21, 2011, requires that banks operating in Lebanon must, among other things, (i) endeavour to comply with the principles issued and to be issued by theInternational Basel Committee for Enhancing Corporate Governance in Banking Institutions; (ii) prepare their own“Corporate Governance Guidelines”; and (iii) publish on their website and in their annual report a summary of these“Corporate Governance Guidelines”.

Pursuant to Central Bank Basic Decision № 9956 dated July 21, 2008 the Board of Directors of each Lebanese bank should comprise of a sufficient number of non-executive and independent members, and is required to:

Establish an audit committee comprised of at least three non-executive directors and chaired by an independentmember who has modern and practical banking or financial experience in accounting, financial management orauditing. This audit committee shall, inter alia, assist the Board of Directors in the performance of its duties, inparticular with respect to: (i) assessing the qualifications and independence of each of the auditors and the internalaudit unit; (ii) monitoring the accuracy of the bank’s financial statements and reviewing the disclosure criteriaadopted by the bank; (iii) reviewing the sufficiency and effectiveness of the bank’s internal control regulations andprocedures; (iv) following up on the implementation of the proposed corrections included in any reports issued bythe internal audit unit and the auditors; and (v) monitoring the bank’s compliance with applicable Central Bankand Banking Control Commission regulations. In addition, the audit committee shall, separate from its duty toassist the Board of Directors, independently supervise the internal audit activities, assess the performance,independence and objectivity of the auditors and review the internal control regulations and procedures, includingthe anti-money laundering procedures and the prevention of terrorism financing procedures, in order to ensuretheir sufficiency and effectiveness. The Bank established its Audit Committee on February 15, 2007, being thefirst among the Lebanese banks to do so.

Establish a Risk Committee comprised of at least three directors and chaired by an independent member who hasmodern and practical banking or financial experience in risk assessment and management. The Risk Committeeshall, inter alia, assist the Board of Directors in the performance of its duties, in particular with respect tosupervision of the proper implementation by the Bank of risk management rules, as detailed in the regulationsissued and to be issued by the Central Bank and the Banking Control Commission. The Committee’s scope ofwork shall cover the Bank in Lebanon and all its branches and subsidiaries abroad. The Bank established its RiskCommittee on February 25, 2010.

Determine the compensation of the Audit and Risk Committees’ Chairmen and members.

Central Bank Decision № 10224 dated August 13, 2009 requires each Lebanese bank to appoint two separate external auditors to jointly audit the bank’s accounts. Auditors are appointed for a renewable, three-year period, provided thatthe audit firm rotates the auditor in charge every five years.

Pursuant to Central Bank Basic Decision № 10227 dated August 21, 2009, Lebanese banks are required to adopt a business continuity plan for purposes of ensuring the continuity of their operations in the event of the occurrence of anydisaster or other event that may affect the continuity of their operations.

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Credit Limits

Central Bank Decision № 7055 dated August 13, 1998, as amended by Decision № 11309 dated December 20, 2012, sets the maximum allowable weighted credit limit for loans to a single borrower (or a group of related borrowers) at:(i) 20.0% of the combined shareholders’ equity of the bank’s domestic and foreign banking operations with respect toloans extended to a single borrower (or a group of related borrowers) the proceeds of which are to be used in Lebanonor outside Lebanon; or (ii) 10.0% of the combined shareholders’ equity of the bank’s domestic and foreign bankingoperations with respect to loans extended to a single borrower (or a group of related borrowers) the proceeds of whichare to be used in countries with sovereign ratings, subject to the following:

for countries with a rating above BBB, (x) the aggregate exposure of a bank to borrowers in all such countries maynot exceed 400% of the combined shareholders’ equity of the bank’s domestic and foreign banking operations and(y) the aggregate exposure of a bank to borrowers in any one such country may not exceed 50.0% of the combinedshareholders’ equity of the bank’s domestic and foreign banking operations;

for countries with a rating below BBB, (x) the aggregate exposure of a bank to borrowers in all such countries maynot exceed 100.0% of the combined shareholders’ equity of the bank’s domestic and foreign banking operationsand (y) the aggregate exposure of a bank to borrowers in any one such country may not exceed 25.0% of thecombined shareholders’ equity of the bank’s domestic and foreign banking operations; and

The relevant country limit imposed on a bank’s foreign banking operations may be increased by an additional 25%of the combined shareholders’ equity of the bank’s domestic and foreign banking operations with respect to loansgranted and to be used in the country in which the relevant foreign banking operation conducts its principalbusiness; provided such loans are financed by local deposits.

In any event, exposure to any one borrower or group of borrowers cannot exceed 20% of the bank’s consolidatedshareholders’ equity.

Foreign Exchange Trading

Central Bank Decision № 6568, dated April 24, 1997, as amended, prohibits Lebanese banks from maintaining at any time (i) net trading positions against Lebanese Pounds in an amount greater than 1.0% of Tier I Capital and (ii) globalpositions greater than 40.0% of Tier I Capital.

Lebanese banks, however, are allowed, under Decision № 6568, to hold a structural foreign exchange position up to 60.0% of Tier I Capital denominated in Lebanese Pounds after making certain adjustments.

Loan Classification

Central Bank Decision № 7159 (“Decision № 7159”), dated November 10, 1998, as amended, introduces specific rulesrelating to loan classification. Specifically, it divides loan facilities into six categories: (i) ordinary/regular loans;(ii) loans to be followed-up; (iii) loans to be followed-up and regularised; (iv) sub-standard loans; (v) doubtful loans;and (vi) bad or ailing loans. See “Overview of Bank Audi—Loan Classifications”.

In addition to imposing the above supervisory classifications, the Central Bank requires banks to adopt a loan gradingsystem, which is composed of 10 grades, to be applied internally. These grades are as follows: (1) excellent; (2) strong;(3) good; (4) satisfactory; (5) adequate; (6) marginal; (7) vulnerable; (8) substandard; (9) doubtful; and (10) loss. Thisscale is expected to be mapped to the above mentioned six categories.

Provision for Bad Debt and Doubtful Loans

The Banking Control Commission requires specific provisions to be established for identified credit losses. Full orpartial provisions must be made in respect of non-performing loans in accordance with applicable Central Bankregulations. Furthermore, non-performing loans must be put on a non-accrual basis and any interest subsequentlyreceived booked on a cash basis, as and when received. Non-performing loans are those as to which the relevant CentralCredit Department has determined that the borrower may be unable to meet principal and/or interest repaymentobligations, or performance is otherwise unsatisfactory. See “Overview of the Bank—Provisioning and Write-OffPolicies”.

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Reserves for General Banking Risk

Pursuant to Central Bank Decision № 7129, dated October 15, 1998, as amended, banks operating in Lebanon are required to allocate on a yearly basis a general reserve (to be included in Tier I Capital) for unspecified banking risksout of net profits in an amount equal to a minimum of 0.2% and a maximum of 0.3% of risk-weighted assets. Theaccumulated reserve for unspecified banking risks must be equivalent to 1.25% of risk-weighted assets within 10 yearsfrom the Decision’s issuance and 2.0% of risk-weighted assets within 20 years from the Decision’s issuance, in eachcase, from 2008, as calculated in accordance with ratios established under the Basel II Accord.

Remunerations and Bonuses granted to bank employees

Pursuant to Central Bank Basic Decision № 11821 dated August 6, 2014, boards of directors of Lebanese banks must, prior to December 31, 2014: (i) approve a written “compensation” policy in line with the relevant bank’s strategy anddevelopment; (ii) establish a board level remuneration committee to be comprised of at least three non-executivedirectors and chaired by an independent member of the board of directors; and (iii) approve a written procedure forevaluation of the performance of its employees in an objective and transparent manner.

Accounting Standards

Effective in 1997, all Lebanese banks are required to prepare their financial statements in accordance with InternationalFinancial Reporting Standards (IFRS). The Banking Control Commission has issued instructions which correspond toInternational Financial Reporting Standards; for instance, the recognition of interest on classified loans only on a cashbasis, collective provisions calculations, guidelines for the effects of hyper-inflation, the recording of exchange gainsand losses arising from revaluation of foreign exchange positions and a statement of non-monetary assets acquired insettlement of debts at current price.

There are also certain restrictions on lending to shareholders and directors and on investments in subsidiaries andaffiliates.

Central Bank Decision № 6576 dated April 24, 1997, requires Lebanese banks to prepare consolidated financial statements effective 1 July 1997. Consolidated financial statements must include all companies (financial and non-financial) under a bank’s exclusive control (evidenced by ownership of 50% or exclusive control over management).Companies in which the bank has joint control (evidenced by direct or indirect ownership ranging from 20.0% up to50.0%) should be presented using the “equity method”.

International Bank Account Number (IBAN)

Pursuant to Decision № 10120, dated April 14, 2009, as amended, all banks operating in Lebanon must take necessary measures for issuing and verifying the banking identification number (the “IBAN”), to be used in the processing ofdomestic and international bank transfers starting 1 January 2010, which consists of a compound number of twenty-eight digits divided as follows (i) Country Code, (ii) Verification Number, (iii) Bank Identification Number and(iv) Account Number.

Business Continuity Plan

Pursuant to Decision № 10227 dated August 21, 2009, all banks operating in Lebanon must prepare a Business Continuity Plan effective August 21, 2010. The plan must include preventive and prudential procedures, detectionprocedures to determine the occurrence of a disaster, rescue procedures or disaster and post-disaster operation modesand finally procedures for resuming normal operation mode. In addition, banks must adopt general principles based onISO IEC 27002-2005 Standard including, in particular (i) risk classification, (ii) bank activity classification, (iii) activityselection under disaster and post-disaster operation modes, (iv) resource classification and provision under disaster andpost-disaster operation modes, (v) alternate site selection, (vi) selecting implementation staff, and determining theirduties and responsibilities, (vii) training staff entrusted with operating the plan, (viii) data transfer and softwaremaintenance, (ix) security procedures, (x) plan implementation procedures, (xi) testing the plan and (xii) updating theplan.

Scientific, technical and ethical qualifications required for performing certain functions in the banking andfinancial sectors

On March 9, 2006, the Central Bank issued the Decision № 9286, as amended, its purpose being to define the framework and the scientific, technical and ethical qualifications required from persons responsible for performingcertain functions in the banking and financial sectors in Lebanon, in order to preserve the stability of these sectors and

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give protection to their clients. Some persons are exempted from taking the examination such as (i) the Chairman –General Manager, (ii) persons with at least 15 years of experience in the banking or financial sector as at September 18,2009, (iii) directors or heads of branches appointed before September 18, 2009 and having at least seven years ofexperience in the banking and financial sector, acquired during the nine years preceding their assignment to thisposition and (iv) persons holding diplomas and examinations accepted by the Central Bank.

Relationship between Banks and Financial Institutions and their correspondents

Pursuant to Central Bank Decision № 10965, dated April 5, 2012, banks and financial institutions in Lebanon must (i) strictly implement the Regulations for the Control of Financial and Banking Operations for Fighting MoneyLaundering and Terrorist Financing, particularly with respect to customers who require cross-border operations throughcorrespondent banks and financial institutions and (ii) be fully informed of the laws and regulations governing theircorrespondents abroad, and deal with the latter in conformity with the laws, regulations, procedures, sanctions andrestrictions adopted by international legal organisations or by the sovereign authorities in the correspondents’ countries.Any dealings between banks and financial institutions operating in Lebanon, and their branches, subsidiaries or sistercompanies abroad should also be subject to these conditions.

Real Time Gross Settlement System “BDL-RTGS”

Pursuant to Central Bank Decision № 11081, dated June 27, 2012, Real Time Gross Settlement System “BDL-RTGS”is a national payment system to be used in banks and certain financial institutions which have applied to be aparticipant. BDL-RTGS has been established at the Central Bank in accordance with the Code of Money and CreditDecree № 13513. BDL-RTGS is a domestic funds transfer system whereby Participants can send or receive a single Funds Settlement Instruction “FSI” to and from each other. FSIs are settled on a gross basis and in a real time mannerprovided that participants have sufficient funds or credit facilities. The BDL-RTGS offers the participants secure,reliable and real time method of payment that adheres to International Standards.

Retail Payment System “BDL-CLEAR”

Pursuant to Central Bank Decision № 11597, dated November 6, 2013, a Retail Payment System “BDL-CLEAR” was established as a national payment system to be used by all participating banks and financial institutions. The CentralBank owns, operates and oversees this domestic retail payment system, which is an automated system offering numberof clearing streams, check clearing facilities, Central Bank collection facilities, credit transfers, Central Bank credittransfers and direct debits and cards clearing facilities. Each facility has specific procedures in addition to the applicablelaws and regulations.

Compliance Function

Pursuant to Central Bank Decision № 11323, dated January 12, 2013, all banks and financial Institutions operating in Lebanon must establish a compliance department that shall be entrusted with a number of duties and shall include: (i) alegal compliance unit responsible for identifying and preventing legal risks, and taking the required measures tomitigate these risks; (ii) an AML/CFT Compliance Unit responsible for verifying compliance with AML/CFTprocedures, laws and regulations as described in Decision № 7818 dated May 18, 2001. The compliance department should be an autonomous department whose work and activities are totally independent from the other activities of thebank or financial institution and any of their units, including the internal audit and legal functions, provided noexecutive tasks or any other mission within the bank or financial institution is assigned to the compliance departmentstaff.

On September 23, 2013, the Central Bank issued Intermediary Decision № 11547, removing the requirement for Lebanese banks and financial institutions owned by Lebanese banks to acquire the Central Bank’s prior approval toadopt the same compliance function as their parent company.

Opening and Closing of Bank Branches

Pursuant to Central Bank Decision № 7147, dated November 5, 1998, banks must obtain the Central Bank’s approval for the opening of any new branches. Specified documents need to be submitted to the Central Bank to support therequest for approval, including a detailed study (including an economic analysis) of the proposed location, competition,potential clients and their related economic sectors, reasons for the opening of a new branch, characteristics of the newbranch and other relevant criteria. In addition, a minimum amount of capital must be allocated to the bank’sheadquarters within Lebanon and to each branch within and outside Lebanon.

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On August 5, 2013 and February 4, 2014, the Central Bank issued Intermediary Decisions № 11491 and № 11673, respectively, which required “new-tech” branches to be considered as regular branches and subjected them to the sameapprovals and requirements as other bank branches. In addition, existing applicable restrictions on operating bracheswere amended to permit banks to open a maximum number of three branches (subject to certain exemptions granted inthe Central Bank’s discretion) in Lebanon per year, so long as at least one such branch was a “new-tech” branch.

Financing Facilities from BDL to Banks and Financial Institutions

Pursuant to Central Bank Intermediary Decision № 11329 dated January 14, 2013, as amended, the Central Bank has introduced new permitted facilities to be extended by the Central Bank to banks and financial institutions, including,new facilities amounting to LBP 2,200 billion against specified facilities granted by banks and financial institutions totheir clients, subject to predefined terms, conditions and deadlines. In addition, Intermediary Decision № 11512 dated August 22, 2013, permitted the granting of facilities to banks against their investments in start-up companies,accelerators, incubators and venture capital, subject to certain terms and conditions, pursuant to which banks mayrecognize the equivalent amount of such investments as additional Tier I Capital as set out in Central Bank IntermediaryDecision № 11513 dated August 22, 2013, amending Central Bank Basic Decision № 6938.

Electronic Banking

In accordance with Central Bank Decision № 7548, dated March 30, 2000, as amended, banks may perform electronic banking and financial operations after giving prior notice of such intention to the Central Bank subject to a well definedframework and certain limitations. Banks are restricted from undertaking banking operations through electronic mobiledevices, except for operations between a specific bank and its customers. Banks are permitted to use electronicsignatures, subject to certain pre-defined conditions.

Going further, pursuant to the above decision and announcement № 900 dated December 19, 2013, the issuance and use of electronic money in any means, especially the Bitcoin is prohibited.

Credit Transparency, Terms and Conditions

Pursuant to Central Bank Decision № 10439, dated May 17, 2010, in order to regulate advertisements relating to financial products in the market, all credit advertisements, made directly or indirectly, as well as the contract andapplication forms adopted by the bank, must be clear, comprehensive and accurate. Decision № 10439 also introduced the Annual Percentage Rate “APR”, being a unit of measurement that represents interest and any other cost imposed onthe client through the bank as a result of a contract for a financial product, and computed in accordance with pre-definedcriteria.

Banking Control Commission Circular № 273 dated November 10, 2012, further details the components of the APR and its computation, and required bank to specify the conditions and the specifications of any given product as well asproviding a simulator in order for the customer to compute the final cost on its website.

Disclosure Policy

CMA Decision № 1, dated June 11, 2013, requires joint stock companies and collective investment funds with tradable shares (listed or “over-the-counter”) and having more than 20 shareholders to implement a disclosure policy to govern,among other things, any company related information affecting the company’s stock price. The disclosure policy isintended to ensure good corporate governance and the protection of stakeholder rights and is subject to the priorapproval of the CMA.

CMA Decision № 2, dated June 11, 2013, sets out the information to be disclosed by joint stock companies, including financial information, which must be communicated in a timely manner and through defined channels ofcommunication (which much be disclosed to the CMA prior to adoption). Any amendments to disclosed informationmust be disclosed to shareholders as soon as possible.

Prohibition of Exploitation of Inside Non-Public Information

Law № 160 prohibits insider trading, which is defined as the selling or purchasing of securities on the basis of material non-public information. Law № 160 also prohibits the disclosure of material non-public information and the provision of investment advice on the basis of such information.

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CMA Decision № 6, dated November 20, 2013, provides for additional restrictions on the trading of securities (in the blackout period) by persons who are deemed to be insiders, such as the chairman or members of a board of directors,external or internal auditors and senior managers of an issuer, as well as the members of their respective families.

Brokerage Activities

CMA Decision № 10, dated January 9, 2014, which replaces Central Bank Decision № 6213, dated June 28, 1996, regulates brokerage activities undertaken by authorised institutions and promulgates rules relating to restrictions,transparency and disclosure obligations, among other matters. CMA Announcement № 4, dated April 28, 2014, also requires investor profiles to be created and maintained to evaluate proposed investment suitability.

Regulations Concerning Operations on Derivatives

CMA Decision № 12, dated February 10, 2014, which replaces Central Bank Decision № 10852 dated December 7, 2011, sets out, among other things, the regulations and conditions relating to operations relating to derivatives andcertain limitations and exceptions for transactions with foreign entities.

Financial Instruments and Products

CMA Decision № 16, dated February 13, 2014, prohibits the issuance and the promotion of financial instruments and products without the CMA’s prior approval. The decision also imposes transparency and disclosure obligations inrespect of such activities. These provisions were migrated from Central Bank Basic Decision № 7439 dated December 24, 1999, as amended, where some provisions related to the same topic remain under the concurrent supervision of theCentral Bank.

Other CMA decisions

The CMA has also issued other decision in respect of, among other things, crowd funding and reporting requirements.

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DESCRIPTION OF THE SHARE CAPITAL OF THE BANK

General

Shares in issue

As at the date of this Offering Circular, the Bank’s share capital consisted of:

(i) 349,749,204 Common Shares, each with a nominal value of LL 1,299, of which 102,493,911 were representedby Global Depositary Receipts;

(ii) 1,250,000 Series E Preferred Shares, each with a par value of LL 1,299, which were issued at a price of, andmay (subject to certain conditions) be redeemed by the Bank at, U.S.$100.00 per Series E Preferred Share;

(iii) 1,500,000 Series F Preferred Shares, each with a par value of LL 1,299, which were issued at a price of, andmay (subject to certain conditions) be redeemed by the Bank at, U.S.$100.00 per Series F Preferred Share;

(iv) 1,500,000 Series G Preferred Shares, each with a par value of LL 1,299 and which were issued at a price of,and may (subject to certain conditions) be redeemed by the Bank at, U.S.$100,00 per Series G Preferred Share;and

(v) 750,000 Series H Preferred Shares, each with a par value of LL 1,299 and which were issued at a price of, andmay (subject to certain conditions) be redeemed by the Bank at, U.S.$100.00 per Series H Preferred Share.

As at June 30, 2014, all of the Common Shares, Series E Preferred Shares, Series F Preferred Shares, Series G PreferredShares and Series H Preferred Shares were issued and fully paid-up.

There has been no material change in the Bank’s capital since December 31, 2013.

Changes in Share Capital

The share capital of the Bank may be increased only with the approval of the Bank’s shareholders at an ExtraordinaryGeneral Meeting and the authorization of the Central Bank, following a recommendation of the Board of Directors. TheBank’s shareholders at the relevant Extraordinary General Meeting shall also determine the conditions of issue of thenew shares. Increases in share capital may be effected either by the issue of new shares, by incorporation of freereserves or by any legally authorized means. New shares may be issued for cash or for assets contributed in kind. UnderLebanese law, the share capital of the Bank may not be reduced in any circumstances; however, in common with otherLebanese banks, the Bank is authorized to buy-back its own shares (which are listed on a stock exchange) and cancelthem subject to certain conditions.

Over the last five years, the following changes have occurred in respect of the Bank’s share capital:

On January 18, 2010, a group of the Bank’s existing shareholders, as well as a number of other high networth individuals and entities investing directly or through investment vehicles, purchased the entire stakepreviously owned by EFG-Hermes comprised of 7,554,148 Common Shares and 2,483,034 GDRs. Inconnection with this transaction, two newly-formed special purpose companies (the “SPCs”) issued notesdue 2013 exchangeable into Common Shares (the “Series 1 Notes”) to finance their purchase of a total of3,396,783 Common Shares from EFG-Hermes (the “Underlying Shares”). The Bank has agreed that, if sorequested at any time, by or on behalf of either such SPC, it will pay to the relevant SPC an amountsufficient to permit such SPC to make payment of its obligations in respect of the notes issued by it to theextent then due. The Bank has also agreed, subject to certain conditions and to obtaining all necessaryapprovals and authorizations (including the prior approval of the Central Bank), if so requested, to purchaseor procure the purchase from the relevant SPC, immediately prior to the maturity date of its Series 1 Notes,of all Underlying Shares at the time held by such SPC. In addition, the Bank has entered into a separate calloption agreement with each SPC, pursuant to which the Bank has the right (but not the obligation), subjectto certain conditions and to obtaining all necessary approvals and authorizations (including the priorapproval of the Central Bank), to purchase or cause to be purchased, in its discretion, all or any part of theUnderlying Shares of the Bank held by the relevant SPC.

On March 2, 2010, the shareholders of the Bank adopted resolutions at an Extraordinary General Meetingauthorising the 10 to 1 Stock Split of all the Bank’s shares (common and preferred). The resulting totalnumber of outstanding shares of the Bank became 356,689,410, including 344,189,410 common shares and12,500,000 Series D Preferred Shares. The new nominal value of each share hence became LL 1,225.

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In May 2010, the Bank issued 1,250,000 Non-Cumulative Redeemable Series E Preferred Shares with a parvalue of LL 1,225 each, which carry annual distribution rights of U.S.$6.00 per Series E Preferred Shareand which were issued, and may be redeemed, at a price of U.S.$100 per Series E Preferred Share, all ofwhich remain issued and outstanding.

On December 13, 2010, the shareholders of the Bank ratified (i) the withdrawal and cancellation of8,029,756 Common Shares comprising deposited property attributable to GDRs held by the Bank intreasury from the deposit facility; (ii) the increase of the nominal value of the remaining shares comprisingthe share capital of the Bank by an amount equivalent to the aggregate nominal value of the cancelledCommon Shares; (iii) the increase of the Bank’s share capital from LL 438,475,777,250 at that date to LL438,786,706,116 through the incorporation of general reserves of LL 310,928,866 in order to round thenominal value of each individual share to LL 1,254; and (iv) the deduction of an amount equivalent to theaggregate amount paid for the purchase of the GDRs evidencing the cancelled Common Shares from theCommon Shares Issue Premium Account.

On December 13, 2010, the shareholders of the Bank ratified the increase in the share capital of the Bankthrough the issuance of 12,317,460 Common Shares reserved for the optionees who had exercised theirrights under the Bank’s 2006 stock option plan as follows: (i) 11,717,760 Common Shares at a price ofU.S.$2.719 per Common Share and (ii) 599,700 Common Shares at a price of U.S.$4.033 per CommonShare.

On October 24, 2011, the shareholders of the Bank ratified the increase in the share capital of the Bankthrough the issuance of 962,830 Common Shares reserved for the optionees who had exercised their rightsunder the Bank’s 2006 stock option plan as follows: (i) 708,610 Common Shares at a price of U.S.$2.719per Common Share and (ii) 254,220 Common Shares at a price of U.S.$4.033 per Common Share.

On April 3, 2012, a newly-incorporated special purpose company (the “New SPC”) purchasedapproximately 99.2% of the aggregate amount of Series 1 Notes issued by the SPCs on January 18, 2010for an aggregate total of U.S.$355 million (the “Series 1 Purchase Price”) and delivered such Series 1Notes to the respective SPCs for redemption. The Series 1 Purchase Price, which was paid on April 5,2012, was funded by (i) a pre-payment made by the Bank of U.S.$123 million, (ii) the cash reservesattributable to the Series 1 Notes and (iii) the proceeds (U.S.$205 million) of new notes convertible intoCommon Shares due 2016 issued by the SPCs (the “Series 2 Notes”) initially to the New SPC inconsideration for delivering the Series 1 Notes for redemption, which were subsequently resold toinvestors. The Series 2 Notes were issued on April 5, 2012 and have the benefit of substantially similaragreements, as described in further detail above. The remaining Series 1 Notes that were not purchased onApril 3, 2012 were redeemed on April 21, 2012 as permitted under the various agreements in respect of theSeries 1 Notes.

In April 2012, the Bank issued 1,500,000 Non-Cumulative Series F Preferred Shares, with a par value ofLL 1,254 and which carry annual distribution rights of U.S.$6.00 per Series F Preferred Share and whichwere issued, and may be redeemed, at a price of U.S.$100 per Series F Preferred Share, all of which remainissued and outstanding.

On October 15, 2012, the shareholders of the Bank ratified the increase in the share capital of the Bankthrough the issuance of 309,260 Common Shares reserved for the optionees who had exercised their rightsunder the Bank’s 2006 stock option plan at a price of U.S.$2.719 per common share.

On April 15, 2013, the shareholders of the Bank decided to cancel the Series D Preferred Shares(12,500,000 shares with a nominal value of LL 15,675 million) and to simultaneously replenish the sharecapital accounts by transferring the same amount from general reserves. As a result, the Bank increased itsshare capital to LL 457,897 million, representing an increase of LBP 187 million, through the conversion ofan additional amount of LL 63 million from general reserves and LL 124 million from the issue premium-preferred shares to share capital. Accordingly, as a result of the cancellation and capital increase, the parvalue per share was increased to LL 1,299.

In May 2013, the Bank issued 1,500,000 Non-Cumulative Series G Preferred Shares, with a par value ofLL 1,299 and which carry annual distribution rights of U.S.$6.00 per Series G Preferred Share (U.S.$4.00for 2013) and which were issued, and may be redeemed, at a price of U.S.$100 per Series G PreferredShare, all of which remain issued and outstanding.

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In May 2013, the Bank issued 750,000 Non-Cumulative Series H Preferred Shares, with a par value of LL1,299 and which carry annual distribution rights of U.S.$6.50 per Series G Preferred Share (U.S.$4.50 for2013) and which were issued, and may be redeemed, at a price of U.S.$100 per Series H Preferred Share,all of which remain issued and outstanding.

Dividends

At the Ordinary General Meeting of the Bank’s shareholders held on April 14, 2014, the Bank’s shareholders approvedthe distribution of dividends out of the Bank’s net income in 2013 of U.S.$6.00 per Series E Preferred Share, U.S.$6.00per Series F Preferred Share, U.S.$4.00 per Series G Preferred Share, U.S.$4.50 per Series H Preferred Share and LBP603 (or U.S.$0.4) per Common Share (before withholding taxes at a rate of 5%). Total dividends paid in respect of 2013represented 54.4% of the Bank’s net earnings for 2013.

See “Dividend Policy”.

Management Incentive Scheme

On April 12, 2010, the General Meeting of Shareholders approved a resolution pursuant to which the Chairman of theBoard of Directors (Mr. Raymond Audi) and the executive members of the Board of Directors (Messrs. Samir Hanna,Marc Audi, Freddie Baz and Imad Itani) are entitled to receive an aggregate of 3.35% of the annual pre-tax profits ofthe Bank for each of the years ended December 31, 2010 through December 31, 2013, inclusive. On April 10, 2012, andin consideration of the resignation of Mr. Mario Saradar from his executive duties within the Bank, the aforementionedpercentage of annual pre-tax profits was reduced to 3.15% with effect from January 1, 2011.

Following the expiration of the aforementioned resolution of the Annual Ordinary General Meeting dated April 2010,the Annual Ordinary General Meeting of Shareholders approved a resolution to (i) grant the same beneficiaries anannual performance-related cash remuneration as a percentage of the Bank’s consolidated net profits before taxes forthe financial years 2014 to 2017, inclusive (such percentage to be determined by the Board of Directors, but not toexceed 3.15%), and (ii) authorize the Board of Directors to substitute, for certain beneficiaries, such remuneration witha fixed one-time bonus payment, to be determined by the Board of Directors and payable in 2014.

The Bank’s stock option plan is no longer in effect.

See also, “Description of Bank Audi—Employees” and “Description of Bank Audi—Service Contracts”.

Other Related Party Transactions

Unless as provided under “Directors, Management and Employees—Interests of Directors”, no director of the Bank hasan interest in any contract, arrangement or transaction entered into by the Bank or its subsidiaries, which is or wasunusual in its nature or conditions or significant in relation to the business of the Bank and which was effected duringthe current or immediately preceding financial year, or was effected during an earlier financial year and remains in anyrespect outstanding or unperformed.

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Shareholders

The following table sets out the composition of the holders of the Common Shares as at June 30, 2014:

Shareholders/Groups of ShareholdersCountry (ultimate economic

ownership)Percentage

Ownership(1)

(%)

Audi Family(2) ................................................................................ Lebanon 7.0Al-Homaizi Family(2) ...................................................................... Kuwait 6.1Saradar Family................................................................................ Lebanon 5.4Sheikh Dhiab Bin Zayed Al-Nehayan............................................... United Arab Emirates 5.1FRH Investment Holding SAL......................................................... Lebanon 4.9Al-Sabbah Family(2) ........................................................................ Kuwait 4.8Investment Finance Opportunities Ltd.............................................. Lebanon 4.3Middle East Opportunities For Structured Finance Ltd...................... Lebanon 4.2Investment and Business Holding S.A.L........................................... Lebanon 3.9Al-Hobayeb Family(2) ...................................................................... Kingdom of Saudi Arabia 2.6Said El-Khoury Family.................................................................... Lebanon 2.4Executive and Employees(3) ............................................................ Lebanon 4.7Others............................................................................................. — 15.3Deutsche Bank Trust Company Americas(4)...................................... — 29.3

Total Shareholding(5) ..................................................................... 100.0__________Notes:(1) Percentage ownership figures represent Common Shares owned by the named Shareholders and are expressed as a percentage of the total

number of Common Shares issued and outstanding.As at June 30, 2014, the Bank (and its affiliates) is the custodian of shares and/or GDRs representing 78.3% of the Bank’s Common Shares.

(2) The Audi Family, Al Homaizi Family, Al Sabbah Family, and Al-Hobayeb Family include the following members of the Board: (i) RaymondWadih Audi and Marc Jean Audi (ii) Suad Hamad Al Saleh Al Homaizi (iii), Mariam Nasser Sabbah Al Nasser Al Sabbah, and (iv) Abdallah AlHobayeb, respectively.

(3) Excluding members of the Audi family, accounted for in a separate row above.(4) As at June 30, 2014, Deutsche Bank Trust Company Americas, in its capacity as depositary under the Bank’s GDR Program, owned

102,493,911 Common Shares represented by GDRs.(5) As at June 30, 2014, the total number of common shares was 349,749,204.

The Bank is not aware of any person, other than as listed in the table above, who has an interest in 3.0% or more of itsissued share capital, or any other person who, directly or indirectly, jointly or severally, exercises or could exercisecontrol over the Bank.

IFO and MOSF are special purpose vehicles, which owned 14,883,530 Common Shares and 14,835,830 CommonShares in the Bank, respectively, representing 4.3% and 4.2% of the Bank’s Common Shares, respectively, as at 30 June2014. The Bank has the right to substitute the Common Shares owned by IFO and MOSF for cash and, accordingly, tosell the Common Shares at any time. As at the date of this Offering Circular, there has been an agreement to sell orsubstitute certain Common Shares held by IFO and MOSF, which will reduce the Common Shares held by IFO andMOSF to 4,766,598 and 4,736,582, respectively, each representing 1.4% of the Bank’s Common Shares. Each of IFOand MOSF have issued notes, which are secured by the Common Shares and the dividend and other distributionspayable in connection therewith. Payments in respect of the Notes are made from dividends and other proceeds of theCommon Shares. In the event that the proceeds of the underlying Common Shares and collateral are insufficient torepay the Notes in full, the Bank has a commitment to cover any shortfall.

See Note 44.0 to the Bank’s audited consolidated financial statements as at, and for the year ended, December 31, 2013.

Description of the Common Shares

The following description of the Bank’s Common Shares and the rights relating thereto does not purport to be completeand is qualified in its entirety by reference to Lebanese law and the By-laws (which have been filed with and arepresently available from the Register of Commerce of Beirut or at the offices of the Bank and the Placement Agentcurrently located at the respective addresses indicated on the back cover of this Offering Circular).

General

As at the date of this Offering Circular, the Bank’s share capital includes 349,749,204 Common Shares, each with a parvalue of LL 1,299, all of which are issued and fully paid.

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Payment of Dividends

Since 1996, the Board of Directors of the Bank has recommended the distribution to holders of Common Shares of adividend payment of at least 30% of after-tax profits in each year.

Pursuant to the Bank’s By-laws, subject to the requirements of Lebanese law, the Bank’s net income in each financialyear shall be allocated in the following order of priority:

to the allocation of 10% of net income to the legal reserve;

to the allocation of amounts required for the establishment of legal regulatory reserves;

to the payment of distributions in respect of any outstanding Series E Preferred Shares, Series F PreferredShares, Series G Preferred Shares and Series H Preferred Shares, as and when approved by the shareholdersof the Bank pursuant to a resolution adopted at the General Meeting of shareholders at which the mostrecent annual audited financial statements of the Bank are approved;

to the establishment of additional special or general reserves or to the allocation of amounts to be carriedforward to the following year in accordance with a decision of the Bank’s shareholders pursuant to aresolution adopted at a General Meeting; and

to the distribution of the balance to holders of Common Shares.

The Bank is legally required to establish and maintain a legal reserve to which an amount equal to 10.0% of the annualnet profits after taxation must be transferred each year until such reserve reaches one-third of the Bank’s share capital.The legal reserve is distributable only upon the liquidation of the Bank. The Bank is also legally required to set aside aminimum of 0.2% and a maximum of 0.3% of the Bank’s risks-weighted assets as a reserve for unspecified bankingrisks, which forms an integral part of the Bank’s Tier I Capital. Pursuant to Central Bank Decision 7129, theaccumulated reserve for unspecified banking risks must be equivalent to 1.25% of risk-weighted assets within 10 yearsfrom Decision 7129’s issuance and 2.0% of risk-weighted assets within 20 years from Decision 7129’s issuance. Inaddition, Central Bank Decision № 7740, dated December 21, 2000, as amended, provides that banks are required to establish a special reserve for properties acquired in satisfaction of debts and not liquidated within the required delays.The Banking Control Commission Circular № 4/2008 provides that banks must establish such special reserve at the end of the fiscal year during which the acquired property should have been liquidated. This special reserve shall be withheldfrom the annual profits and shall not be accounted for as an expense in the profit and loss account in accordance withIFRS.

No dividends or other distributions in respect of the Common Shares may be made unless and until the full amount ofdistributions in respect of any outstanding Series E Preferred Shares, Series F Preferred Shares, Series G PreferredShares and Series H Preferred Shares and any future series of preference shares of the Bank at the time outstanding andranking pari passu with the existing preferred shares, in each case, then due and payable shall have been paid ordeclared and set aside.

Payment of dividends to holders of Common Shares must be made annually on the dates specified by the GeneralMeeting (or any other shareholders’ meeting) at which the relevant annual audited financial statements of the Bank areapproved. Under Lebanese law, dividends not claimed within five years of the date of payment become barred bystatute of limitations; half of these unclaimed dividends revert to the Bank, while the balance is paid over to theGovernment.

Liquidation Rights

If the Bank is liquidated, the assets of the Bank remaining after payment of its debts, liquidation expenses and all of itsremaining obligations will be distributed first to pay the liquidation preference in respect of any outstanding Series EPreferred shares, Series F Preferred Shares, Series G Preferred Shares and Series H Preferred Shares and any futureseries of preference shares of the Bank at the time outstanding and ranking pari passu with the existing preferred shares.Thereafter, such assets will be applied to repay in full the par value of the Common Shares, with the surplus, if any,being distributed pro rata among holders of the Common Shares based on the number of Common Shares they hold.

Restrictions on Transfer of Common Shares

In accordance with Law 308, any transfer of Common Shares requires the approval of the Central Bank in the event that(i) such transfer of shares would result in the transferee owning, directly or indirectly, 5.0% or more of the outstanding

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share capital of the bank (excluding preference shares) or voting rights relating thereto, whichever is higher; (ii) thetransferee owns at the time of the transfer 5.0% or more of the outstanding share capital of the bank (excludingpreference shares) or voting rights relating thereto, whichever is higher; or (iii) either the transferee or the transferor is acurrent or elected member of the bank’s Board of Directors irrespective of the number of transferred shares.

Attendance and Voting at Shareholders’ Meetings

In accordance with Lebanese law, there are three types of General Meetings of shareholders: constituent; ordinary; andextraordinary.

The constituent General Meeting takes place only once, at the call of the founders, and takes all resolutions concerningthe constitution of the Bank.

Ordinary General Meetings are required for matters such as the election and remuneration of directors, the appointmentand remuneration of statutory auditors, the approval or modification of the annual accounts, the declaration ofdividends, the creation of reserves and the issue of debentures and bonds.

Extraordinary General Meetings are required for approval of matters such as amendments to the By-laws, mergers(including the transfer of the Bank’s assets and liabilities to the resulting company of such a merger), modifications ofthe form or object of the Bank, increases in share capital (including pursuant to a waiver of preferential subscriptionrights), the creation of a new class of shares, the issue of bonds convertible into or exchangeable for shares, the extensionor reduction of the duration of the Bank and the liquidation of the Bank prior to the end of its statutory term. Resolutionsproposing a modification of the Bank’s form or object require a quorum of at least three-quarters of the Bank’s votingcapital. Resolutions put forward at an Extraordinary General Meeting proposing other changes require a quorum of atleast two-thirds of the Bank’s voting capital. If the requisite quorum is not satisfied at the first General Meetings,holders of at least one-half of the Bank’s voting capital must be present or represented at the second General Meeting,and at least one-third of the Bank’s voting capital must be present or represented at any subsequent General Meetings.

Resolutions proposed at Extraordinary General Meetings are passed by an affirmative vote of at least two-thirdsmajority vote of the Bank’s voting capital present or represented at a duly constituted Extraordinary General Meeting.Any amendment to the By-laws is subject to the approval of the Central Bank.

The Board of Directors is required to convene an annual Ordinary General Meeting, which must be held within sixmonths of the end of the Bank’s financial year, for approval of the annual accounts and reports of the Board ofDirectors. The quorum required for the annual Ordinary General Meeting is one-third of the capital (pursuant to Article198-1 of the Lebanese Code of Commerce). If the quorum is not present, the Ordinary General Meeting is adjourned.Upon recommencement of the adjourned General Meeting, there is no quorum requirement and the resolutions of thatGeneral Meeting will be valid regardless of the portion of capital represented (pursuant to Article 198-2 of the LebaneseCode of Commerce). Resolutions are adopted by an affirmative vote of the absolute majority of the Bank’s votingcapital present or represented at a duly constituted Ordinary General Meeting. Other Ordinary or Extraordinary GeneralMeetings may be convened at any time during the year. General Meetings may be convened by the Board of Directors,or, if the Board of Directors fails to call such a meeting, by the Bank’s statutory auditors or by a court-appointed agent.

At least 16 days before the date set for any General Meeting, a notice must be published in two local daily newspapers.This period may be reduced to eight days for General Meetings convened for the second or third time following aprevious inquorate General Meeting. Where only eight days’ notice is given, the notice must be published twice, withan interval of one week, in the Official Gazette and in an economic newspaper and a daily local newspaper. Such anotice must state the agenda of the previous inquorate Meeting and the results of that Meeting.

The notice of any General Meeting must state the date, time, venue and agenda for such General Meeting. The agendafor a General Meeting must be drawn up by the Board of Directors or the person that has convened the General Meeting(auditor, special director or liquidator). No action may be taken at any General Meeting on any matter not listed on theagenda for that General Meeting. However, the Board of Directors or the person convening a General Meeting may addto the agenda a proposal made by shareholders representing one-fifth of the share capital, provided that the proposal ismade in writing and has been submitted ten days before the Meeting.

At the request of shareholders representing at least one-fifth of the Bank’s share capital, the Board of Directors of theBank must, within two months following the date of the request, convene a General Meeting. The agenda of such aGeneral Meeting must state the items that the requesting shareholders wish to discuss. If needed, the auditors may alsoconvene a General Meeting.

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If the annual Ordinary General Meeting is not called, any shareholder has the right to petition the President of theTribunal of Commerce in the city of the head office of the Bank to appoint a special director. The reasons for notconvening the annual Ordinary General Meeting, and the consequences of the failure to convene, will be discussed withthe special director.

Attendance and exercise of voting rights at Ordinary General Meetings and Extraordinary General Meetings are subjectto certain conditions. Each holder of Common Shares has the right to vote at General Meetings. Voting occurs by ashow of hands or by any other method agreed by shareholders at a General Meeting. Each Common Share confers onthe holder thereof the right to one vote; any fully paid Common Share that has been registered in the name of the sameshareholder for at least two years prior to any General Meeting shall carry two votes.

A shareholder may appoint a proxy to vote on his behalf. With the exception of legal representatives of incapacitatedshareholders, such proxies must themselves be holders of Common Shares.

A shareholder may not vote in person, or by proxy, on any matter in which it has a vested interest, or in respect of adispute between itself and the Bank.

A request by any shareholder for a secret ballot must be granted where resolutions concern personal matters such as thedismissal of Board members or the determination of potential liability of directors.

A General Meeting held in accordance with Lebanese law represents all holders of Common Shares, whether present ornot, and its resolutions shall be binding on all such shareholders, including absent or dissenting shareholders.

Resolutions of General Meetings must be signed by the Chairman of the Board of Directors, the Secretary and twoscrutineers and are recorded in a special register. This register is kept at the head office of the Bank and every holder ofCommon Shares has the right to consult it.

Preferential Subscription Rights

In the event of an increase in the share capital of the Bank, the Lebanese Code of Commerce and the By-laws confer onexisting holders of Common Shares a priority right for allocation, upon subscription, to be allocated newly issuedCommon Shares (but not preference shares), for cash on a pro rata basis.

Existing holders of Common Shares may decide at an Extraordinary General Meeting to waive such preferentialallocation rights for new Common Shares in whole or in part, or that new Common Shares shall not be offered forsubscription in proportion to Common Shares already held. Any allotment of newly issued Common Shares followingsuch a waiver, whether to persons who are not existing shareholders or preferentially to a particular class of existingshareholders, is subject to a process of verification by an expert appointed by the court. In the case of an issue topersons who are not existing shareholders, this verification process applies to all of the newly issued Common Shares.In the case of an issue to existing shareholders, only the portion of newly issued Common Shares not offered to existingholders of Common Shares is subject to the verification process (pursuant to Article 113 of the Lebanese Code ofCommerce and Article 7-2 of the By-laws). Failure to comply with this verification process will render a capitalincrease null and void (pursuant to Article 113 of the Lebanese Code of Commerce).

Where preferential allocation rights have not been waived at the relevant Extraordinary General Meeting, holders ofCommon Shares may nevertheless individually elect to refrain from exercising their preferential right, may assign theirpreferential right to a third party or may expressly waive their preferential right. In the event of a waiver, the newlyissued Common Shares may be offered for subscription to third parties.

Repurchase of Common Shares

Pursuant to Lebanese law and Central Bank regulations, Lebanese banks may acquire up to 10% of their own shareslisted on any stock exchange, with the approval of the Central Bank and subject to certain conditions.

Form of Common Shares

The Common Shares are in registered form. Interests in the Common Shares are shown only on, and transfers thereofmay be effected (subject as provided herein) only through, the book-entry system maintained by Midclear and itsparticipants, including the Bank.

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Description of the Series H Preferred Shares

General

As at the date of this Offering Circular, the Bank’s preferred shares capital includes 750,000 Non-Cumulative Series HPreferred Shares, each with a par value of LL 1,299, which were issued in May 2013 at a price of, and may (subject tocertain conditions) be redeemed, at a price of U.S.$100.00 per Series H Preferred Share, all of which are issued andfully paid

Series H Distributions

Preference shares, such as the Series H Preferred Shares, are a form of equity, which offer investors a priority over thehigher level of periodic distributions than common or ordinary shares, but which typically do not participate in the netprofits of the Bank over and above a fixed distribution level or liquidation preference. Holders of Series H PreferredShares have the right to receive distributions, on a non-cumulative basis, if (i) the Bank has sufficient distributable netincome for the year available for the payment of such distributions, as well as all distributions at the time due andpayable in respect of any other preference shares of the Bank at the time outstanding and ranking pari passu with theSeries H Preferred Shares in respect of distribution, including the outstanding Series E Preferred Shares, the Series FPreferred Shares and the Series G Preferred Shares; (ii) the Bank is in full compliance with applicable regulations andfinancial ratios at the time imposed by the Central Bank and the Banking Control Commission in respect of the paymentof dividends or other distributions; and (iii) such distributions have been recommended by the Board of Directors andapproved by the shareholders of the Bank pursuant to a resolution adopted at the General Meeting of shareholders atwhich the most recent annual audited financial statements of the Bank are approved, unless there exists an obligatorylegal or regulatory reason that requires otherwise.

It is the intention of the Board of Directors of the Bank to recommend to the shareholders of the Bank that they approveannual distributions in respect of the Series H Preferred Shares out of distributable net income for the year, to the extentavailable, and to recommend to the shareholders of the Bank the approval of such distributions. It is expected thatdistributions, when declared, will be payable within 21 days following the date of the General Meeting of shareholdersat which the most recent annual audited financial statements of the Bank are approved.

Under Lebanese law, distributions not claimed within five years of the date of payment become barred by statute oflimitations; half of these unclaimed distributions revert to the Bank, while the balance is paid over to the Government.

Ranking

The Series H Preferred Shares rank pari passu (on a pro rata basis) with any outstanding Series E Preferred Shares,Series F Preferred Shares and Series G Preferred Shares and any future series of preference shares of the Bank at thetime outstanding and granted a similar ranking in respect of:

the right to receive distributions in respect of the Bank’s share capital (other than as to the amountsthereof);

the right to receive payments out of the assets of the Bank upon any voluntary or involuntary liquidation,dissolution or winding-up of the Bank (other than as to the amounts thereof); and

the right to subscribe to newly issued preference shares of the Bank, if any (other than as to the numbers ofnewly issued shares).

Preference shares rank senior to ordinary shares, and the Series H Preferred Shares rank senior to the Common Shares,in respect of the right to receive distributions and the right to receive the liquidation preference out of the assets of theBank in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Bank.

The Series H Preferred Shares, however, rank junior to debt and other obligations of the Bank such that, in the event ofthe voluntary or involuntary liquidation, dissolution or winding-up of the Bank, the holders of debt instruments andother similar obligations would be entitled to be repaid prior to the payment of any amounts to holders of Series HPreferred Shares.

The Series H Preferred Shares are not secured or covered by any guarantee from the Bank or any related party, and donot benefit from any other arrangement that legally or economically enhances the preference or seniority of their claims.

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Series H Liquidation Preference

Subject as set out in “—Loss Absorbency”, in the event of any voluntary or involuntary liquidation, dissolution orwinding-up of the Bank, the holders of Series H Preferred Shares shall be entitled, on a pro rata basis with holders ofany outstanding Series E Preferred Shares, Series F Preferred Shares and Series G Preferred Shares and any future seriesof preference shares of the Bank at the time outstanding and ranking pari passu with the Series H Preferred Shares,determined on the basis of the respective issue prices for such shares to be paid out of the assets of the Bank availablefor distribution to its shareholders, before any payment shall be made on the Common Shares (but after repayment of alldebts and other similar obligations of the Bank), an amount per share equal to a Series H liquidation preference.

The Series H liquidation preference shall be subject to adjustment to reflect the occurrence of an adjustment event (butnot upon any other event, including the issuance of any new shares below market value, stock dividends or arecapitalisation of the Bank’s share capital).

Loss Absorbency

Subject to applicable Lebanese law and regulation and consistent with the Basel Committee requirements to ensure lossabsorbency at the point of non-viability (as per the reforms to raise the quality of regulatory capital issued on January13, 2011), the Series H Preferred Shares shall constitute loss absorbency instruments, and, accordingly, similar to othershares constituting the capital of the Bank, the Series H Preferred Shares shall, participate pro rata in absorbing anycapital losses of the Bank.

Voting Rights of Series H Preferred Shares

In addition, holders of preference shares generally do not have the right to vote and holders of Series H Preferred Sharesare entitled to vote on a pro rata basis with any outstanding Series E Preferred Shares, Series F Preferred Shares, SeriesG Preferred Shares and any future series of preference shares of the Bank at the time outstanding and Common Shares,determined on the basis of the nominal values of the respective classes of shares (provided that, in compliance witharticle 117 of the Lebanese Code of Commerce, holders shall have the right to two votes per share in respect of anyCommon Shares owned by them for two years or longer) in respect of matters put before the shareholders of the Bankonly on any proposed amendments to the object or legal form of the Bank, any capital increase by way of a contributionin kind of assets or any dissolution, liquidation or winding-up of the Bank or in the event that the Bank shall default inthe provision of any of the rights or benefits attached to the Series H Preferred Shares. The by-laws of the association ofthe holders of Series H Preferred Shares include regulations governing (among other things) the exercise of votingrights of the holders of Series H Preferred Shares, including, in particular, that any priority subscription rights to whichholders of Series H Preferred Shares may otherwise be entitled will be waiveable by an extraordinary resolution adoptedby the association (i.e., by holders of Series H Preferred Shares representing two-thirds of the Series H Preferred Sharesrepresented at the relevant meeting of the association, provided there is a quorum comprised of a minimum of 75% ofall Series H Preferred Shares at the time outstanding).

Call Option

Preference shares are typically subject to redemption upon the occurrence of certain events or subject to the passage oftime, whereas ordinary shares are usually not redeemable. The Series H Preferred Shares are of perpetual existence,provided that, subject to compliance with any and all then applicable regulations and financial ratios of the CentralBank and the Banking Control Commission, including the availability of sufficient free reserves for the purpose, and toverification of such compliance by the Banking Control Commission, the Bank may, at its option, redeem and cancel allor any part (but not less than the lesser of (i) 20% of the aggregate issue size or (ii) the aggregate then outstanding sizeof the Series H Preferred Shares),

at any time after the Issue Date, upon the occurrence of a regulatory event (i.e., a change in any applicablelaw or domestic or international regulation or standard, or in the official interpretation or applicationthereof, which would be reasonably likely to result in the aggregate Issue Price in respect of all Series HPreferred Shares not being included in Tier I Capital of the Bank or otherwise in the event that the Bankwould not be permitted to maintain the issue premium in respect of the Series H Preferred Shares in U.S.Dollars or any other foreign currency as may be acceptable to the Bank); and

within 60 days following the date of the Ordinary General Meeting (or any other shareholders’ meeting) atwhich the annual audited financial statements of the Bank for the year ended December 31, 2019 areapproved (which is expected to be in April 2020), and annually thereafter within 60 days following eachsuch subsequent Ordinary General Meeting (or any other shareholders’ meeting) at which the annualaudited financial statements of the Bank for the immediately preceding fiscal year are approved;

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in its sole discretion, in each case, at a redemption price equal to U.S.$100.00 per share (subject to adjustment to reflectthe occurrence of an adjustment event (but not upon any other event, including the issuance of any new shares belowmarket value, stock dividends or a recapitalization of the Bank’s share capital)) plus any declared but unpaiddistributions; provided that no distributions shall be payable in respect of the year in which Series H Preferred Sharesare redeemed and cancelled.

Upon any redemption of Series H Preferred Shares, such Series H Preferred Shares shall be cancelled and the par valueof each of the remaining shares then constituting the outstanding share capital of the Bank, irrespective of the classthereof, shall be adjusted to reflect such cancellation, while the Bank’s total capital remains unchanged.

In the case of redemption and cancellation of a part only of the Series H Preferred Shares at the time outstanding, theredemption and cancellation will be on a pro rata basis.

Transfers of Series H Preferred Shares

There are no restrictions imposed by the Central Bank on the transfer of Series H Preferred Shares and, accordingly, theSeries H Preferred Shares shall be freely transferable.

Description of the Series G Preferred Shares

As at the date of this Offering Circular, the Bank’s preferred shares capital includes 1,500,000 Non-Cumulative SeriesG Preferred Shares, each with a par value of LL 1,299, which were issued in May 2013 at a price of, and may (subjectto certain conditions) be redeemed, at a price of U.S.$100.00 per Series G Preferred Share, all of which are issued andfully paid.

The principal terms of the Series G Preferred Shares are identical to the principal terms of the Series H PreferredShares, except that the Series G Preferred Shares are expected to be redeemed within 60 days following the later of: (i)the date of the Shareholders’ meeting held at which the financial statements of the Bank for the year ended December31, 2017 are approved; or (ii) the fifth anniversary of the date of the EGM held to confirm the issuance of the Series GPreferred Shares. Subject to the same conditions applicable to the payment of distributions in respect of the Series HPreferred Shares, distributions in respect of the Series G Preferred Shares shall be payable on account of each fiscalyear, in the amount of U.S.$6.00 per Series G Preferred Share.

Description of the Series F Preferred Shares

As at the date of this Offering Circular, the Bank’s preferred shares capital includes 1,500,000 Non-Cumulative Series FPreferred Shares, each with a par value of LL 1,299, which were issued in May 2012 at a price of, and may (subject tocertain conditions) be redeemed by the Bank at, U.S.$100.00 per Series F Preferred Share, all of which are issued andfully paid.

The principal terms of the Series F Preferred Shares are identical to the principal terms of the Series H Preferred Shares,except that the Series F Preferred Shares are expected to be redeemed within 60 days following the later of the date ofthe Shareholders’ meeting held, at which the financial statements of the Bank for the year ended December 31, 2016 areapproved and of the fifth anniversary of the issue date of the Series F Preferred Shares. Subject to the same conditionsapplicable to the payment of distributions in respect of the Series H Preferred Shares, distributions in respect of theSeries F Preferred Shares shall be payable on account of each fiscal year, in the amount of U.S.$6.00 per Series FPreferred Share

Description of the Series E Preferred Shares

As at the date of this Offering Circular, the Bank’s preferred shares capital includes 1,250,000 Non-Cumulative SeriesE Preferred Shares, each with a par value of LL 1,299, which were issued in May 2010 at a price of, and may (subject tocertain conditions) be redeemed by the Bank at, U.S.$100.00 per Series E Preferred Share, all of which are issued andfully paid.

The principal terms of the Series E Preferred Shares are identical to the principal terms of the Series H Preferred Shares,except that Series E Preferred Shares are expected to be redeemed within 60 days following the later of theShareholders’ meeting held at which the financial statements of the Bank for the year ended December 31, 2014 areapproved and of the fifth anniversary of the issue date of the Series E Preferred Shares. Subject to the same conditionsapplicable to the payment of distributions in respect of the Series H Preferred Shares, distributions in respect of theSeries E Preferred Shares shall be payable on account of each fiscal year, in the amount of U.S.$6.00 per Series EPreferred Share.

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Description of the GDRs

The following is a summary of certain terms and conditions of the Bank’s GDRs and the rights relating thereto.

General

On October 23, 1997, the Bank entered into a depositary agreement (the “Deposit Agreement”) with Deutsche BankTrust Company Americas (acting as depositary) and established a GDR program (the “GDR Program”) pursuant towhich holders of Common Shares (initially Class B Common Shares, which have since been combined with all otheroutstanding Common Shares to comprise a single class) were given the option to deposit their Common Shares for theissuance of GDRs.

Dividends

The GDRs are entitled to any dividends the Bank may declare or pay on the shares underlying the GDRs (the“Deposited Shares”). While dividends on the Common Shares are paid in Lebanese Pounds, holders of GDRs willreceive payments of such dividends in U.S. Dollars, subject to the fees and expenses of the Depositary and anyapplicable withholding tax.

Distributions subject to Withholding Tax

As at the date of this Offering Circular, dividends paid to the Depositary as holder of the Common Shares underlyingthe GDRs are subject to withholding tax in Lebanon at the rate of 5%, as long as shares of the Bank representing at leastone-third of the Bank’s outstanding share capital or GDRs representing at least 20% of the Bank’s outstanding sharecapital are listed for trading on the BSE.

Voting Rights of GDRs

Holders of GDRs have the right, subject to certain conditions, to instruct the Depositary with regard to the exercise ofthe voting rights or the solicitation of consents attaching to the Deposited Shares; provided that, under certain limitedcircumstances, the Depositary may vote in accordance with the instructions of the Board of Directors. The Bank willnotify the Depositary of any resolution to be proposed at any General Meeting of the Bank’s shareholders and theDepositary will vote or cause to be voted the Deposited Shares subject to and in accordance with the specified noticeand other procedure requirements and subject to applicable law.

Information Furnishing Requirements

Pursuant to applicable Lebanese law and regulations, a Lebanese bank must take necessary steps to provide the BankingControl Commission at least twice a year with a list identifying any person who owns, directly or indirectly throughbeneficial ownership: (i) GDRs representing 5% or more of the bank’s outstanding GDRs, (ii) any number of GDRs, ifsuch person also owns 5% or more of the bank’s outstanding shares and (iii) GDRs, whose GDRs and shares(combined) represent 5% or more of the Bank’s outstanding share capital. In order to permit the Bank to fulfil thisobligation, Holders of GDRs and persons owning any beneficial interest in the GDRs will be required to provide certainidentifying information to the Depositary with respect to their direct or indirect ownership of any shares of the Bank orGDRs, who, in turn, will provide such information received by it to the Bank.

Withdrawal Restrictions

Common Shares may be withdrawn from the GDR Program at any time, subject to certain customary conditions,including payment of standard fees. Any such withdrawal, however, will constitute a transfer of shares under Lebaneselaw and therefore be subject to the prior approval of (i) the Central Bank in the event that (x) such transfer of shareswould result in the transferee owning, directly or indirectly, 5% or more of the outstanding share capital of the Bank(excluding preferred shares) or voting rights relating thereto, whichever is higher, (y) the transferee owns at the time ofthe transfer 5% or more of the outstanding share capital of the Bank (excluding preferred shares) or voting rightsrelating thereto, whichever is higher, or (z) either the transferee or the transferor is a current or elected member of theBoard of Directors, irrespective of the number of transferred shares; and (ii) any other regulatory authority havingjurisdiction over the Bank or any of its subsidiaries whose approval shall then be required for the transfer of shares.

Admission and Listing

GDRs, representing 29.3% of the Common Shares, have been issued under the GDR Program and are admitted totrading on the LSE’s Main Market and the BSE.

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Settlement

The GDRs settle through the book-entry systems of Euroclear, Clearstream, DTC and Midclear.

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TERMS AND CONDITIONS OF THE WARRANTS

The Warrants will be issued pursuant to a resolution of the Extraordinary General Meeting of Shareholders passed onAugust 26, 2014 and will be constituted by, and issued subject to and with the benefit of, the deed poll relating to thewarrants to be signed by the Bank, expected to be dated on or about September 23, 2014 (the “Warrant Deed Poll”).Holders of Warrants will be bound by all the terms and conditions set out in the Warrant Deed Poll. The terms andconditions of the Warrants, which form a schedule to the Warrant Deed Poll, are set out below. The Bank will alsoenter into a custody and agency agreement with Midclear, as custodian and common depositary of the Warrants, to bedated on or about September 23, 2014 (the “Custody and Agency Agreement”). Capitalized terms used in this sectionand not otherwise defined herein shall have the meanings ascribed to such terms in the Warrant Deed Poll.

The Warrants have not been, and will not be, registered under the Securities Act or with any securities regulatoryauthority of any state or other jurisdiction of the United States and may not be offered or sold within the United Statesexcept pursuant to an exemption from registration under the Securities Act. Persons exercising Warrants will represent,amongst other things, that they are outside the United States and not a U.S. person (or acting for the account or benefitof a U.S. Person), and are acquiring Odeabank Shares upon exercise of the Warrants in reliance on an exemption from,or in a transaction not subject to, the registration requirements of the Securities Act.

1. Warrants

Each Warrant entitles the holder of Warrants (a “Warrantholder”), subject to these Conditions and the Deed Poll, onany Business Day during the Exercise Period to subscribe for one Share, provided that the Reverse Stock Split hasoccurred, subject to adjustment (i) as set out in these Conditions and (ii) in the event that the Reverse Stock Split has notoccurred, and, provided the Warrantholder is eligible to receive Shares, each Warrant obliges Bank Audi to make therelevant number of Shares available for delivery to the Warrantholder, subject to these Conditions, the terms of theDeed Poll and the full payment by the Warrantholder to Bank Audi of the Exercise Price payable for the Shares inrespect of which the Warrant is being exercised.

2. Form and transfer

(a) The Warrants shall be issued in registered form. The Deed Poll contains provisions relating to theregistration of the Warrants. Title to the Warrants will pass by transfer and registration as described in theDeed Poll.

(b) The Warrants will be initially evidenced by a single global Warrant (the “Global Warrant”). Bank Audishall cause the Global Warrant Certificate to be deposited with and registered in the name of Midclear, asCustodian and Common Depositary (the “Custodian”). Warrants in definitive form (“DefinitiveWarrants”) may be issued in accordance with Condition 2(d).

(c) Upon the initial issuance of the Warrants, beneficial interests in the Warrants shall be credited to the accountof Bank Audi currently maintained with Midclear and will be held in custody for the benefit of eachWarrantholder, respectively, in accordance with the standard custody arrangements of Bank Audi, subject toa request by the relevant Warrantholder to transfer the custody thereof to another participant in Midclear orto issue a Definitive Warrant in accordance with Clause 2.5. So long as the Warrants are evidenced by theGlobal Warrant Certificate, interests in the Warrants will be shown only on, and transfers thereof may beeffected only through, the book-entry system maintained by Midclear and its participants, including BankAudi.

(d) Definitive Warrant Certificates will be issued upon a Warrantholders’ request, whereupon the number ofWarrants represented by the Global Warrant Certificate will be reduced by the number of Definitive WarrantCertificates issued. In the event that any such Warrantholder requests delivery of a Definitive WarrantCertificate in exchange for its interest in the Global Warrant Certificate, Midclear shall deliver the relevantDefinitive Warrant Certificate to such Warrantholder and Bank Audi may, in its discretion, elect to issueDefinitive Warrant Certificates to all Warrantholders that are Midclear participants and cancel the GlobalWarrant Certificate. Definitive Warrant Certificates, if issued under any of the circumstances described inthis Condition 2(d), will be made available at Midclear to the relevant Warrantholders owning the interestsrepresented thereby. Definitive Warrant Certificates shall be substantially in the form set out in Schedule 2and shall have the Conditions endorsed thereon.

(e) Bank Audi shall cause a register (the “Register”) to be kept at the specified offices of Midclear showing thenumber of Warrants for the time being issued and outstanding and the date of issue of such Warrants,together with the names and addresses of the Warrantholders and all transfers or changes of ownership

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thereof. Any change of name or address on the part of any Warrantholder shall be notified by theWarrantholder to Midclear and thereupon Midclear shall alter the Register accordingly.

(f) So long as the Warrants are represented by the Global Warrant Certificate, ownership by Warrantholders ofsuch Warrants, and their corresponding interests in the Global Warrant Certificate, may be acquired, andtransfers thereof may be effected, exclusively through the book-entry settlement systems maintained byMidclear, subject to the usual operating procedures and management regulations established by Midclear,and otherwise subject to the provisions of these Conditions and the Custody Agreement. For all purposes,the securities account of Midclear shall, in the absence of manifest error, be conclusive evidence of theowners of beneficial interests in the Warrants and of the number of Warrants to be credited to the securitiesaccounts of such Warrantholders (but without prejudice to any other means of producing such records inevidence). None of Bank Audi or the Custodian, each in its capacity as such, will have any responsibility forany aspect of the securities account records of Midclear, nor shall Bank Audi or the Custodian have anyresponsibility for maintaining, supervising or reviewing any such securities account records relating to theWarrants or the interests therein.

(g) Transfers of Warrants represented by Definitive Warrant Certificates shall be made by way of an instrumentin writing in accordance with the provisions of the Deed Poll. No transfer of Definitive Warrant Certificatesshall be valid unless and until entered on the Register.

(h) A Warrantholder may transfer Warrants it holds to any person, subject to the transfer restrictions referred toin the legend endorsed on the Global Warrant Certificate or the Definitive Warrant Certificate, as the casemay be.

(i) Notwithstanding any other provisions of these Conditions, no Warrants may be transferred in violation ofany provision of the Articles of Odeabank.

(j) The Warrantholder shall pay all (if any) taxes, stamp and other duties and charges due in respect of thetransfer of the Warrants it holds.

3. Exercise of the Warrants

The Warrants may be exercised during the Exercise Period by delivery to Bank Audi at the address specified inCondition 7 (Notices), or to such other agent of Bank Audi as so notified from time-to-time by Bank Audi, of:

(i) the Exercise Notice duly completed;

(ii) the relevant Warrant Certificate; and

(iii) payment in U.S. Dollars in cash, banker’s draft, cheque or by transfer of the aggregate ExercisePrice payable for the Shares in respect of which the Warrants are being exercised.

The account details to which such payment should be made are as follows:

Bank: JP Morgan Chase, N.Y.

Swift: CHASUS33

Account No.: 544-7-29027

In favour of: Bank Audi s.a.l.

Swift: AUDBLBBX

Description: Exercise of Warrants

or to such other account that is notified by Bank Audi to the Warrantholders from time to time.

Where payment is not received for same-day value, the Exercise Date shall be the date on which Bank Audireceives full value for the relevant payment.

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Once lodged, an Exercise Notice shall be irrevocable save with the consent of the directors of Bank Audi.Compliance must also be made with any statutory requirements for the time being applicable. An ExerciseNotice, which is completed and lodged other than in accordance with these Conditions and the Deed Poll,shall be of no effect. To the extent that the Warrants have not been exercised, on or prior to, the date uponwhich the Exercise Period ends, they shall automatically expire and be cancelled, the Warrantholder of suchWarrants will receive no payment and neither Bank Audi nor Odeabank shall have any liability to anyperson in respect thereof.

A Warrantholder may exercise any or all of the Warrants it holds during the Exercise Period.

The Shares to be made available for delivery pursuant to the exercise of the Warrants shall be fully paid and shall rankpari passu with Shares of the same class in issue on the Exercise Date, including the right to participate in full in alldividends payable on or after the Exercise Date.

No fraction of a Share shall be delivered on the exercise of any Warrants and any fractional entitlement that wouldotherwise accrue to a Warrantholder on the exercise of Warrants under any Exercise Notice shall be rounded downaccordingly.

A Warrantholder shall pay all (if any) taxes, stamp and other duties and charges in respect of the exercise of Warrants itholds and the delivery of Shares pursuant to such exercise.

4. Adjustments

Upon any sub-division or consolidation of the Shares on or by reference to a date prior to the end of the ExercisePeriod, the number and/or nominal value of Shares to be subscribed for on any subsequent exercise of the Warrants willbe increased or reduced, as the case may be, in due proportion and/or the Exercise Price will be adjusted accordingly.On any such sub-division or consolidation, Bank Audi shall certify the appropriate adjustments and notice thereof willbe sent to each Warrantholder within 28 days and (i) if the Warrants are represented by the Global Warrant Certificate,the Warrantholder’s account with Midclear shall be credited with interests in Warrants representing any additionalShares for which he is thereby entitled to subscribe and (ii) if the Warrants are represented by Definitive WarrantCertificates, the Warrantholder shall be sent a further Definitive Warrant Certificate in respect of any additional Sharesfor which he is thereby entitled to subscribe. Fractional entitlements remaining following the aggregation of all suchfractional entitlements as may otherwise accrue to any particular Warrantholder being ignored.

The Deed Poll also contains provisions relating to the Reverse Stock Split.

5. Modifications

(a) Save for the Exercise Price, all or any of the rights for the time being attached to the Warrants may fromtime-to-time (whether or not Odeabank is being wound up) be altered or abrogated with the sanction of theconsent in writing of the Warrantholders of not less than 66⅔% of the Warrants then outstanding. For the avoidance of doubt, notwithstanding any provision contained in these Conditions or the Deed Poll, nomodification or amendment of these Conditions or the Deed Poll may be made without the prior writtenconsent of Bank Audi. Any meetings of Warrantholders shall be convened in the manner to be determinedby Bank Audi at the relevant time.

(b) Bank Audi may, without the consent of the Warrantholders, effect (i) any modification to the Warrants orthe Deed Poll, which is not, in the reasonable opinion of Bank Audi, prejudicial to the interests of theWarrantholder or (ii) any modification of the Warrants or the Deed Poll, which is of a formal, minor ortechnical nature or made to correct a manifest error or to comply with mandatory provisions of anyapplicable law. Any such modification will be binding on the Warrantholders and will be notified to them inaccordance with Condition 7 (Notices) as soon as practicable thereafter.

6. Lost or destroyed Warrant Certificates

If any Global Warrant Certificate or Definitive Warrant Certificate is lost, stolen, mutilated, defaced or destroyed it maybe replaced at the specified offices of the Custodian subject to all applicable laws or other relevant authorityrequirements, upon payment by the claimant of the expenses incurred in connection with such replacement and on suchterms as to evidence, security, indemnity and otherwise as Bank Audi and the Custodian may require (provided that therequirements are reasonable in the light of prevailing market practice). Mutilated or defaced Warrant Certificates mustbe surrendered before replacements will be issued.

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7. Notices

(a) Any notice or other document to be given hereunder shall be given:

(i) (save where otherwise directed in an Exercise Notice) by Bank Audi to the relevant Warrantholderat his address for the time being shown in the Register; or (as the case may be); and

(ii) by the relevant Warrantholder to Bank Audi at its registered office for the time being or to suchother address as so notified by Bank Audi from time to time.

(b) Any notice or other document given hereunder shall be deemed to have been served or received:

(i) at the time of delivery, if delivered personally; and

(ii) on the third Business Day following its posting if sent by pre-paid airmail letter.

(c) So long as the Global Warrant is held by, or on behalf of Midclear, notices may be delivered by Bank Audito Warrantholders through Midclear.

8. Deed Poll and Custody and Agency Agreement

So long as any of the Warrants remain outstanding, Bank Audi shall at all times during normal business hours allow anyWarrantholder to inspect a copy of the Deed Poll pursuant to which the Warrants are issued, as well as the Custody andAgency Agreement, at the registered office of Bank Audi, or at such other address as so notified from time to time by BankAudi, forthwith upon demand by such Warrantholder and shall, upon request, supply any Warrantholder as soon as reasonablypracticable with a copy of the Deed Poll and Custody and Agency Agreement after payment of the reasonable expenses ofBank Audi incurred in connection therewith.

9. Contracts (Rights of Third Parties) Act 1999

No rights are conferred on any person under the Contracts (Rights of Third Parties) Act 1999 to enforce any provisions of theWarrants, but this does not affect any right or remedy which exists or is available apart from that Act.

10. Governing law and jurisdiction

(a) The Warrants and the Deed Poll pursuant to which the Warrants are issued, and any non-contractual obligationsarising out of the same, shall be governed by and construed in accordance with the laws of England and Wales.

(b) Bank Audi agrees for the benefit of the Warrantholders that the courts of England and Wales shall havejurisdiction to hear and determine any suit, action or proceedings which may arise out of or in connectionwith the Warrants (“Proceedings”) and to settle any dispute or difference of whatever nature howsoeverarising under, out of or in connection with the Warrants or the Deed Poll (including a dispute or differenceas to the breach, existence or validity of the Warrants or the Deed Poll) (“Disputes”) and, for such purposes,irrevocably submits to the jurisdiction of such courts.

(c) Bank Audi irrevocably waives any objection which it might now or hereafter have to the courts of Englandand Wales being nominated as the forum to hear and determine any Proceedings and to settle any Disputes,and agrees not to claim that any such court is not a convenient or appropriate forum.

(d) The submission to the jurisdiction of the courts of England and Wales shall not (and shall not be construedso as to) limit the right of any Warrantholder to take Proceedings in any other court of competentjurisdiction, nor shall the taking of Proceedings in any one or more jurisdictions preclude the taking ofProceedings in any other jurisdiction (whether concurrently or not) if and to the extent permitted by law.

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DESCRIPTION AND SETTLEMENT PROCEDURES RELATING TO THE WARRANTS

Warrants

In connection with the Capital Increase, the Bank will issue Warrants. Each Warrant will entitle the holder, during theWarrant Exercise Period, to purchase an Odeabank Share.

Delivery of Warrants

The Warrants shall be issued in registered form. The Warrants will, upon issue, be represented by Global Warrant. TheBank shall cause the Global Warrant to be deposited with and registered in the name of Midclear. Warrants representedby the Global Warrant may only be acquired and held through participants in Midclear. Upon the initial issuance of theWarrants, interests in the Warrants shall be credited to the account of the Bank currently maintained with Midclear andwill be held in custody for the benefit of each Warrantholder, subject to such Warrantholder providing know-your-clientand other information required by the Bank and the Bank being satisfied with such information, in accordance with thestandard custody arrangements of the Bank, and further subject to a request by the relevant Warrantholder to transferthe custody thereof to another participant in Midclear at such Warrantholder’s risk and expense. Pursuant to theCustody and Agency Agreement, Midclear shall maintain books for the registration of the original issuance and thetransfer of the Warrants.

So long as Warrants are evidenced by a Global Warrant, interests in such Warrants will be shown only on, and transfersthereof may be effected only through, the book-entry system maintained by Midclear and its participants, including theBank. So long as the Warrants are evidenced by a Global Warrant, interests in the Warrants will be shown only on, andtransfers thereof may be effected only through, the book-entry system maintained by Midclear and its participants,including the Bank.

The Global Warrant shall bear a legend to the following effect:

THE WARRANTS REPRESENTED BY THIS GLOBAL WARRANT CERTIFICATE HAVE NOT BEENREGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), ANDMAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATESOR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS (AS DEFINED IN RULE 902PROMULGATED UNDER THE SECURITIES ACT), EXCEPT IN ACCORDANCE WITH REGULATION SUNDER THE SECURITIES ACT. TERMS USED ABOVE HAVE THE MEANINGS GIVEN TO THEM BYREGULATION S. THE WARRANTS REPRESENTED BY THIS GLOBAL WARRANT CERTIFICATE MAY NOTBE EXERCISED ON OR ON BEHALF OF U.S. PERSONS.

IN ADDITION, (I) ANY OFFER, SALE PLEDGE OR OTHER TRANSFER OF THE WARRANTS REPRESENTEDBY THIS CERTIFICATE IS RESTRICTED BY, AND THE RIGHTS ATTACHING TO THESE WARRANTS ARESUBJECT TO, THE CONDITIONS CONTAINED HEREIN AND IN THE ARTICLES OF ODEABANK, AS THEYMAY BE AMENDED FROM TIME-TO-TIME, WHICH ARE AVAILABLE FOR EXAMINATION BY HOLDERSOF WARRANTS AT THE REGISTERED OFFICE OF MIDCLEAR, AND (II) THE WARRANTS REPRESENTEDBY THIS CERTIFICATE MAY ONLY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED INCIRCUMSTANCES WHICH DO NOT REQUIRE THE PUBLICATION BY BANK AUDI OR ODEABANK OF APROSPECTUS PURSUANT TO ARTICLE 3 OF THE E.U. PROSPECTUS DIRECTIVE 2003/71/EC ASAMENDED, OR ANY IMPLEMENTING MEASURE IN ANY MEMBER STATE, WHICH HAS IMPLEMENTEDTHE SAME.

THE PURCHASER OF ANY WARRANT REPRESENTED BY THIS GLOBAL WARRANT CERTIFICATEACKNOWLEDGES THE RESTRICTIONS ON THE TRANSFER OF THE WARRANTS SET FORTH ABOVEAND AGREES THAT IT SHALL TRANSFER ANY WARRANT ONLY IN COMPLIANCE WITH SUCHRESTRICTIONS AND AS PROVIDED IN THE WARRANT DEED POLL REFERRED TO HEREIN. IFREQUESTED BY THE ISSUER OR BY AN AGENT, THE PURCHASER AGREES TO PROVIDE THEINFORMATION NECESSARY TO DETERMINE WHETHER THE TRANSFER OF WARRANTS REPRESENTEDBY THIS GLOBAL WARRANT CERTIFICATE IS PERMISSIBLE UNDER THE SECURITIES ACT.

THE WARRANTS AND RELATED DOCUMENTATION MAY BE AMENDED OR SUPPLEMENTED FROMTIME TO TIME TO MODIFY THE RESTRICTIONS ON AND PROCEDURES FOR RESALES AND OTHERTRANSFERS OF THE WARRANTS TO REFLECT ANY CHANGE IN APPLICABLE LAW OR REGULATION(OR THE INTERPRETATION THEREOF) OR IN PRACTICES RELATING TO THE RESALE OR TRANSFER OFRESTRICTED SECURITIES GENERALLY. THE PURCHASER OF WARRANTS REPRESENTED BY THISGLOBAL WARRANT CERTIFICATE SHALL BE DEEMED TO HAVE AGREED TO ANY SUCH AMENDMENTOR SUPPLEMENT.

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Definitive Warrants will be issued, upon a Warrantholder’s request, in accordance with the Conditions and in exchangefor interests in the Global Warrant, whereupon the number of Warrants represented by the Global Certificate will bereduced by the number of Warrants represented by Definitive Warrants issued. In the event that any Warrantholderrequests delivery of a Definitive Warrant in exchange for its interest in the Global Warrant Certificate, Midclear shalldeliver the relevant Definitive Warrant to such Warrantholder and the Bank may, in its discretion, elect to issueDefinitive Warrants to all Warrantholders and cancel the Global Warrant Certificate. Definitive Warrants, if issuedunder any of the circumstances described in the Conditions, will be made available at Midclear to the relevantWarrantholders owning the interests represented thereby.

Definitive Warrants shall bear a legend to the following effect:

THE WARRANTS REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THEU.S. SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND MAY NOT BE OFFERED,SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THEACCOUNT OR BENEFIT OF, U.S. PERSONS (AS DEFINED IN RULE 902 PROMULGATED UNDER THESECURITIES ACT), EXCEPT IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT.TERMS USED ABOVE HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S. THE WARRANTSREPRESENTED BY THIS CERTIFICATE MAY NOT BE EXERCISED ON OR ON BEHALF OF U.S. PERSONS.

IN ADDITION, (I) ANY OFFER, SALE PLEDGE OR OTHER TRANSFER OF THE WARRANTS REPRESENTEDBY THIS CERTIFICATE IS RESTRICTED BY, AND THE RIGHTS ATTACHING TO THESE WARRANTS ARESUBJECT TO, THE CONDITIONS CONTAINED HEREIN AND IN THE ARTICLES OF ODEABANK, AS THEYMAY BE AMENDED FROM TIME-TO-TIME, WHICH ARE AVAILABLE FOR EXAMINATION BY HOLDERSOF WARRANTS AT THE REGISTERED OFFICE OF THE MIDCLEAR, AND (II) THE WARRANTSREPRESENTED BY THIS CERTIFICATE MAY ONLY BE OFFERED, SOLD, PLEDGED OR OTHERWISETRANSFERRED IN CIRCUMSTANCES WHICH DO NOT REQUIRE THE PUBLICATION BY BANK AUDI ORODEABANK OF A PROSPECTUS PURSUANT TO ARTICLE 3 OF THE E.U. PROSPECTUS DIRECTIVE2003/71/EC, AS AMENDED, OR ANY IMPLEMENTING MEASURE IN ANY MEMBER STATE, WHICH HASIMPLEMENTED THE SAME.

THE PURCHASER OF ANY WARRANT REPRESENTED BY THIS WARRANT CERTIFICATEACKNOWLEDGES THE RESTRICTIONS ON THE TRANSFER OF THE WARRANTS SET FORTH ABOVEAND AGREES THAT IT SHALL TRANSFER ANY WARRANT ONLY IN COMPLIANCE WITH SUCHRESTRICTIONS AND AS PROVIDED IN THE WARRANT DEED POLL REFERRED TO HEREIN. IFREQUESTED BY THE ISSUER OR BY AN AGENT, THE PURCHASER AGREES TO PROVIDE THEINFORMATION NECESSARY TO DETERMINE WHETHER THE TRANSFER OF WARRANTS REPRESENTEDBY THIS WARRANT CERTIFICATE IS PERMISSIBLE UNDER THE SECURITIES ACT.

THE WARRANTS AND RELATED DOCUMENTATION MAY BE AMENDED OR SUPPLEMENTED FROMTIME TO TIME TO MODIFY THE RESTRICTIONS ON AND PROCEDURES FOR RESALES AND OTHERTRANSFERS OF THE WARRANTS TO REFLECT ANY CHANGE IN APPLICABLE LAW OR REGULATION(OR THE INTERPRETATION THEREOF) OR IN PRACTICES RELATING TO THE RESALE OR TRANSFER OFRESTRICTED SECURITIES GENERALLY. THE PURCHASER OF WARRANTS REPRESENTED BY THISWARRANT CERTIFICATE SHALL BE DEEMED TO HAVE AGREED TO ANY SUCH AMENDMENT ORSUPPLEMENT.

Exercise of Warrants

The Bank intends to cause the Odeabank Shares to be consolidated at the rate of 10:1 pursuant to the Reverse StockSplit prior to the beginning of the Warrant Exercise Period. Each Warrant entitles the Warrantholder, subject to theConditions and the Warrant Deed Poll, on any business day during the Exercise Period to purchase one OdeabankShare, provided that the Reverse Stock Split has occurred, subject to adjustment (i) as set out in the Conditions and (ii)in the event that the Reverse Stock Split has not occurred, and, provided the Warrantholder is eligible to receiveOdeabank Shares, each Warrant obliges the Bank to make the relevant number of Odeabank Shares available fordelivery to the Warrantholder, subject to the Conditions, the terms of the Warrant Deed Poll and the full payment by theWarrantholder to the Bank of the Exercise Price payable for the Odeabank Shares in respect of which the Warrant isbeing exercised.

The Warrantholders shall pay all (if any) taxes, stamp and other duties and charges in respect of the exercise ofWarrants it holds and the delivery of Odeabank Shares pursuant to the exercise of the Warrants.

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The Warrants will only be exercisable by persons who represent, amongst other things, that they are outside the UnitedStates and not a U.S. person (or acting for the account or benefit of a U.S. person), and are acquiring Odeabank Sharesupon the exercise of the Warrants in reliance on an exemption from, or in a transaction not subject to, the registrationrequirements of the Securities Act. In addition, the Warrants will not be exerciseable by residents of the TurkishRepublic.

Prospective investors should note that to the extent that any Warrantholder will own, upon exercise of the Warrants,more than 10% of the Odeabank Shares, such Warrantholder must apply to the BRSA and obtain the necessaryapprovals for the transfer. In addition, under Turkish law, the transfer of Odeabank Shares pursuant to the exercise ofWarrants will be considered to be a contractual obligation of the Bank and specific performance may not be possible.

Settlement if Odeabank Shares are listed

If, as at the Exercise Date, the Odeabank Shares are listed on the Borsa Istanbul, upon valid exercise of the Warrants,the Bank will make available for delivery the relevant number of Odeabank Shares represented by the exercisedWarrants to be made to the custody account with a Turkish intermediary institution that is a member of the CentralRegistry Agency of Turkey, as specified in the relevant Exercise Notice.

Accordingly, only those persons with a custody account with a Turkish intermediary institution that is a member of theCentral Registry Agency will be able to purchase and receive Odeabank Shares. Warrantholders are responsible fortaking the necessary actions to obtain a custody account prior to the Exercise Date. Neither the Bank nor Odeabank willbe liable if the Warrantholders are unable to exercise their rights under the Warrants.

Settlement if Odeabank Shares are not listed

If, as at the Exercise Date, the Odeabank Shares are not listed on the Borsa Istanbul, upon valid exercise of theWarrants, the Bank will make available for delivery the relevant number of Odeabank Shares endorsed by the Bank tothe address specified in the relevant Exercise Notice, together with a notarised copy of the relevant sections of the shareledger of Odeabank evidencing the registration of the transfer of the Odeabank Shares to the exercising Warrantholder.

121

TAXATION

The following is a summary of the principal Lebanese tax consequences for holders of New Shares and Warrants, aswell as the principal Turkish tax consequences for holders of Warrants. This summary only addresses the taxconsequences with respect to the purchase, ownership and sale of the New Shares and Warrants. This summary is notintended to be a comprehensive description of all relevant tax considerations, and each applicant should consult itsown tax advisor before making a decision to purchase New Shares and Warrants. The following is based on the taxlaws of Lebanon and the Turkish Republic as in effect on the date hereof. For advice relating to the tax consequences toholders of New Shares and Warrants in countries outside Lebanon and the Turkish Republic, including countries inwhich they may be resident or domiciled, applicants are urged to consult their own tax advisors on the consequences ofsuch acquisition, ownership and sale, including specifically the tax consequences under Lebanese and Turkish law,laws of their countries of residence and any tax treaty between Lebanon or Turkey and their countries of residence.

Lebanese Taxation

Withholding Tax on Distributions

Under current Lebanese law, distribution of dividends is subject to withholding tax at the rate of 10% on any dividendpayment and any other distributions to holders, which tax rate will be reduced by 50% in the case of a company listedon the BSE. As at the date of this Offering Circular, the Bank’s share capital is listed on the BSE, and therefore, thewithholding tax applicable to Distributions on the New Shares is 5%.

In principle, this tax is due irrespective of the nationality or domicile of the beneficiary of the dividends. However, theapplication of tax treaties aimed at avoiding double taxation between Lebanon and other countries, when applicable,may reduce this tax.

The Bank does not have any obligation to reimburse holders of New Shares for any taxes withheld from Distributions(if any) paid to such holders.

Taxation of Capital Gains

As at the date of this Offering Circular, capital gains made in connection with the sale of shares of Lebanese joint stockcompanies, such as the Bank, are subject to the following:

gains on the sale of shares held by individuals (resident and non-resident) and foreign non-residentcompanies are not subject to tax on moveable assets;

gains on the sale of shares held by Lebanese holding companies are tax exempt if held for a minimumperiod of two years; otherwise, they are subject to capital gains tax, at a rate of 10%;

gains on the sale of shares held by Lebanese companies, the object of which includes the trading of sharesand securities, are subject to corporate tax, at a rate of 15%; and

gains on the sale of shares held by Lebanese companies outside the normal course of their business (as non-current equity securities) are subject to capital gains tax at the rate of 10%.

Stamp Duties

The Law promulgated by Decree № 5439 dated September 20, 1982 granted an exemption to all contracts for the transfer of shares, bonds or treasury bills from the stamp duty imposed by the Law promulgated by Decree № 67 dated August 5, 1967. Accordingly, as at the date of this Offering Circular, there is no stamp duty imposed in Lebanon uponany holder in connection with the ownership and transfer of New Shares.

Warrants

As of the date of this Offering Circular, there are no provisions in the current Lebanese tax laws regarding Warrants andthe latter are not subject to any tax or stamp duty.

Turkish Taxation

No Turkish tax is payable by Warrantholders who are not-resident in the Turkish Republic in respect of the holding,transfer or exercise of Warrants.

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PLACEMENT OF THE NEW SHARES AND WARRANTS

Placement

Subject to certain conditions, Audi Investment Bank has agreed to act on a best efforts basis as the exclusive PlacementAgent for the Capital Increase. The Bank has agreed to indemnify the Placement Agent against certain liabilities inconnection with the completion of the Capital Increase or to contribute to payments the Placement Agent may berequired to make in respect thereof.

The Securities are being offered for sale by the Bank to eligible investors in offshore transactions outside the UnitedStates, through the Placement Agent on an as and if issued basis, subject to prior sale or withdrawal, cancellation ormodification. An Eligible Investor is required to sign a Purchase Application, substantially in the form of Exhibit Ahereto or an earlier version thereof as may have been previously made available to it by the Bank or the PlacementAgent, as a condition to receiving Securities. See “Subscription Timetable and Procedures”.

Selling Restrictions

Neither the Securities have been and nor will be registered under the laws of any jurisdiction, nor has any other actionbeen taken, nor will any action be taken, by the Bank, the Placement Agent or any other person that would permit apublic offering of the Securities or the possession, circulation or distribution of this Offering Circular or anyamendment or supplement hereto or thereto, or any other offering material relating to the Bank or the Securities, in anycountry or jurisdiction where action for any such purpose may be required. The offer and sale of Securities, and thedelivery of this Offering Circular, are restricted by law in certain jurisdictions and the Securities may not be offered orsold, and this Offering Circular may not be distributed, in any jurisdiction under circumstances where such offer, sale ordistribution would be prohibited or restricted by law.

Each of the Bank and the Placement Agent has agreed that it will (to the best of its knowledge and belief) comply withall applicable securities laws and regulations in force in any jurisdiction in which it offers, sells or delivers theSecurities or possesses or distributes this Offering Circular. Neither the Bank nor the Placement Agent, however,represents that the Securities may at any time lawfully be sold in compliance with any applicable registration or otherrequirements in any jurisdiction, or pursuant to any exemption available thereunder, and neither assumes anyresponsibility for facilitating any such sale.

Without limiting the foregoing, prospective purchasers of Securities should be aware of the following restrictions:

Lebanon

The marketing, offering, distribution and sale of the Securities in Lebanon shall comply with all applicable laws andregulations in Lebanon, in particular, Law 161 dated August 17, 2011 governing capital markets in Lebanon, whichprohibits marketing or promoting financial instruments in Lebanon prior to obtaining the authorization of the Council ofthe CMA to that effect. The Bank has obtained the authorization of the Council of the CMA to market, promote, offerand sell the Securities in Lebanon.

United States of America

The Securities have not been and will not be registered under the Securities Act or any state securities laws and may notbe offered or sold within the United States or to, or for the account or benefit of, any U.S. person, except in accordancewith Regulation S under the Securities Act or pursuant to an exemption from, or in a transaction not subject to, theregistration requirements of the Securities Act. Terms used in this paragraph have the meanings given to them byRegulation S.

Each of the Bank and the Placement Agent agreed that it will not offer, sell or deliver the Securities within the UnitedStates or to, or for the account of, any U.S. person, as part of its distribution at any time, except in accordance withRegulation S under the Securities Act or pursuant to another available exemption from the registration requirements ofthe Securities Act.

European Economic Area

In relation to each Member State of the EEA which has implemented the Prospectus Directive (each, a “RelevantMember State”), each of the Bank and the Placement Agent has represented and agreed that with effect from andincluding the date on which the Prospectus Directive is implemented in that Relevant Member State (the “RelevantImplementation Date”) it has not made and will not make an offer of Securities to the public in that Relevant Member

123

State prior to the publication of a prospectus in relation to the Securities (as applicable), which has been approved bythe competent authority in that Relevant Member State in accordance with the Prospectus Directive, or, whereappropriate, published in another Relevant Member State and notified to the competent authority in that RelevantMember State in accordance with Article 18 of the Prospectus Directive, except that it may, with effect from andincluding the Relevant Implementation Date, make an offer of Securities to the public in that Relevant Member State atany time:

(i) to any legal entity which is a Qualified Investor as defined in the Prospectus Directive;

(ii) to fewer than 100 or, if the Relevant Member State has implemented the relevant provisions of the 2010 PDAmending Directive, 150, natural or legal persons (other than qualified investors as defined in the ProspectusDirective), as permitted under the Prospectus Directive; or

(iii) in any other circumstances falling within Article 3(2) of the Prospectus Directive,

provided that no such offer of Securities shall require the Bank or the Placement Agent to publish a prospectus pursuantto Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive.

For the purposes of this provision, the expression an “offer of Securities to the public” in relation to any Securities inany Relevant Member State means the communication in any form and by any means of sufficient information on theterms of the offer and the Securities to be offered so as to enable an investor to decide to purchase or subscribe theSecurities, as the same may be varied in that Member State by any measure implementing the Prospectus Directive inthat Member State.

The expression “Prospectus Directive” means Directive 2003/71/EC (and amendments thereto, including the 2010 PDAmending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementingmeasure in the Relevant Member State and the expression “2010 PD Amending Directive” means Directive2010/73/EU.

United Kingdom

Each of the Bank and the Placement Agent has further represented and agreed that:

(i) it has only communicated or caused to be communicated and will only communicate or cause to becommunicated any invitation or inducement to engage in investment activity (within the meaning of section 21of the Financial Services and Markets Act 2000 of the United Kingdom) received by it in connection with theissue or sale of any Securities in circumstances in which section 21(1) of the Financial Services and MarketsAct 2000 of the United Kingdom does not apply; and

(ii) it has complied and will comply with all applicable provisions of the Financial Services and Markets Act 2000of the United Kingdom with respect to anything done by it in relation to the Securities in, from or otherwiseinvolving the United Kingdom.

Turkey

The issuance of the Securities has not been approved by the Turkish Capital Markets Board and the Securities are notbeing publicly offered or sold in Turkey. This Offering Circular is not intended to be a public offering, advertisement,marketing, promotion or solicitation of the Securities or any interests therein. No transaction that may be deemed as apublic offering or otherwise as a sale of the Securities (or beneficial interests therein) in Turkey by may be engaged in.

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GENERAL INFORMATION

1. The Capital Increase has been authorized by resolutions adopted by an Extraordinary General Meeting of theShareholders of the Bank adopted on August 26, 2014, as well as by the Central Bank on August 27, 2014. Allconsents, approvals, registrations, authorizations, notifications and other orders of regulatory authoritiesrequired to be obtained prior to the Issue Date under the laws and regulations of Lebanon in connection withthe issue, offer and sale of the Securities have been or, prior to the Issue Date, will be obtained.

2. The CMA approved the distribution of the term sheet relating to the Capital Increase on August 6, 2014. TheCMA has not passed upon and takes no responsibility for the information contained in this Offering Circular orfor the merits of any offering of the Securities.

3. Copies of this Offering Circular are available free of charge at the registered office of the Bank.

4. There are no litigation or arbitration proceedings against or affecting the Bank or its assets, nor is the Bankaware of any pending or threatened proceedings, which have a materially adverse effect on it or its operationsor which are or might be material in the context of the Capital Increase.

5. Ernst & Young p.c.c. and BDO, Semaan, Gholam & Co. have audited the Annual Financial Statements andhave given and have not withdrawn their written consent to the distribution of this Offering Circular with theinclusion herein of their reports and references to their names in the form and context in which these appear.

A-1

EXHIBIT A – FORM OF PURCHASE APPLICATION

1 20581751

BANK AUDI S.A.L.

Proposed Capital Increase

PURCHASE APPLICATION

1. APPLICANT INFORMATION

Applicant Name: ___________________________________________________________________(the “Applicant”)

Address: ________________________________________________________________________________________

(Street)

________________________________________________________________________________________________

(City) (Country)

Telephone Number: _________________________________ Fax Number: _________________________________

Jurisdiction of Organization/Country of Residence: ______________________________________________________

Authorized Signatory: _____________________________________________________________________________

(If signing on behalf of a corporation or other legal entity) (Name) (Title)

2. APPLICANT’S ACKNOWLEDGEMENTS

a. The Applicant acknowledges that Bank Audi S.A.L. (“Bank Audi”) intends to offer the Securities,

the indicative terms of which are set forth in the term sheet dated August 19, 2014, a copy of which is attached hereto

(the “Term Sheet”). Capitalized terms not otherwise defined herein have the same meaning as set forth on the Term

Sheet.

b. The Applicant acknowledges that a copy of the Term Sheet has been made available to it and hereby

represents that it has carefully reviewed and fully understands the contents thereof.

c. The Applicant further acknowledges that Bank Audi is not acting as a legal, tax or accounting adviser

in respect of the offered Securities.

3. PURCHASE OF SECURITIES. [TO BE COMPLETED BY THE APPLICANT]

Subject to the terms and conditions set forth herein, the Applicant hereby confirms its interest to subscribe for Securities

in the amount indicated below at the purchase price specified below (complete as appropriate):

[For existing shareholders of the Bank]

Shareholder №: ____________

A. Number of New Shares to be subscribed for: ______________

B. Number of Residual New Shares to be subscribed for: ______________

Total number of New Shares to be subscribed for (A+B): ______________

Purchase Price for New Shares to be subscribed for (at $6.00 per New Share): U.S.$_________________, to

be deposited in accounts № 402196 350 002 001 01 (if subscription is for Common Shares) and № 402196 350

002 001 02 (if subscription is for GDRs) open with Bank Audi.

Note: Warrants will be allocated at the rate of three Warrants per New Share.

[For new investors]

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2 20581751

Number of New Shares to be subscribed for: ______________

Purchase Price for New Shares to be subscribed for (at $6.00 per New Share): U.S.$_________________, to

be deposited in account № 402196 350 002 001 01 open with Bank Audi.

Note: Warrants will be allocated at the rate of three Warrants per New Share.

4. ACCEPTANCE, TERMINATION, ETC.

The Applicant acknowledges and agrees that:

a. This Purchase Application is subject to the terms and Conditions Precedent set forth in the Term

Sheet.

b. This Purchase Application shall be deemed accepted only upon execution by the Applicant, payment

of the purchase price as provided herein and acceptance by, or on behalf of, Bank Audi, such acceptance to be

evidenced by delivery of a fully executed copy of this Purchase Application to the Applicant.

c. Bank Audi may, in its sole discretion, reject this Purchase Application in whole or in part and,

whether or not this Purchase Application has been accepted, may, in its sole discretion, terminate the Capital Increase or

any part of it at any time and for any reason whatsoever. In any such event, the Applicant shall have no right to

purchase Securities at any time.

d. If this Purchase Application has been accepted, Bank Audi retains the right to reduce, in its sole

discretion, the Securities allocated to the Applicant.

e. Notwithstanding the foregoing, in the event of the issuance of Rights by Bank Audi, existing

shareholders shall have the right to subscribe for Securities in the First Capital Increase during the Formal Offering

Period on the terms and conditions set out at such time.

f. The Applicant acknowledges that it has no right to revoke or withdraw this Purchase Application at

any time, whether or not it has been previously accepted by, or on behalf of, Bank Audi; provided that, this Purchase

Application may be rescinded by the Applicant and withdrawn by written notice to Bank Audi (i) during the Rescission

Period and (ii) in the event that the Securities are not issued and delivered to the Applicant on or before December 15,

2014. In either such event, this Purchase Application shall be deemed to have been withdrawn and the funds received by

Bank Audi from the Applicant in respect of the purchase price for the Securities covered by this Purchase Application

will be promptly refunded to the Applicant, together with interest thereon, as more fully provided in Paragraph 5 below.

5. PAYMENT

a. The Applicant represents that it has transferred funds to Bank Audi in an amount or amounts to the

account or accounts set for the above in Paragraph 3.

b. In the event that the Capital Increase or the relevant portion thereof is terminated or the Applicant is

not allocated the full principal amount of Securities for which it has applied under this Purchase Application (whether

or not this Purchase Application was previously accepted), or in the event that this Purchase Application is rejected (in

whole or in part), the funds received by Bank Audi from the Applicant in respect of such purchase price (or a

corresponding portion thereof) will be promptly refunded to the Applicant at the Applicant’s account specified below,

together with interest thereon, from and including the value date as of which such amount is received by Bank Audi

from the Applicant to but excluding the date on which such amount is so refunded, at the rate of 4% per annum.

c. In the event (or to the extent) that this Purchase Application is accepted, the Applicant shall receive

interest on the funds paid by it to Bank Audi in respect of the purchase price for the Securities for which it has applied

hereunder (or, if this Purchase Application is accepted only in part, the portion thereof accepted for allocation) from and

including the value date as of which such amount is received by Bank Audi from the Applicant to but excluding the

issue date of the Securities, at the rate of 4% per annum.

d. Subject to the other terms and conditions set forth herein, the Applicant hereby authorizes Bank Audi

to apply or otherwise utilize the funds received by it hereunder in respect of the purchase price for the Securities for

which it has applied under this Purchase Application in its discretion in connection with the purchase, on behalf of the

Applicant, of Securities as contemplated by this Purchase Application. The Applicant acknowledges that Bank Audi

A - 3

3 20581751

may transfer all or a portion of such funds to the Central Bank of Lebanon, as required by applicable regulation. Funds

not transferred to the Central Bank of Lebanon shall be invested in the sole discretion of Bank Audi.

6. DELIVERY OF SECURITIES

The Applicant acknowledges that Securities purchased by it as contemplated hereby will be delivered (unless otherwise

specified by the Applicant), upon issuance, by deposit to the MIDCLEAR account of Bank Audi, Account № 56-10,

and (unless the Applicant has specified for the Securities to be delivered to an alternative MIDCLEAR account) the

Applicant hereby instructs Bank Audi to hold the Securities purchased by it hereunder in custody for the benefit of the

Applicant in accordance with its standard custody arrangements, the terms of which are available to the Applicant upon

request.

7. REPRESENTATIONS

a. The Applicant hereby makes the representations and warranties set forth in Annex A to, and for the

benefit of Bank Audi, on the date hereof and on and as of the Closing Date, and understands that, if this Purchase

Application is accepted, Securities will be sold to the Applicant in reliance on those representations and warranties.

b. The Applicant hereby agrees and undertakes, as promptly as possible after request by, or on behalf of

Bank Audi, to complete and furnish to Bank Audi all information requested in connection with the transactions

contemplated by this Purchase Application and the Applicant represents, for the benefit of Bank Audi and its respective

agents and advisors, that all such information will be true, accurate and complete.

8. GENERAL

a. Modification

This Purchase Application may not be modified, discharged or terminated, except by an instrument in

writing, signed by the party against which enforcement is sought.

b. Counterparts

This Purchase Application may be executed in two counterpart copies, each of which shall be

considered an original and all of which shall constitute one and the same instrument, binding on all parties hereto,

notwithstanding that all the parties are not signatories to the same counterpart.

c. Successors and Assigns

Except as otherwise provided herein, this Purchase Application shall be enforceable by and against the

successors and assigns of the parties hereto, and shall inure to the benefit of and be enforceable by the parties hereto and

their respective successors and permitted assigns. This Purchase Application is not transferable or assignable by the

Applicant.

d. Applicable Law

This Purchase Application shall be governed by and construed in accordance with the laws of the

Lebanese Republic.

[SIGNATURE PAGE FOLLOWS]

A - 4

4 20581751

The undersigned has executed this Purchase Application on this [•]th

day of [•] 2014.

Signed by the Applicant:

Print Name & Title of

Person Signing on

Behalf of Applicant:

Applicant’s bank details:

Name of Bank: ..............................

Account №: ...................................

Account Name: .............................

Reference: .....................................

The foregoing Purchase Application is

hereby accepted by, or on behalf of,

Bank Audi S.A.L.,

this [•]th

day of [•] 2014.

By

Name:

Title:

لائحة التعزيف التي هي في اللغة الإًجليزية وهى ببلتبلي يؤكذ بأًه فهن هىضىع على طلب الشزاء هذا و يقز هقذم الطلب أًه يتقي اللغة الإًجليزية وأًه إتطلع

أو وكلاء الأصذار والحصىل على /كوب وأى هقذم الطلب يقز بأًه تن إعطبئه الفزصة لطزح الأسئلة وتلقي الإجبببت عٌهب هي قبل الوصذر و. هحتىاهب كليب

.هن وتقيين هزايب وهخبطز شزاء واهتلاك الأسهن العبدية هعلىهبت إضبفية ضزورية لف

A - 5

5 20581751

Annex A

REPRESENTATIONS AND WARRANTIES OF THE APPLICANT

1. The Applicant hereby acknowledges that none Bank Audi or any of its respective affiliates, or any other person

has made or makes any representation or warranty, express or implied, concerning: (i) the political, economic, security

or monetary conditions prevailing in Lebanon, Turkey or any other country where Bank Audi conducts operations;

(ii) the financial condition of Bank Audi; or (iii) the market value, if any, of the Securities; except as set out in the Term

Sheet and the Offering Circular, as and when published.

2. The Applicant has carefully reviewed and understands the Term Sheet. The Applicant acknowledges that Bank

Audi is in the process of preparing and will distribute to Applicants an Offering Circular containing further details

relating to the issue, offer, and sale of the Securities, as well as related risk factors, in September 2014.

3. The Warrants will not be listed. The Applicant acknowledges that, although the Bank will appoint one or more

financial institutions to make a market in the Warrants, there is no assurance that a secondary market in respect of the

Warrants will develop or, if a secondary market does develop, that it will be sustained.

4. The Applicant understands that the majority of Bank Audi’s operations are conducted in Lebanon and that,

accordingly, the financial condition and results of operations of Bank Audi are greatly affected by the political, economic

and monetary conditions prevailing in the Republic of Lebanon and that, as a result, the New Shares are instruments

reflecting general Lebanese sovereign risk.

5. The Securities have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the

“Securities Act”). Accordingly, the Securities are being offered outside the United States in reliance on Regulation S

and may not be offered, sold or delivered within the United States or to, or for the account or benefit of, U.S. Persons at

any time. The offer and sale of the Securities are also subject to restrictions in certain other jurisdictions, and the

Applicant is responsible for informing itself about and observing all such restrictions that are applicable to it.

6. The Applicant is not a U.S. person, as defined in Regulation S under the U.S. Securities Act of 1933, as

amended, was outside the United States when it executed this Purchase Application and will be outside the United

States when it purchases any Securities allocated to it under this Purchase Application. The Applicant acknowledges

that the Securities will be subject to restrictions on the offer, transfer and resale in certain jurisdictions, as more fully

described in the Term Sheet and the Offering Circular.

7. The Applicant acknowledges that it is fluent in the English language. The Applicant further acknowledges that

it fully understands the content of this Purchase Application and Term Sheet and that he has been given the opportunity

to ask questions of, and receive answers from, the issuer and obtain additional information necessary to understand and

evaluate the merits and risks of purchasing and owning the Securities.

A - 6

F-1

INDEX TO THE FINANCIAL STATEMENTS

Page

Unaudited Interim Condensed Consolidated Financial Statements of the Bank as at and for the six monthsended June 30, 2014 and 2013

Interim Condensed Consolidated Income Statement for each of the six months ended June 30, 2014 and 2013........ F-5

Interim Condensed Consolidated Statement of Financial Position as at June 30, 2014 and 2013.............................. F-7

Interim Condensed Consolidated Cash Flow Statement for each of the six months ended June 30, 2014 and 2013... F-8

Interim Condensed Consolidated Statement of Changes in Equity for the six months ended June 30, 2014 and2013............................................................................................................................................................... F-9

Notes to the Consolidated Financial Statements..................................................................................................... F-10

Audited Consolidated Financial Statements of the Bank as at and for the years ended December 31, 2013and 2012

Independent Auditors’ Report to the Shareholders of the Bank dated March 24, 2014 issued by Ernst & Youngp.c.c. and Semaan, Gholam & Co. with respect to the consolidated financial statements of the Bankas at and in 2013................................................................................................................................................... F-44

Consolidated Income Statement for each of the years ended December 31, 2013 and 2012 ..................................... F-45

Consolidated Statement of Financial Position as at December 31, 2013 and 2012................................................... F-47

Consolidated Cash Flow Statement for each of the years ended December 31, 2013 and 2012 ................................ F-48

Consolidated Statement of Changes in Equity for the years ended December 31, 2013 and 2012............................. F-49

Notes to the Consolidated Financial Statements..................................................................................................... F-50

Audited Consolidated Financial Statements of the Bank as at and for the years ended December 31, 2012and 2011

Independent Auditors’ Report to the Shareholders of the Bank dated March 22, 2013 issued by Ernst & Youngp.c.c. and Semaan, Gholam & Co. with respect to the consolidated financial statements of the Bankas at and in 2012................................................................................................................................................... F-151

Consolidated Income Statement for each of the Years ended December 31, 2012 and 2011..................................... F-152

Consolidated Statement of Financial Position as at December 31, 2012 and 2011................................................... F-154

Consolidated Cash Flow Statement for each of the Years ended December 31, 2012 and 2011................................ F-155

Consolidated Statement of Changes in Equity for the Years ended December 31, 2012 and 2011............................ F-156

Notes to the Consolidated Financial Statements..................................................................................................... F-157

Unconsolidated Financial Statements and Related Disclosures for Odeabank as at June 30, 2014

Independent Auditors’ Review Report to the Board of Directors of Odeabank dated August 11, 2014 issued byGüney Bağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik Anonim Şirketi, A member firm of Ernst & Young Global Limited.......................................................................................................................................... F-252

General Information ............................................................................................................................................. F-255

Unconsolidated Financial Statements .................................................................................................................... F-257

Accounting Principles .......................................................................................................................................... F-266

Information on Financial Structure........................................................................................................................ F-274

Explanations and Disclosures on Financial Structure ............................................................................................. F-290

Other Explanations............................................................................................................................................... F-312

Independent Auditor’s Review Report .................................................................................................................. F-312

F-2

Unconsolidated Financial Statements and Related Disclosures for Odeabank as at December 31, 2013

Independent Auditors’ Report to the Board of Directors of Odeabank dated March 4, 2014 issued by GüneyBağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik Anonim Şirketi, A member firm of Ernst & Young Global Limited..................................................................................................................................................... F-314

General Information ............................................................................................................................................. F-318

Unconsolidated Financial Statements .................................................................................................................... F-321

Accounting Principles .......................................................................................................................................... F-331

Information on Financial Structure........................................................................................................................ F-340

Explanations and Disclosures on Financial Structure ............................................................................................. F-364

Other Explanations............................................................................................................................................... F-394

Independent Auditor’s Report............................................................................................................................... F-394

F - 3

F - 4

F - 5

F - 6

F - 7

F - 8

F - 9

F - 10

F - 11

F - 12

F - 13

F - 14

F - 15

F - 16

F - 17

F - 18

F - 19

F - 20

F - 21

F - 22

F - 23

F - 24

F - 25

F - 26

F - 27

F - 28

F - 29

F - 30

F - 31

F - 32

F - 33

F - 34

F - 35

F - 36

F - 37

F - 38

F - 39

F - 40

F - 41

F - 42

BANK AUDI SAL

AUDI SARADAR GROUP

(SUBSEQUENTLY “BANK AUDI SAL”)

CONSOLIDATED FINANCIAL STATEMENTS

31 DECEMBER 2013

F - 43

F - 44

Bank Audi SAL – Audi Saradar Group

The attached notes 1 to 61 form part of these consolidated financial statements.

2

CONSOLIDATED INCOME STATEMENT For the year ended 31 December 2013

2013 2012

Notes LL million LL million

CONTINUING OPERATIONS Interest and similar income 4 2,693,381 2,208,509

Interest and similar expense 5 (1,731,234) (1,344,819)

_______________ _______________

Net Interest Income 962,147 863,690

_______________ _______________ Fee and commission income 6 351,110 330,562

Fee and commission expense 7 (69,092) (51,197)

_______________ _______________

Net Fee and Commission Income 282,018 279,365

_______________ _______________ Net gain on financial assets at fair value through profit or loss 8 162,307 197,456 Net gain on sale of financial assets at amortized cost 9 163,976 265,812

Revenues from financial assets at fair value through other

comprehensive income

26

28,806

30,245

Share of profit of associates under equity method 27 1,169 551

Net gain on sale of subsidiaries 10 775 -

Other operating income 11 12,909 22,251 _______________ _______________

Total Operating Income 1,614,107 1,659,370

Net credit losses 12 (135,362) (182,585)

_______________ _______________

Net Operating Income 1,478,745 1,476,785 _______________ _______________ Personnel expenses 13 (493,064) (411,746)

Other operating expenses 14 (343,122) (291,959)

Depreciation of property and equipment 28 (52,723) (46,088) Amortisation of intangible assets 29 (16,092) (7,663)

Impairment of goodwill 32 - (21,167)

_______________ _______________

Total Operating Expenses (905,001) (778,623)

_______________ _______________

Operating Profit 573,744 698,162 Net gain on disposal of fixed assets 685 850 _______________ _______________

Profit Before Tax From Continuing Operations 574,429 699,012

Income tax 15 (114,711) (154,537)

_______________ _______________

Profit After Tax From Continuing Operations 459,718 544,475 DISCONTINUED OPERATIONS

(Loss) profit from discontinued operations, net of tax 16 (600) 33,814

_______________ _______________

Profit for the period 459,118 578,289

_______________ _______________

Attributable to:

Equity holders of the Bank: 454,621 564,737

Profit for the year from continuing operations 455,221 531,419 Profit for the year from discontinued operations (600) 33,318 Non-controlling interests: 4,497 13,552

Profit for the year from continuing operations 4,497 13,056

Profit for the year from discontinued operations - 496 _______________ _______________

459,118 578,289

_______________ _______________

Earnings per share:

LL LL Basic earnings per share 1,199 1,527 Diluted earnings per share 1,199 1,526

Basic earnings per share from continuing operations 1,201 1,431

Diluted earnings per share from continuing operations 1,201 1,430

F - 45

Bank Audi SAL – Audi Saradar Group

The attached notes 1 to 61 form part of these consolidated financial statements.

3

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2013

Restated

2013 2012

Notes LL million LL million

Profit for the year from continuing operations 459,718 544,475

Discontinued operations (600) 33,814

_____________ _____________

Profit for the year 459,118 578,289

Other comprehensive income (loss)

Items to be reclassified to the income statement in

subsequent periods:

Exchange differences on translation of foreign operations (254,388) (126,143)

Net loss on hedge of net investments (5,743) (3,589)

_____________ _____________

47 (260,131) (129,732)

_____________ _____________

Items not to be reclassified to the income statement in

subsequent periods:

Actuarial loss on defined benefits plans (578) (3,572)

Net deferred income taxes (167) 822

_____________ _____________

47 (745) (2,750)

Net unrealized gain on financial assets at fair value through other

comprehensive income

25,647

5,613

Net deferred income taxes 6,989 (9,667)

_____________ _____________

47 32,636 (4,054)

Share of other comprehensive income of an associate

under equity method

27

4,546

-

_____________ _____________

36,437 (6,804)

_____________ _____________

Other comprehensive gain for the year, net of tax 47 (223,694) (136,536)

_____________ _____________

Total comprehensive income for the year, net of tax 235,424 441,753

_____________ _____________

Attributable to:

Equity holders of the Bank 265,015 472,011

Non-controlling interest (29,591) (30,258)

_____________ _____________

235,424 441,753

_____________ _____________

F - 46

Bank Audi SAL – Audi Saradar Group

The attached notes 1 to 61 form part of these consolidated financial statements.

4

CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 31 December 2013

Restated

2013 2012

Notes LL million LL million

ASSETS

Cash and balances with central banks 18 9,192,108 9,462,380

Due from banks and financial institutions 19 4,229,556 4,280,978

Loans to banks and financial institutions and reverse

repurchase agreements

20

657,945

1,060,267

Derivative financial instruments 21 136,062 51,046

Financial assets at fair value through profit or loss 22 409,083 510,657

Loans and advances to customers at amortized cost 23 22,064,822 15,416,403

Loans and advances to related parties at amortized cost 24 114,829 304,511

Debtors by acceptances 262,689 182,715

Financial assets at amortized cost 25 16,023,035 14,549,116

Financial assets at fair value through other

comprehensive income

26

272,475

245,793

Investments in associates 27 28,615 34,230

Property and equipment 28 575,836 528,710

Intangible assets 29 82,259 49,600

Non current assets held for sale 30 19,318 50,054

Other assets 31 278,584 241,484

Goodwill 32 211,144 222,846

_______________ _______________

TOTAL ASSETS 54,558,360 47,190,790

_______________ _______________

LIABILITIES

Due to central banks 33 252,042 133,108

Due to banks and financial institutions 34 1,599,912 1,171,174

Due to banks under repurchase agreements 34 196,180 681,487

Derivative financial instruments 21 134,466 56,042

Customers‟ deposits at amortized cost 35 46,118,217 39,718,890

Deposits from related parties at amortized cost 36 757,590 689,101

Engagements by acceptances 262,689 182,715

Other liabilities 37 502,771 408,865

Provisions for risks and charges 38 132,882 111,313

Non current liabilities held for sale 30 - 14,799

Subordinated loans and similar debts 39 537,101 -

_______________ _______________

TOTAL LIABILITIES 50,493,850 43,167,494

_______________ _______________

SHAREHOLDERS’ EQUITY – GROUP SHARE

Share capital – common shares 40 454,324 438,586

Share capital – preferred shares 40 6,495 19,124

Issue premium – common shares 41 659,206 659,206

Issue premium – preferred shares 41 747,255 583,876

Cash contribution to capital 42 72,586 72,586

Non-distributable reserves 43 959,545 812,960

Distributable reserves 44 589,523 551,406

Treasury shares 46 (114,327) (20,245)

Retained earnings 441,400 323,697

Other components of equity 47 (269,081) (79,475)

Result of the year 454,621 564,737

_______________ _______________

4,001,547 3,926,458

NON-CONTROLLING INTEREST 48 62,963 96,838

_______________ _______________

TOTAL SHAREHOLDERS’ EQUITY 4,064,510 4,023,296

_______________ _______________

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 54,558,360 47,190,790

_______________ _______________

F - 47

Bank Audi SAL – Audi Saradar Group

CONSOLIDATED CASH FLOW STATEMENT For the year ended 31 December 2013

The attached notes 1 to 61 form part of these consolidated financial statements.

5

Restated

2013 2012

Notes LL million LL million

OPERATING ACTIVITIES

Profit before tax from continuing operations 574,429 699,012

Profit before tax from discontinued operations (600) 45,581 Adjustments to reconcile profit before tax to net cash flows:

Non-cash:

Depreciation and amortisation 28 & 29 68,815 55,180

Impairment of assets acquired in settlement of debt reversed 30 - (4)

Net gain on financial instruments at amortised cost 9 (163,976) (265,812)

Provisions for loans and advances 12 145,721 202,104

Recoveries of provision for loans and advances 12 (14,131) (19,629)

Share of net profit of associates 27 (1,169) (551) Net gain on disposal of assets acquired in settlement of debt 11 - (8,297)

Net gain on sale or disposal of fixed assets (685) (850)

Provision for risks and charges 38 31,441 17,597

Write back of provisions for risks and charges 38 (2,307) (7)

Provision for impairment of financial instruments 12 (736) 110

Provision for end of service benefits 38 21,741 15,224

Write back of provision for end of service benefits (27) - Gain on sale of subsidiaries and associates 16 - (48,622)

Gain on revaluation due to loss of control 16 - (20,439)

Impairment of goodwill 32 - 31,088

______________ ______________

658,516 701,685

Working capital adjustments:

Balances with the Central Banks, banks and financial institutions maturing in more than 3 months 597,293 (163,621)

Change in derivatives and financial assets held for trading 94,982 342,228 Change in loans and advances to customers and related parties (6,546,791) (2,923,486)

Change in other assets (40,232) 53,869

Change in deposits from customers and related parties 6,467,816 3,025,484

Change in other liabilities 122,862 (459,123)

Proceeds from sale of assets obtained in settlement of debt 35,841 19,068

Cost of non current assets held for sale (5,104) (211)

Change in non controlling interest 213 (524) Effect of entities deconsolidated during the year (6,092) (66,482)

______________ ______________

Cash from operations 1,379,304 528,887 Provisions for risks and charges paid 38 (16,952) (249)

End of service benefits paid 38 (3,989) (5,435)

Taxation paid 15 (158,751) (131,373)

______________ ______________

Net cash flows from operating activities 1,199,612 391,830

______________ ______________ INVESTING ACTIVITIES

Change in financial assets – other than trading (1,303,331) 17,722

Purchase of property and equipment and intangibles 28 & 29 (186,243) (182,586)

Change in investments under equity method and related loans 6,556 9,420 Cash collected from sale of property and equipment and intangibles 822 18,635

Proceeds from sale of associates and subsidiaries 16 - 118,706

______________ ______________

Net cash flows used in investing activities (1,482,196) (18,103)

______________ ______________

FINANCING ACTIVITIES

Issuance of preferred shares 40 339,008 226,125

Cancellation of preferred share “D” 40 (188,438) -

Distribution of dividends 40 (245,131) (236,179) Treasury GDR transactions (93,936) 59,084

Subordinated debts 39 537,101 -

______________ ______________

Net cash flows from financing activities 348,604 49,030

______________ ______________

INCREASE IN CASH AND CASH EQUIVALENTS 66,020 422,757

Net foreign exchange difference (255,107) (130,035)

Cash and cash equivalents at 1 January 5,592,462 5,299,740

______________ ______________

CASH AND CASH EQUIVALENTS AT 31 DECEMBER 49 5,403,375 5,592,462

______________ ______________

Operational cash flows from interest and dividends

Interest paid (1,706,500) (1,316,918) Interest received 2,658,311 2,265,668

Dividends received 28,987 30,418

F - 48

Bank Audi SAL – Audi Saradar Group

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2013

The attached notes 1 to 61 form part of these consolidated financial statements.

6

Attributable to the equity holders of the Bank

Share capital

- common

shares

Share capital -

preferred

shares

Issue

premium-

common

shares

Issue

premium-

preferred

shares

Cash

contribution

to capital

Non

distributable

reserves

Distributable

reserves

Treasury

shares

Retained

earnings

Other

components

of equity

Result

of the year Total

Non-

controlling

interest

Total

shareholders’

equity LL million LL million LL million LL million LL million LL million LL million LL million LL million LL million LL million LL million LL million LL million

Balance at 1 January 2013 438,586 19,124 659,206 583,876 72,586 812,960 551,406 (20,245) 323,697 (79,475) 564,737 3,926,458 96,838 4,023,296

Net profits for the year - - - - - - - - - - 454,621 454,621 4,497 459,118

Other comprehensive losses - - - - - - - - - (189,606) - (189,606) (34,088) (223,694)

___________ __________ ___________ ___________ ___________ __________ __________ ___________ ___________ ___________ ___________ ________ __________ _________ Total comprehensive income - - - - - - - - - (189,606) 454,621 265,015 (29,591) 235,424

Appropriation of 2012 profits - - - - - 151,332 18,825 - 149,449 - (319,606) - - - Cancellation of preferred share “D” - (15,675) - (172,762) - - - - - - - (188,437) - (188,437)

Increase in share nominal value 15,738 124 - (124) - - (15,738) - - - - - - -

Issue of preferred shares G & H - 2,922 - 336,265 - - (174) - - - - 339,013 339,013 Distribution of dividends on ordinary shares - - - - - - - - 431 - (210,176) (209,745) - (209,745)

Distribution of dividends on preferred shares - - - - - - - - - - (34,955) (34,955) - (34,955)

Entities consolidated during the year - - - - - - - - 470 - - 470 - 470

Entities deconsolidated during the year - - - - - (251) (2,894) - 3,184 - - 39 - 39 Entities under equity method - - - - - - - - 478 - - 478 - 478

Treasury shares transactions - - - - - 146 - (94,082) - - - (93,936) - (93,936)

Non controlling interest share of reserves - - - - - - - - - - - - (4,662) (4,662) Non controlling interest share of capital - - - - - (116) (13,365) - 13,103 - - (378) 378 -

Transfer between reserves - - - - - (4,526) 51,470 - (46,944) - - - - -

Increase in subsidiary ownership - - - - - - - - (3,983) - - (3,983) - (3,983) Other movements - - - - - - (7) - 1,515 - - 1,508 - 1,508

___________ __________ ___________ ___________ _________ ____________ ___________ ____________ ___________ ___________ ___________ ________ __________ _________

Balance at 31 December 2013 454,324 6,495 659,206 747,255 72,586 959,545 589,523 (114,327) 441,400 (269,081) 454,621 4,001,547 62,963 4,064,510

___________ __________ ___________ __________ _________ ____________ ___________ ____________ ___________ ___________ ___________ ________ __________ _________

Balance at 1 January 2012 438,197 17,243 657,846 359,633 72,586 696,360 380,215 (103,912) 328,516 21,056 544,239 3,411,979 141,172 3,553,151

Effect of adopting IAS 19 (R) - - - - - - - - - (10,223) - (10,223) - (10,223) ___________ __________ ___________ ___________ ___________ __________ __________ ___________ ___________ ___________ ___________ ________ __________ _________

Balance at 1 January 2012 as restated 438,197 17,243 657,846 359,633 72,586 696,360 380,215 (103,912) 328,516 10,833 544,239 3,401,756 141,172 3,542,928

Net profits for the year - - - - - - - - - - 564,737 564,737 13,552 578,289 Other comprehensive income - - - - - - - - - (92,726) - (92,726) (43,810) (136,536)

___________ __________ ___________ ___________ ___________ __________ __________ ___________ ___________ ___________ ___________ ________ __________ _________

Total comprehensive income - - - - - - - - - (92,726) 564,737 472,011 (30,258) 441,753

Appropriation of 2011 profits - - - - - 133,284 1,505 - 172,828 - (307,617) - - -

Distribution of dividends on ordinary shares - - - - - 443 - - - - (210,712) (210,269) - (210,269) Distribution of dividends on preferred shares - - - - - - - - - - (25,910) (25,910) - (25,910)

Issue of preferred shares - 1,881 - 224,243 - - - - - - - 226,124 - 226,124

Employees‟ share-based payments 389 - 1,360 - - (587) - - (2,247) - - (1,085) - (1,085)

Entities deconsolidated during the year - - - - - (8,219) (19,637) - 24,690 497 - (2,669) - (2,669) Entities under equity method - - - - - - - - (723) - - (723) - (723)

Treasury shares transactions - - - - - (24,583) - 83,667 - - - 59,084 - 59,084

Non controlling interest share of capital - - - - - - - - - - - - (12,840) (12,840) Non controlling interest share of reserves - - - - - (138) (4,308) - 5,682 - - 1,236 (1,236) -

Reserve for share option agreements - - - - - - 6,844 - - - - 6,844 - 6,844

Transfer between reserves - - - - - 16,612 186,781 - (205,314) 1,921 - - - - Other movements - - - - - (212) 6 - 265 - - 59 - 59

___________ __________ ___________ ___________ _________ ____________ ___________ ____________ ___________ ___________ ___________ ________ __________ _________

Balance at 31 December 2012 438,586 19,124 659,206 583,876 72,586 812,960 551,406 (20,245) 323,697 (79,475) 564,737 3,926,458 96,838 4,023,296

___________ __________ ___________ __________ _________ ____________ ___________ ____________ ___________ ___________ ___________ ________ __________ _________

F - 49

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

7

1 CORPORATE INFORMATION

Bank Audi SAL – Audi Saradar Group (the Bank) is a Lebanese joint stock company registered since 1962 in

Lebanon under No 11347 at the Register of Commerce and under No 56 on the Banks‟ list at the Bank of

Lebanon (“BDL”). The Bank‟s head office is located in Bank Audi Plaza, Omar Daouk Street, Beirut, Lebanon.

The Bank‟s shares are listed on the Beirut Stock Exchange and London SEAQ.

The Bank, together with its affiliated banks and subsidiaries (collectively “the Group”), provides a full range of

retail, commercial, investment and private banking activities through its headquarter as well as its branches in

Lebanon and its presence in Europe, the Middle East and North Africa.

On 27 December 2013, the extraordinary general assembly decided to change the name of the Bank to “Bank

Audi SAL”. The Bank of Lebanon approved the change on 29 January 2014 as per the letter from the governor

of the Central Bank of Lebanon dated 5 February 2014.

During 2012, the Group started its operations in Turkey under its newly established subsidiary, Odeabank.

Besides, the Group decided to discontinue its banking operations through Bank Audi Monaco SAM pursuant to

the decision of the General Assembly of Bank Audi Monaco dated 27 July 2012.

The consolidated financial statements were authorized for issue in accordance with the Board of Directors‟

resolution on 20 March 2014.

2 ACCOUNTING POLICIES

2.1 Basis of preparation

The consolidated financial statements have been prepared on a historical cost basis except for: a) the restatement

of certain tangible real estate properties in Lebanon according to the provisions of law No 282 dated 30

December 1993, and b) the measurement at fair value of derivative financial instruments, financial assets at fair

value through profit or loss and financial assets at fair value through other comprehensive income.

The carrying values of recognised assets and liabilities that are hedged items in fair value hedges, and otherwise

carried at amortised cost, are adjusted to record changes in fair value attributable to the risks that are being

hedged.

The consolidated financial statements are presented in Lebanese Pounds (LL) and all values are rounded to the

nearest million, except when otherwise indicated. Besides, the consolidated financial statements provide

comparative information in respect of the previous period.

Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting

Standards (IFRS) as issued by the International Accounting Standards Board (IASB), and the regulations of the

Central Bank of Lebanon and the Banking Control Commission (“BCC”).

Presentation of financial statements

The Group presents its statement of financial position broadly in order of liquidity. An analysis regarding

recovery or settlement within one year after the statement of financial position date (current) and more than one

year after the statement of financial position date (non-current) is presented in the risk management notes.

Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of

financial position only when there is a legally enforceable right to offset the recognised amounts and there is an

intention to settle on a net basis, or to realise the assets and settle the liability simultaneously. This is not

generally the case with master netting agreements, therefore the related assets and liabilities are presented gross

in the consolidated statement of financial position. Income and expense will not be offset in the consolidated

income statement unless required or permitted by any accounting standard or interpretation, as specifically

disclosed in the accounting policies of the Group.

F - 50

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

8

2 ACCOUNTING POLICIES (continued)

2.2 Basis of consolidation

The consolidated financial statements comprise the financial statements of Bank Audi SAL – Audi Saradar

Group and its subsidiaries as at 31 December 2013. Control is achieved when the Group is exposed, or has

rights, to variable returns from its involvement with the investee and has the ability to affect those returns

through its power over the investee. Specifically, the Group controls an investee if and only if the Group has:

Power over the investee (i.e. existing rights that give it the current ability to direct the relevant

activities of the investee)

Exposure, or rights, to variable returns from its involvement with the investee, and

The ability to use its power over the investee to affect its returns

When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all

relevant facts and circumstances in assessing whether it has power over an investee, including:

The contractual arrangement with the other vote holders of the investee

Rights arising from other contractual arrangements

The Group‟s voting rights and potential voting rights

The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are

changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group

obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities,

income and expenses of a subsidiary acquired or disposed of during the year are included in the statement of

comprehensive income from the date the Group gains control until the date the Group ceases to control the

subsidiary.

Non-controlling interest represent the portion of profit or loss and net assets of subsidiaries not owned directly

or indirectly by the Bank. Profit or loss and each component of other comprehensive income (OCI) are

attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results

in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial

statements of subsidiaries to bring their accounting policies into line with the Group‟s accounting policies. All

intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between

members of the Group are eliminated in full on consolidation.

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity

transaction. If the Group loses control over a subsidiary, it:

- Derecognises the assets (including goodwill) and liabilities of the subsidiary

- Derecognises the carrying amount of any non-controlling interests

- Derecognises the cumulative translation differences, recorded in equity

- Recognises the fair value of the consideration received

- Recognises the fair value of any investment retained

- Recognises any surplus or deficit in profit or loss

- Reclassifies the parent‟s share of components previously recognised in other comprehensive income to

profit or loss or retained earnings, as appropriate.

Where the Group loses control of a subsidiary, such that the former subsidiary becomes an associate accounted

for under the equity method, the effect is that the Group's interest in the former subsidiary (associate) is

reported:

- using the equity method from the date on which control is lost in the current reporting period; and

- using full consolidation for any earlier part of the current reporting period, and of any earlier reporting period,

during which the associate was controlled.

F - 51

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

9

2 ACCOUNTING POLICIES (continued)

2.3 Changes in accounting policies and disclosures

New and amended standards and interpretations

The Group applied, for the first time, certain standards and amendments that require restatement of previous

financial statements. The nature and the impact of each new standards and amendments is described below:

IAS 1 Presentation of Items of Other Comprehensive Income – Amendments to IAS 1

The amendments to IAS 1 introduce a grouping of items presented in other comprehensive income (OCI). Items

that could be reclassified (or recycled) to the statement of income at a future point in time now have to be

presented separately from items that will never be reclassified. The amendment affected presentation only and

had no impact on the Group‟s financial position or performance.

IAS 1 Clarification of the Requirement for Comparative Information (Amendment)

The amendment to IAS 1 clarifies the difference between voluntary additional comparative information and the

minimum required comparative information. An entity must include comparative information in the related

notes to the financial statements when it voluntarily provides comparative information beyond the minimum

required comparative period.

An opening statement of financial position (known as the „third balance sheet‟) must be presented when an

entity applies an accounting policy retrospectively, makes retrospective restatements, or reclassifies items in its

financial statements, provided any of those changes has a material effect on the statement of financial position at

the beginning of the preceding period. The amendment clarifies that a third balance sheet does not have to be

accompanied by comparative information in the related notes. As described below, the effect of retrospective

adoption of accounting standards effective in 2013 was not deemed to have a material effect on the financial

statements. As such, summarized information about the effect was presented below instead. The Group has not

included comparative information in the related notes in respect of the opening statement of financial position as

at 1 January 2012. The amendments affect presentation only and have no impact on the Group‟s financial

position or performance.

IAS 19 (revised 2011) Employee Benefits

In June 2011, the IASB issued revisions to IAS 19 Employee Benefits (“IAS 19R” or “the revised standard”).

During 2013, the Group adopted IAS 19R retrospectively in accordance with the transitional provisions set out

in the standard. The revised standard introduces changes to the recognition, measurement, presentation and

disclosure of post-employment benefits. IAS 19R eliminates the “corridor method”, under which the recognition

of actuarial gains and losses was deferred. Instead, the full defined benefit obligation net of plan assets is now

recorded on the balance sheet, with changes resulting from re-measurements recognized immediately in other

comprehensive income. In addition, IAS 19R requires net interest expense/income to be calculated as the

product of the net defined benefit liability/asset and the discount rate as determined at the beginning of the year.

Other amendments include new disclosures, such as, sensitivity disclosures.

The comparative statement of financial position as of 31 December 2012 and other primary statements for the

year then ended have been restated to reflect the effect of adopting IAS19 (R). The transition effects on the

opening equity balance as of 1 January 2012 are presented in the statement of changes in equity. No Statement

of financial position as of the beginning of 2012 has been presented as adoption was not deemed to have a

material impact on the financial statements. The balance sheet as of 31 December 2013 and the comparative

figures have been presented as if IAS 19R had always been applied. The effect of adoption on assets, liabilities

and equity of prior period financial statements is shown in the table below.

Provisions for Other components

Other assets risks and charges of equity

LL million LL million LL million Balance as of 1 January 2012 - as previously reported 288,171 72,925 21,056

Change in reported figures 2,499 12,722 (10,223)

______________ ______________ ______________

Balance as of 1 January 2012 - as restated 290,670 85,647 10,833

______________ ______________ ______________

Balance as of 31 December 2012 - as previously reported 238,169 95,096 (66,579)

Cumulative effect of prior period 2,499 12,722 (10,223)

Change in reported figures for the year 816 3,495 (2,673)

______________ ______________ ______________

Balance as of 31 December 2012 – as restated 241,484 111,313 (79,475)

______________ ______________ ______________

F - 52

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

10

2 ACCOUNTING POLICIES (continued)

2.3 Changes in accounting policies and disclosures (continued)

New and amended standards and interpretations (continued)

IAS 32 Tax Effects of Distributions to Holders of Equity Instruments (Amendment)

The amendment to IAS 32 Financial Instruments: Presentation clarifies that income taxes arising from

distributions to equity holders are accounted for in accordance with IAS 12 Income Taxes. The amendment

removes existing income tax requirements from IAS 32 and requires entities to apply the requirements in IAS 12

to any income tax arising from distributions to equity holders. The amendment did not have an impact on the

Groups‟ financial statements.

IFRS 7 Financial Instruments: Disclosures – Offsetting Financial Assets and Financial Liabilities –

Amendments to IFRS 7 The amendment requires an entity to disclose information about rights to set-off financial instruments and

related arrangements (e.g., collateral agreements). The disclosures would provide users with information that is

useful in evaluating the effect of netting arrangements on an entity‟s financial position. The new disclosures are

required for all recognised financial instruments that are set off in accordance with IAS 32. The disclosures also

apply to recognised financial instruments that are subject to an enforceable master netting arrangement or

similar agreement, irrespective of whether the financial instruments are set off in accordance with IAS 32. As

the Group is not setting off financial instruments in accordance with IAS 32 and does not have relevant

offsetting arrangements, the amendment does not have an impact on the Group.

IFRS 10 Consolidated Financial Statements and IAS 27 Separate Financial Statements

IFRS 10 establishes a single control model that applies to all entities including special purpose entities. IFRS 10

replaces the parts of previously existing IAS 27 Consolidated and Separate Financial Statements that dealt with

consolidated financial statements and SIC-12 Consolidation – Special Purpose Entities. IFRS 10 changes the

definition of control such that an investor controls an investee when it is exposed, or has rights, to variable

returns from its involvement with the investee and has the ability to affect those returns through its power over

the investee. To meet the definition of control in IFRS 10, all three criteria must be met, including: (a) an

investor has power over an investee; (b) the investor has exposure, or rights, to variable returns from its

involvement with the investee; and (c) the investor has the ability to use its power over the investee to affect the

amount of the investor‟s returns. IFRS 10 had no impact on the consolidation of investments held by the Group.

IFRS 11 Joint Arrangements and IAS 28 Investments in Associates and Joint Ventures

IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities — Non-monetary

Contributions by Venturers. IFRS 11 removes the option to account for jointly controlled entities (JCEs) using

proportionate consolidation. Instead, JCEs that meet the definition of a joint venture under IFRS 11 must be

accounted for using the equity method. As the Group does not have investments in joint ventures, IFRS 11 does

not have an impact on the Group.

IFRS 12 Disclosure of Interests in Other Entities

IFRS 12 sets out the requirements for disclosures relating to an entity‟s interests in subsidiaries, joint

arrangements, associates and structured entities. The requirements in IFRS 12 are more comprehensive than the

previously existing disclosure requirements for subsidiaries. An entity is now required to disclose the

judgements made to determine whether it controls another entity.

The Group disclosed more information about the consolidated and unconsolidated structured entities with which

it is involved or has sponsored. However, the standard did not have any impact on the financial position or

performance of the Bank.

IFRS 13 Fair Value Measurement

IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not

change when an entity is required to use fair value, but rather provides guidance on how to measure fair value

under IFRS. IFRS 13 defines fair value as an exit price. As a result of the guidance in IFRS 13, the Group re

assessed its policies for measuring fair values, in particular, its valuation inputs such as non-performance risk

for fair value measurement of liabilities. IFRS 13 also requires additional disclosures.

Application of IFRS 13 has not materially impacted the fair value measurements of the Group. Additional

disclosures where required, are provided in the individual notes relating to the assets and liabilities whose fair

values were determined. Fair value hierarchy is also provided in the notes.

F - 53

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

11

2 ACCOUNTING POLICIES (continued)

2.4 Standards issued but not yet effective

The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group‟s

financial statements are disclosed below. The Group intends to adopt these standards, if applicable, when they

become effective.

IAS 36 Impairment of Assets

These amendments remove the unintended consequences of IFRS 13 on the disclosures required under IAS 36.

In addition, these amendments require disclosure of the recoverable amounts for the assets or CGUs for which

impairment loss has been recognised or reversed during the period. These amendments are effective

retrospectively for annual periods beginning on or after 1 January 2014 with earlier application permitted,

provided IFRS 13 is also applied. This amendment is not expected to have an impact on the Group‟s financial

performance or position and affects presentation only.

Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27)

These amendments are effective for annual periods beginning on or after 1 January 2014 and provide an

exception to the consolidation requirement for entities that meet the definition of an investment entity under

IFRS 10. The exception to consolidation requires investment entities to account for subsidiaries at fair value

through profit or loss. It is not expected that this amendment would be relevant to the Group, since none of the

entities in the Group would qualify to be an investment entity under IFRS 10.

IAS 32 Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32

These amendments clarify the meaning of “currently has a legally enforceable right to set-off” and the criteria

for non-simultaneous settlement mechanisms of clearing houses to qualify for offsetting. These are effective for

annual periods beginning on or after 1 January 2014. These amendments are not expected to be relevant to the

Group.

IAS 39 Novation of Derivatives and Continuation of Hedge Accounting – Amendments to IAS 39

These amendments provide relief from discontinuing hedge accounting when novation of a derivative

designated as a hedging instrument meets certain criteria. These amendments are effective for annual periods

beginning on or after 1 January 2014. These amendments will be considered for future novations.

2.5 Summary of significant accounting policies

Foreign currency translation

The consolidated financial statements are presented in Lebanese Lira which is the Group‟s presentation

currency. Each entity in the Group determines its own functional currency and items included in the financial

statements of each entity are measured using that functional currency.

(i) Transactions and balances

Transactions in foreign currencies are initially recorded at the functional currency rate of exchange ruling at the

date of the transaction.

Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate

of exchange at the date of the statement of financial position. All differences are taken to “net gain on financial

assets at fair value through profit or loss” in the consolidated income statement.

Non–monetary items that are measured in terms of historical cost in a foreign currency are translated using the

exchange rates as at the dates of the initial transactions. Non–monetary items measured at fair value in a foreign

currency are translated using the exchange rates at the date when the fair value was determined. The gain or loss

arising on retranslation of non-monetary items is treated in line with the recognition of gain or loss on change in

fair value of the item (i.e., translation differences on items whose fair value gain or loss is recognised in other

comprehensive income or profit or loss is also recognised in other comprehensive income or profit or loss

respectively).

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying

amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign

operations and translated at closing rate.

F - 54

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

12

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

Foreign currency translation (continued)

(ii) Group companies

On consolidation, the assets and liabilities of subsidiaries and overseas branches are translated into the Bank‟s

presentation currency at the rate of exchange as at the reporting date, and their income statements are translated

at the weighted average exchange rates for the year. Exchange differences arising on translation are taken

directly to a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount

recognised in equity relating to that particular foreign operation is recognised in the consolidated income

statement.

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying

amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign

operations and translated at closing rate.

The table below presents the exchange rates of the currencies used to translate assets, liabilities and statement of

income items of foreign branches and subsidiaries:

2013 2012

Year end rate Average rate Year end rate Average rate

LL LL LL LL

US Dollar 1,507.50 1,507.50 1,507.50 1,507.50

Euro 2,074.77 2,004.10 1,987.79 1,948.85

Swiss Franc 1,690.97 1,632.43 1,645.38 1,616.84

Syrian Lira 10.50 10.50 19.48 22.4

Turkish Lira 706.16 788.97 841.14 837.52

Jordanian Dinar 2,129.54 2,127.94 2,123.24 2,127.09

Egyptian Pound 217.08 220.47 243.58 248.2

Sudanese Dinar 252.91 264.06 251.15 402.81

Saudi Riyal 401.94 401.97 401.94 401.97

Qatari Riyal 413.98 414.04 414.05 414.03

Financial instruments –classification and measurement

(i) Date of recognition

All financial assets and liabilities are initially recognised on the trade date, i.e. the date that the Group becomes a

party to the contractual provisions of the instrument. This includes “regular way trades”: purchases or sales of

financial assets that require delivery of assets within the time frame generally established by regulation or

convention in the market place.

(ii) Classification and measurement of financial instruments

a. Financial assets

The classification of financial assets depends on the basis of each entity's business model for managing the

financial assets and the contractual cash flow characteristics of the financial asset. Assets are initially measured

at fair value plus, in the case of a financial asset not at fair value through profit or loss, particular transaction

costs. Assets are subsequently measured at amortised cost or fair value.

An entity may, at initial recognition, irrevocably designate a financial asset as measured at fair value through

profit or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency

(sometimes referred to as an 'accounting mismatch') that would otherwise arise from measuring assets or

liabilities or recognising the gains and losses on them on different bases. An entity is required to disclose such

financial assets separately from those mandatorily measured at fair value.

F - 55

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

13

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

(ii) Classification and measurement of financial instruments (continued)

a. Financial assets (continued)

Financial assets at amortised cost

Debt instruments are subsequently measured at amortised cost less any impairment loss (except for debt

instruments that are designated at fair value through profit or loss upon initial recognition) if they meet the

following two conditions:

The asset is held within a business model whose objective is to hold assets in order to collect

contractual cash flows; and

The contractual terms of the instrument give rise on specified dates to cash flows that are solely

payments of principal and interest on the principal amount outstanding.

These financial assets are initially recognised at cost, being the fair value of the consideration paid for the

acquisition of the investment. All transaction costs directly attributed to the acquisition are also included in the

cost of investment. After initial measurement, these financial assets are measured at amortised cost using the

effective interest rate method (EIR), less allowance for impairment. Amortised cost is calculated by taking into

account any discount of premium on acquisition and fees and costs that are an integral part of the effective

interest rate. The amortization is included in “Interest and similar income” in the income statement. The losses

arising from impairment are recognised in the income statement in “Impairment losses on other financial

assets”.

Although the objective of an entity's business model may be to hold financial assets in order to collect

contractual cash flows, the entity need not hold all of those instruments until maturity. Thus an entity's business

model can be to hold financial assets to collect contractual cash flows even when sales of financial assets occur.

However, if more than an infrequent number of sales are made out of a portfolio, the entity needs to assess

whether and how such sales are consistent with an objective of collecting contractual cash flows. If the objective

of the entity's business model for managing those financial assets changes, the entity is required to reclassify

financial assets.

Gains and losses arising from the derecognition of financial assets measured at amortised cost are reflected

under “Net gain on sale of financial assets at amortised cost” in the consolidated income statement.

Balances with central banks, due from banks and financial institutions, and loans and advances to customers

and related parties – at amortized cost

After initial measurement, “Balances with central banks”, “Due from banks and financial institutions”, and

“Loans and advances to customers and related parties” are subsequently measured at amortised cost using the

EIR, less allowance for impairment. Amortised cost is calculated by taking into account any discount or

premium on acquisition and fees and costs that are an integral part of the EIR. The amortisation is included in

„Interest and similar income‟ in the consolidated income statement. The losses arising from impairment are

recognised in the consolidated income statement in “Net credit losses”.

Financial assets at fair value through profit or loss

Included in this category are those debt instruments that do not meet the conditions in “Financial assets at

amortised cost” above, debt instruments designated at fair value through profit or loss upon initial recognition,

and equity instruments at fair value through profit or loss.

Debt instruments at fair value through profit or loss

These financial assets are recorded in the consolidated statement of financial position at fair value. Changes in

fair value and interest income are recorded under “net gain on financial assets at fair value through profit or loss”

in the consolidated income statement showing separately, those related to financial assets designated at fair value

upon initial recognition from those mandatorily measured at fair value. Gains and losses arising from the

derecognition of debt instruments and other financial assets at fair value through profit or loss are also reflected

under “net gain on financial assets at fair value through profit or loss” in the consolidated income statement

showing separately, those related to financial assets designated at fair value upon initial recognition from those

mandatorily measured at fair value.

F - 56

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

14

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

(ii) Classification and measurement of financial instruments (continued)

a. Financial assets (continued)

Equity instruments at fair value through profit or loss

Investments in equity instruments are classified at fair value through profit or loss, unless the Group designates

at initial recognition an investment that is not held for trading as at fair value through other comprehensive

income.

These financial assets are recorded in the consolidated statement of financial position at fair value. Changes in

fair value and dividend income are recorded under “net gain on financial assets at fair value through profit or

loss” in the consolidated income statement. Gains and losses arising from the derecognition of equity

instruments at fair value through profit or loss are also reflected under “net gain from financial assets at fair

value through profit or loss” in the consolidated income statement.

Financial assets at fair value through other comprehensive income Investments in equity instruments designated at initial recognition as not held for trading are classified at fair

value through other comprehensive income.

These financial assets are initially measured at fair value plus transaction costs. Subsequently, they are measured

at fair value, with gains and losses arising from changes in fair value recognised in other comprehensive income

and accumulated under equity. The cumulative gain or loss will not be reclassified to the consolidated income

statement on disposal of the investments.

Dividends on these investments are recognised under “ Revenue from financial assets at fair value through other

comprehensive income” in the consolidated income statement when the Group‟s right to receive payment of

dividend is established in accordance with IAS 18: “Revenue”, unless the dividends clearly represent a recovery

of part of the cost of the investment.

b. Financial liabilities

Liabilities are initially measured at fair value plus, in the case of a financial liability not at fair value through

profit or loss, particular transaction costs. Liabilities are subsequently measured at amortised cost or fair value.

The Group classifies all financial liabilities as subsequently measured at amortised cost using the effective

interest method, except for:

- financial liabilities at fair value through profit or loss (including derivatives);

- financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or when

the continuing involvement approach applies.

- financial guarantee contracts and commitments to provide a loan at a below-market interest rate which after

initial recognition are subsequently measured at the higher of the amount determined in accordance with IAS

37 Provisions, Contingent Liabilities and Contingent Assets and the amount initially recognised less, when

appropriate, cumulative amortisation recognised in accordance with IAS 18 Revenue.

The Group may, at initial recognition, irrevocably designate a financial liability as measured at fair value

through profit or loss when:

- doing so results in more relevant information, because it either eliminates or significantly reduces a

measurement or recognition inconsistency (sometimes referred to as 'an accounting mismatch') that would

otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different

bases; or

- a group of financial liabilities or financial assets and financial liabilities is managed and its performance is

evaluated on a fair value basis, in accordance with a documented risk management or investment strategy,

and information about the group is provided internally on that basis to the Group's key management

personnel.

F - 57

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

15

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

(ii) Classification and measurement of financial instruments (continued)

b. Financial liabilities (continued)

The amount of changes in fair value of a financial liability designated at fair value through profit or loss at initial

recognition that is attributable to changes in credit risk of that liability is recognised in other comprehensive

income, unless such recognition would create an accounting mismatch in the consolidated income statement.

Changes in fair value attributable to changes in credit risk are not reclassified to consolidated income statement.

Debt issued and other borrowed funds and subordinated notes

Financial instruments issued by the Group, which are not designated at fair value through profit or loss, are

classified as liabilities where the substance of the contractual arrangement results in the Group having an

obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by

the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares.

After initial measurement, debt issued and other borrowings and subordinated notes are subsequently measured

at amortised cost using the effective interest rate method. Amortised cost is calculated by taking into account

any discount or premium on the issue and costs that are an integral part of the effective interest rate method.

A compound financial instrument which contains both a liability and an equity component is separated at the

issue date. A portion of the net proceeds of the instrument is allocated to the debt component on the date of issue

based on its fair value (which is generally determined based on the quoted market prices for similar debt

instruments). The equity component is assigned the residual amount after deducting from the fair value of the

instrument as a whole the amount separately determined for the debt component. The value of any derivative

features (such as a call option) embedded in the compound financial instrument other than the equity component

is included in the debt component.

Due to central banks, banks and financial institutions and customers’ and related parties’ deposits

After initial measurement, due to banks and financial institutions, customers‟ and related parties‟ deposits are

measured at amortised cost less amounts repaid using the effective interest rate method. Amortised cost is

calculated by taking into account any discount or premium on the issue and costs that are an integral part of the

effective interest rate method.

c. Derivatives recorded at fair value through profit or loss The Group uses derivatives such as interest rate swaps and futures, credit default swaps, cross currency swaps,

forward foreign exchange contracts and options on interest rates, foreign currencies and equities.

Derivatives are recorded at fair value and carried as assets when their fair value is positive and as liabilities when

their fair value is negative. Changes in the fair value of derivatives are recognised in “Net gain on financial

assets at fair value through profit or loss” in the consolidated income statement.

An embedded derivative is separated from the host and accounted for as a derivative if, and only if:

(a) the hybrid contract contains a host that is not an asset within the scope of IFRS 9

(b) the economic characteristics and risks of the embedded derivative are not closely related to the

economic characteristics and risks of the host

(c) a separate instrument with the same terms as the embedded derivative would meet the definition of a

derivative; and

(d) the hybrid contract is not measured at fair value with changes in fair value recognised in profit or loss.

F - 58

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

16

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

(iii) Day 1 profit or loss

When the transaction price differs from the fair value of other observable current market transactions in the

same instrument or based on a valuation technique whose variables include only data from observable markets,

the Group immediately recognizes the difference between the transaction price and fair value (a “Day 1” profit

or loss) in the consolidated income statement. In cases where fair value is determined using data which is not

observable, the difference between the transaction price and model value is only recognised in the consolidated

income statement when the inputs become observable, or when the instrument is derecognised.

(iv) Reclassification of financial assets

The Group reclassifies financial assets if the objective of the business model for managing those financial assets

changes. Such changes are expected to be very infrequent. Such changes are determined by the Group‟s senior

management as a result of external or internal changes when significant to the Group‟s operations and

demonstrable to external parties.

If financial assets are reclassified, the reclassification is applied prospectively from the reclassification date,

which is the first day of the first reporting period following the change in business model that results in the

reclassification of financial assets. Any previously recognised gains, losses or interest are not restated.

If a financial asset is reclassified so that it is measured at fair value, its fair value is determined at the

reclassification date. Any gain or loss arising from a difference between the previous carrying amount and fair

value is recognised in profit or loss. If a financial asset is reclassified so that it is measured at amortised cost, its

fair value at the reclassification date becomes its new carrying amount.

Derecognition of financial assets and financial liabilities

(i) Financial assets

A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is

derecognised when:

The rights to receive cash flows from the asset have expired.

The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation

to pay the received cash flows in full without material delay to a third party under a “pass-through”

arrangement; and either:

- The Group has transferred substantially all the risks and rewards of the asset, or

- The Group has neither transferred nor retained substantially all the risks and rewards of the asset,

but has transferred control of the asset.

When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through

arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor

transferred control of the asset, the asset is recognised to the extent of the Group‟s continuing involvement in the

asset. In that case, the Group also recognizes an associated liability. The transferred asset and the associated

liability are measured on a basis that reflects the rights and obligations that the Group has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of

the original carrying amount of the asset and the maximum amount of consideration that the Group could be

required to repay.

(ii) Financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

Where an existing financial liability is replaced by another from the same lender on substantially different terms,

or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a

derecognition of the original liability and the recognition of a new liability. The difference between the carrying

value of the original financial liability and the consideration paid is recognised in the consolidated income

statement.

F - 59

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

17

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

Derecognition of financial assets and financial liabilities (continued)

Repurchase and reverse repurchase agreements

Securities sold under agreements to repurchase at a specified future date are not derecognised from the

consolidated statement of financial position as the Group retains substantially all the risks and rewards of

ownership. The corresponding cash received is recognised in the consolidated statement of financial position as

an asset with a corresponding obligation to return it, including accrued interest as a liability within “Cash

collateral on securities lent and repurchase agreements”, reflecting the transaction‟s economic substances as a

loan to the Group. The difference between the sale and repurchase prices is treated as interest expense and is

accrued over the life of the agreement using the EIR. When the counterparty has the right to sell or repledge the

securities, the Group reclassifies those securities in its statement of financial position to “Financial assets given

as collateral”.

Conversely, securities purchased under agreements to resell at a specified future date are not recognised in the

consolidated statement of financial position. The consideration paid, including accrued interest is recorded in the

consolidated statement of financial position within “Cash collateral on securities borrowed and reverse purchase

agreements”, reflecting the transaction‟s economic substance as a loan by the Group. The difference between the

purchase and resale prices is recorded in “Net interest income” and is accrued over the life of the agreement

using the EIR.

If securities purchased under agreement to resell are subsequently sold to third parties, the obligation to return

the securities is recorded as a short sale within “Financial liabilities at fair value through profit or loss” and

measured at fair value with any gains or losses included in “Net gain on financial instruments at fair value

through profit or loss” in the consolidated income statement.

Fair value measurement

The Group measures financial instruments, such as, derivatives, and non-financial assets such as investment

properties, at fair value at each balance sheet date. Also, fair values of financial instruments measured at

amortised cost are disclosed in the notes.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly

transaction between market participants at the measurement date. The fair value measurement is based on the

presumption that the transaction to sell the asset or transfer the liability takes place either:

In the principal market for the asset or liability, or

In the absence of a principal market, in the most advantageous market for the asset or liability

The principal or the most advantageous market must be accessible by the Group. The fair value of an asset or a

liability is measured using the assumptions that market participants would use when pricing the asset or liability,

assuming that market participants act in their economic best interest.

A fair value measurement of a non-financial asset takes into account a market participant's ability to generate

economic benefits by using the asset in its highest and best use or by selling it to another market participant that

would use the asset in its highest and best use.

The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are

available to measure fair value, maximising the use of relevant observable inputs and minimising the use of

unobservable inputs.

F - 60

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

18

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

Fair value measurement (continued)

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized

within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair

value measurement as a whole:

Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities

Level 2 - Valuation techniques for which the lowest level input that is significant to the fair value

measurement is directly or indirectly observable

Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value

measurement is unobservable

For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group

determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorization

(based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each

reporting period.

The Group‟s management determines the policies and procedures for both recurring fair value measurement,

such as investment properties and unquoted financial assets, and for non-recurring measurement, such as assets

held for distribution in discontinued operation.

At each reporting date, the management analyses the movements in the values of assets and liabilities which are

required to be re-measured or re-assessed as per the Group‟s accounting policies. For this analysis, the

management verifies the major inputs applied in the latest valuation by agreeing the information in the valuation

computation to contracts and other relevant documents.

For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis

of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as

explained above.

Impairment of financial assets

The Group assesses at each statement of financial position date whether there is any objective evidence that a

financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is

deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events

that has occurred after the initial recognition of the asset (an incurred “loss event”) and that loss event (or

events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets

that can be reliably estimated.

Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing

significant financial difficulty, the probability that they will enter bankruptcy or other financial reorganization

default or delinquency in interest or principal payments, and where observable data indicates that there is a

measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that

correlate with defaults.

(i) Financial assets at amortised cost

For financial assets carried at amortised cost (such as due from banks and financial institutions, debt instruments

at amortised cost, loans and advances to customers and related parties, the Group first assesses individually

whether objective evidence of impairment exists for financial assets that are individually significant, or

collectively for financial assets that are not individually significant. If the Group determines that no objective

evidence of impairment exists for an individually assessed financial asset, it includes the asset in a group of

financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that

are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are

not included in a collective assessment of impairment.

F - 61

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

19

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

Impairment of financial assets (continued)

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as

the difference between the asset‟s carrying amount and the present value of estimated future cash flows

(excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is

reduced through the use of an allowance account and the amount of the loss is recognised in the consolidated

income statement.

Loans together with the associated allowance are written off when there is no realistic prospect of future

recovery and all collateral has been realised or has been transferred to the Group. If, in a subsequent year, the

amount of the estimated impairment loss increases or decreases because of an event occurring after the

impairment was recognised; the previously recognised impairment loss is increased or reduced by adjusting the

allowance account. If a future write-off is later recovered, the recovery is credited to the “Net credit losses” in

the consolidated income statement.

The present value of the estimated future cash flows is discounted at the financial asset‟s original effective

interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the

current effective interest rate. The calculation of the present value of the estimated future cash flows of a

collateralized financial asset reflects the cash flows that may result from foreclosure less costs of obtaining and

selling the collateral, whether or not the foreclosure is probable.

For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the

Group‟s internal credit grading system, that considers credit risk characteristics such as asset type, industry,

geographical location, collateral type, past-due status and other relevant factors.

Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on

the basis of historical loss experience for assets with credit risk characteristics similar to those in the Group.

Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current

conditions on which the historical loss experience is based and to remove the effects of conditions in the

historical period that do not exist currently.

Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related

observable data from year to year (such as changes in unemployment rates, property prices, commodity prices,

payment status, or other factors that are indicative of incurred losses in the Group and their magnitude). The

methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any

differences between loss estimates and actual loss experience.

(ii) Renegotiated loans

Where possible, the Group seeks to restructure loans rather than to take possession of collateral. This may

involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have

been renegotiated any impairment is measured using the original effective interest rate as calculated before the

modification of terms and the loan is no longer considered past due. The loans continue to be subject to an

individual or collective impairment assessment, calculated using the loan‟s original effective interest rate.

(iii) Collateral repossessed

The Group occasionally acquires properties in settlement of loans and advances. Upon initial recognition, those

assets are measured at fair value as approved by the regulatory authorities. Subsequently these properties are

measured at the lower of carrying value or net realisable value.

Upon sale of repossessed assets, any gain or loss realized is recognized in the consolidated income statement

under “Other operating income” or “Other operating expenses”. Gains resulting from the sale of repossessed

assets are transferred to “Reserves for capital increase” in the following financial year.

F - 62

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

20

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

Hedge accounting

The Group makes use of derivative instruments to manage exposures to interest rate, foreign currency and credit

risks, including exposures arising from forecast transactions and firm commitments. In order to manage

particular risks, the Group applies hedge accounting for transactions which meet the specified criteria.

At inception of the hedge relationship, the Group formally documents the relationship between the hedged item

and the hedging instrument, including the nature of the risk, the objective and strategy for undertaking the hedge

and the method that will be used to assess the effectiveness of the hedging relationship.

At each hedge effectiveness assessment date, a hedge relationship must be expected to be highly effective on a

prospective basis and demonstrate that it was effective (retrospective effectiveness) for the designated period in

order to qualify for hedge accounting. A formal assessment is undertaken to ensure the hedging instrument is

expected to be highly effective in offsetting the designated risk in the hedged item, both at inception and at each

quarter end on an ongoing basis. A hedge is expected to be highly effective if the changes in fair value or cash

flows attributable to the hedged risk during the period for which the hedge is designated are expected to offset in

a range of 80% to 125% and are expected to achieve such offset in future periods. Hedge ineffectiveness is

recognized in the consolidated income statement in “Net gain (loss) from financial instruments at fair value

through profit or loss”. For situations where that hedged item is a forecast transaction, the Group also assesses

whether the transaction is highly probable and presents an exposure to variations in cash flows that could

ultimately affect the consolidated income statement.

(i) Fair value hedges

For designated and qualifying fair value hedges, the change in the fair value of a hedging derivative is

recognised in the consolidated income statement. Meanwhile, the change in the fair value of the hedged item

attributable to the risk hedged is recorded as part of the carrying value of the hedged item and is also recognised

in “Net gain on financial assets at fair value through profit or loss” in the consolidated income statement.

If the hedging instrument expires or is sold, terminated or exercised, or where the hedge no longer meets the

criteria for hedge accounting, the hedge relationship is terminated. For hedged items recorded at amortised cost,

the difference between the carrying value of the hedged item on termination and the face value is amortised over

the remaining term of the original hedge using the effective interest rate. If the hedged item is derecognised, the

unamortised fair value adjustment is recognised immediately in the consolidated income statement.

(ii) Cash flow hedges

For designated and qualifying cash flow hedges, the effective portion of the gain or loss on the hedging

instrument is initially recognised directly in equity in the “Cash flow hedge” reserve. The ineffective portion of

the gain or loss on the hedging instrument is recognised immediately in the consolidated income statement.

When the forecast transaction subsequently results in the recognition of a non-financial asset or a non-financial

liability, the gains and losses previously recognised in the other comprehensive income are removed from the

reserve and included in the initial cost of the asset or liability.

When the hedged cash flow affects the consolidated income statement, the gain or loss on the hedging

instrument is recorded in the corresponding income or expense line of the consolidated income statement. When

a hedging instrument expires, or is sold, terminated, exercised, or when a hedge no longer meets the criteria for

hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised

when the hedged forecast transaction is ultimately recognised in the consolidated income statement. When a

forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is

immediately transferred to the consolidated income statement.

(iii) Hedge of a net investment

Hedges of net investments in a foreign operation, including a hedge of a monetary item that is accounted for as

part of the net investment, are accounted for in a way similar to cash flow hedges. Gains or losses on the

hedging instrument relating to the effective portion of the hedge are recognised directly in equity while any

gains or losses relating to the ineffective portion are recognised in the consolidated income statement. On

disposal of the foreign operation, the cumulative value of any such gains or losses recognised directly in equity

is transferred to the consolidated income statement.

F - 63

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

21

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

Leasing

The determination of whether an arrangement is a lease, or it contains a lease, is based on the substance of the

arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of

a specific asset or assets and the arrangement conveys a right to use the asset.

Group as a lessee

Leases which do not transfer to the Group substantially all the risks and benefits incidental to ownership of the

leased items are operating leases. Operating lease payments are recognised as an expense in the consolidated

income statement on a straight line basis over the lease term. Contingent rental payable are recognised as an

expense in the period in which they are incurred.

Group as a lessor

Leases where the Group does not transfer substantially all the risks and benefits of ownership of the asset are

classified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the

carrying amount of the leased asset and recognised over the lease term on the same basis as rental income.

Contingent rents are recognised as revenue in the period in which they are earned.

Recognition of income and expenses

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the

revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is

recognised.

(i) Interest and similar income and expense

For all financial instruments measured at amortised cost, , interest income or expense is recorded using the EIR,

which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of

the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset

or financial liability. The calculation takes into account all contractual terms of the financial instrument and

includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of

the effective interest rate, but not future credit losses.

The carrying amount of the financial asset or financial liability is adjusted if the Group revises its estimates of

payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate

and the change in the carrying amount is recorded as “Interest and similar income” for financial assets and

“Interest and similar expense” for financial liabilities.

Once the recorded value of a financial asset on a group of similar financial assets has been reduced due to an

impairment loss, interest income continue to be recognised using the rate of interest used to discount the future

cash flows for the purpose of measuring the impairment loss.

(ii) Fee and commission income

The Group earns fee and commission income from a diverse range of services it provides to its customers. Fee

income can be divided into the following two categories:

Fee income earned from services that are provided over a certain period of time

Fees earned for the provision of services over a period of time are accrued over that period. These fees include

commission income and asset management, custody and other management and advisory fees.

Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred

(together with any incremental costs) and recognised as an adjustment to the EIR on the loan. When it is

unlikely that a loan be drawn down, the loan commitment fees are recognised over the commitment period on a

straight line basis.

Fee income from providing transaction services

Fee arising from negotiating or participating in the negotiation of a transaction for a third party, such as the

arrangement of the acquisition of shares or other securities or the purchase or sale of businesses, are recognised

on completion of the underlying transaction. Fee or components of fee that are linked to a certain performance

are recognised after fulfilling the corresponding criteria.

F - 64

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

22

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

Recognition of income and expenses (continued)

(iii) Dividend income

Dividend income is recognised when the right to receive the payment is established.

(iv) Net gain on financial assets at fair value through profit or loss

Results arising from financial assets at fair value through profit or loss, include all gains and losses from

changes in fair value and related income or expense and dividends for financial assets at fair value through

profit or loss. This includes any ineffectiveness recorded in hedging transactions. This caption also includes the

results arising from trading activities including all gains and losses from changes in fair value and related

income or expense and dividends for financial assets held for trading.

Cash and cash equivalents

Cash and cash equivalents as referred to in the cash flow statement comprise balances with original maturities of a

period of three months or less including: cash and balances with the central banks, deposits with banks and

financial institutions, and deposits due to banks and financial institutions.

Property and equipment

Property and equipment is stated at cost excluding the costs of day-to-day servicing, less accumulated depreciation

and accumulated impairment in value. Such cost includes the cost of replacing part of the property and

equipment. When significant parts of property and equipment are required to be replaced at intervals, the Group

recognises such parts as individual assets with specific useful lives and depreciates them accordingly. Likewise,

when a major inspection is performed, its cost is recognised in the carrying amount of the equipment as a

replacement if the recognition criteria are satisfied. All other repair and maintenance costs are recognised in the

consolidated income statement as incurred. The present value of the expected cost for the decommissioning of

an asset after its use is included in the cost of the respective asset if the recognition criteria for a provision are

met.

Changes in the expected useful life are accounted for by changing the depreciation period or method, as

appropriate and treated as changes in accounting estimates.

Depreciation is calculated using the straight line method to write down the cost of property and equipment to their

residual values over their estimated useful lives. Land is not depreciated. The estimated useful lives are as follows:

Buildings 40 to 50 years

Installations and fixtures 5 to 11 years

Motor vehicles 5 to 7 years

Office equipment and computer hardware 5 to 11 years

Office machinery and furniture 5 to 11 years

Property and equipment is derecognised on disposal or when no future economic benefits are expected from its

use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal

proceeds and the carrying amount of the asset) is recognised in “Net gain on disposal of fixed assets” in the year

the asset is derecognised.

The asset‟s residual lives and methods of depreciation are reviewed at each financial year end and adjusted

prospectively if applicable.

Intangible fixed assets

An intangible asset is recognised only when its cost can be measured reliably and it is probable that the expected

future economic benefits that are attributable to it will flow to the Group.

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets

acquired in a business combination is their fair value as at the date of acquisition. Following initial recognition,

intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses.

F - 65

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

23

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

Intangible fixed assets (continued)

The useful lives of intangible assets are assessed to be either finite of indefinite. Intangible assets with finite

lives are amortised over the useful economic life. The amortisation period and the amortisation method for an

intangible asset with a finite useful life are reviewed at least at each financial year-end. Changes in the expected

useful life or the expected pattern of consumption of future economic benefits embodied in the asset are

accounted for by changing the amortisation period or method, as appropriate, and treated as changes in

accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the

consolidated income statement.

Intangible assets with indefinite useful lives are not amortised, but are tested for impairment annually, either

individually or at the cash-generating unit level. The assessment of indefinite life is reviewed annually to

determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite

to finite is made on a prospective basis.

Gains or losses arising from de-recognition of an intangible asset are measured as the difference between the net

disposal proceeds and the carrying amount of the asset and are recognised in the statement of profit or loss when

the asset is derecognised.

The Group does not have intangible assets with indefinite economic life.

Amortisation is calculated using the straight-line method to write down the cost of intangible assets to their

residual values over their estimated useful lives as follows:

Computer software 5 years

Key money 70 years

Others 7 to 10 years

Non-current assets held for sale and discontinued operations

Non-current assets held for sale are measured at the lower of their carrying amount and fair value less costs to

sell. Non-current assets and disposal groups are classified as held for sale if their carrying amounts will be

recovered principally through a sale transaction rather than through continuing use. This condition is regarded as

met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its

present condition, management has committed to the sale, and the sale is expected to have been completed

within one year from the date of classification.

In the consolidated statement of comprehensive income of the reporting period, and of the comparable period of

the previous year, income and expenses from discontinued operations are reported separately from income and

expenses from continuing operations, down to the level of profit after taxes, even when the bank retains a non

controlling interest in the subsidiary after the sale. The resulting profit or loss (after taxes) is reported separately

in the statement of comprehensive income.

Business combinations and goodwill

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as

the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any

non-controlling interest in the acquiree. For each business combination, the Group measures the non controlling

interest in the acquiree at the proportionate share of the acquiree‟s identifiable net assets. Acquisition costs

incurred are expensed and included in administrative expenses.

When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate

classification and designation in accordance with the contractual terms, economic circumstances and pertinent

conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by

the acquiree.

F - 66

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

24

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

Business combinations and goodwill (continued)

If the business combination is achieved in stages, the acquisition date fair value of the acquirer‟s previously held

equity interest in the acquiree is remeasured to fair value at the acquisition date through the consolidated income

statement. It is then considered in the determination of goodwill.

Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition

date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or

liability will be recognised either in profit or loss or as a change to other comprehensive income. If the

contingent consideration is classified as equity, it should not be remeasured until it is finally settled within

equity.

Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the

amount recognised for non-controlling interests, and any previous interest held, over the net identifiable assets

acquired and liabilities assumed. If the fair value of the net assets acquired is in excess of the aggregate

consideration transferred, the Group re-assesses whether it has correctly identified all of the assets acquired and

all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognised at the

acquisition date. If the re-assessment still results in an excess of the fair value of net assets acquired over the

aggregate consideration transferred, then the gain is recognised in profit or loss.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose

of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to

each of the Group‟s cash-generating units that are expected to benefit from the combination, irrespective of

whether other assets or liabilities of the acquiree are assigned to those units.

Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the

goodwill associated with the operation disposed of is included in the carrying amount of the operation when

determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured

based on the relative values of the operation disposed of and the portion of the cash-generating unit retained.

Impairment of non-financial assets

The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any

indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset‟s

recoverable amount. An asset‟s recoverable amount is the higher of an asset‟s or cash-generating unit‟s fair

value less costs to sell and its value in use. Where the carrying amount of an asset or cash-generating unit

exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.

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. In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are

corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair

value indicators.

For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication

that previously recognised impairment losses may no longer exist or may have decreased. If such indication

exists, the recoverable amount is estimated. A previously recognised impairment loss is reversed only if there

has been a change in the estimates used to determine the asset‟s recoverable amount since the last impairment

loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its

recoverable amount, nor exceeds the carrying amount that would have been determined, net of depreciation, had

no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the consolidated

income statement.

Impairment losses relating to goodwill cannot be reversed in future periods.

F - 67

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

25

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

Investment in associates

An associate is an entity over which the Group has significant influence. Significant influence is the power to

participate in the financial and operating policy decisions of the investee, but is not control or joint control over

those policies.

The considerations made in determining significant influence are similar to those necessary to determine control

over subsidiaries.

The Group‟s investments in its associate is accounted for using the equity method. Under the equity method, the

investment in an associate is initially recognised at cost. The carrying amount of the investment is adjusted to

recognise changes in the Group‟s share of net assets of the associate or joint venture since the acquisition date.

Goodwill relating to the associate or joint venture is included in the carrying amount of the investment and is

neither amortised nor individually tested for impairment.

The statement of profit or loss reflects the Group‟s share of the results of operations of the associates. Any

change in OCI of those investees is presented as part of the Group‟s OCI. In addition, when there has been a

change recognised directly in the equity of the associate, the Group recognises its share of any changes, when

applicable, in the statement of changes in equity. Unrealised gains and losses resulting from transactions

between the Group and the associate are eliminated to the extent of the interest in the associate.

The aggregate of the Group‟s share of profit or loss of an associate is shown on the face of the statement of

profit or loss outside operating profit and represents profit or loss after tax and non-controlling interests in the

subsidiaries of the associate.

The financial statements of associates are prepared for the same reporting period as the Group. When necessary,

adjustments are made to bring the accounting policies in line with those of the Group.

After application of the equity method, the Group determines whether it is necessary to recognise an impairment

loss on its investment in its associate. At each reporting date, the Group determines whether there is objective

evidence that the investment in the associate is impaired. If there is such evidence, the Group calculates the

amount of impairment as the difference between the recoverable amount of the associate and its carrying value,

then recognises the loss in the consolidated income statement.

Upon loss of significant influence over the associate, the Group measures and recognises any retained

investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant

influence and the fair value of the retained investment and proceeds from disposal is recognised in profit or loss.

Provisions for risks and charges

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past

event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the

obligation and a reliable estimate can be made of the amount of the obligation. The expense relating to any

provision is presented in the consolidated income statement net of any reimbursement.

Pensions and other post-employment benefits

The Group provides retirement benefits obligation to its employees under defined benefit plans which requires

contributions to be made to separately administered funds.. The cost of providing these benefits is determined

using the projected unit credit method which involves making actuarial assumptions about discount rates,

expected rates of return on assets, future salary increases, mortality rates and future pension increases. Those

assumptions are unbiased and mutually compatible.

Re-measurements, comprising of actuarial gains and losses, the effect of the asset ceiling, excluding net interest

and the return on plan assets (excluding net interest), are recognized immediately in the statement of financial

position with a corresponding debit or credit to retained earnings through OCI in the period in which they occur.

Re-measurements are not reclassified to profit or loss in subsequent periods.

F - 68

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

26

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

Pensions and other post-employment benefits (continued)

Past service costs are recognised in profit or loss on the earlier of:

The date of the plan amendment or curtailment, and

The date that the Group recognises restructuring-related costs

Net interest is calculated by applying the discount rate to the net defined benefit liability or asset. The Group

recognises the following changes in the net defined benefit obligation under “Personnel expenses” in

consolidated statement of income:

Service costs comprising current service costs, past-service costs, gains and losses on curtailments and non-

routine settlements

Net interest expense or income

Taxes

Taxes are provided for in accordance with regulations and laws that are effective in the countries where the

Group operates.

(i) Current tax

Current tax assets and liabilities for the current and prior years are measured at the amount expected to be

recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are

those that are enacted or substantively enacted by the statement of financial position date.

(ii) Deferred tax

Deferred tax is provided on temporary differences at the statement of financial position date between the tax

bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognised for all taxable temporary differences, except:

Where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability

in a transaction that is not a business combination and, at the time of the transaction, affects neither the

accounting profit nor taxable profit or loss.

In respect of taxable temporary differences associated with investments in subsidiaries and associates,

where the timing of the reversal of the temporary differences can be controlled and it is probable that

the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits

and unused tax losses, to the extent that it is probable that taxable profit will be available against which the

deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be

utilised except:

Where the deferred tax asset relating to the deductible temporary difference arises from the initial

recognition of an asset or liability in a transaction that is not a business combination and, at the time of

the transaction, affects neither the accounting profit nor taxable profit or loss.

In respect of deductible temporary differences associated with investments in subsidiaries and

associates, deferred tax assets are recognised only to the extent that it is probable that the temporary

differences will reverse in the foreseeable future and taxable profit will be available against which the

temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at each statement of financial position date and reduced

to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the

deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each statement of financial

position date and are recognised to the extent that it has become probable that future taxable profit will allow the

deferred tax asset to be recovered.

F - 69

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

27

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

Taxes (continued)

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the

asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or

substantively enacted at the statement of financial position date.

Current tax and deferred tax relating to items recognised directly in equity are also recognised in equity and not

in the consolidated income statement.

Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax

assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation

authority.

Assets under management and assets held in custody and under administration

The Group provides custody and administration services that result in the holding or investing of assets on

behalf of its clients. Assets held in trust, under management or under custody or under administration, are not

treated as assets of the Group and accordingly are recorded as off balance sheet items.

Dividends on ordinary shares

Dividends on ordinary shares are recognized as a liability and deducted from equity when they are approved by

the Bank‟s shareholders. Interim dividends are deducted from equity when they are declared and no longer at

the discretion of the Bank.

Dividends for the year that are approved after the reporting date are disclosed as an event after the reporting

date.

Treasury shares Own equity instruments of the Bank which are acquired by it or by any of its subsidiaries (treasury shares) are

deducted from equity and accounted for at weighted average cost. Consideration paid or received on the

purchase sale, issue or cancellation of the Bank‟s own equity instruments is recognised directly in equity. No

gain or loss is recognised in the consolidated income statement on the purchase, sale, issue or cancellation of the

Bank‟s own equity instruments.

When the Group holds own equity instruments on behalf of its clients, those holdings are not included in the

Group‟s consolidated statement of financial position.

Contracts on own shares that require physical settlement of a fixed number of own shares for a fixed

consideration are classified as equity and added to or deducted from equity. Contracts on own shares that require

net cash settlement or provide a choice of settlement are classified as trading instruments and changes in the fair

value are reported in the consolidated income statement.

Financial guarantees

In the ordinary course of business, the Group gives financial guarantees, consisting of letters of credit,

guarantees and acceptances. Financial guarantees are initially recognised in the financial statements (within

“Other liabilities”) at fair value, being the premium received. Subsequent to initial recognition, the Group‟s

liability under each guarantee is measured at the higher of the amount initially recognised less, when

appropriate, cumulative amortization recognised in the consolidated income statement, and the best estimate of

expenditure required to settle any financial obligation arising as a result of the guarantee. Any increase in the

liability relating to financial guarantees is recorded in the consolidated income statement. The premium received

is recognised in the consolidated income statement on a straight line basis over the life of the guarantee.

Customers’ acceptances

Customers‟ acceptances represent term documentary credits which the Group has committed to settle on behalf

of its clients against commitments by those clients (acceptances). The commitments resulting from these

acceptances are stated as a liability in the statement of financial position for the same amount.

F - 70

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

28

2 ACCOUNTING POLICIES (continued)

2.6 Significant accounting judgements and estimates

The preparation of the Group‟s consolidated financial statements requires management to make judgments,

estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the

accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these assumptions and

estimates could result in outcomes that require a material adjustment to the carrying amount of assets or

liabilities affected in future periods.

Judgments

In the process of applying the Group‟s accounting policies, management has made the following judgments,

apart from those involving estimations, which have the most significant effect in the amounts recognised in the

financial statements:

Consolidation of entities in which the Group holds less than majority of voting rights

The Group considers that it controls Bank Audi Syria SA even though it owns less than 50% of the voting

rights. This is because the Group is the single largest shareholder of Bank Audi Syria SA with a 47% equity

interest. The remaining 53% of the equity shares are held by many other shareholders, none of which

individually hold more than 5% of the equity shares. There is no history of the other shareholders collaborating

to exercise their votes collectively or to outvote the Group. Besides, in 2005 Bank Audi SAL signed an

agreement with Bank Audi Syria SA according to which Bank Audi SAL provides technical assistance to Bank

Audi Syria SA in strategic and operational matters.

Going concern

The Group‟s management has made an assessment of the Group‟s ability to continue as a going concern and is

satisfied that the Group has the resources to continue in business for the foreseeable future. Furthermore,

management is not aware of any material uncertainties that may cast significant doubt upon the Group‟s ability

to continue as a going concern. Therefore, the financial statements continue to be prepared on the going concern

basis.

Estimates and assumptions

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date,

that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities

within the next financial year, are described below. The Group based its assumptions and estimates on

parameters available when the consolidated financial statements were prepared. Existing circumstances and

assumptions about future developments, however, may change due to market changes or circumstances arising

beyond the control of the Group. Such changes are reflected in the assumptions when they occur.

Fair value of financial instruments

Where the fair values of financial assets and financial liabilities recorded on the statement of financial position

cannot be derived from active markets, they are determined using a variety of valuation techniques that include

the use of mathematical models. The inputs to these models are derived from observable market data where

possible, but where observable market data are not available, judgment is required to establish fair values. The

judgments include considerations of liquidity and model inputs such as volatility for longer dated derivatives

and discount rates, prepayment rates and default rate assumptions for asset backed securities. Changes in

assumptions about these factors could affect the reported fair value of financial instruments.

Impairment losses on loans and advances

The Group reviews its individually significant loans and advances at each statement of financial position date to

assess whether an impairment loss should be recorded in the consolidated income statement. In particular,

judgment by management is required in the estimation of the amount and timing of future cash flows when

determining the impairment loss. In estimating these cash flows, the Group makes judgments about the

borrower‟s financial situation and the net realizable value of collateral. These estimates are based on

assumptions about a number of factors and actual results may differ, resulting in future changes to the

allowance.

Loans and advances that have been assessed individually and found not to be impaired and all individually

insignificant loans and advances are then assessed collectively, in groups of assets with similar risk

characteristics, to determine whether provision should be made due to incurred loss events for which there is

objective evidence but whose effects are not yet evident. The collective assessment takes account of data from

the loan portfolio (such as credit quality, levels of arrears, credit utilization, loan to collateral ratios etc.),

concentrations of risks and economic data (including levels of unemployment, real estate price indices, country

risk and the performance of different individual groups).

F - 71

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

29

2 ACCOUNTING POLICIES (continued)

2.6 Significant accounting judgements and estimates (continued)

Deferred tax assets

Deferred tax assets are recognised in respect of tax losses to the extent that it is probable that taxable profit will

be available against which the losses can be utilized. Judgment is required to determine the amount of deferred

tax assets that can be recognised, based upon the likely timing and level of future taxable profits, together with

future tax planning strategies.

Business model

In making an assessment whether a business model‟s objective is to hold assets in order to collect contractual

cash flows, the Group considers at which level of its business activities such assessment should be made.

Generally, a business model is a matter of fact which can be evidenced by the way business is managed and the

information provided to management. However, in some circumstances it may not be clear whether a particular

activity involves one business model with some infrequent asset sales or whether the anticipated sales indicate

that there are two different business models.

In determining whether its business model for managing financial assets is to hold assets in order to collect

contractual cash flows the Group considers:

- management‟s stated policies and objectives for the portfolio and the operation of those policies in

practice;

- how management evaluates the performance of the portfolio;

- whether management‟s strategy focuses on earning contractual interest revenues;

- the degree of frequency of any expected asset sales;

- the reason for any asset sales; and

- whether assets that are sold are held for an extended period of time relative to their contractual maturity.

Contractual cash flows of financial assets

The Group exercises judgment in determining whether the contractual terms of financial assets it originates or

acquires give rise on specific dates to cash flows that are solely payments of principal and interest on the

principal outstanding and so may qualify for amortised cost measurement. In making the assessment the Group

considers all contractual terms, including any prepayment terms or provisions to extend the maturity of the

assets, terms that change the amount and timing of cash flows and whether the contractual terms contain

leverage.

Consolidation of special purpose entities (SPEs)

The Bank sponsors the formation of SPEs, which may or may not be directly or indirectly owned subsidiaries.

The Bank consolidates those SPEs it controls. In assessing and determining if the Bank controls SPEs, judgment

is exercised to determine whether the activities of the SPE are being conducted on behalf of the Bank to obtain

benefits from the SPE‟s operation; whether the Bank has the decision-making powers to control or to obtain

control of the SPE or its assets; whether the Bank has rights to obtain the majority of the benefits of the SPE‟s

activities; and whether the Bank retains the majority of the risks related to the SPE or its assets in order to obtain

benefits from its activities.

Pensions obligation

The cost of the defined benefit pension plan is determined using an actuarial valuation. The actuarial valuation

involves making assumptions about discount rates, expected rates of return on assets, future salary increases,

mortality rates and future pension increases. Due to the long-term nature of these plans, such estimates are

subject to significant uncertainty.

3 SEGMENT REPORTING

Management monitors the operating results of its business units separately for the purpose of making decisions

about resource allocation and performance assessment. Segments are evaluated based on net operating income.

Income taxes and depreciation are managed on a group basis and are not allocated to operating segments.

Interest income is reported net, since management monitors net interest income not the gross income and expense

amounts. Net interest income is allocated to the business segment based on the assumption that all positions are

funded or invested via a central funding unit. An internal Funds Transfer Pricing (FTP) mechanism was

implemented between operating segments.

F - 72

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

30

3 SEGMENT REPORTING (continued)

The assets and liabilities that are reported in the segments are net from inter-segments‟ assets and liabilities

since they constitute the basis of the management measures of the segments‟ assets and liabilities and the basis

of the allocation of resources between segments.

A) Business Segments

The Group operates in four main business segments which are corporate and commercial banking, treasury and

capital markets, retail and personal banking and group functions and head office.

Corporate and Commercial Banking Provides diverse products and services to the corporate and

commercial customers including loans, deposits, trade finance,

exchange of foreign currencies as well as all regular corporate and

commercial banking activities.

Retail and Personal Banking Provides individual customers‟ deposits and consumer loans,

overdrafts, credit cards, and funds transfer facilities, as well as all

regular retail and private banking activities.

Treasury and Capital Markets Provides treasury services including transactions in money and

capital markets for the Group‟s customers, manages investment and

trading transactions (locally and internationally), and manages

liquidity and market risks. This segment also offers investment

banking and brokerage services and manages the Group‟s own

portfolio of stocks, bonds, and other financial instruments.

Group Functions and Head Office Consists of capital and strategic investments, exceptional profits

and losses as well as operating results of subsidiaries which offer

non-banking services.

Transfer prices between operating segments are on an arm‟s length basis in a manner similar to transactions with

third parties.

The following table presents net operating income, total assets and total liabilities and shareholders‟ equity of

the Group‟s business segments.

i) Net operating income information 2013

Corporate and Retail Treasury Group

Commercial and Personal and Capital Functions and

Banking Banking Markets Head Office Total

LL million LL million LL million LL million LL million

Net interest income 362,441 43,091 539,364 17,251 962,147

___________ ____________ ____________ ____________ ____________

Non interest income

Net fee and commission income 104,861 156,446 18,969 1,742 282,018

Foreign exchange operations 6,565 19,923 42,398 (121) 68,765

Financial operations 7,392 6,848 248,622 24,237 287,099

Share of profit of associates - - - 1,169 1,169 Other operating income 397 1,229 976 10,307 12,909

____________ ____________ ____________ ____________ ____________

Total non interest income 119,215 184,446 310,965 37,334 651,960

____________ ____________ ____________ ____________ ____________

Total operating income 481,656 227,537 850,329 54,585 1,614,107

____________ ____________ ____________ ____________ ____________

Net credit losses (115,211) (20,976) 825 - (135,362) ____________ ____________ ____________ ____________ ____________

Net operating income 366,445 206,561 851,154 54,585 1,478,745

___________ ____________ ____________ ____________ ____________

F - 73

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

31

3 SEGMENT REPORTING (continued)

A) Business Segments (continued)

i) Net operating income information (continued)

2012

Corporate and Retail Treasury Group

Commercial and Personal and Capital Functions and

Banking Banking Markets Head Office Total LL million LL million LL million LL million LL million

Net interest income 292,959 23,118 516,123 31,490 863,690

___________ ____________ ____________ ____________ ____________

Non interest income

Net fee and commission income 112,113 139,524 22,331 5,397 279,365

Foreign exchange operations 4,231 20,886 114,150 132 139,399 Financial operations 20 8,618 315,441 30,035 354,114

Share of profit of associates - - - 551 551

Other operating income 43 8,570 364 13,274 22,251

____________ ____________ ____________ ____________ ____________

Total non interest income 116,407 177,598 452,286 49,389 795,680

____________ ____________ ____________ ____________ ____________

Total operating income 409,366 200,716 968,409 80,879 1,659,370

____________ ____________ ____________ ____________ ____________

Net credit losses (136,351) (46,184) (50) - (182,585)

____________ ____________ ____________ ____________ ____________

Net operating income 273,015 154,532 968,359 80,879 1,476,785

___________ ____________ ____________ ____________ ____________

ii) Financial position information 2013

Corporate and Retail Treasury Group

Commercial and Personal and Capital Functions and

Banking Banking Markets Head Office Total

LL million LL million LL million LL million LL million

Investments in associates - - - 28,615 28,615

____________ ____________ ____________ ____________ ____________

Total assets 17,946,452 6,147,007 24,890,896 5,574,005 54,558,360 ____________ ____________ ____________ ____________ ____________

Total liabilities 11,229,936 34,046,925 954,003 4,262,986 50,493,850

____________ ____________ ____________ ____________ ____________

2012

Corporate and Retail Treasury Group

Commercial and Personal and Capital Functions and

Banking Banking Markets Head Office Total

LL million LL million LL million LL million LL million

Investments in associates - - - 34,230 34,230

____________ ____________ ____________ ____________ ____________

Total assets 12,248,359 5,413,046 24,813,627 4,715,758 47,190,790

____________ ____________ ____________ ____________ ____________

Total liabilities 8,577,415 32,378,828 1,766,123 445,128 43,167,494

____________ ____________ ____________ ____________ ____________

Capital expenditures amounting to LL 186,242 million for the year 2013 (2012: LL 182,674) are allocated to the

Group Functions and Head Office business segment.

B) Geographical Segments

The Group operates in three geographical segments, Lebanon, Middle East and North Africa and Turkey

(MENAT) and Europe, as such, is subject to different risks and returns. The following tables show the

distribution of the Groups‟ external net operating income, assets and liabilities and shareholders‟ equity

allocated based on the location of the subsidiaries reporting the results or advancing the funds. Transactions

between segments are carried at market prices and within pure trading conditions.

F - 74

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

32

3 SEGMENT REPORTING (continued)

B) Geographical Segments (continued)

i) Net operating income information 2013

Lebanon MENAT Europe Total LL million LL million LL million LL million

Net interest income 569,277 342,392 50,478 962,147

____________ ____________ ____________ ____________

Non interest income

Net fee and commission income 151,877 81,375 48,766 282,018

Foreign exchange operations 19,358 33,143 16,264 68,765

Financial operations 203,174 81,080 2,845 287,099

Share of profit or loss of associates 53 1,116 - 1,169

Other operating income 8,947 2,382 1,580 12,909

____________ ____________ ____________ ____________

Total non interest income 383,409 199,096 69,455 651,960

____________ ____________ ____________ ____________

Total external operating income 952,686 541,488 119,933 1,614,107

____________ ____________ ____________ ____________

Net credit losses (36,031) (94,575) (4,756) (135,362)

____________ ____________ ____________ ____________

Net external operating income 916,655 446,913 115,177 1,478,745

____________ ____________ ____________ ____________

2012

Lebanon MENAT Europe Total

LL million LL million LL million LL million

Net interest income 526,293 289,667 47,730 863,690

____________ ____________ ____________ ____________

Non interest income

Net fee and commission income 155,343 78,214 45,808 279,365

Foreign exchange operations 18,051 103,511 17,837 139,399

Financial operations 333,298 10,380 10,436 354,114

Share of profit or loss of associates (414) 965 - 551

Other operating income 19,770 1,349 1,132 22,251

____________ ____________ ____________ ____________

Total non interest income 526,048 194,419 75,213 795,680

____________ ____________ ____________ ____________

Total external operating income 1,052,341 484,086 122,943 1,659,370

____________ ____________ ____________ ____________

Net credit losses (123,405) (49,874) (9,306) (182,585)

____________ ____________ ____________ ____________

Net external operating income 928,936 434,212 113,637 1,476,785

____________ ____________ ____________ ____________

ii) Financial position information 2013

Lebanon MENAT Europe Total

LL million LL million LL million LL million

Capital expenditures 58,826 120,487 6,929 186,242

____________ ____________ ____________ ____________

Investments in associates 14,665 13,950 - 28,615

____________ ____________ ____________ ____________

Total assets 33,654,158 17,360,985 3,543,217 54,558,360

____________ ____________ ____________ ____________

Total liabilities 30,377,187 16,794,896 3,321,767 50,493,850

____________ ____________ ____________ ____________

F - 75

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

33

3 SEGMENT REPORTING (continued)

B) Geographical Segments (continued)

ii) Financial position information (continued) 2012

Lebanon MENAT Europe Total

LL million LL million LL million LL million

Capital expenditures 83,194 98,042 1,438 182,674

____________ ____________ ____________ ____________

Investments in associates 12,195 22,035 - 34,230

____________ ____________ ____________ ____________

Total assets 33,870,190 9,890,071 3,430,529 47,190,790

____________ ____________ ____________ ____________

Total liabilities 30,350,140 9,717,270 3,100,084 43,167,494

____________ ____________ ____________ ____________

4 INTEREST AND SIMILAR INCOME

2013 2012

LL million LL million

Balances with central banks 236,030 278,433

Due from banks and financial institutions 27,907 49,828

Reverse repurchase agreements 61,725 869

Loans and advances to customers at amortised cost 1,338,634 890,902

Loans and advances to related parties at amortised cost 8,362 19,902

Financial assets classified at amortised cost 1,020,365 967,550

Other interest income 358 1,025

____________ ____________

2,693,381 2,208,509

____________ ____________

The components of interest and similar income from financial assets classified at amortised cost are detailed as

follows:

2013 2012

LL million LL million Lebanese sovereign 705,537 678,934

Other sovereign 288,666 249,951

Private sector and other securities 26,162 38,665

____________ ____________

1,020,365 967,550

____________ ____________

5 INTEREST AND SIMILAR EXPENSE

2013 2012

LL million LL million

Due to central banks 3,839 4,797

Due to banks and financial institutions 39,617 31,350

Due to banks under repurchase agreements 26,374 36,419

Customers‟ deposits at amortised cost 1,629,815 1,243,161

Deposits from related parties at amortised cost 21,060 26,117

Subordinated loans and similar debts 9,476 -

Other interest expense 1,053 2,975

____________ ____________

1,731,234 1,344,819

____________ ____________

F - 76

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

34

6 FEE AND COMMISSION INCOME

2013 2012

LL million LL million

Commercial banking income 68,669 66,704

Credit related fees and commissions 59,399 47,452

Brokerage and custody income 55,971 53,212

Trust and fiduciary activities 5,758 5,130

Trade finance income 48,127 49,586

Electronic banking 84,699 75,045

Corporate finance fees 14,112 25,854

Insurance brokerage income 6,429 2,797

Other fees and commissions 7,946 4,782

____________ ____________

351,110 330,562

____________ ____________

7 FEE AND COMMISSION EXPENSE

2013 2012

LL million LL million

Commercial banking expenses 7,584 5,221

Insurance brokerage fees 885 386

Brokerage and custody fees 12,823 7,755

Electronic banking 41,203 35,387

Other fees and commissions 6,597 2,448

____________ ____________

69,092 51,197

____________ ____________

F - 77

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

35

8 NET GAIN ON FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

2013 2012

Trading

income (loss)

Interest

income

Total

Trading

income (loss)

Interest

income

Total

LL million LL million LL million LL million LL million LL million

a) Net gain on financial instruments

Lebanese sovereign and Central

Bank of Lebanon

Certificates of deposits (493) 2,608 2,115 (89) 216 127

Treasury bills 1,807 2,986 4,793 10,169 16,629 26,798

Eurobonds (1,653) 11,683 10,030 5,247 12,202 17,449

___________ ___________ ___________ ___________ ___________ ___________

(339) 17,277 16,938 15,327 29,047 44,374

___________ ___________ ___________ ___________ ___________ ___________

Other sovereign

Treasury bills 1,345 5,171 6,516 479 103 582

Other governmental securities (3) - (3) (25) 93 68

Eurobonds 25 5 30 93 26 119

___________ ___________ ___________ ___________ ___________ ___________

1,367 5,176 6,543 547 222 769

___________ ___________ ___________ ___________ ___________ ___________

Private sector and other securities

Banks and financial institutions

debt instruments

(492)

168

(324)

693

7,079

7,772

Corporate debt instruments 543 4,098 4,641 1,114 2,073 3,187

Structured products - - - 8 - 8

Mutual funds 4,063 - 4,063 2,657 - 2,657

Equity instruments 348 - 348 437 - 437

___________ ___________ ___________ ___________ ___________ ___________

4,462 4,266 8,728 4,909 9,152 14,061

___________ ___________ ___________ ___________ ___________ ___________

b) Other trading income

Currency derivatives and forex 126,564 - 126,564 142,253 - 142,253

Credit derivatives 1,001 - 1,001 (4,126) - (4,126)

Other derivatives 2,352 - 2,352 (48) - (48)

Dividends 181 - 181 173 - 173

___________ ___________ ___________ ___________ ___________ ___________

130,098 - 130,098 138,252 - 138,252

___________ ___________ ___________ ___________ ___________ ___________

135,588 26,719 162,307 159,035 38,421 197,456

___________ ___________ ___________ ___________ ___________ ___________

Trading gain on financial assets at fair value through profit or loss includes the results of trading in the above

classes of securities, as well as the result of the change in their fair values.

Currency derivatives and forex includes gains and losses from spot transactions, forward currency contracts and

the revaluation of the daily open trading position.

For the year ended 31 December 2013, derivatives include a gain of LL 1,001 million (2012: loss of LL 4,126

million) representing the change in fair value of the credit default swaps related to the Lebanese sovereign risk

and embedded in some of the Bank‟s deposits as discussed in note 35 to these consolidated financial statements.

9 NET GAIN ON SALE OF FINANCIAL ASSETS AT AMORTISED COST

The Group derecognises some debt instruments classified at amortised cost due to the following reasons:

- Deterioration of the credit rating below the ceiling allowed in the Group‟s investment policy;

- Liquidity gap and yield management;

- Exchange of certificates of deposit by the Lebanese Central Bank;

- Currency risk management as a result of change in the currency base of deposits; or

- Liquidity for capital expenditures.

F - 78

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

36

9 NET GAIN ON SALE OF FINANCIAL ASSETS AT AMORTISED COST (continued)

The schedule below details the gains and losses arising from the derecognition of these financial assets:

2013 2012

Gains Losses Net Gains Losses Net

LL million LL million LL million LL million LL million LL million

Lebanese sovereign and Central Bank of Lebanon

Central Bank‟s certificates of deposits 50,911 (40,447) 10,464 160,268 (172) 160,096

Bank placements 49,842 - 49,842 47,548 - 47,548

Treasury bills 15,181 (1,347) 13,834 12,033 (1,959) 10,074

Eurobonds 78,184 (3,132) 75,052 29,559 (171) 29,388

__________ __________ __________ __________ __________ __________

194,118 (44,926) 149,192 249,408 (2,302) 247,106

__________ __________ __________ __________ __________ __________

Other sovereign

Treasury bills 10,950 - 10,950 3,479 (10) 3,469

Other governmental securities - (88) (88) 2,969 - 2,969

Eurobonds 177 - 177 1,139 - 1,139

__________ __________ __________ __________ __________ __________

11,127 (88) 11,039 7,587 (10) 7,577

__________ __________ __________ __________ __________ __________

Private sector and other securities

Banks and financial institutions debt instruments 5,558 (103) 5,455 - (6) (6)

Corporate and other debt instruments 253 (1,963) (1,710) 5,796 (1,096) 4,700

Structured products - - - 6,556 (121) 6,435

__________ __________ __________ __________ __________ __________

5,811 (2,066) 3,745 12,352 (1,223) 11,129

__________ __________ __________ __________ __________ __________

211,056 (47,080) 163,976 269,347 (3,535) 265,812

__________ __________ __________ __________ __________ __________

During 2013, the Group discounted long-term placements at the Central Bank of Lebanon which resulted in a

gain of LL 49,842 million (2012: similar transactions resulted in a gain of LL 47,548 million).

10 NET GAIN ON SALE OF SUBSIDIARIES

During 2013, the Group sold all its participation in Agence Saradar d‟Assurances SAL to Marius Saradar

Holding SAL – Groupe Saradar. The gain resulting from this transaction amounted to LL 444 million. In

addition, the Bank received LL 331 million in proceeds from the liquidation of Société Linea SAL.

11 OTHER OPERATING INCOME

2013 2012

LL million LL million Profit sharing agreements 3,761 5,907

Accruals and provisions written back 2,929 2,689

Income from disposal of assets acquired against debts - 8,297

Provision no more required EOSI (note 38) 27 -

Net provision recoveries (note 38) 2,307 7

Other income 3,885 5,351

____________ ____________

12,909 22,251

____________ ____________

During 2011, the Group entered into profit sharing agreements under which it become entitled to 30% of CGI‟s

profits for a period of 5 years ending during the second quarter of 2016 and 33% of Global Com Holding SAL

profits up to 31 December 2016. The Group‟s share of these profits for the year 2013 amounted to LL 3,761

million (2012: LL 5,907 million).

F - 79

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

37

12 NET CREDIT LOSSES

2013 2012

LL million LL million

Charges for the year

Loans and advances to customers at amortised cost (note 23) 145,333 201,900

Loans directly written off 4,896 203

Impairment of financial instruments at amortised cost (note 25) - 110

____________ ____________

150,229 202,213

____________ ____________

Recoveries for the year – loans and advances to customers

Impairment allowance recovered (note 23) (7,043) (11,636)

Unrealized interest recovered (note 23) (631) (2,082)

Recoveries of debts previously written off (6,358) (5,877) Other recoveries for the year

Impairment allowance recovered (note 19) (99) (33)

Impairment of financial instruments at amortised cost (note 25) (736) -

____________ ____________

(14,867) (19,628)

____________ ____________

135,362 182,585

____________ ____________

13 PERSONNEL EXPENSES

2013 2012

LL million LL million Salaries and related benefits 386,041 328,739

Social security contributions 36,343 30,625

End of service benefits (note 38) 21,741 15,224

Transportation 17,544 12,179

Schooling 7,060 6,241

Medical expenses 4,696 4,489

Food and beverage 5,899 4,227

Training and seminars 5,724 4,173

Other staff expenses 8,016 5,849

____________ ____________

493,064 411,746

____________ ____________

F - 80

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

38

14 OTHER OPERATING EXPENSES

2013 2012

LL million LL million

Operating leases 40,995 29,371

Professional fees 27,855 27,116

Executive directors‟ rewards 16,351 26,381

Board of Directors fees 4,007 3,643

Advertising fees 52,169 22,742

Taxes and similar disbursements 20,026 19,258

Outsourcing services 22,853 16,935

Premium for guarantee of deposits 18,991 16,315

Information technology 24,826 14,619

Donations and social aids 4,792 13,552

Provisions for risks and charges (note 38) 7,210 8,091

Travel and related expenses 12,574 12,240

Telephone and mail 12,383 10,380

Electricity, water and fuel 9,226 8,310

Maintenance 8,742 7,692

Insurance premiums 7,805 7,617

Facilities services 8,165 6,363

Subscription to communication services 8,638 6,116

Office supplies 6,930 5,806

Receptions and gifts 7,804 4,457

Credit cards expenses 5,182 3,654

Regulatory charges 5,577 3,448

Documentation and miscellaneous subscriptions 2,346 2,379

Others 7,675 15,474

____________ ____________

343,122 291,959

____________ ____________

15 INCOME TAX

The components of income tax expense for the year ended 31 December are detailed as follows:

2013 2012

LL million LL million

Current tax

Current income tax 124,043 151,252

Adjustment in respect of current income tax of prior years 115 756

Other taxes treated as income tax 2,616 11,811

____________ ____________

126,774 163,819

Deferred tax

Relating to origination and reversal of temporary differences (12,063) (9,282)

____________ ____________

114,711 154,537

____________ ____________

The tax rates applicable to the parent and subsidiaries vary from 0% to 40% in accordance with the income tax

laws of the countries where the Group operates. For the purpose of determining the taxable results of the

subsidiaries for the year, the accounting results have been adjusted for tax purposes. Such adjustments include

items relating to both income and expense and are based on the current understanding of the existing tax laws

and regulations and tax practices.

F - 81

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

39

15 INCOME TAX (continued)

The components of operating profit before tax, and the differences between income tax expense reflected in the

financial statements and the amounts calculated at the Lebanese tax rate, are shown in the table below:

2013 2012

LL million LL million

Operating profit before tax 574,429 699,012

Of which Lebanon 451,048 437,634

Of which foreign 123,381 261,378

__________ __________

Income tax at Lebanese tax rate 15% 86,164 104,852

Increase resulting from:

Foreign tax rates differing from Lebanese tax rate 51,575 47,543

Non deductible expenses 9,332 16,906

Non deductible provisions 5,367 29,119

Other non deductibles 1,076 1,510

__________ __________

67,350 95,078

__________ __________

Decrease resulting from:

Revenues previously subject to tax (14,405) (4,431)

Provision recoveries previously subject to tax (6,156) (710)

Exempted revenues (1,763) (28,483)

Unrealized gains on financial instruments (62) (3,165)

Other deductibles (7,085) (11,889)

__________ __________

(29,471) (48,678)

__________ __________

Income tax 124,043 151,252

__________ __________

Effective income tax rate 21.59% 21.63%

__________ __________

The movement of current tax liabilities during the year is as follows:

2013 2012

LL million LL million Balance at 1 January 118,058 86,756

____________ ____________

Charges for the year 126,774 163,819

Transfers (5,686) (1,144)

____________ ____________

121,088 162,675

____________ ____________

Less taxes paid:

Current year tax liability * 85,761 68,315

Prior years tax liabilities 69,425 57,834

Foreign exchange difference 3,565 5,224

____________ ____________

158,751 131,373

____________ ____________

Balance at 31 December 80,395 118,058

____________ ____________

(*) Represents taxes paid on interest received from treasury bills and central banks‟ certificates of deposits.

F - 82

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

40

15 INCOME TAX (continued)

Deferred taxes recorded in the consolidated statement of financial position result from the following items:

2013

Deferred tax

assets

Deferred tax

liabilities

LL million LL million

Provisions 8,482 (1,847)

Impairment allowance for loans and advances 16,729 -

Fair value of financial instruments (1,070) 1,903

Carried forward taxable losses 9,140 -

Difference in depreciation rates (3,281) 3,779

Defined benefit obligation 3,157 (4)

Other temporary differences 407 -

____________ ____________

33,564 3,831

____________ ____________

2012

Deferred tax

assets

Deferred tax

liabilities

LL million LL million

Provisions 3,731 (1,292)

Impairment allowance for loans and advances 13,794 -

Fair value of financial instruments 546 10,508

Carried forward taxable losses 1,282 -

Difference in depreciation rates - 3,962

Defined benefit obligation 3,321 -

Other temporary differences 276 162

____________ ____________

22,950 13,340

____________ ____________

16 PROFIT FROM DISCONTINUED OPERATIONS

During May 2012, the Bank entered into a Sale and Purchase Agreement through which it sold 81% (926,437

shares) of its investment in LIA Insurance SAL (“LIA”), the insurance arm of the Group. Consideration received

amounted to US$ 89 million (equivalent to LL 133 billion) in cash.

The business of LIA Insurance SAL was included in the “Group Functions and Head Office” business segment

and “Lebanon” geographic segment. The cash flows generated by the sale of the discontinued operation during

2012 have been considered in the consolidated statement of cash flows as part of the investing activities.

On 26 July 2012, the directors of Banaudi Holding Limited, sole shareholder of Bank Audi SAM, decided to

cease the activities of the subsidiary bank and to liquidate it and withdraw its banking license.

Bank Audi SAM, exercised banking activities in Monaco under banking license provided by local authorities.

The cessation of activities involves restitution of the assets of the clients, transfer of credit in process and

cancellation of all arrangements concluded with the external services providers.

F - 83

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

41

16 PROFIT FROM DISCONTINUED OPERATIONS (continued)

The results of LIA Insurance SAL and Bank Audi SAM are as follows:

2013 2012

Bank Audi

SAM

Bank Audi

SAM

LIA Insurance

SAL

Total

LL million LL million LL million LL million

Interest and similar income 251 3,467 8,870 12,337

Interest and similar expense (8) (1,874) (15) (1,889)

__________ __________ __________ __________

Net interest income 243 1,593 8,855 10,448

__________ __________ __________ __________

Fee and commission income 2 813 8,620 9,433

Fee and commission expense (32) (429) (4,889) (5,318)

__________ __________ __________ __________

Net fee and commission income (30) 384 3,731 4,115

__________ __________ __________ __________

Other operating income 6 79 334 413

__________ __________ __________ __________

Total operating income 219 2,056 12,920 14,976

__________ __________ __________ __________

Total operating expenses (470) (16,146) (6,342) (22,488)

__________ __________ __________ __________

Operating (loss) profit (251) (14,090) 6,578 (7,512)

Non- operating expenses (349) (6,046) - (6,046)

Tax attributable to operating profit - - (793) (793)

__________ __________ __________ __________

Loss for the period from discontinued operations (600) (20,136) 5,785 (14,351)

(Loss) gain recognised from fair value remeasurement - (9,922) 20,439 10,517

Tax attributable to fair value remeasurement - - (3,065) (3,065)

(Loss) gain on disposal - - 48,621 48,621

Tax attributable to gain on disposal - - (7,908) (7,908)

__________ __________ __________ __________

(600) (30,058) 63,872 33,814

__________ __________ __________ __________

Cash inflow from sale:

Total consideration received 133,212

Cash included as cash and cash equivalents on January 1 in the cash

flow statements

(14,506)

__________

118,706

__________

LL LL

Earnings per share:

Basic, from discontinued operations (2) 96

Diluted, from discontinued operations (2) 96

After remeasurement to fair value, the remaining investment in LIA Insurance SAL amounted to LL 32,199

million and was classified under financial assets at fair value through other comprehensive income.

17 EARNINGS PER SHARE

Basic earnings per share is calculated by dividing the profit for the year attributable to ordinary equity holders of

the Bank by the weighted average number of ordinary shares outstanding during the year .

Diluted earnings per share is calculated in the same manner after adding to the weighted average number of

common shares outstanding, the weighted average number of dilutive shares that would have been issued

pursuant to the Bank‟s share-based payments plan. The number of shares issued has been calculated at the date

of the statement of financial position for the purpose of calculating diluted earnings per share based on the

realization of accomplishment conditions as if the accomplishment date is the current statement of financial

position date.

F - 84

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

42

17 EARNINGS PER SHARE (continued)

The following table shows the income and share data used to calculate basic and diluted earnings per share:

2013 2012

LL million LL million Profit attributable to equity holders of the Bank 454,621 564,737

Less: dividends attributable to preferred shares (39,007) (34,955)

____________ ____________

Profit available to holders of ordinary shares 415,614 529,782

____________ ____________

Weighted average number of shares outstanding 346,552,238 346,903,074

Weighted average number of common shares outstanding

after dilutive effect of share-based payments

346,552,238

347,048,590

Basic earnings per share 1,199 1,527

Diluted earnings per share 1,199 1,526

There were no transactions involving common shares or potential common shares between the reporting date

and the date of the completion of these consolidated financial statements which would require the restatement of

earnings per share.

18 CASH AND BALANCES WITH CENTRAL BANKS

2013 2012

LL million LL million Cash on hand 329,293 249,347

____________ ____________

Central Bank of Lebanon

Current accounts 304,468 541,387

Time deposits 6,367,815 7,287,985

Accrued interest 54,501 53,382

____________ ____________

6,726,784 7,882,754

____________ ____________

Other Central Banks

Current accounts 850,470 845,468

Time deposits 1,285,560 484,777

Accrued interest 1 34

____________ ____________

2,136,031 1,330,279

____________ ____________

9,192,108 9,462,380

____________ ____________

Obligatory reserves:

- In accordance with the Central Bank of Lebanon‟s rules and regulations, banks operating in Lebanon are

required to deposit with the Central Bank of Lebanon an obligatory reserve calculated on the basis of 25% of

sight commitments and 15% of term commitments denominated in Lebanese Pounds. This is not applicable for

investment banks which are exempted from obligatory reserve requirements on commitments denominated in

Lebanese Pounds. Additionally, all banks operating in Lebanon are required to deposit with the Central Bank

of Lebanon interest-bearing placements representing 15% of total deposits in foreign currencies regardless of

nature.

- Subsidiary banks operating in foreign countries are also subject to obligatory reserve requirements determined

based on the banking rules and regulations of the countries in which they operate.

F - 85

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

43

18 CASH AND BALANCES WITH CENTRAL BANKS (continued)

Obligatory reserves (continued)

Obligatory reserve deposits are not available for use in the Bank‟s day-to-day operations. The following table

summarises the Group‟s placements in Central Banks available against the obligatory reserves as of 31

December: 2013 2012

Lebanese

Pounds

Foreign

currencies

Total

Lebanese

Pounds

Foreign

currencies

Total

LL million LL million LL million LL million LL million LL million

Central Bank of Lebanon

Current accounts 188,254 - 188,254 205,210 - 205,210

Time deposits 42,570 3,311,729 3,354,299 247,814 3,279,894 3,527,708

__________ __________ __________ __________ __________ __________

230,824 3,311,729 3,542,553 453,024 3,279,894 3,732,918

__________ __________ __________ __________ __________ __________

Other Central Bank

Current accounts - 309,654 309,654 - 335,845 335,845

Time deposits - 1,283,618 1,283,618 - 270,077 270,077

__________ __________ __________ __________ __________ __________

- 1,593,272 1,593,272 - 605,922 605,922

__________ __________ __________ __________ __________ __________

230,824 4,905,001 5,135,825 453,024 3,885,816 4,338,840

__________ __________ __________ __________ __________ __________

19 DUE FROM BANKS AND FINANCIAL INSTITUTIONS

2013 2012

LL million LL million

Current accounts 1,567,337 1,582,867

Time deposits 2,437,863 2,493,183

Checks for collection 177,285 171,449

Other amounts due 47,654 34,080

Accrued interest 318 397

Less: impairment allowance (901) (998)

____________ ____________

4,229,556 4,280,978

____________ ____________

The movement of the impairment allowance was as follows:

2013 2012

LL million LL million

Balance at 1 January 998 1,028

Recoveries (note 12) (99) (33)

Foreign exchange difference 2 3

____________ ____________

901 998

____________ ____________

20 LOANS TO BANKS AND FINANCIAL INSTITUTIONS AND REVERSE REPURCHASE

AGREEMENTS

2013 2012

LL million LL million

Loans and advances 332,333 272,282

Reverse repurchase agreements 324,903 787,087

Accrued interest 709 898

____________ ____________

657,945 1,060,267

____________ ____________

F - 86

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

44

21 DERIVATIVE FINANCIAL INSTRUMENTS

The tables below show the positive and negative fair values of derivative financial instruments, together with the

notional amounts analysed by the term to maturity. The notional amount is the amount of a derivative‟s

underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are

measured. The notional amounts indicate the volume of transactions outstanding at year end and are indicative

of neither the market risk nor the credit risk.

Credit risk in respect of derivative financial instruments arises from the potential for a counterparty to default on

its contractual obligations and is limited to the positive market value of instruments that are favorable to the

Group.

The Group has positions in the following types of derivatives:

Notional amount by term to maturity

31 December 2013

Positive fair

value

Negative fair

value

Notional

amount

Within

3 months

3 to12

months

1 to 5

years

Over

5 years

LL million LL million LL million LL million LL million LL million LL million

Derivatives held for trading

Forward foreign exchange contracts 13,358 5,949 2,101,999 1,699,419 255,883 146,697 -

Forward precious metals contracts 1 4 1,357 1,357 - - -

Currency swaps 22,602 45,769 1,839,336 1,345,799 493,537 - -

Precious metals swaps 1,901 105 99,113 93,033 6,080 - -

Currency options 90,299 76,985 6,065,578 1,326,452 4,045,045 694,081 -

Interest rate swaps 2,856 - 1,065,145 - - 793,201 271,944

Indices swaps and options - - 157 157 - - -

Credit default swaps 3,535 1,025 1,809,609 644,779 589,687 575,143 -

Equity options 1,508 - 1,508 1,508 - - -

___________ ___________ ___________ ___________ ___________ ___________ ___________

Total 136,060 129,837 12,983,802 5,112,504 5,390,232 2,209,122 271,944

___________ ___________ ___________ ___________ ___________ ___________ ___________

Derivatives held to hedge net

investments in foreign operations

Forward foreign exchange contracts - 134 194,745 - 194,745 - -

Currency swaps - 3,752 133,823 - 133,823 - -

___________ ___________ ___________ ___________ ___________ ___________ ___________

- 3,886 328,568 - 328,568 - -

___________ ___________ ___________ ___________ ___________ ___________ ___________

Derivatives used as cash flows hedge

Interest rate swaps 2 743 36,687 1,615 4,844 30,228 -

___________ ___________ ___________ ___________ ___________ ___________ ___________

136,062 134,466 13,349,057 5,114,119 5,723,644 2,239,350 271,944

___________ ___________ ___________ ___________ ___________ ___________ ___________

Notional amount by term to maturity

31 December 2012

Positive fair

value

Negative fair

value

Notional

amount

Within

3 months

3 to12

months

1 to 5

years

Over

5 years

LL million LL million LL million LL million LL million LL million LL million

Derivatives held for trading

Forward foreign exchange contracts 7,218 4,992 72,825 46,796 26,029 - -

Forward precious metals contracts 134 44 10,545 9,045 1,500 - -

Currency swaps 15,293 15,842 2,449,196 2,201,792 247,404 - -

Precious metals swaps 477 30 42,204 35,374 6,830 - -

Currency options 25,449 25,557 2,122,281 719,125 1,403,156 - -

Indices swaps and options 135 - 76,544 - 76,544 - -

Credit default swaps 2,339 829 1,442,219 779,425 647,169 15,625 -

___________ ___________ ___________ ___________ ___________ ___________ ___________

Total 51,045 47,294 6,215,814 3,791,557 2,408,632 15,625 -

___________ ___________ ___________ ___________ ___________ ___________ ___________

Derivatives held to hedge net

investments in foreign operations

Forward foreign exchange contracts - 552 40,036 40,036 - - -

Currency swaps - 8,196 167,968 51,682 116,286 - -

___________ ___________ ___________ ___________ ___________ ___________ ___________

- 8,748 208,004 91,718 116,286 - -

___________ ___________ ___________ ___________ ___________ ___________ ___________

Derivatives used as cash flows hedge

Interest rate swaps 1 - 30,128 - 4,844 25,284 -

___________ ___________ ___________ ___________ ___________ ___________ ___________

51,046 56,042 6,453,946 3,883,275 2,529,762 40,909 -

___________ ___________ ___________ ___________ ___________ ___________ ___________

F - 87

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

45

21 DERIVATIVE FINANCIAL INSTRUMENTS (continued)

Derivative financial instruments held for trading purposes

Most of the Group‟s derivative trading activities relate to deals with customers which are normally offset by

transactions with other counterparties. Also included under this heading are any derivatives entered into for risk

management purposes which do not meet the IAS 39 hedge accounting criteria.

Derivative financial instruments held for hedging purposes

As part of its asset and liability management, the bank uses derivatives for hedging purposes in order to reduce

its exposure to credit and market risks. This is achieved by hedging specific financial instruments, portfolios of

fixed rate financial instruments and forecast transaction as well as strategic hedging against overall financial

position exposures.

During 2013, the Bank renewed its currency swap contracts designated to hedge the net investment in its

subsidiaries in Cyprus and France. The Bank also bought forward contracts to hedge its net investments in the

Kingdom of Saudi Arabia and Qatar. The notional amount of these contracts amounted to LL 328,568 million as

of 31 December 2013 (2012: LL 208,004 million). The negative fair value of these contracts amounted to LL

3,886 million (2012: positive fair value of LL 8,748 million) and was transferred to “Foreign currency

translation reserve” in equity to offset gains on translation of the net investment in the subsidiaries. No

ineffectiveness from hedges of net investments in foreign operations was recognized in profit or loss during the

year.

Forwards and futures

Forwards and futures contracts are contractual agreements to buy or sell a specified financial instrument at a

specific price and date in the future. Forwards are customized contracts transacted in the over-the-counter

market. Futures contracts are transacted in standardised amounts on regulated exchanges and are subject to daily

cash margin requirements.

Options

Options are contractual agreements that convey the right, but not the obligation, for the purchaser either to buy

or to sell a specific amount of a financial instrument at a fixed price, either at a fixed future date or at any time

within a specified period.

Swaps

Swaps are contractual agreements between two parties to exchange movements in interest or foreign currency

rates as well as the contracted upon amounts for currency swaps.

In a currency swap, the bank pays a specified amount in one currency and receives a specified amount in

another currency. Currency swaps are mostly gross-settled.

A credit default swap (CDS) is a credit derivative between two counterparties, whereby they isolate the credit

risk of at least one third party and trade it. Under the agreement, one party makes periodic payments to the other

and receives the promise of a payoff if the third party defaults. The former party receives credit protection and is

said to be the “buyer” while the other party provides credit protection and is said to be the “seller”. The third

party is known as the “reference entity”.

The notional amount of credit default swaps represents the carrying value of certain time deposits held by the

Group as of 31 December 2013 and 2012 (note 35).

F - 88

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

46

22 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

2013 2012

LL million LL million

Lebanese sovereign and Central Bank of Lebanon

Central Bank certificates of deposit 19,118 11,268

Treasury bills 138,265 124,843

Eurobonds 123,690 232,410

_____________ _____________

281,073 368,521

_____________ _____________

Other sovereign

Treasury bills & bonds 1,843 -

Eurobonds - 1,615

_____________ _____________

Private sector and other securities

Banks and financial institutions debt instruments 3,185 2,404

Loans and advances to customers 47,844 75,555

Corporate debt instruments 10,507 10,340

Mutual funds 61,033 49,010

Equity instruments 3,598 3,212

_____________ _____________

126,167 140,521

_____________ _____________

409,083 510,657

_____________ _____________

The classification of the above instruments according to the type of interest is as follows:

2013 2012

LL million LL million

Fixed interest

Lebanese sovereign and Central Bank of Lebanon 281,073 368,521

Other sovereign 1,843 1,615

Private sector and other securities 61,536 88,300

____________ ____________

344,452 458,436

____________ ____________

Non-interest bearing

Private sector and other securities 64,631 52,221

____________ ____________

409,083 510,657

____________ ____________

F - 89

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

47

23 LOANS AND ADVANCES TO CUSTOMERS AT AMORTISED COST

2013

Corporate

SME

Retail and

personal banking

Public

sector

Total

LL million LL million LL million LL million LL million

Overdraft accounts 2,409,676 873,840 724,358 37,830 4,045,704

Loans 9,385,087 4,971,393 3,795,889 237,056 18,389,425

Discounted bills and commercial paper 104,873 118,397 9,089 6,409 238,768

____________ ___________ ____________ _____________ ____________ 11,899,636 5,963,630 4,529,336 281,295 22,673,897

Impairment allowance (375,301) (34,469) (111,090) (3,780) (524,640)

Unrealized interest (61,256) (2,558) (20,621) - (84,435)

____________ ___________ ____________ _____________ ____________

11,463,079 5,926,603 4,397,625 277,515 22,064,822

____________ ___________ ____________ _____________ ____________

2012

Corporate

SME

Retail and personal banking

Public sector

Total

LL million LL million LL million LL million LL million

Overdraft accounts 2,408,650 764,158 634,556 65,560 3,872,924

Loans 7,403,071 1,681,182 2,695,458 56,264 11,835,975

Discounted bills and commercial paper 111,132 58,440 24,609 15,250 209,431 ____________ ___________ ____________ _____________ ____________

9,922,853 2,503,780 3,354,623 137,074 15,918,330

Impairment allowance (308,129) (28,540) (101,342) (3,732) (441,743)

Unrealized interest (40,403) (4,424) (15,357) - (60,184)

____________ ___________ ____________ _____________ ____________

9,574,321 2,470,816 3,237,924 133,342 15,416,403

____________ ___________ ____________ _____________ ____________

The breakdown and movement of the impairment allowance during the year are as follows:

2013

Corporate SME

Retail and

personal banking

Public

sector Total LL million LL million LL million LL million LL million Balance at 1 January 308,129 28,540 101,342 3,732 441,743

Add:

Charges for the year (note 12) 102,176 17,487 24,440 1,230 145,333

Transfers 2,324 (1,804) (649) 295 166

Less:

Recoveries (note 12) (4,081) (1,381) (78) (1,503) (7,043)

Write offs (2,367) (6,884) (5,146) - (14,397)

Foreign exchange difference (30,880) (1,489) (8,819) 26 (41,162)

__________ ___________ ___________ __________ ____________ Balance at 31 December 375,301 34,469 111,090 3,780 524,640

__________ ___________ ___________ __________ ____________

Individual impairment 235,347 14,430 75,554 1,508 326,839

Collective impairment 139,954 20,039 35,536 2,272 197,801

__________ ___________ ___________ ___________ ___________ 375,301 34,469 111,090 3,780 524,640

__________ ___________ ___________ ___________ ___________

F - 90

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

48

23 LOANS AND ADVANCES TO CUSTOMERS AT AMORTISED COST (continued) 2012

Corporate SME

Retail and

personal banking

Public

sector Total LL million LL million LL million LL million LL million Balance at 1 January 191,395 56,788 115,780 4,575 368,538

Add:

Charges for the year (note 12) 150,832 7,018 41,306 2,744 201,900 Transfers 4,726 (4,726) 363 (582) (219)

Less: Recoveries (note 12) (4,000) (2,879) (3,914) (843) (11,636)

Write offs (20,684) (27,728) (45,976) - (94,388)

Foreign exchange difference (14,140) 67 (6,217) (2,162) (22,452)

__________ ___________ ___________ __________ ____________

Balance at 31 December 308,129 28,540 101,342 3,732 441,743 __________ ___________ ___________ __________ ____________

Individual impairment 196,703 14,284 61,917 2,187 275,091 Collective impairment 111,426 14,256 39,425 1,545 166,652

__________ ___________ ___________ ___________ ___________

308,129 28,540 101,342 3,732 441,743 __________ ___________ ___________ ___________ ___________

The movement of unrealized interest during the year is as follows:

2013

Corporate

SME

Retail and personal

banking

Total

LL million LL million LL million LL million Balance at 1 January 40,403 4,424 15,357 60,184

Add:

Unrealized interest applied on non-performing loans 23,246 337 6,231 29,814

Less:

Unrealized interest written off (304) (2,057) (197) (2,558) Unrealized interest recovered (note 12) (206) (112) (313) (631)

Foreign exchange difference (1,883) (34) (457) (2,374)

___________ ___________ ____________ ____________

Balance at 31 December 61,256 2,558 20,621 84,435

___________ ___________ ____________ ____________

2012

Corporate

SME

Retail and personal banking

Total

LL million LL million LL million LL million Balance at 1 January 37,512 30,888 31,040 99,440

Add:

Unrealized interest applied on non-performing loans 20,948 3,643 8,648 33,239

Less:

Unrealized interest written off (16,993) (28,954) (23,394) (69,341)

Unrealized interest recovered (note 12) (587) (746) (749) (2,082)

Foreign exchange difference (477) (407) (188) (1,072)

___________ ___________ ____________ ____________

Balance at 31 December 40,403 4,424 15,357 60,184

___________ ___________ ____________ ____________

F - 91

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

49

23 LOANS AND ADVANCES TO CUSTOMERS AT AMORTISED COST (continued)

The distribution by economic sector of loans and advances to customers at amortised cost is as follows:

2013 2012

LL million LL million

Manufacturing industries 3,982,166 3,091,234

Individuals – excluding housing 3,167,243 2,528,147

Wholesale and retail trade 3,255,933 2,278,118

Financial services and brokerage 1,466,945 1,671,096

Real estate services 1,433,561 1,222,188

Construction 3,348,179 1,142,268

Transportation and warehousing 945,456 1,134,051

Individuals – housing 1,544,568 1,030,297

Hotels and restaurants 827,027 451,869

Electricity, gas, water and telecommunication 782,676 304,378

Professional services 708,184 292,191

Agriculture 229,081 129,501

Extractive industry 205,035 19,784

Others 168,768 121,281

_____________ _____________

22,064,822 15,416,403

_____________ _____________

In accordance with the Banking Control commission Circular No. 240, bad loans and related provisions and

unrealized interest which fulfil certain requirements have been transferred to off balance sheet accounts. The

gross balance of these loans transferred during 2013 amounted to LL 16,955 million (2012: LL 163,729

million). Besides, amounts recovered from off balance sheet accounts during 2013 amounted to LL 6,358

million (2012: 5,877 million) (note 12).

24 LOANS AND ADVANCES TO RELATED PARTIES AT AMORTISED COST

2013

Corporate

SME

Retail and

personal banking

Total

LL million LL million LL million LL million

Overdraft accounts - 25,454 21,113 46,567

Loans 8,172 2,546 57,544 68,262

___________ ___________ ___________ ___________

8,172 28,000 78,657 114,829

___________ ___________ ___________ ___________

2012

Corporate

SME

Retail and

personal banking

Total

LL million LL million LL million LL million

Overdraft accounts - 187,284 38,659 225,943

Loans 8,172 - 70,396 78,568

___________ ___________ ___________ ___________

8,172 187,284 109,055 304,511

___________ ___________ ___________ ___________

F - 92

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

50

24 LOANS AND ADVANCES TO RELATED PARTIES AT AMORTISED COST (continued)

The distribution by economic sector of loans and advances to related parties at amortised cost is as follows:

2013 2012

LL million LL million Construction 10,956 177,021

Individuals – excluding housing 56,070 66,339

Real estate services 23,265 36,865

Individuals – housing 22,413 21,957

Hotels and restaurants 1,377 2,104

Financial services and brokerage 6 33

Others 742 192

_____________ _____________

114,829 304,511

_____________ _____________

25 FINANCIAL ASSETS AT AMORTISED COST

2013 2012

LL million LL million

Lebanese sovereign and Central Bank of Lebanon

Central Bank‟s certificates of deposits 4,848,530 5,008,977

Treasury bills 1,839,167 3,379,072

Eurobonds 5,061,094 2,222,422

__________ __________

11,748,791 10,610,471

__________ __________

Other sovereign

Treasury bills 2,987,822 2,425,358

Eurobonds 105,317 121,725

Other governmental securities 102,068 244,427

__________ __________

3,195,207 2,791,510

__________ __________

Private sector and other securities

Banks and financial institutions debt instruments 740,271 853,948

Corporate debt instruments 344,620 299,713

Loans related to investments in equity instruments 168 539

__________ __________

1,085,059 1,154,200

__________ __________

16,029,057 14,556,181

Less: impairment allowance (6,022) (7,065)

__________ __________

16,023,035 14,549,116

__________ __________

The movement of the impairment allowance was as follows:

Balance at 1 January 7,065 7,698

Charges during the year (note 12) - 110

Recoveries (note 12) (736) -

Write offs (228) -

Foreign exchange differences (79) (743)

__________ __________

Balance at 31 December 6,022 7,065

__________ __________

F - 93

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

51

25 FINANCIAL ASSETS AT AMORTISED COST (continued)

The classification of the above instruments according to the type of interest is as follows:

2013 2012

LL million LL million

Fixed interest

Lebanese sovereign and Central Bank of Lebanon 11,748,791 10,610,471

Other sovereign 2,982,947 2,757,698

Private sector and other securities 1,079,037 1,130,621

_____________ _____________

15,810,775 14,498,790

_____________ _____________

Variable interest

Private sector and other securities - 16,370

Other sovereign 212,260 33,813

Loans related to investments in equity instruments - 143

_____________ _____________

212,260 50,326

_____________ _____________

16,023,035 14,549,116

_____________ _____________

26 FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME

The Group classified the following instruments at fair value through other comprehensive income as it intends

to hold them for strategic reasons.

The tables below list those equity instruments and dividends received:

2013

Fair value

Cumulative changes in

fair value

Dividends

LL million LL million LL million

AZA Holding SAL 132,873 102,483 6,062

LIA Insurance SAL (note 16) 32,199 - 2,173

BankMed SAL 7.75% series “1” preferred shares 15,075 - 1,168

Visa NC – Class “C” 21,102 14,482 67

Phoenicia – Aer Rianta Co. SAL 10,729 - 16,585

Banque de l‟Habitat SAL 13,575 7,936 372

Solidere International Limited 6,421 (4,823) -

Liban Lait SAL 5,232 - -

Saraya Aqaba Real Estate Development 4,385 4 -

Master Card Inc Class B 4,791 4,077 1

Kafa Holding SAL 2,049 - -

Kafalat 1,820 1,224 -

International payment Network SAL 1,453 683 122

Arab Trade Finance Program 2,735 756 -

Abdel Wahab 618 Holding SAL 1,202 - -

Fransabank SAL 1,221 - 55

Societe ABC SAL (bearer) 2,354 1,132 185

D.F. Arem, Media Ltd 1 - 1,684

Kayan 947 (24) -

C-Mobile Group Holding Ltd 1 (10,877) -

Other equity instruments 12,310 2,390 332

___________ ___________ __________ 272,475 119,443 28,806

___________ ___________ __________

F - 94

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

52

26 FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME

(continued) 2012

Fair value

Cumulative changes in

fair value

Dividends

LL million LL million LL million

AZA Holding SAL 125,371 85,482 6,110

LIA Insurance SAL (note 16) 32,199 - 9

BankMed SAL 7.75% series “1” preferred shares 15,075 - 1,168 Visa NC – Class “C” 14,216 8,597 66

Phoenicia – Aer Rianta Co. SAL 10,729 - 15,076

Banque de l‟Habitat SAL 10,125 5,004 56 Solidere International Limited 6,479 (4,770) 131

Liban Lait SAL 5,232 - -

Saraya Aqaba Real Estate Development 3,015 (985) 2,156

Master Card Inc Class B 2,778 2,361 4

Kafa Holding SAL 2,049 - -

Kafalat 1,628 1,060 - International payment Network SAL 1,392 631 122

Arab Trade Finance Program 1,366 70 -

Abdel Wahab 618 Holding SAL 1,272 - - Fransabank SAL 1,221 - 52

Societe ABC SAL (bearer) 1,022 - 174

D.F. Arem, Media Ltd 841 - 1,843 Kayan 736 (235) -

C-Mobile Group Holding Ltd - (10,875) -

Other equity instruments 9,047 465 3,278 ___________ ___________ __________

245,793 86,805 30,245

___________ ___________ __________

27 INVESTMENTS IN ASSOCIATES

2013 2012

Country of

incorporation

Ownership

%

Cost

LL million

Ownership

%

Cost

LL million

Investments

Assurex SAL Lebanon 23.82 8,890 23.92 3,540

Syrian Arab for Insurance SAL Syria 36.00 4,915 36.00 8,175

Pin-Pay SAL Lebanon 35.50 365 24.93 12

Capital Outsourcing Ltd (Dubai) UAE 37.50 4,325 37.50 3,958

____________ ____________

18,495 15,685

Related loans

Capital Outsourcing Ltd (Dubai) UAE 9,625 18,077

Pinpay Lebanon 495 468

____________ ____________

28,615 34,230

____________ ____________

Pursuant to the revaluation of its real estate property, Assurex SAL recorded a revaluation reserve of LL 19,086

million. The Group share of this reserve amounted to LL 4,546 million and was recorded in other

comprehensive income during 2013.

During April 2013, the General Assembly of Pin-Pay SAL decided to increase the capital of the company by

LL 2.25 billion representing 9,000 common shares. The Bank‟s share of this increase amounted to LL 829

million. During 2012, Pinpay increased its share capital in cash by an amount equal to LL 1,500 million

representing 10,000 new shares in addition to LL 200,010 issue premium per share, conferring equal rights to

the shareholders as the existing shares. The share capital of Pin-Pay after the capital increase amounts to LL

3,000 million. The Bank did not subscribe in the capital increase and as a result its ownership percentage was

diluted.

During 2013, Capital Outsourcing Ltd (Dubai) made a partial early redemption of the loans extended by the

Bank (note 53).

F - 95

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

53

27 INVESTMENTS IN ASSOCIATES (continued)

The Bank‟s investments accounted for under the equity method are not listed on public exchanges. The

following table illustrates the summarized financial information of these investments:

2013 2012

LL million LL million

Share of associates’ statement of financial position

Current assets 26,970 23,516

Non current assets 36,733 11,647

Current liabilities (11,842) (4,936)

Non current liabilities (31,586) (18,159)

_____________ _____________

Net assets 20,275 12,068

_____________ _____________

Share of associates revenues and profits

Revenues 15,941 6,348

_____________ _____________

Share of profits for the year 1,169 551

_____________ _____________

28 PROPERTY AND EQUIPMENT

Land and

buildings

Installations

and fixtures

Motor

vehicles

Office

equipment

and

computer

hardware

Office

machinery

and furniture

Other fixed

assets Total

LL million LL million LL million LL million LL million LL million LL million

Cost or revaluation:

At 1 January 2013 407,747 195,666 3,517 128,162 99,601 16,766 851,459

Additions 28,150 41,652 303 47,915 13,011 721 131,752

Disposals - (4,171) (775) (2,516) (1,202) (1) (8,665)

Transfers 13,716 (13,716) - 2 (2) - -

Foreign exchange difference (12,335) (14,637) (341) (145) (6,782) (7,816) (42,056)

__________ __________ ___________ ___________ ___________ __________ __________

At 31 December 2013 437,278 204,794 2,704 173,418 104,626 9,670 932,490

__________ __________ __________ __________ ___________ __________ __________

Depreciation:

At 1 January 2013 70,730 106,865 2,087 77,223 54,841 11,003 322,749

Charge for continuing operations 7,663 17,905 353 17,677 8,111 1,014 52,723

Disposals - (4,149) (730) (2,472) (1,178) - (8,529)

Transfers 749 (749) - - - - -

Foreign exchange difference (126) (3,920) (367) 1,952 (2,929) (4,899) (10,289)

__________ __________ __________ __________ ___________ __________ __________

At 31 December 2013 79,016 115,952 1,343 94,380 58,845 7,118 356,654

__________ __________ __________ __________ ___________ __________ __________

Net book value:

At 31 December 2013 358,262 88,842 1,361 79,038 45,781 2,552 575,836

__________ __________ __________ __________ ___________ __________ __________

F - 96

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

54

28 PROPERTY AND EQUIPMENT (continued)

Land and

buildings

Installations

and fixtures

Motor

vehicles

Office

equipment

and

computer

hardware

Office

machinery and

furniture

Other fixed

assets Total

LL million LL million LL million LL million LL million LL million LL million

Cost or revaluation:

At 1 January 2012 436,163 159,600 4,104 104,493 92,389 16,031 812,780

Entities deconsolidated during the

year (7,283) (1,056) (91) (1,043) (316) (69)

(9,858)

Additions 40,496 48,897 552 30,086 15,177 1,358 136,566

Disposals (19,886) (5,520) (513) (2,195) (3,498) - (31,612)

Transfers to non current assets held

for sale

(32,303)

(77)

(189)

(445)

(90)

(23)

(33,127)

Other transfers - - - 29 (29) (88) (88)

Foreign exchange difference (9,440) (6,178) (346) (2,763) (4,032) (443) (23,202)

__________ __________ ___________ ___________ ___________ __________ __________

At 31 December 2012 407,747 195,666 3,517 128,162 99,601 16,766 851,459

__________ __________ __________ __________ ___________ __________ __________

Depreciation:

At 1 January 2012 69,712 97,629 2,222 69,425 52,225 10,017 301,230

Entities deconsolidated during the

year (576) (647) (46) (894) (269) (51) (2,483)

Charge for continuing operations 8,421 16,247 425 12,508 7,528 959 46,088

Charge for discontinued operations - 624 - 382 423 - 1,429

Disposals (3,541) (4,811) (283) (2,050) (3,142) - (13,827)

Transfers to non current assets

held for sale

(2,076)

(14)

(23)

(105)

(79)

-

(2,297)

Other transfers 9 - - - (9) - -

Foreign exchange difference (1,219) (2,163) (208) (2,043) (1,836) 78 (7,391)

__________ __________ __________ __________ ___________ __________ __________

At 31 December 2012 70,730 106,865 2,087 77,223 54,841 11,003 322,749

__________ __________ __________ __________ ___________ __________ __________

Net book value:

At 31 December 2012 337,017 88,801 1,430 50,939 44,760 5,763 528,710

__________ __________ __________ __________ ___________ __________ __________

29 INTANGIBLE FIXED ASSETS

Key

money

Computer

software

Other

Total

LL million LL million LL million LL million

Cost:

At 1 January 2013 4,402 91,151 291 95,844

Additions 6 54,322 162 54,490

Disposals (1,151) (5) - (1,156)

Foreign exchange difference (1,673) (6,264) (15) (7,952)

___________ __________ ___________ _________

At 31 December 2013 1,584 139,204 438 141,226

___________ __________ ___________ _________

Amortization:

At 1 January 2013 2,235 43,982 27 46,244

Charge for the year 13 16,023 56 16,092

Disposals (1,151) (5) - (1,156)

Foreign exchange difference (979) (1,269) 35 (2,213)

___________ __________ ___________ _________

At 31 December 2013 118 58,731 118 58,967

___________ __________ ___________ _________

Net book value:

At 31 December 2013 1,466 80,473 320 82,259

___________ __________ ___________ _________

F - 97

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

55

29 INTANGIBLE FIXED ASSETS (continued)

Key money

Computer software

Other

Total

LL million LL million LL million LL million

Cost:

At 1 January 2012 5,021 47,938 - 52,959

Entities deconsolidated during the year - (1,104) - (1,104) Additions 38 45,781 289 46,108

Disposals - (276) - (276)

Transfers to non current assets held for sale (1) (160) - (161) Foreign exchange difference (656) (1,028) 2 (1,682)

___________ __________ ___________ _________

At 31 December 2012 4,402 91,151 291 95,844 ___________ __________ ___________ _________

Amortization:

At 1 January 2012 891 38,560 - 39,451

Entities deconsolidated during the year - (943) - (943)

Charge for the year 28 7,608 27 7,663

Disposals - (276) - (276) Transfers to non current assets held for sale (1) (147) - (148)

Foreign exchange difference 1,317 (820) - 497

___________ __________ ___________ _________

At 31 December 2012 2,235 43,982 27 46,244

___________ __________ ___________ _________

Net book value:

At 31 December 2012 2,167 47,169 264 49,600

___________ __________ ___________ _________

30 NON CURRENT ASSETS HELD FOR SALE

The Group occasionally takes possession of properties in settlement of loans and advances. The Group is in the

process of selling these properties and are as such included in non-current assets held for sale. Gains or losses on

disposal and revaluation losses are recognized in the consolidated income statement for the year.

Besides, as at 31 December 2012, the Bank continued to recognise in its financial statements the assets and

liabilities from three subsidiaries which represent non-core businesses. Management completed the sale of these

disposal groups during 2013. 2013 2012

Properties

acquired in

settlement of

debts

Other disposal

groups Total

Properties

acquired in settlement of

debts

Other disposal

groups Total

LL million LL million LL million LL million LL million LL million

Cost:

At 1 January 15,743 34,941 50,684 27,001 - 27,001

Additions 121 4,983 5,104 211 - 211

Transfers - - - 254 34,941 35,195 Disposals - (34,941) (34,941) (11,025) - (11,025)

Foreign exchange difference (873) - (873) (698) - (698)

_____________ _____________ ____________ _____________ _____________ ____________

At 31 December 14,991 4,983 19,974 15,743 34,941 50,684

_____________ _____________ ____________ _____________ _____________ ____________

Impairment:

At 1 January 630 - 630 622 - 622 Reversal due to disposals - - - (4) - (4)

Foreign exchange difference 26 - 26 12 - 12

_____________ _____________ ____________ _____________ _____________ ____________

At 31 December 656 - 656 630 - 630

_____________ _____________ ____________ _____________ _____________ ____________

Net book value:

At 31 December 14,335 4,983 19,318 15,113 34,941 50,054

_____________ _____________ ____________ _____________ _____________ ____________

During 2013, the Bank purchased 47,250 shares comprising 30% of the capital of Elite Insurance and

Reinsurance Company for LL 4,983 million. Management intends to sell this investment whereby the Bank is in

the process of obtaining all necessary approvals on the sale transaction during 2014.

F - 98

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

56

30 NON CURRENT ASSETS HELD FOR SALE (continued)

The major classes of assets and liabilities of the entities classified as held for sale as at 31 December 2012 are as

follows:

Agence Saradar

d’Assurances

SAL

Clover Building

SAL

Eagle One Third

Investment

Company SAL Total

LL million LL million LL million LL million

Assets

Intangible fixed assets 13 - - 13

Property and equipment 969 29,000 861 30,830

Other assets 3,985 111 2 4,098

____________ ____________ ____________ ____________

4,967 29,111 863 34,941

____________ ____________ ____________ ____________

Liabilities

Other Liabilities 3,634 11,143 22 14,799

____________ ____________ ____________ ____________

3,634 11,143 22 14,799

____________ ____________ ____________ ____________

There is no cumulative income or expenses in other comprehensive income relating to assets held for sale.

Gain on sale of properties acquired in settlement of debt amounted to LL 8,297 million for the year ended

31 December 2012 and were recorded under “Other Operating Income”.

Non current assets held for sale are classified under Group Functions and Head Office in the business segments.

31 OTHER ASSETS

2013 2012

LL million LL million Advances on acquisition of tangible fixed assets 47,674 67,819

Advances on acquisition of intangible fixed assets 13,862 6,460

Prepaid charges 48,759 36,194

Electronic cards and regularization accounts 21,108 21,790

Trade receivables related to non-banking operations 6,342 2,345

Advances to staff 20,494 8,124

Hospitalization and medical care under collection 19,294 14,980

Advances on investments 11,212 7,123

Deferred tax assets (note 15) 33,564 22,950

Interest and commissions receivable 2,198 3,225

Funds management fees 3,157 3,152

Fiscal stamps, bullions and commemorative coins 2,129 1,672

Management and advisory fees receivable 1,733 495

Tax regularization account 22,555 15,167

Miscellaneous debtors and other debtor accounts 24,503 29,988

_____________ _____________

278,584 241,484

_____________ _____________

32 GOODWILL Lebanon Switzerland Egypt Sudan United States Monaco Others Total

LL million LL million LL million LL million LL million LL million LL million LL million

Cost:

At 1 January 2013 54,716 46,731 118,899 2,500 - - - 222,846

Foreign exchange difference - 1,274 (12,986) 10 - - - (11,702)

________ __________ __________ __________ __________ __________ __________ __________

At 31 December 2013 54,716 48,005 105,913 2,510 - - - 211,144

________ __________ __________ __________ __________ __________ __________ __________

F - 99

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

57

32 GOODWILL (continued)

Lebanon Switzerland Egypt Sudan United States Monaco Others Total

LL million LL million LL million LL million LL million LL million LL million LL million

Cost:

At 1 January 2012 54,716 45,064 144,216 5,587 - 9,846 2,002 261,431

Entities deconsolidated

during the year - - - - - - (1,996) (1,996)

Impairment – continuing

operations - - (21,167) - - - - (21,167)

Impairment – discontinued

operations - - - - - (9,922) - (9,922)

Foreign exchange difference - 1,667 (4,150) (3,087) - 76 (6) (5,500)

________ __________ __________ __________ __________ __________ __________ __________

At 31 December 2012 54,716 46,731 118,899 2,500 - - - 222,846

________ __________ __________ __________ __________ __________ __________ __________

For the purpose of impairment testing, goodwill is allocated to the Cash Generating Units (CGUs), which

represent the lowest level within the Group at which the goodwill is monitored for internal management

purposes. The cost of equity assigned to an individual CGU and used to discount its future cash flows can have a

significant effect on its valuation. The cost of equity percentage is generally derived from an appropriate capital

asset pricing model, which itself depends on inputs reflecting a number of financial and economic variables

including the risk rate in the country concerned and a premium to reflect the inherent risk of the business being

evaluated.

Management judgment is required in estimating the future cash flows of the CGUs. These values are sensitive to

cash flows projected for the periods for which detailed forecasts are available, and to assumptions regarding the

term sustainable pattern of cash flows thereafter. While the acceptable range within which underlying

assumptions can be applied is governed by the requirement for resulting forecasts to be compared with actual

performance and verifiable economic data in future years, the cash flow forecasts necessarily and appropriately

reflect management view of future business prospects.

The online brokerage CGU in Egypt (Arabeya Online) is a separate legal entity performing brokerage activities

to its customers and is reported under Retail and Personal Banking business segment and MENA geographic

segment. Due to the adverse events witnessed in Egypt, the volume of trading activities has drastically dropped

in that market and accordingly the earnings of this CGU were significantly affected. As a result, an impairment

loss on goodwill amounting to USD 14 million (equivalent to LL 21,167 million) has been recognised during

the year ended 31 December 2012. The recoverable amount of this cash-generating unit is its value in use.

Pursuant to management's decision to discontinue its banking operations carried through Bank Audi SAM

(Monaco), operations in Monaco, the Goodwill attributable to that Private Banking CGU was deemed to be

impaired by effect of discontinuing the operations. The Group's activities in Monaco were included in the

“Retail and Personal Banking” business segment and “Europe” geographic segment. The net results of Bank

Audi SAM were included under “Profit from of Discontinued Operations” in the Income Statement for the years

ended 31 December 2013 and 2012.

The following CGUs include in their carrying value goodwill that is a significant proportion of total goodwill

reported by the Group. These CGUs do not carry on their statement of financial position any intangible assets

with indefinite lives, other than goodwill. The following schedule shows the discount and terminal growth rates

used for CGUs subject to impairment testing.

2013 2012

Discount Terminal Discount Terminal

rate growth rate rate growth rate

% % % %

Cash Generating Units

Commercial and Private Banking – Lebanon 17.00 2.00 17.00 2.00

Private Banking – Switzerland 10.00 2.00 10.00 2.00 Commercial Banking – Egypt 16.00 3.00 17.00 3.00

Commercial Banking – Sudan 22.00 2.00 22.00 2.00

Online Brokerage – Egypt 16.00 4.00 17.00 4.00

The key assumptions described above may change as economic and market conditions change. The Group

estimates that reasonably possible changes in these assumptions are not expected to cause the recoverable

amount of either unit to decline below the carrying amount.

F - 100

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

58

33 DUE TO CENTRAL BANKS

2013 2012

LL million LL million

Subsidised loan 251,534 132,612

Accrued interest 508 496

______________ ______________

252,042 133,108

______________ ______________

During 2013, the Bank signed a credit agreement with the Central Bank of Lebanon based on the provisions of

Decision no. 6116 dated 7 March 1996 relating to the facilities which can be granted by BDL to banks. The loan

amounted to LL 118,922 million as of 31 December 2013.

During 2009, the Bank signed a credit agreement with the Central Bank of Lebanon based on the provisions of

the same decision. The loan amounted to LL 132,612 million as of 31 December 2013. The purpose of this loan

was to finance subsidised loans.

Interest expense on these loans amounted to LL 3,839 million and LL 4,797 million for the years ended 31

December 2013 and 2012, respectively.

34 DUE TO BANKS AND FINANCIAL INSTITUTIONS

2013 2012

LL million LL million

Current accounts 282,592 180,579

Term loans 1,007,723 512,337

Time deposits 303,751 475,488

Accrued interest 5,846 2,770

____________ ____________

1,599,912 1,171,174

Repurchase agreements 196,180 681,487

____________ ____________

1,796,092 1,852,661

____________ ____________

Included in term loans above, is an amount of LL 434,939 million representing loans granted from various

supranational entities for the purpose of financing small and medium size enterprises in the private sector with

annual interest rates ranging from 1.74% to 5.68%.

The commitments arising from bank facilities received are disclosed in note 51 to these consolidated financial

statements.

During the last quarter of 2013, the Group entered into repurchase agreements against pledging treasury bills as

collateral. The terms of these agreements are as follows:

2013 2012

LL million LL million

Central Banks 196,180 241,310

Other banks - 440,177

____________ ____________

196,180 681,487

____________ ____________ Carrying value of collateral 204,799 695,139

Interest expense 9,812 5,151

Annual interest rate 3.75% - 3.83% 4.25% - 10.15%

Maturity date January 2014 During 2013

F - 101

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

59

35 CUSTOMERS’ DEPOSITS AT AMORTISED COST

2013

Corporate and

SME

Retail and

personal

banking

Public

sector

Other

Total LL million LL million LL million LL million LL million Sight deposits 1,989,518 4,906,209 42,946 4,309 6,942,982

Time deposits 10,535,291 21,917,220 303,037 - 32,755,548

Saving accounts 5,563 4,682,109 - - 4,687,672

Certificates of deposits 65,610 995,427 - - 1,061,037

Margins on LC‟s and LG‟s 259,517 58,263 - - 317,780

Other margins 62,330 132,892 - - 195,222

Other deposits 60,172 97,804 - - 157,976

____________ ____________ ____________ ____________ ____________

12,978,001 32,789,924 345,983 4,309 46,118,217

____________ ____________ ____________ ____________ ____________

Deposits pledged as collateral 3,537,437

____________

2012

Corporate and

SME

Retail and

personal

banking

Public

sector

Other

Total

LL million LL million LL million LL million LL million Sight deposits 1,831,353 4,632,182 42,575 - 6,506,110

Time deposits 6,514,884 23,143,181 246,110 - 29,904,175

Saving accounts 11,366 1,720,479 - - 1,731,845

Certificates of deposits 9,389 850,902 - - 860,291

Margins on LC‟s and LG‟s 287,073 58,351 - - 345,424

Other margins 66,791 149,421 - - 216,212

Other deposits 76,571 78,039 223 - 154,833

____________ _____________ _____________ ____________ _____________

8,797,427 30,632,555 288,908 - 39,718,890

____________ ____________ ____________ ____________ ____________

Deposits pledged as collateral 3,586,547

____________

Time deposits include special deposits amounting to LL 1,809,609 million as at 31 December 2013 (2012: LL

1,442,219 million) that pay a preferential (simple) interest rate. The principal is settled at maturity according to

the full discretion of the Bank either in cash or in Lebanese Government Eurobonds denominated in US Dollars

and having the same nominal amount. As these deposits are linked to the credit risk of the Lebanese Republic,

the Bank separated the embedded derivative and accounted for it at fair value through profit or loss.

36 DEPOSITS FROM RELATED PARTIES AT AMORTISED COST

2013

Corporate

and SME

Retail and personal

banking

Total

LL million LL million LL million Sight deposits 21,242 191,101 212,343

Time deposits 317,388 222,105 539,493

Saving accounts - 1,153 1,153

Other deposits and margin accounts 3,865 736 4,601

_____________ ____________ ____________

342,495 415,095 757,590

_____________ ____________ ____________

Deposits pledged as collateral 48,546

____________

F - 102

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

60

36 DEPOSITS FROM RELATED PARTIES AT AMORTISED COST (continued)

2012

Corporate

and SME

Retail and personal

banking

Total

LL million LL million LL million Sight deposits 21,122 177,504 198,626

Time deposits 304,578 177,703 482,281

Saving accounts - 1,268 1,268

Other deposits and margin accounts 6,781 145 6,926

_____________ ____________ ____________

332,481 356,620 689,101

_____________ ____________ ____________

Deposits pledged as collateral 66,557

____________

37 OTHER LIABILITIES

2013 2012

LL million LL million Current tax liabilities (note 15) 80,395 118,058

Accrued expenses 103,775 59,545

Miscellaneous suppliers and other payables 71,754 58,803

Credit balances of factoring clients 97,188 56,740

Operational taxes 48,147 32,620

Employee accrued benefits 3,821 29,195

Unearned commissions and premiums 44,326 12,267

Deferred tax liabilities (note 15) 3,831 13,340

Electronic cards and regularization accounts 6,726 6,493

Social security dues 7,015 6,258

Due to National Institute for Guarantee of Deposits 14,783 1,330

Other credit balances 21,010 14,216

_____________ _____________

502,771 408,865

_____________ _____________

38 PROVISIONS FOR RISKS AND CHARGES

2013 2012

LL million LL million Provisions for risks and charges (a) 42,035 38,571

End of service benefits (b) 90,847 72,742

_____________ _____________

132,882 111,313

_____________ _____________

a) Provisions for risks and charges

2013 2012

LL million LL million Provision for contingencies 18,965 22,753

Provision for legal claims 1,760 1,723

Provision for bonus 17,654 11,818

Other provisions 3,656 2,277

_____________ _____________

42,035 38,571

_____________ _____________

F - 103

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

61

38 PROVISIONS FOR RISKS AND CHARGES (continued)

a) Provisions for risks and charges (continued)

The movement of provision for risks and charges is as follows:

2013 2012

LL million LL million

Balance at 1 January 38,571 24,557

Add:

Charge for operating expenses (note 14) 7,210 8,091

Charge for loans written off 4,507 -

Charge for personnel expenses 19,724 9,506

_____________ _____________

31,441 17,597

_____________ _____________

Less:

Paid during the year 16,952 249

Net provisions recoveries (note 11) 2,307 7

Entities deconsolidated during the year - 2,019

Transfer to other liabilities 3,416 499

Foreign exchange difference 5,302 809

_____________ _____________

27,977 3,583

_____________ _____________

Balance at 31 December 42,035 38,571

_____________ _____________

b) End of service benefits

The Bank in Lebanon has two defined benefit plans covering all of its employees. The first requires

contributions to be made to the National Social Security Fund whereby the entitlement to and level of these

benefits depend on the employees‟ length of service, the employees‟ salaries and contributions paid to the fund

among other requirements. Under the second plan, no contributions are required to be made, however a fixed

end of service lump sum amount should be paid for long service employees. The entitlement to and level of

these end of service benefits provided depends on the employees‟ length of service, the employees‟ salaries and

other requirements outlined in the Workers‟ Collective Agreement. Defined benefit plans for employees at

foreign subsidiaries are set in line with the laws and regulations of the respective countries in which these

subsidiaries are located. The movement of provision for staff retirement benefit obligation is as follows:

2013

Lebanon Foreign countries Total

LL million LL million LL million

Balance at 1 January 2013 58,833 13,909 72,742

Charge for the year (note 13) 17,405 4,336 21,741

Paid during the year (789) (3,200) (3,989)

Actuarial loss or gain on obligation 3,116 (2,538) 578

Provision no more required - (27) (27)

Foreign exchange difference - (198) (198)

_____________ ____________ ____________

Balance at 31 December 2013 78,565 12,282 90,847

_____________ ____________ ____________

F - 104

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

62

38 PROVISIONS FOR RISKS AND CHARGES (continued)

b) End of service benefits (continued) 2012

Lebanon Foreign countries Total LL million LL million LL million

Balance at 1 January 2012 – as originally reported

43,290

5,112

48,402

Actuarial differences resulting from the

adoption of IAS 19 (2011)

6,824

5,898

12,722 _____________ ____________ ____________

Balance at 1 January 2012 – as

subsequently adjusted

50,114

11,010

61,124

Charge for the year (note 13) 11,989 3,235 15,224

Paid during the year (2,615) (2,820) (5,435) Actuarial loss on obligation 710 2,862 3,572

Transfer from deconsolidated entities 113 - 113

Transfer to non current assets held for sale (502) - (502) Effect of entities deconsolidated during

the year

(977)

-

(977)

Foreign exchange difference - (377) (377) _____________ ____________ ____________

Balance at 31 December 2012 58,832 13,910 72,742

_____________ ____________ ____________

The amount provided during the year is as follows:

2013 2012

LL million LL million

Current service cost 10,793 11,827

Interest on obligation 3,730 3,397

Past service cost 7,218 -

_____________ _____________

Total charge for the year 21,741 15,224

_____________ _____________

Defined benefit plans in Lebanon constitute more than 80% of the Group required obligation. The key

assumptions used in the calculation of Lebanese retirement benefit obligation are as follows:

Economic assumptions

2013 2012 Discount rate (p.a.) 8.50% 8.50%

Salary increase (p.a.)

Employees 6% 6%

Senior managers 8% 8%

Expected annual rate of return on NSSF contributions 5% Reducing from 6%

in 2013 to 5% in

2018; and 5%

thereafter

Treatment of bonus 3-year average as a

% of basic

3-year average as a

% of basic

Demographic assumptions

Retirement age Earliest of age 64 or

completion of 20

contribution years

Earliest of age 64 or

completion of 20

contribution years

Pre – termination mortality None None

Pre – termination turnover rates (age related with average of) 2.00% 2.00%

F - 105

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

63

38 PROVISIONS FOR RISKS AND CHARGES (continued)

b) End of service benefits (continued)

A quantitative sensitivity analysis for significant assumptions as at 31 December 2013 is shown as below:

Discount rate Future salary increase NSSF interest rate

% increase % decrease % increase % decrease % increase % decrease

LL million LL million LL million LL million LL million LL million Impact on net defined benefit obligation (4,575) 5,041 2,941 (2,812) (1,764) 1,708

The sensitivity analyses above was determined based on a method that extrapolates the impact on net defined

benefit obligation as a result of 50 basis point changes in key assumptions occurring at the end of the reporting

period.

39 SUBORDINATED LOANS AND SIMILAR DEBTS

2013 2012

LL million LL million Subordinated loans 527,625 -

Accrued interests 9,476 -

_____________ _____________

537,101 -

_____________ _____________

During 2013, the Bank issued subordinated bonds maturing on 16 October 2023 with a nominal value of US$

350 million subject to the following conditions:

1- Nature of the bonds: subordinated unsecured bonds;

2- Maturity: the bonds mature after ten years from the date of issuance (with an additional margin of three

months), with the option of prepayment at the Bank‟s discretion and according to the conditions set forth

in item 4 below;

3- Interest: annual interest of 6.75% payable every three months and calculated on the basis of 30/360, net of

applicable tax. In case the bondholder was not a Lebanese bank or Lebanese financial institution, the issuer

shall reimburse any amounts deducted (Gross-Up).

4- Prepayment: the Group, at its sole discretion and after obtaining approval of the Central Bank of

Lebanon, has the right to prepay all bonds (entirely and not partially) according to the following:

4-1 First time, after five years from issuance and upon payment of interest thereafter.

4-2 Without regard to the dates set above and according to the following:

- At any time after one year from the date of issuance, in the event of amendments to local and

international laws and regulations, the subordinated bonds cannot be computed within the private funds

of the Bank (Tier II);

- At any time after one year from the date of issuance for reasons related to the amendment of Lebanese

taxation laws;

5- Liquidation rights: In case the Group permanently stopped payments or in the event of its voluntary or

involuntary liquidation, the holders of subordinated bonds shall be entitled to payment until all the deposits

of the Group and other unsecured and unsubordinated commitments have been fulfilled but on equal terms

with any subordinated debt holders, if existent, and before fulfilling the rights of common and preferred

shareholders.

F - 106

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

64

40 SHARE CAPITAL

The share capital of Bank Audi SAL – Audi Saradar Group as at 31 December is as follows:

2013 2012

Stock exchange Number of Number of

listing shares LL million shares LL million

Ordinary shares Beirut 247,255,293 321,185 247,731,553 310,656

Global depository receipts

London SEAQ and Beirut

102,493,911

133,139

102,017,651

127,930

__________ ___________ __________ ___________

349,749,204 454,324 349,749,204 438,586

__________ ___________ __________ ___________

Preferred shares series “D” Beirut - - 12,500,000 15,675

Preferred shares series “E” Beirut 1,250,000 1,623 1,250,000 1,568

Preferred shares series “F” Beirut 1,500,000 1,949 1,500,000 1,881

Preferred shares series “G” Beirut 1,500,000 1,949 - -

Preferred shares series “H” Beirut 750,000 974 - -

__________ ___________ __________ ___________

5,000,000 6,495 15,250,000 19,124

__________ ___________ __________ ___________

354,749,204 460,819 364,999,204 457,710

__________ ___________ __________ ___________

1. In its meeting dated 15 April 2013 the Extraordinary General Assembly of shareholders decided to cancel

the series “D” preferred shares totalling 12,500,000 shares which have a nominal value of LL 15,675

million and to simultaneously replenish the share capital accounts by transferring the same amount from

general reserves. As a result and avoiding decimals in the share nominal value, the Bank increased its

capital up to LL 457,897 million, thus an increase of LL 187 million by converting an additional amount

of LL 63 million from general reserves and LL 124 million from the issue premium- preferred shares to

share capital, so that the nominal value per share after the cancellation and capital increase amounted to

LL 1,299. The Bank had issued preferred shares series “D” pursuant to the resolution of the extraordinary

general assembly held on 5 September 2005, under the following terms:

- Number of shares: 12,500,000 (after the stock split)

- Share‟s issue price: USD 100

- Share‟s nominal value: LL 1,000 (subsequently increased to LL 1,254 due to the increase of the share‟s

nominal value).

- Issue premium : Calculated in USD as the difference between USD 100 and the counter value of the

par value per share based on the exchange rate at the underwriting dates.

- Benefits: Annual dividends of USD 7.75 per share, non cumulative.

- Repurchase right: The Bank has the right to purchase the shares in 5 years after issuance, as well as to

call them off by that date.

2. The Extraordinary General Assembly of shareholders held on 15 April 2013 also decided to increase the

Bank's capital by LL 2,922 million through the issuance of 2,250,000 preferred shares divided into

1,500,000 series "G" preferred shares and 750,000 series “H” preferred shares with a nominal value of LL

1,299 under the following terms

a- Preferred shares series ”G”

- Number of shares: 1,500,000

- Share‟s issue price: USD 100

- Share‟s nominal value: LL 1,299

- Issue premium : Calculated in USD as the difference between USD 100 and the counter value of the

par value per share based on the exchange rate at the underwriting dates.

- Benefits: Annual non cumulative dividends of USD 4 per share for the year 2013, and USD 6

for each subsequent year.

- Repurchase right: The Bank has the right to repurchase the shares in 5 years after issuance, as well as to

call them off by that date.

F - 107

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

65

40 SHARE CAPITAL (continued)

b- Preferred shares series ”H”

- Number of shares: 750,000

- Share‟s issue price: USD 100

- Share‟s nominal value: LL 1,299

- Issue premium : Calculated in USD as the difference between USD 100 and the counter value of the

par value per share based on the exchange rate at the underwriting dates.

- Benefits: Annual non cumulative dividends of USD 4.5 per share for the year 2013, and USD 6.5

for each subsequent year.

- Repurchase right: The Bank has the right to repurchase the shares in 7 years after issuance, as well as to

call them off by that date.

The Extraordinary General Assembly of shareholders held on 21 June 2013 validated and ratified the

capital increases according to the aforementioned terms for preferred shares series “G” and “H”.

3. Pursuant to the resolution of the extraordinary general assembly of shareholders held on 10 April 2012,

the Bank issued preferred shares series “F” under the following terms:

Number of shares: 1,500,000

Share‟s issue price: USD 100

Share‟s nominal value: LL 1,254 (later became LBP 1,299 upon increasing the nominal value).

Issue premium: Calculated in USD as the difference between USD 100 and the counter value of the

par value per share based on the exchange rate at the underwriting dates.

Benefits: Annual non cumulative dividends of USD 4 per share for the year 2012, and USD 6

for each subsequent year.

Repurchase right: The Bank has the right to repurchase the shares in 5 years after issuance, as well as to

call them off by that date.

The Extraordinary General Assembly of shareholders held on 22 June 2012 validated and ratified the

capital increases according to the aforementioned terms.

4. Pursuant to the resolution of the extraordinary general assembly of shareholders held on 2 March 2010,

the Bank issued 1,250,000 preferred shares series “E” according to the following terms:

Number of shares: 1,250,000

Share‟s issue price: USD 100

Share‟s nominal value: LL 1,225 (later became LBP 1,299 upon increasing the nominal value).

Issue premium: Calculated in USD as the difference between USD 100 and the counter value of the

par value per share based on the exchange rate at the underwriting dates.

Benefits: Annual dividends of USD 6 per share, non cumulative (for 2010 was set to USD 4

per share).

Repurchase right: The Bank has the right to repurchase the shares in 5 years after issuance, as well as

to call them off by that date.

5. 476,260 Common Shares were transferred to Global Depository Receipts during 2013.

6. In accordance with the resolution of the extraordinary general assembly of shareholders held on 22 June

2012, the Bank increased the share capital by LL 389 million by issuing 309,260 common shares, entirely

designated for options holders who exercised their rights.

F - 108

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

66

40 SHARE CAPITAL (continued)

Paid dividends

In accordance with the resolution of the general assembly of shareholders held on 8 April 2013, dividends were

distributed as follows:

2013

Number of

shares

Distribution

per share

Total LL million LL million

Preferred shares series “D” 12,500,000 1,168 14,604

Preferred shares series “E” 1,250,000 9,045 11,306

Preferred shares series “F” 1,500,000 6,030 9,045

Common shares and Global Depository Receipts 348,550,907 603 210,176

_____________

245,131

_____________

In accordance with the resolution of the general assembly of shareholders held on 10 April 2012, dividends were

distributed as follows:

2012

Number of Distribution

shares per share Total

LL LL million Preferred shares series “D” 12,500,000 1,168 14,604

Preferred shares series “E” 1,250,000 9,045 11,306

Common shares and Global Depository Receipts 349,439,944 603 210,712

____________

236,622

____________

41 ISSUE PREMIUMS

2013 2012

LL million LL million Issue premium – common shares 659,206 659,206

Issue premium – preferred shares 747,255 583,876

___________ _____________

1,406,461 1,243,082

___________ _____________

The movements on the issue premiums are detailed as follows as at 31 December 2013 and 2012:

- Pursuant to the resolution of the extraordinary general assembly of shareholders dated 15 April 2013

related to the cancellation of preferred shares series “D”, the Bank decreased the issue premium of

preferred shares by LL 172,762 and transferred an amount of LL 124 million from the issue premium of

preferred shares to the share capital accounts of preferred shares series “G” and “H” (note 40).

- The increase in the issue premium of preferred shares for the year ended 31 December 2013 amounting to

LL 336,265 million resulted from the issuance of 1,500,000 preferred shares series “G” and 750,000

preferred shares “H” (note 40).

- The increase in common shares issue premium for the year ended 31 December 2012 represent the

issuance of 309,260 common shares pursuant to the exercise of stock options. The subscribers paid the

difference between USD 2.719 and the nominal amount per share based on the exchange rates at the

exercise dates. Besides, an amount of LL 587 million was transferred from the employees‟ share-based

payments reserve to the issue premium of subscribed shares.

- The increase in the issue premium of preferred shares for the year ended 31 December 2012 amounting to

LL 224,243 million resulted from the issuance of 1,500,000 preferred shares series “F”.

F - 109

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

67

42 CASH CONTRIBUTION TO CAPITAL

In previous years, agreements were entered between the Bank and its shareholders whereby the shareholders

granted cash contributions to the Bank amounting to LL 72,586 million (USD 48,150,000) as at 31 December

2013 and 2012 subject to the following conditions:

- These contributions will remain placed as a fixed deposit as long as the Bank performs banking activities;

- If the Bank incurs losses and has to reconstitute its capital, these contributions may be used to cover the losses

if needed;

- The shareholders have the right to use these contributions to settle their share in any increase of capital;

- No interest is due on the above contributions;

- The above cash contributions are considered as part of Tier I capital for the purpose of determining the Bank‟s

capital adequacy ratio; and

- The right to these cash contributions is for the present and future shareholders of the Bank.

43 NON DISTRIBUTABLE RESERVES

Legal

reserve

Reserves

appropriated

for capital

increase

Gain on sale

of treasury

shares

Reserve for

general

banking

risks

Unrealised gain

on fair value

through profit or

loss

Reserve for

foreclosed

assets

Other

reserves Total

LL million LL million LL million LL million LL million LL million LL million LL million

Balance at 1 January 2013 337,255 44,626 22,936 393,899 4,679 3,725 5,840 812,960

Appropriation of 2012 profits 53,629 8,591 - 55,541 21,277 2,604 9,690 151,332

Entities deconsolidated during

the year (251) - - - - - - (251)

Treasury shares transactions - - 146 - - - - 146

Non-controlling interest share

of reserves (116) - - - - - - (116)

Transfers between reserves - - - - (4,526) - - (4,526)

__________ __________ __________ __________ _________ _________ _________ __________

Balance at 31 December 2013 390,517 53,217 23,082 449,440 21,430 6,329 15,530 959,545

__________ __________ __________ _________ _________ _________ _________ __________

Legal

reserve

Reserves

appropriated

for capital

increase

Gain on sale

of treasury

shares

Reserve for

general

banking

risks

Unrealised gain

on fair value

through profit

or loss

Reserve for

foreclosed

assets

Other

reserves Total

LL million LL million LL million LL million LL million LL million LL million LL million

Balance at 1 January 2012 286,273 33,453 47,076 323,971 - 5,000 587 696,360

Appropriation of 2011 profits 57,901 11,174 - 63,705 153 351 - 133,284

Distribution of dividends on

ordinary shares - - 443 -

-

-

-

443

Employees‟ share-based

payments - - - -

-

-

(587) (587)

Entities deconsolidated during

the year (8,219) - - -

-

-

-

(8,219)

Treasury shares transactions - - (24,583) - - - - (24,583)

Non-controlling interest share

of reserves (137) (1) - -

-

-

- (138)

Transfers between reserves 1,649 - - 6,223 4,526 (1,626) 5,840 16,612

Other movements (212) - - - - - - (212)

__________ __________ __________ __________ __________ _________ _________ __________

Balance at 31 December 2012

337,255 44,626 22,936 393,899

4,679 3,725

5,840 812,960

__________ __________ __________ _________ _________ _________ _________ __________

Legal reserve

The Lebanese Commercial Law and the Bank‟s articles of association stipulate that 10% of the net annual

profits be transferred to legal reserve. In addition, subsidiaries and branches are also subject to legal reserve

requirements based on the rules and regulations of the countries in which they operate. This reserve is not

available for dividend distribution.

The Bank and different subsidiaries transferred to legal reserve an amount of LL million 53,629 (2012:

LL 57,901 million) as required by the laws applicable in the countries in which they operate.

Reserves appropriated for capital increase

The Bank and the subsidiaries transferred LL 8,591 million from 2013 profits (2012: LL 11,174 million) to

reserves appropriated for capital increase. This amount represents the net gain on the disposal of fixed assets

acquired in settlement of debt, in addition to reserves on recovered provisions for doubtful loans and debts

previously written off, whenever recoveries exceed booked allowances.

F - 110

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

68

43 NON DISTRIBUTABLE RESERVES (continued)

Gain on sale of treasury shares

These gains arise from the Global Depository Receipts (GDRs) owned by the Group. Based on the applicable

regulations, the Bank does not have the right to distribute these gains.

The net gain arising from the treasury GDRs amounted to LL 146 million for the year ended 31 December 2013

(2012: loss of LL 24,583 million).

Reserve for unrealised revaluation gains on financial assets at fair value through profit or loss

As per the Banking Control Commission circular No. 270 dated 19 September 2011, banks are required to

appropriate in a special reserve from their annual net profits the value of gross unrealized profits on financial

assets at fair value through profit or loss. This reserve is not available for dividend distribution until such profits

are realized and released to general reserves.

Reserves for general banking risks

According to the Bank of Lebanon‟s regulations, banks are required to appropriate from their annual net profit a

minimum of 0.2 percent and a maximum of 0.3 percent of total risk weighted assets and off-balance sheet accounts

based on rates specified by the Central Bank of Lebanon to cover general banking risks. The consolidated ratio

should not be less than 1.25 percent of these risks by the year 2017 and 2 percent by the year 2027. This reserve is

part of the Group‟s equity and is not available for distribution.

Reserve for foreclosed assets

The reserve for foreclosed assets represents appropriation against assets acquired in settlement of debt in

accordance with the circulars of the Lebanese Banking Control Commission. Appropriations against assets

acquired in settlement of debt shall be transferred to unrestricted reserves upon the disposal of the related assets.

Other reserves

In accordance with decision 362 of the Council of Money and Credit of Syria, unrealized accumulated foreign

exchange profits from the revaluation of the structural position in foreign currency maintained by the subsidiary

bank in Syria are non-distributable.

44 DISTRIBUTABLE RESERVES

General

reserves

Reserve for share

option agreements

Other

reserves

Total

LL million LL million LL million LL million Balance at 1 January 2013 553,075 - (1,669) 551,406

Appropriation of 2012 profits 18,825 - - 18,825

Transfer to capital increase (15,738) - - (15,738)

Entities deconsolidated during the year (2,894) - - (2,894)

Non controlling interest share of reserves (13,365) - - (13,365)

Issue preferred shares G & H - - (174) (174) Transfers between reserves 51,470 - - 51,470

Other movements (7) - - (7)

____________ ____________ ____________ ____________

Balance at 31 December 2013 591,366 - (1,843) 589,523

____________ ____________ ____________ ____________

General

reserves

Reserve for share

option agreements

Other

reserves

Total

LL million LL million LL million LL million Balance at 1 January 2012 567,742 (185,858) (1,669) 380,215

Appropriation of 2011 profits 1,505 - - 1,505 Entities deconsolidated during the year (19,637) - - (19,637)

Non controlling interest share of reserves (4,308) - - (4,308)

Reserves for share option agreements - 6,844 - 6,844

Transfers between reserves 7,767 179,014 - 186,781

Other movements 6 - - 6

____________ ____________ ____________ ____________

Balance at 31 December 2012 553,075 - (1,669) 551,406

____________ ____________ ____________ ____________

F - 111

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

69

44 DISTRIBUTABLE RESERVES (continued)

Reserve for share option agreements During January 2010, the Bank entered into share option agreements with two structured investment vehicles

(SIVs) who undertook the issuance of 5% callable notes exchangeable into shares of the Bank and maturing on

19 July 2013 (the “series 1” notes). The nominal value of the issued notes amounted to USD 355 million. The

share option agreement provides the Bank with the right but not the obligation, in its sole discretion, to purchase

or cause to be purchased, all or any part of the shares held by the SIVs. The share option agreements also cause

the purchase, subject to all necessary approvals and authorisations or procure the purchase, of all or part of the

Bank‟s shares to fund the cash reserves of the SIVs in case they were insufficient to pay their obligations when

they fall due.

During 2012, the Bank settled an amount of LL 179,014 million to finance the cash reserves of the SIVs pursuant

to their early redemption of the series 1 notes. Besides, the SIVs issued new “series 2” notes with a nominal

amount of USD 205 million exchangeable into shares of the Bank, bearing 5% annual interest and maturing on 11

May 2016. The series 2 notes are subject to terms and conditions similar to those described above which used to be

applicable to the series 1 notes.

45 PROPOSED DIVIDENDS

In its meeting held on 20 March 2014, the Board of Directors of the Bank resolved to propose to the annual

Ordinary General Assembly the distribution of dividends of LL 603 per common share and GDR. Proposed

dividends related to preferred shares amounted to LL 39,007 million. These dividends are subject to the General

Assembly‟s approval.

46 TREASURY SHARES

2013 2012

Number of Cost Number of Cost

GDRs LL million GDRs LL million Balance at 1 January 1,897,535 20,245 8,497,399 103,912 Purchase of treasury shares 7,738,634 97,737 8,364,532 49,923

Sale of treasury shares (414,284) (3,655) (14,964,396) (133,590)

___________ ___________ ___________ ___________

Balance at 31 December 9,221,885 114,327 1,897,535 20,245

___________ ___________ ___________ ___________

47 OTHER COMPONENTS OF EQUITY

2013

Reserve for

real estate

revaluation

Cumulative

changes in

fair value

Foreign

currency

translation

reserve

Actuarial loss

on defined

benefit

obligation

Group share

of associates’

other

comprehensive

income

Total

LL million LL million LL million LL million LL million LL million

Balance at 1 January 2013 20,375 86,805 (173,759) (12,896) - (79,475)

Other comprehensive income - 32,636 (260,131) (745) 4,546 (223,694)

Non-controlling interest share of reserves - 2 34,086

-

- 34,088

__________ ___________ ___________ ___________ ___________ __________

Balance at 31 December 2013 20,375 119,443 (399,804) (13,641) 4,546 (269,081)

__________ ___________ ___________ ___________ ___________ __________

F - 112

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

70

47 OTHER COMPONENTS OF EQUITY (continued)

2012

Reserve for real

estate

revaluation

Cumulative

changes in fair

value

Foreign currency

translation

reserve

Actuarial loss on

defined benefit

obligation

Total

LL million LL million LL million LL million LL million Balance at 1 January 2012 – as

originally reported

20,375

87,228

(86,547)

-

21,056

Effect of adoption of IAS 19 (R) - - - (10,223) (10,223)

__________ ___________ ___________ ___________ ___________ Balance at 1 January 2012 as

subsequently adjusted

20,375

87,228

(86,547)

(10,223)

10,833

Other comprehensive income - (4,054) (129,732) (2,750) (136,536) Entities deconsolidated during the

year -

275 145

77 497

Non-controlling interest share of reserves - 130 43,680

- 43,810

Transfers between reserves - 3,226 (1,305) - 1,921

__________ ___________ ___________ ___________ ___________

Balance at 31 December 2012 20,375 86,805 (173,759) (12,896) (79,475)

__________ ___________ ___________ ___________ ___________

Reserve for real estate revaluation

During the year 1995, the Bank revalued certain real estate properties based on the provisions of law number

282 dated 30 December 1993 and decree number 5451 dated 26 July 1994. The revaluation differences

amounted to LL 16,600 million. Another LL 2,000 million relate to the revaluation of some of the Bank‟s assets

in 1994 and LL 1,775 million is due to the reclassification of real estate revaluation differences made during

2011 by the National Bank of Sudan.

Cumulative changes in fair value

The cumulative changes as at 31 December 2013 represent the fair value differences from the revaluation of

financial assets measured at fair value through other comprehensive income.

The movement of the cumulative changes in fair value is as follows:

Change in

fair value

Deferred

tax Net

LL million LL million LL million Balance at 1 January 2013 96,766 (9,961) 86,805

Other comprehensive income 25,647 6,989 32,636

Non-controlling interest share of reserves 2 - 2

___________ ___________ ___________

Balance at 31 December 2013 122,415 (2,972) 119,443

___________ ___________ ___________

Balance at 1 January 2012 87,522 (294) 87,228

Other comprehensive income 5,613 (9,667) (4,054)

Entities deconsolidated during the year 275 - 275

Non-controlling interest share of reserves 130 - 130

Transfers between reserves 3,226 - 3,226

___________ ___________ ___________

Balance at 31 December 2012 96,766 (9,961) 86,805

___________ ___________ ___________

F - 113

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

71

48 NON-CONTROLLING INTEREST

2013 2012

LL million LL million Capital 118,329 118,613

Capital reserves 34,861 21,380

Retained earnings 2,850 6,781

Profit for the year 4,497 13,552

Other components of equity (97,574) (63,488)

___________ ___________

62,963 96,838

___________ ___________

Material Partially Owned Subsidiaries National Bank of Sudan Bank Audi Syria S.A.

2013 2012 2013 2012

% % % % Proportion of equity interests held by non-controlling interests 23.44% 23.44% 53% 53%

Summarized statement of profit or loss National Bank of Sudan Bank Audi Syria S.A.

2013 2012 2013 2012

LL million LL million LL million LL million Net interest income 7,550 8,864 10,434 26,162

Net fee and commission income 4,125 3,352 4,269 9,548

Net gain on financial assets at fair value through profit or loss 587 44,445 39,876 28,627

Net gain on sale of financial assets at amortized cost - - 33 1,187

Other operating income 665 425 67 391

___________ ___________ ___________ ___________

Total Operating Income 12,927 57,086 54,679 65,915 Net credit gains (losses) 1,501 (1,501) (41,550) (43,172)

Total operating expenses (4,220) (3,620) (9,900) (21,230)

Non operating revenues (expenses) 57 - (2) (123)

___________ ___________ ___________ ___________

Profit Before Tax 10,265 51,965 3,227 1,390

Income tax (797) (1,533) - (1,547)

___________ ___________ ___________ ___________

Profit for the period 9,468 50,432 3,227 (157)

___________ ___________ ___________ ___________

Attributable to non-controlling interests 2,219 11,821 1,711 (83)

___________ ___________ ___________ ___________

Dividends paid to non-controlling interests 1,845 4,011 - -

___________ ___________ ___________ ___________

Summarized statement of financial position National Bank of Sudan Bank Audi Syria S.A.

2013 2012 2013 2012

LL million LL million LL million LL million

ASSETS

Cash and balances with central banks 38,697 29,590 179,288 281,804

Due from banks and financial institutions 124 86 12,692 21,979

Due from head office, sister, related banks and financial institutions 86,402 80,304 77,208 101,012

Loans and advances to customers at amortized cost 21,386 13,811 195,672 407,051

Financial assets at amortized cost 32,560 33,813 83,200 104,639

Investment in subsidiaries and associates - - 3,556 6,495

Property and equipment 2,740 2,870 13,540 27,058

Intangible assets 213 50 925 1,694

Non current assets held for sale - - 970 1,798

Other assets 3,246 3,575 2,494 4,633

___________ ___________ ___________ ___________

TOTAL ASSETS 185,368 164,099 569,545 958,163

___________ ___________ ___________ ___________

LIABILITIES

Due to banks and financial institutions - - 22,263 28,460

Due to head office, sister, related banks and financial institutions 25,570 20,098 82 195

Customers‟ deposits at amortized cost 51,310 46,698 451,959 763,941

Deposits from related parties at amortized cost - - 13,681 23,554

Other liabilities 11,049 3,864 3,792 5,071

Provisions for risks and charges 480 597 2,245 2,950

___________ ___________ ___________ ___________

TOTAL LIABILITIES 88,409 71,257 494,022 824,171

___________ ___________ ___________ ___________

TOTAL SHAREHOLDERS’ EQUITY 96,959 92,842 75,523 133,992

Attributable to: non-controlling interest 13,002 2,873 (11,472) 2,611

___________ ___________ ___________ ___________

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 185,368 164,099 569,545 958,163

___________ ___________ ___________ ___________

F - 114

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

72

48 NON-CONTROLLING INTEREST (continued)

Summarized cash flow information National Bank of Sudan Bank Audi Syria S.A.

2013 2012 2013 2012

LL million LL million LL million LL million Operating 7,929 47,203 60,156 (47,459)

Investing 1,093 (2,384) (26,910) 31,896

Financing (5,417) (20,449) (5) (2)

___________ ___________ ___________ ___________ 3,605 24,370 33,241 (15,565)

___________ ___________ ___________ ___________

49 CASH AND CASH EQUIVALENTS

2013 2012

LL million LL million Cash and balances with Central Banks 1,664,983 2,160,406

Due from banks and financial institutions 4,195,176 4,025,200

Loans to banks and financial institutions and reverse repurchase

agreements

406,488

819,808

Due to banks and financial institutions (667,093) (731,465)

Due to banks under repurchase agreements (196,179) (681,487)

___________ ___________

5,403,375 5,592,462

___________ ___________

50 FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair values in this note are stated at a specific date and may be different from the amounts which will

actually be paid on the maturity or settlement dates of the instrument. In many cases, it would not be possible to

realize immediately the estimated fair values given the size of the portfolios measured. Accordingly, these fair

values do not represent the value of these instruments to the Group as a going concern. Financial assets and

liabilities are classified according to a hierarchy that reflects the significance of observable market inputs. The

three levels of the fair value hierarchy are defined below.

Quoted market prices – Level 1

Financial instruments are classified as Level 1 if their value is observable in an active market. Such instruments are

valued by reference to unadjusted quoted prices for identical assets or liabilities in active markets where the quoted

price is readily available, and the price represents actual and regularly occurring market transactions on an arm‟s

length basis. An active market is one in which transactions occur with sufficient volume and frequency to provide

pricing information on an ongoing basis.

Valuation technique using observable inputs – Level 2

Financial instruments classified as Level 2 have been valued using models whose most significant inputs are

observable in an active market. Such valuation techniques and models incorporate assumptions about factors

observable in an active market, that other market participants would use in their valuations, including interest rate

yield curve, exchange rates, volatilities, and prepayment and defaults rates.

Valuation technique using significant unobservable inputs – Level 3

Financial instruments are classified as Level 3 if their valuation incorporates significant inputs that are not based on

observable market data (unobservable inputs). A valuation input is considered observable if it can be directly

observed from transactions in an active market, or if there is compelling external evidence demonstrating an

executable exit price. Unobservable input levels are generally determined based on observable inputs of a similar

nature, historical observations or other analytical techniques.

F - 115

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

73

50 FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

Fair value measurement hierarchy of the Group’s financial assets and liabilities carried at fair value:

2013

Level 1 Level 2 Level 3 Total

LL million LL million LL million LL million

FINANCIAL ASSETS

Derivative financial assets 62,788 73,274 - 136,062

____________ ____________ ____________ ____________

Financial assets at fair value through profit or loss

Lebanese sovereign

Central Bank‟s certificates of deposits - 19,118 - 19,118

Treasury bills - 138,265 - 138,265

Eurobonds 123,690 - - 123,690

Other sovereign

Treasury bills 1,843 - - 1,843

Private sector and other securities

Banks and financial institutions debt instruments 1,484 1,701 - 3,185

Corporate debt instruments 10,507 - - 10,507

Loans and advances to customers - 47,844 - 47,844

Investment and mutual funds 16,318 44,715 - 61,033

Equity instruments 3,598 - - 3,598

____________ ____________ ____________ ____________

157,440 251,643 - 409,083

____________ ____________ ____________ ____________

Financial assets designated at fair value through other

comprehensive income

Private sector and other securities

Equity instruments 5,795 190,043 76,637 272,475

____________ ____________ ____________ ____________

226,023 514,960 76,637 817,620

____________ ____________ ____________ ____________

FINANCIAL LIABILITIES

Derivative financial liabilities 60,351 74,115 - 134,466

____________ ____________ ____________ ____________

2012

Level 1 Level 2 Level 3 Total

LL million LL million LL million LL million

FINANCIAL ASSETS

Derivative financial assets 43,815 7,231 - 51,046

____________ ____________ ____________ ____________

Financial assets at fair value through profit or loss

Lebanese sovereign

Central Bank‟s certificates of deposits 592 10,676 - 11,268

Treasury bills - 124,843 - 124,843

Eurobonds 232,410 - - 232,410

Other sovereign -

Eurobonds 1,615 - - 1,615

Private sector and other securities -

Banks and financial institutions debt instruments 617 1,787 - 2,404

Corporate debt instruments 10,338 2 - 10,340

Loans and advances to customers - 75,555 - 75,555

Investment and mutual funds 30,810 18,200 - 49,010

Equity instruments 3,212 - - 3,212

____________ ____________ ____________ ____________

279,594 231,063 - 510,657

____________ ____________ ____________ ____________

Financial assets designated at fair value through other

comprehensive income

Private sector and other securities

Equity instruments 4,756 170,762 70,275 245,793

____________ ____________ ____________ ____________

292,165 409,056 70,275 802,496

____________ ____________ ____________ ____________

FINANCIAL LIABILITIES

Derivative financial liabilities 51,462 4,580 - 56,042

____________ ____________ ____________ ____________

There were no transfers between levels during 2013 (2012: the same).

F - 116

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

74

50 FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

Assets and liabilities carried at fair value using a valuation technique with significant observable inputs

(Level 2)

Derivatives

Derivative products are valued using a valuation technique with market observable inputs. The most frequently

applied valuation techniques include forward pricing and swap models, using present value calculations. The

models incorporate various inputs including the credit quality of counterparties, foreign exchange spot and

forward rates and interest rate curves.

Government bonds, certificates of deposits and other debt securities

The Group values these unquoted debt securities using discounted cash flow valuation models where the lowest

level input that is significant to the entire measurement is observable in an active market. These inputs include

assumptions regarding current rates of interest, implied volatilities, and credit spreads.

Assets and liabilities carried at fair value using a valuation technique with significant unobservable inputs

(Level 3)

Equity shares of non-listed entities

The Group‟s strategic investments are generally classified at fair value through other comprehensive income and

are not traded in active markets. These are investments in private companies, for which there is no or only

limited sufficient recent information to determine fair value. The Group determined that cost adjusted to reflect

the investee‟s financial position and results since initial recognition represents the best estimate of fair value.

Comparison of carrying and fair values for financial assets and liabilities not held at fair value:

The fair values included in the table below were calculated for disclosure purposes only. The fair valuation

techniques and assumptions described below relate only to the fair value of the Group‟s financial instruments

not measured at fair value. Other institutions may use different methods and assumptions for their fair value

estimations, and therefore such fair value disclosures cannot necessarily be compared from one institution to

another.

The fair value of financial instruments that are carried at amortised cost as of 31 December 2013 is as follows:

2013

Fair value Book value Unrealized gain (loss) LL million LL million LL million

Financial assets

Cash and balances with central banks 9,191,435 9,192,108 (673)

Due from banks and financial institutions 4,227,128 4,229,556 (2,428)

Loans to banks and financial institutions and reverse repurchase agreements 780,419 657,945 122,474

Loans and advances to customers at amortised cost 22,371,602 22,064,822 306,780

Loans and advances to related parties at amortised cost 114,756 114,829 (73)

Financial assets at amortised cost 16,142,357 16,023,035 119,322

______________ ______________ ______________

52,827,697 52,282,295 545,402

______________ ______________ ______________

Financial liabilities

Due to central banks 252,042 252,042 -

Due to banks and financial institutions 1,602,387 1,599,912 (2,475)

Due to banks under agreements 196,180 196,180 -

Customers‟ deposits at amortised cost 46,142,845 46,118,217 (24,628)

Deposits from related parties at amortised cost 757,809 757,590 (219)

Subordinated loans and similar debts 537,101 537,101 -

______________ ______________ ______________ 49,488,364 49,461,042 (27,322)

______________ ______________ ______________

F - 117

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

75

50 FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

The breakdown by major class of financial assets is as follows:

2013

Fair value Book value Unrealized gain (loss) LL million LL million LL million

Net loans and advances to customers at amortized cost

Corporate 11,549,594 11,463,079 86,515

SME 5,972,484 5,926,604 45,880

Retail and personal banking 4,570,516 4,397,625 172,891

Public Sector 279,008 277,514 1,494

______________ ______________ ______________

22,371,602 22,064,822 306,780 ______________ ______________ ______________ Net loans and advances to related parties at

amortized cost

Corporate 8,172 8,172 -

SME 27,724 28,000 (276)

Retail and personal banking 78,860 78,657 203

______________ ______________ ______________

114,756 114,829 (73) ______________ ______________ ______________ Financial assets classified at amortized cost

Lebanese sovereign and Central Bank 11,870,024 11,748,791 121,233

Other sovereign 3,178,880 3,195,207 (16,327)

Private sector and other securities 1,093,453 1,079,037 14,416

______________ ______________ ______________

16,142,357 16,023,035 119,322

______________ ______________ ______________

The fair value of financial instruments that are carried at amortised cost as of 31 December 2012 is as follows:

2012

Fair value Book value Unrealized gain (loss) LL million LL million LL million

Financial assets

Cash and balances with central banks 9,462,172 9,462,380 (208) Due from banks and financial institutions 4,281,096 4,280,978 118

Loans to banks and financial institutions and reverse

repurchase agreements 1,060,265 1,060,267 (2) Loans and advances to customers at amortised cost 15,497,755 15,416,403 81,352

Loans and advances to related parties at amortised cost 305,040 304,511 529

Financial assets at amortised cost 14,694,614 14,549,116 145,498 ______________ ______________ ______________

45,300,942 45,073,655 227,287 ______________ ______________ ______________

Financial liabilities

Due to central banks 133,108 133,108 - Due to banks and financial institutions 1,171,265 1,171,174 (91)

Due to banks under agreements 681,487 681,487 -

Customers‟ deposits at amortised cost 39,725,231 39,718,890 (6,341) Deposits from related parties at amortised cost 690,350 689,101 (1,249)

______________ ______________ ______________

42,401,441 42,393,760 (7,681) ______________ ______________ ______________

F - 118

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

76

50 FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

The breakdown by major class of financial assets is as follows:

2012

Fair value Book value Unrealized gain (loss)

LL million LL million LL million

Net loans and advances to customers at amortized cost

Corporate 9,610,690 9,574,321 36,369

SME 2,487,608 2,470,816 16,792

Retail and personal banking 3,266,118 3,237,924 28,194

Public Sector 133,339 133,342 (3)

______________ ______________ ______________

15,497,755 15,416,403 81,352

______________ ______________ ______________

Net loans and advances to related parties at

amortized cost

Corporate 8,172 8,172 -

SME 187,284 187,284 -

Retail and personal banking 109,584 109,055 529

______________ ______________ ______________

305,040 304,511 529

______________ ______________ ______________

Financial assets classified at amortized cost

Lebanese sovereign and Central Bank 10,731,384 10,610,471 120,913

Other sovereign 2,811,325 2,791,510 19,815

Private sector and other securities 1,151,905 1,147,135 4,770

______________ ______________ ______________

14,694,614 14,549,116 145,498

______________ ______________ ______________

Assets and liabilities for which fair value is disclosed using a valuation technique with significant

observable inputs (Level 2) and / or significant unobservable inputs (Level 3)

For financial assets and financial liabilities that are liquid or have a short term maturity (less than three months),

the Group assumed that the carrying values approximate the fair values. This assumption is also applied to

demand deposits which have no specific maturity and financial instruments with variable rates.

Deposits with banks and loans and advances to banks

For the purpose of this disclosure there is minimal difference between fair value and carrying amount of these

financial assets as they are short-term in nature or have interest rates that re-price frequently. The fair value of

deposits with longer maturities are estimated using discounted cash flows applying market rates for

counterparties with similar credit quality.

Government bonds, certificates of deposits and other debt securities

The Group values these unquoted debt securities using discounted cash flow valuation models where the lowest

level input that is significant to the entire measurement is observable in an active market. These inputs include

assumptions regarding current rates of interest and credit spreads.

Loans and advances to customers

For the purpose of this disclosure, fair value of loans and advances to customers is estimated using discounted

cash flows by applying current rates for new loans granted during 2013 with similar remaining maturities and to

counterparties with similar credit quality.

Deposits from banks and customers

In many cases, the fair value disclosed approximates carrying value because these financial liabilities are short-

term in nature or have interest rates that re-price frequently. The fair value for deposits with long-term

maturities, such as time deposits, are estimated using discounted cash flows, applying either market rates or

current rates for deposits of similar remaining maturities.

F - 119

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

77

50 FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

Assets and liabilities for which fair value is disclosed using a valuation technique with significant

observable inputs (Level 2) and / or significant unobservable inputs (Level 3) (continued)

Subordinated loans and similar debts

Fair values are determined using discounted cash flows valuation models where the inputs used are estimated

by comparison with quoted prices in an active market for similar instruments.

2013

Level 1 Level 2 Level 3 Total

LL million LL million LL million LL million

FINANCIAL ASSETS

Cash and balances with central banks 329,293 8,862,142 - 9,191,435

Due from banks and financial institutions - 4,227,128 - 4,227,128

Loans to banks and financial institutions and reverse

repurchase agreements

-

780,419

-

780,419

Net loans & advances to customers - - 22,371,602 22,371,602

Corporate - - 11,549,594 11,549,594

SME - - 5,972,484 5,972,484

Retail and Personal Banking - - 4,570,516 4,570,516

Public sector - - 279,008 279,008

Net loans & advances to related parties - - 114,756 114,756

Corporate - - 8,172 8,172

SME - - 27,724 27,724

Retail and Personal Banking - - 78,860 78,860

Financial assets classified at amortized cost 7,458,933 8,675,186 8,238 16,142,357

Lebanese sovereign and central bank 5,146,221 6,723,803 - 11,870,024

Other sovereign 1,320,119 1,858,761 - 3,178,880

Private sector and other securities 992,593 92,622 8,238 1,093,453

____________ ____________ ____________ ____________

7,788,226 22,544,875 22,494,596 52,827,697

____________ ____________ ____________ ____________

Financial liabilities

Due to central banks - 252,042 - 252,042

Due to banks and financial institutions - 1,602,387 - 1,602,387

Due to banks under repurchase agreements - 196,180 - 196,180

Customers‟ deposits at amortized cost - 46,142,845 - 46,142,845

Deposits from related parties at amortized cost - 757,809 - 757,809

Subordinated loans and similar debts - 537,101 - 537,101

____________ ____________ ____________ ____________

- 49,488,364 - 49,488,364

____________ ____________ ____________ ____________

51 CONTINGENT LIABILITIES, COMMITMENTS AND LEASING ARRANGEMENTS

Credit-related commitments and contingent liabilities

To meet the financial needs of customers, the Group enters into various commitments, guarantees and other

contingent liabilities, which are mainly credit-related instruments including both financial and non-financial

guarantees and commitments to extend credit. Even though these obligations may not be recognised on the

statement of financial position, they do contain credit risk and are therefore part of the overall risk of the Group.

The table below discloses the nominal principal amounts of credit-related commitments and contingent

liabilities. Nominal principal amounts represent the amount at risk should the contracts be fully drawn upon and

clients default. As a significant portion of guarantees and commitments is expected to expire without being

withdrawn, the total of the nominal principal amount is not indicative of future liquidity requirements.

2013

Banks Customers Total

LL million LL million LL million

Guarantees and contingent liabilities

Financial guarantees 246,191 1,519,107 1,765,298

Other guarantees 137,484 723,035 860,519

_________ _________ _________

383,675 2,242,142 2,625,817

_________ _________ _________

Commitments

Documentary credits - 570,906 570,906

Loan commitments - 3,754,997 3,754,997

Of which revocable - 2,998,416 2,998,416

Of which irrevocable - 756,581 756,581

_________ _________ _________

- 4,325,903 4,325,903

_________ _________ _________

F - 120

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

78

51 CONTINGENT LIABILITIES, COMMITMENTS AND LEASING ARRANGEMENTS

(continued)

2012

Banks Customers Total

LL million LL million LL million

Guarantees and contingent liabilities

Financial guarantees 314,140 1,099,601 1,413,741

Other guarantees 76,764 821,691 898,455

_________ _________ _________

390,904 1,921,292 2,312,196

_________ _________ _________

Commitments

Documentary credits - 353,763 353,763

Loan commitments - 3,508,070 3,508,070

Of which revocable - 3,047,107 3,047,107

Of which irrevocable - 460,963 460,963

_________ _________ _________

- 3,861,833 3,861,833

_________ _________ _________

Guarantees

Guarantees are given as security to support the performance of a customer to third parties. The main types of

guarantees provided are:

• Financial guarantees given to banks and financial institutions on behalf of customers to secure loans, overdrafts,

and other banking facilities; and

• Other guarantees are contracts that have similar factures to the financial guarantee contracts but fail to meet the

strict definition of a financial guarantee contract under IFRS. These include mainly performance and tender

guarantees.

Documentary credits

Documentary credits commit the Group to make payments to third parties, on production of documents, which

are usually reimbursed immediately by customers.

Loan commitments

Loan commitments are defined amounts (unutilized credit lines or undrawn portions of credit lines) against

which clients can borrow money under defined terms and conditions.

Revocable loan commitments are those commitments that can be cancelled at any time (without giving a reason)

subject to notice requirements according to their general terms and conditions. Irrevocable loan commitments

result from arrangements where the Group has no right to withdraw the loan commitment once communicated to

the beneficiary.

In addition to the above, the Group has issued letters of intent in the amount of LL 7,191,032 million as of 31

December 2013 (2012: LL 1,047 million). These letters of intent do not represent loan commitments on behalf

of the Group.

Legal claims

Litigation is a common occurrence in the banking industry due to the nature of the business. The Group has an

established protocol for dealing with such legal claims. Once professional advice has been obtained and the

amount of damages reasonably estimated, the Group makes adjustments to account for any adverse effects

which the claims may have on its financial standing. At year end, the Group had several unresolved legal claims.

Based on advice from legal counsel, management believes that legal claims will not result in any material

financial loss to the Group.

F - 121

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

79

51 CONTINGENT LIABILITIES, COMMITMENTS AND LEASING ARRANGEMENTS

(continued)

Operating lease and capital expenditure commitments

2013 2012

LL million LL million

Capital expenditure commitments 18,047 13,421

Operating lease commitments – Group as lessee 66,037 50,838

Within one year 19,197 12,663

One to five years 42,861 32,617

More than five years 3,979 5,558

______________ ______________

84,084 64,259

______________ ______________

Commitments resulting from credit facilities received

The Bank has the following commitments resulting from the credit facilities received from non-resident

financial institutions:

- The net past due loans (after the deduction of provisions) should not exceed 5 percent of the net credit

facilities granted

- The provision for past due loans which includes specific and collective provisions and unrealized interest

should not fall below 70 percent of the past due loans

- The net doubtful loans should not exceed 20 percent of the tier 1 capital

- Sustaining a liquidity ratio exceeding 115 percent

- Sustaining a capital adequacy exceeding the minimum ratio as per the regulations applied by the Central

Bank of Lebanon and the requirements of the Basel agreements to the extent it is applied by the Central

Bank of Lebanon.

Other commitments and contingencies

Financial assets at amortized cost include Lebanese government treasury bills amounting to LL 133,736 million

(2012: LL 133,714 million) pledged to the Central Bank of Lebanon against credit facilities. They also include

Jordanian and Egyptian treasury bills amounting to LL 695,139 million pledged against repurchase agreements

(note 35).

The Bank‟s books in Lebanon remain subject to the review of the tax authorities for the period from 1 January

2012 to 31 December 2013 and the review of the National Social Security Fund (NSSF) for the period from 30

September 2011 to 31 December 2013. In addition, the subsidiaries‟ books and records are subject to review by

the tax and social security authorities in the countries in which they operate. Management believes that adequate

provisions were recorded against possible review results to the extent that they can be reliably estimated.

During 2013 and 2012, Syria, one of the significant credit markets of the Group, witnessed a period of political

and civil unrest together with adverse events which can affect the economic environment of future periods. As

part of its collective provisioning process, management performed a stress test on the loan portfolio exposed to

the Syrian market risks and, as a result, the necessary provisions were booked. The Group‟s management

continues to monitor its loan portfolio and evaluate the impact of these events during 2014.

52 ASSETS UNDER MANAGEMENT

Assets under management include client assets managed or deposited with the Group. For the most part, the

clients decide how these assets are to be invested.

2013 2012

LL million LL million

Assets under management 12,286,291 11,274,636

___________ ___________

F - 122

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

80

53 RELATED PARTY TRANSACTIONS

Parties are considered to be related if one party has the ability to control the other party or exercise significant

influence over the other party in making financial or operational decisions, or one other party controls both. The

definition includes subsidiaries, associates, key management personnel and their close family members, as well as

entities controlled or jointly controlled by them.

Key management personnel are defined as those persons having authority and responsibility for planning, directing

and controlling the activities of the Group, directly or indirectly. At the level of the Group, key management

personnel include the Chairman of the Board and members of the Group Executive Committee.

Loans to related parties, (a) were made in the ordinary course of business, (b) were made on substantially the

same terms, including interest rates and collateral, as those prevailing at the same time for comparable

transactions with others and (c) did not involve more than a normal risk of collectability or present other

unfavorable features.

Related party balances included in the Group‟s Statement of Financial Position are as follows as of 31

December:

2013 2012

LL million LL million

Loans and advances 114,829 304,511

of which: granted to key management personnel 22,189 33,207

Indirect facilities 3,732 3,957

Deposits 757,590 689,101

Cash collateral received against loans 62,327 221,979

Related party balances included in the Group‟s Income Statement are as follows for the year ended 31

December:

2013 2012

LL million LL million

Interest income on loans 8,362 19,902

Interest expense on deposits 21,060 26,117

Subsidiaries

Transactions between the Bank and its subsidiaries meet the definition of related party transactions. However,

where these are eliminated on consolidation, they are not disclosed in the Group‟s financial statements. The

following table shows information related to the significant subsidiaries of the Bank.

Percentage of ownership Country of Principal Functional

2013 2012 incorporation activity currency Bank Audi Saradar (France) SA 100.00% 100.00% France Banking (Commercial) EUR Audi Saradar Investment Bank SAL (ASIB) 100.00% 100.00% Lebanon Banking (Investment) LBP

Audi Saradar Private Bank SAL (ASPB) 100.00% 100.00% Lebanon Banking (Private) LBP

Banque Audi (Suisse) SA 100.00% 100.00% Switzerland Banking (Private) CHF Bank Audi Syria SA * 47.00% 47.00% Syria Banking (Commercial) SYP

National Bank of Sudan 76.56% 76.56% Sudan Banking (Commercial) SDG

Bank Audi SAE (Egypt) 100.00% 100.00% Egypt Banking (Commercial) EGP Audi Capital (KSA) 99.99% 99.99% Saudi Arabia Financial Services SAR

Bank Audi LLC Qatar 100.00% 100.00% Qatar Banking Services USD

Societe Libanaise de Factoring SAL 94.85% 90.85% Lebanon Factoring LBP ODEA Bank SA 100.00% 100.00% Turkey Banking (Commercial) TRY

Infi Gamma Holding SAL 99.97% 99.97% Lebanon Investment USD

Audi Investments Holding SAL 100.00% - Lebanon Investment USD

* Bank Audi SAL – Audi Saradar Group established Bank Audi Syria SA, signed a technical assistance

agreement and retained de facto control over it.

F - 123

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

81

53 RELATED PARTY TRANSACTIONS (continued)

Associates

The Group provides banking services to its associates and to entities under common directorships. As such,

loans, overdrafts, interest and non-interest bearing deposits and current accounts are provided to these entities as

well as other services. These transactions are conducted on the same terms as third-party transactions.

Summarised financial information for the Group‟s associates is set out in note 27 to these financial statements.

Interest income on loans granted to associates amounted to LL million 319 (2012: LL 1,253 million).

Key Management Personnel

Total remuneration awarded to key management personnel represents the awards made to individuals that have

been approved by the Board Remuneration Committee as part of the latest payround decisions. Figures are

provided for the period that individuals met the definition of key management personnel.

2013 2012

LL million LL million

Short-term benefits

31,785 43,703

Post-employment benefits 2,010 677

Short-term benefits comprise of salaries, bonuses, attendance fees and other benefits.

54 RISK MANAGEMENT

As a growing financial institution with operations in three continents, the Group is faced with a constantly

changing array of business risks, some of which are:

- Credit Risk: The risk of default or deterioration in the ability of a borrower to repay a loan.

- Market risk: The risk of loss in balance sheet and off-balance sheet positions arising from movements

in market prices. Movements in market prices include changes in interest rates (including credit

spreads), exchange rates and equity prices.

- Liquidity risk: The risk that the Bank cannot meet its financial obligations when they come due in a

timely manner and at reasonable cost.

- Operational risk: The risk of loss resulting from inadequate or failed internal processes, people and

systems, or from external events.

- Other risks faced by the Group include concentration risk, reputation risk, legal risk and

business/strategic risk.

Risks are managed through a process of ongoing identification, measurement and monitoring, mitigating and

control, while being subject to risk limits and procedural controls. Risk management is important for the

continuous profitability and solvency of the Group and every employee is tasked with the prudent management

of risks within the parameters of his or her responsibilities.

Governance

Board of Directors

The Board of Directors (the Board) is ultimately responsible for identifying and setting the level of tolerable

risks to which the Group is exposed, and as such defines the risk appetite for the Group. In addition, the Board

approves policies and procedures related to all types of risks. Periodic reporting is made to the Board on existing

and emerging risks in the Group. A number of Management committees and departments are also responsible

for various levels of risk management, as set out below.

Board Group Risk Committee

The role of the Board‟s Group Risk Committee (BGRC) is to oversee the risk management framework and

assess its effectiveness, review and recommend to the Board the group risk policies and risk appetite, monitor

the group risk profile, review stress tests scenarios and results, and provide access for the Group Chief Risk

Officer (CRO) to the Board. The BGRC meets at least every quarter in the presence of the CRO.

F - 124

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

82

54 RISK MANAGEMENT (continued)

Governance (continued)

Executive Committee

The mandate of the Group Executive Committee is to support the Board in the implementation of its strategy, to

support the Group CEO in the day-to-day management of the Group, and to develop and implement business

policies for the Group and issue guidance for the Group within the strategy approved by the Board. The

Executive Committee is involved in drafting and submitting to the Board the risk policy and risk tolerances and

appetite.

Asset Liability Committee

The Asset Liability Committee (ALCO) is a Management committee responsible in part for managing market

risk exposures, liquidity, funding needs and contingencies. It is the responsibility of this committee to set up

strategies for managing market risk exposures and ensuring that treasury implements those strategies so that

exposures are managed within approved limits and in a manner consistent with the risk policy and limits

approved by the Board.

Internal Audit

All risk management processes are independently audited by the internal audit department at least annually. This

includes the examination of both the adequacy and effectiveness of risk control procedures. Internal audit

discusses the results of its assessments with Management and reports its findings and recommendations to the

Audit Committee of the Board.

Group Risk Division

The Group Risk Division (GRD) is a function independent of business lines and headed by the Group‟s CRO.

The Division has the responsibility to ensure that risks are properly identified, measured, monitored, and

reported to heads of business lines, Senior Management, ALCO, the Board Group Risk Committee and the

Board. In addition, GRD works closely with Senior Management to assist in ensuring proper controls are set up

in order to mitigate various risks. GRD has the responsibility to set policies and procedures at the Group level for

its final adoption at each entity within the Group. In addition, GRD is in charge of monitoring risks across the

Group and aggregating such risks. From time to time, GRD provides technical support for the various entities

within the Group in their effort to develop the local risk function within the parameters set at the Group level.

Local Risk Management Functions

Local risk management functions vary in size depending on local needs and any additional need in human

resources is met by GRD. The roles of local risk managers are to comply with GRD policies, to assess risks

using a blend of methodologies developed at the Group level and others sometimes more attuned to their local

circumstances, to provide an independent opinion on risks and to report on them to their Senior Management

and to their board of directors and to adapt to local needs and regulations.

Risk Monitoring and Control

The primary drivers behind monitoring and controlling risks are the Risk Appetite and Limits established by the

Board. These limits reflect the business strategy and market environment of the Group, as well as the level of

risks that the Group is willing to tolerate.

Risk Appetite and Limits are formalized in a document which is reviewed by the Executive Committee and the

Board Group Risk Committee and approved by the Board. The Risk Appetite and Limits comprise limits to

various types of risk to which the Bank is exposed.

Information independently compiled from all business lines and risk-taking units is examined and processed in

order to identify and measure the risk profile. The results are reported and presented on a regular basis to

Management and to the Board.

F - 125

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

83

55 CREDIT RISK

Credit risk is the risk that the Group will incur a loss because its customers or counterparties fail to discharge

their contractual obligations. Credit risk appetites and strategies are set at the Group level by the Board and are

communicated to senior management, which in turn formulates credit policies and procedures in line with these

strategies. These policies are approved by the Executive Committee and the Board and are reviewed on an

annual basis.

Credit Limits

The Group controls credit risk by setting limits on the amount of risk it is willing to accept for individual

counterparties and for geographical and industry concentration, and by monitoring exposures in relation to such

limits. These limits are set for the following classes of assets:

Financial institutions

Percentage floors and absolute limits are set on the Group‟s deposits that should be placed with highly rated

financial institutions.

Sovereign exposure and other financial instruments

Limits are placed on sovereign exposures and other financial instruments according to ratings of the instruments

and risk appetite of the Group as determined by the Board mainly for foreign currency-denominated issues.

Loans and advances to customers

The Group sets limits per country, economic sector, tenor of the loan, rating, and group of obligors among

others in order to avoid significant risk concentrations.

Credit Granting and Monitoring Processes

The Group has set clearly established processes related to loan origination, documentation and maintenance of

extensions of credits.

Initiation

Initiation of the credit facilities is done by the business originating function which is shared between branches

and the corporate and commercial departments.

Analysis

Credit analysis is performed within the business originating function and is reviewed independently by the

Credit Risk Management department, which in turn prepares a written opinion about the credit facilities and

submits it to the respective credit committees.

Approval

Credit committees are exclusively responsible for the approval of facilities per obligor and geographical entity

up to the limit assigned to them. The Group has various levels of credit approving authorities, depending on the

nature and limit of the requested facilities, namely:

The Board of Directors

The Executive Committee

Other Credit Committees, depending on the limit and region.

Once approved by the Credit Committee, facilities are disbursed when all requirements set by the respective

committee are met and documents intended as security are reviewed and verified by the Credit Administration

function.

Monitoring

The Group maintains continuous monitoring in the quality of its portfolio. Timely reports are sent to the

Executive Committee and to the Board detailing credit risk profile including Group follow-up accounts, large

exposures, risk ratings and concentration by industry, geography and group of obligors.

Recovery and Restructuring

The Group assesses impaired loans by evaluating the exposure to loss, on a case by case basis. They are directly

managed by the recovery and restructuring department which is responsible for formulating a workout strategy,

in coordination with the Legal & Compliance department. Credit committees are responsible for approving these

workout strategies.

F - 126

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

84

55 CREDIT RISK (continued)

Provisioning Policy

In the normal course of business, some loans may become unrecoverable. Such loans would then be required to

be partially or fully written-off after taking into consideration the following guidelines:

a) The loan is written-off with proper approval when:

All efforts to recover the bad debt have failed.

The borrower‟s bankruptcy or inability to repay is established.

Legal remedies have proved to be futile and/or cost prohibitive.

b) Requests for write-offs are to be submitted to the Remedial Committee for approval. Approved

write-offs are notified to the Executive Committee and then to the Board.

As part of the conservative approach to sustain the quality of the Group‟s loan portfolio, an evaluation of loan

loss provisions is made on a quarterly basis. As such, all adversely classified accounts are reviewed on a

quarterly basis (earlier if need be) and the recovery and restructuring department makes recommendation for

specific provisions against the accounts. These recommendations are submitted to the Remedial Committee for

approval before they are implemented. In this regard, mainly for tax reasons, specific approval from the

regulatory authority might be necessary depending on the regulatory environment of the concerned entity.

Besides, impairment is assessed on a collective basis for loans that are not individually impaired.

Derivative Financial Instruments

Credit risk arising from derivative financial instruments is, at any time, limited to those with positive fair values,

as recorded in the statement of financial position. In the case of credit derivatives, the Group is also exposed to

or protected from the risk of default of the underlying entity referred by the derivative.

Management of Risk Concentration

Credit concentrations arise when a number of counterparties are engaged in similar business activities in the

same geographic region or have similar economic features that would cause their ability to meet contractual

obligations to be similarly affected by changes in economic, political and other conditions. Concentrations

indicate the relative sensitivity of the Group‟s performance to developments affecting a particular industry or

geographical location. Similarly for liquidity, concentration is measured with respect to the source and type of

funding.

In order to avoid excessive concentrations of risk, the Group‟s Risk Appetite and Limits document includes

specific guidelines and limits to maintain a diversified funding and portfolio, including board-approved

measures in line with the pillar 2 requirements.

Credit-Related Commitments Risks

The Group makes available to its customers guarantees which may require payments on their behalf. Such

payments are collected from customers based on the terms of the letter of credit. They expose the Group to similar

risks to loans and these are mitigated by the same control processes and policies.

F - 127

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

85

55 CREDIT RISK (continued)

Analysis to maximum exposure to credit risk and collateral and other credit enhancements

The following table shows the maximum exposure to credit risk by class of financial asset. It further shows the total fair value of collateral, capped to the maximum exposure to which it relates and the

net exposure to credit risk. 2013

Maximum

exposure

Cash collateral

and margins

Securities

Guarantees received

from banks and

financial institutions

Real

estate

Other

guarantees

Netting

agreements

Net credit

exposure

LL million LL million LL million LL million LL million LL million LL million LL million Cash and balances with central banks 8,862,815 - - - - - - 8,862,815

Due from banks and financial institutions 4,229,556 - - - - - - 4,229,556

Loans to banks and financial institutions and reverse repurchase

agreements 657,945 - - - - - - 657,945

Derivative financial instruments 132,527 - - - - - - 132,527 Financial assets at fair value through profit or loss 344,452 - - - - - - 344,452

Loans and advances to customers at amortised cost 22,064,822 2,741,234 996,302 360,328 5,563,596 1,683,687 7,436 10,712,239

Corporate 11,463,079 1,081,363 728,168 267,481 1,905,057 740,386 510 6,740,114

SME 5,926,603 715,691 17,618 85,778 1,901,079 797,737 6,926 2,401,774

Retail and personal banking 4,397,625 942,020 250,516 7,069 1,757,460 145,564 - 1,294,996

Public sector 277,515 2,160 - - - - - 275,355

Loans and advances to related parties at amortized cost 114,829 14,608 36,178 1,085 21,993 1,834 - 39,131

Debtors by acceptances 262,689 9,036 - - 3,243 7,744 - 242,666

Financial assets at amortized cost 16,023,035 - - - - - 1,812,073 14,210,962

Contingent liabilities 2,336,204 177,710 - 4,808 77 45,983 - 2,107,626

Letters of credit 570,906 16,517 - 60 - 9,850 - 544,479

Letters of guarantee given to banks and financial institutions 246,191 4,408 - - - - - 241,783 Letters of guarantee given to customers 1,519,107 156,785 - 4,748 77 36,133 - 1,321,364

____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________

Total 55,028,874 2,942,588 1,032,480 366,221 5,588,909 1,739,248 1,819,509 41,539,919

____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________

Guarantees received from banks, financial institutions and

customers

Utilized collateral 2,942,588 1,032,480 366,221 5,588,909 1,739,248 11,669,446

Surplus of collateral before undrawn credit lines 643,395 1,425,680 58,491 6,608,950 934,658 9,671,174 ____________ ____________ ____________ ____________ ____________ ____________

3,585,983 2,458,160 424,712 12,197,859 2,673,906 21,340,620

____________ ____________ ____________ ____________ ____________ ____________

The surplus of collateral mentioned above is presented before offsetting additional credit commitments given to customers amounting to LL 3,754,997 million as at 31 December 2013.

F - 128

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

86

55 CREDIT RISK (continued)

2012

Maximum exposure

Cash collateral

and margins

Securities

Guarantees received

from banks and

financial institutions

Real

estate

Other

guarantees

Netting

agreements Net credit exposure

LL million LL million LL million LL million LL million LL million LL million LL million Cash and balances with central banks 9,213,033 - - - - - - 9,213,033 Due from banks and financial institutions 4,280,978 - - 1,149 - - - 4,279,829

Loans to banks and financial institutions and reverse repurchase

agreements 1,060,267 - 786,466 - - - - 273,801

Derivative financial instruments 48,707 - - - - - - 48,707

Financial assets at fair value through profit or loss 458,435 - - - - - - 458,435

Loans and advances to customers at amortised cost 15,416,403 2,593,801 1,750,630 356,700 2,919,554 662,665 13,727 7,119,326

Corporate 9,574,321 1,184,225 1,491,882 266,781 1,400,670 403,783 618 4,826,362 SME 2,470,816 511,548 20,226 82,125 398,446 122,354 13,109 1,323,008

Retail and personal banking 3,237,924 898,028 238,522 7,794 1,120,438 136,528 - 836,614

Public sector 133,342 - - - - - - 133,342

Loans and advances to related parties at amortized cost 304,511 221,979 - 225 33,705 1,314 - 47,288

Debtors by acceptances 182,715 17,883 - 251 7,378 9,949 1 147,253

Financial assets at amortized cost 14,549,116 - - - - - 1,463,553 13,085,563

Contingent liabilities 1,767,504 191,060 9,507 35,712 86,694 3,306 3 1,441,222

Letters of credit 353,763 52,308 - 90 8,260 2,528 - 290,577

Letters of guarantee given to banks and financial institutions 314,140 43,586 - 13,849 - - - 256,705

Letters of guarantee given to customers 1,099,601 95,166 9,507 21,773 78,434 778 3 893,940

____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________

Total 47,281,669 3,024,723 2,546,603 394,037 3,047,331 677,234 1,477,284 36,114,457

____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________

Guarantees received from banks, financial institutions and

customers

Utilized collateral 3,024,723 2,546,603 394,037 3,047,331 677,234 9,689,928

Surplus of collateral before undrawn credit lines 628,382 619,724 53,902 630,893 1,905,166 3,838,067

____________ ____________ ____________ ____________ ____________ ____________

3,653,105 3,166,327 447,939 3,678,224 2,582,400 13,527,995

____________ ____________ ____________ ____________ ____________ ____________

The surplus of collateral mentioned above is presented before offsetting additional credit commitments given to customers amounting to LL 3,508,070 million as at 31 December 2012.

F - 129

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

87

55 CREDIT RISK (continued)

Analysis to maximum exposure to credit risk and collateral and other credit enhancements

Collateral and Other Credit Enhancements

The amount and type of collateral required depends on an assessment of the credit risk of the counterparty.

Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters.

Management monitors the market value of collateral, requests additional collateral in accordance with the

underlying agreement and monitors the market value of collateral obtained during its review of the adequacy of the

allowance for impairment losses.

The main types of collateral obtained are as follows:

Securities: The balances shown above represent the fair value of the securities.

Letters of credit / guarantees: The Group holds in some cases guarantees, letters of credit and similar

instruments from banks and financial institutions which enable it to claim settlement in the event of default on

the part of the counterparty. The balances shown represent the notional amount of these types of guarantees held

by the Group.

Real estate (commercial and residential): The Group holds in some cases a first degree mortgage over

residential property (for housing loans) and commercial property (for commercial loans). The value shown

above reflects the fair value of the property limited to the related mortgaged amount.

Netting agreements: The Group makes use of netting agreements where there is a legally enforceable right to

offset in the event of counterparty default and where as a result there is a net exposure for credit risk. However,

there is no intention to settle these balances on a net basis under normal circumstances, and they do not qualify

for offset. The amounts above represent available netting agreements in the event of default of the counterparty.

This includes netting agreements for loans and advances to customers and financial assets at amortized cost. In

addition, derivatives may also be settled net when there is a netting agreement in place providing for this in the

event of default, reducing the Group‟s exposure to counterparties on derivative asset positions. The reduction in

risk is the amount of liability held.

In addition to the above, the Group also obtains guarantees from parent companies for loans to their subsidiaries,

personal guarantees for loans to companies owned by individuals, second degree mortgages, and assignments of

insurance or bills proceeds and revenues, which are not reflected in the above table.

Restructured Loans

Restructuring activity aims to manage customer relationships, maximize collection opportunities and, if

possible, avoid foreclosure or repossession. Such activities include extended payment arrangements, deferring

foreclosure, modification, loan rewrites and/or deferral of payments pending a change in circumstances.

Restructuring policies and practices are based on indicators or criteria which, in the judgment of local

management, indicate that repayment will probably continue. The application of these policies varies according

to the nature of the market and the type of the facility.

2013 2012

LL million LL million

Corporate 268,046 181,371

SME 8,026 11,203

Retail and personal banking 22,561 1,359

______________ ______________

298,633 193,933

______________ ______________

F - 130

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

88

55 CREDIT RISK (continued)

Credit Rating System

The Group assesses the quality of its credit portfolio using the following credit rating methods:

(i) External ratings from approved credit rating agencies for financial institutions, financial assets and

large corporate borrowers.

(ii) Rating models that take into account financial as well as non-financial factors such as observations

on management quality, operating environment and company standing. These rating models

include a Corporate model, an SME model for borrowers with reliable financial statements and

another one for obligors with unreliable financial statements, as well as a Project Finance model.

(iii) Scorecards for retail borrowers which help in assessing their creditworthiness, evaluating potential

risk and arriving at a final credit decision.

(iv) Supervisory ratings, comprising six main categories: (a) Regular includes borrowers demonstrating

good to excellent financial condition, risk factors, and capacity to repay. These loans demonstrate

regular and timely payment of dues, adequacy of cash flows, timely presentation of financial

statements, and sufficient collateral / guarantee when required. (b) Follow-up represents a lack of

documentation related to a borrower‟s activity, an inconsistency between facilities‟ type and

related conditions. (c) Follow-up and regularisation includes credit worthy borrowers requiring

close monitoring without being impaired. These loans might be showing weaknesses; insufficient

or inadequate cash flows; highly leveraged; deterioration in economic sector or country where the

facility is used; loan rescheduling more than once since initiation; or excess utilization above limit.

(d) Substandard loans include borrowers with incapacity to repay from identified cash flows. Also

included under this category are those with recurrent late payments and financial difficulties. (e)

Doubtful loans where full repayment is questioned even after asset liquidation of collateral. It also

includes loans stagnating for over 6 months and debtors who are unable to repay restructured

loans. Finally, (f) Bad loans with no or little expected inflows from business or assets. This

category also includes borrowers who witness significant delays and are insolvent.

Credit Quality

The table below shows the credit quality by class of asset for all financial assets exposed to credit risk, based on

the Group‟s internal credit rating system. The amounts presented are gross of impairment allowances. 2013

Past due and impaired

Neither past due

nor impaired

Past due but

not impaired

Substandard

Doubtful and

bad

Total

LL million LL million LL million LL million LL million Cash and balances with central banks 8,862,815 - - - 8,862,815

Due from banks and financial institutions 4,229,218 - - 1,239 4,230,457

Loans to banks and financial institutions and reverse repurchase agreements

657,945

-

-

-

657,945

Derivative financial instruments 132,527 - - - 132,527

Financial assets at fair value through profit or loss

344,452 - - -

344,452

Loans and advances to customers at amortised

cost 21,499,510 525,461 12,161 636,765

22,673,897

Loans and advances to related parties at

amortised cost 114,829 - - - 114,829

Financial assets at amortised cost 16,021,521 - - 7,536 16,029,057

_____________ ___________ ___________ ___________ ____________

51,862,817 525,461 12,161 645,540 53,045,979

_____________ ___________ ___________ ___________ ____________

Loans and advances:

Corporate 11,134,517 296,679 7,174 469,438 11,907,808

SME 5,828,850 117,460 1,854 43,466 5,991,630

Retail and personal banking 4,372,624 111,322 3,133 120,914 4,607,993

Public sector 278,348 - - 2,947 281,295

____________ ___________ ___________ ___________ ____________

21,614,339 525,461 12,161 636,765 22,788,726

____________ ___________ ___________ ___________ ____________

F - 131

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

89

55 CREDIT RISK (continued)

Credit Quality (continued) 2012

Past due and impaired

Neither past due nor impaired

Past due but not impaired

Substandard

Doubtful and bad

Total

LL million LL million LL million LL million LL million Cash and balances with central banks 9,213,033 - - - 9,213,033

Due from banks and financial institutions 4,280,978 - - 998 4,281,976 Loans to banks and financial institutions and

reverse repurchase agreements

1,060,267

-

-

-

1,060,267

Derivative financial instruments 48,707 - - - 48,707 Financial assets at fair value through

profit or loss

458,435 - - -

458,435

Loans and advances to customers at amortised

cost 15,072,862 390,484 17,750 437,234

15,918,330

Loans and advances to related parties at

amortised cost 304,511 - - - 304,511 Financial assets at amortised cost 14,547,829 - - 8,352 14,556,181

_____________ ___________ ___________ ___________ ____________

44,986,622 390,484 17,750 446,584 45,841,440 _____________ ___________ ___________ ___________ ____________

Loans and advances:

Corporate 9,358,813 242,450 12,867 316,895 9,931,025 SME 2,639,902 28,772 1,761 20,629 2,691,064

Retail and personal banking 3,246,170 119,262 3,122 95,124 3,463,678

Public sector 132,488 - - 4,586 137,074 ____________ ___________ ___________ ___________ ____________

15,377,373 390,484 17,750 437,234 16,222,841

____________ ___________ ___________ ___________ ____________

The aging analysis of past due but not impaired loans and advances to customers at amortised cost as at 31

December are as follows:

2013

Less than 30

days

31 to 60

days

61 to 90

days

More than

90 days

Total

LL million LL million LL million LL million LL million

Corporate 46,116 79,583 69,304 101,676 296,679

SME 36,147 9,695 7,619 63,999 117,460

Retail and personal banking 60,506 25,486 8,803 16,527 111,322

___________ ___________ ___________ ___________ ___________

142,769 114,764 85,726 182,202 525,461

___________ ___________ ___________ ___________ ___________

2012

Less than 30

days

31 to 60

days

61 to 90

days

More than

90 days

Total

LL million LL million LL million LL million LL million

Corporate 32,992 76,609 6,919 125,930 242,450

SME 3,701 8,190 1,527 15,354 28,772

Retail and personal banking 51,435 27,305 19,382 21,140 119,262

___________ ___________ ___________ ___________ ___________

88,128 112,104 27,828 162,424 390,484

___________ ___________ ___________ ___________ ___________

F - 132

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

90

55 CREDIT RISK (continued)

The classification of loans and advances to customers and related parties at amortised cost as in accordance with

the ratings of Central Bank of Lebanon circular 58 is as follows:

2013

Gross

balance

Unrealised

interest

Impairment

allowances

Net

balance

LL million LL million LL million LL million Regular 20,384,370 - - 20,384,370

Follow up 593,383 - - 593,383

Follow up and regularization 1,162,047 - - 1,162,047

Substandard 12,161 (2,150) - 10,011

Doubtful 370,650 (39,940) (135,528) 195,182

Bad 266,115 (42,345) (191,311) 32,459

_____________ _____________ _____________ _____________

22,788,726 (84,435) (326,839) 22,377,452

_____________ _____________ _____________ _____________

Collective impairment - - (197,801) (197,801)

_____________ _____________ _____________ _____________

22,788,726 (84,435) (524,640) 22,179,651

_____________ _____________ _____________ _____________

2012

Gross

balance

Unrealised

interest

Impairment

allowances

Net

balance

LL million LL million LL million LL million Regular 14,501,112 - - 14,501,112 Follow up 228,875 - - 228,875

Follow up and regularization 1,037,870 - - 1,037,870

Substandard 17,750 (1,835) - 15,915 Doubtful 220,530 (28,388) (112,097) 80,045

Bad 216,704 (29,961) (162,994) 23,749

_____________ _____________ _____________ _____________ 16,222,841 (60,184) (275,091) 15,887,566

_____________ _____________ _____________ _____________

Collective impairment - - (166,652) (166,652) _____________ _____________ _____________ _____________

16,222,841 (60,184) (441,743) 15,720,914

_____________ _____________ _____________ _____________

F - 133

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

91

55 CREDIT RISK (continued)

The classification of the Group financial instruments and balances due from banks and financial institutions as per international ratings are as follows:

2013

Sovereign and Central Banks Non – Sovereign

AAA to AA- A+ to BBB- BB+ to B- Unrated Total AAA to AA- A+ to BBB- BB+ to B- Unrated Total Grand total

LL million LL million LL million LL million LL million LL million LL million LL million LL million LL million LL million

Cash and balances with

central banks 535,224 1,199,569 7,128,022

- 8,862,815 - - - - - 8,862,815

Due from banks and financial institutions - - -

- - 530,143 3,201,941 64,361 433,111 4,229,556 4,229,556

Loans to banks and financial

institutions and reverse repurchase agreements - - - - - 11,348 472,243 126,241 48,113 657,945 657,945

Financial assets at fair value

through profit or loss - 1,843 281,073

- 282,916 - 11,991 - 49,545 61,536 344,452

Financial assets at amortised

cost 118,475 674,660 14,112,281

32,560 14,937,976 299,850 627,713 131,642 25,854 1,085,059 16,023,035

__________ __________ ___________ _________ _________ __________ ____________ __________ ___________ ___________ ___________ 653,699 1,876,072 21,521,376 32,560 24,083,707 841,341 4,313,888 322,244 556,623 6,034,096 30,117,803

__________ __________ ___________ _________ _________ __________ ____________ __________ ___________ ___________ ___________

2012

Sovereign and Central Banks Non – Sovereign

AAA to AA- A+ to BBB- BB+ to B- Unrated Total AAA to AA- A+ to BBB- BB+ to B- Unrated Total Grand total

LL million LL million LL million LL million LL million LL million LL million LL million LL million LL million LL million

Cash and balances with

central banks 449,366 339,480 8,395,262

28,925 9,213,033 - - - - - 9,213,033 Due from banks and

financial institutions - - -

- - 1,180,968 2,624,431 114,388 361,191 4,280,978 4,280,978

Loans to banks and financial institutions and reverse

repurchase agreements - - -

- - - 892,480 91,185 76,602 1,060,267 1,060,267

Financial assets at fair value

through profit or loss 1,614 - 368,521

- 370,135 82,605 3,905 1,788 2 88,300 458,435

Financial assets at amortised

cost 146,431 79,124 13,142,614

33,813 13,401,982 123,163 839,192 148,797 35,982 1,147,134 14,549,116 __________ __________ ___________ _________ _________ __________ ____________ __________ ___________ ___________ ___________

597,411 418,604 21,906,397 62,738 22,985,150 1,386,736 4,360,008 356,158 473,777 6,576,679 29,561,829

__________ __________ ___________ _________ _________ __________ ____________ __________ ___________ ___________ ___________

F - 134

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

92

55 CREDIT RISK (continued)

The Group controls credit risk by setting credit limits on the amount of risk it is willing to accept by geographic location. The distribution of financial assets by geographic region as of 31 December

are as follows: 2013

Lebanon

Turkey

MENA

Europe

North

America

Asia

Rest of

Africa

Rest of the

world

Total

LL million LL million LL million LL million LL million LL million LL million LL million LL million Cash and balances with central banks 6,926,240 1,254,972 670,503 340,393 - - - - 9,192,108

Due from banks and financial institutions 317,064 762,242 411,754 2,010,127 658,510 34,720 - 35,139 4,229,556

Loans to banks and financial institutions and reverse repurchase agreements

48,112

526,883

15,071

67,879 -

-

-

-

657,945

Derivative financial instruments 9,373 62,998 130 63,561 - - - - 136,062

Financial assets at fair value through profit or loss 286,371 1,843 52,793 68,076 - - - - 409,083

Loans and advances to customers at amortised cost 7,578,277 8,142,755 4,941,143 684,765 70,519 86,968 530,039 30,356 22,064,822

Loans and advances to related parties at amortised cost 81,259 - 33,339 231 - - - - 114,829

Debtors by acceptances 111,143 31,126 46,279 22,390 706 540 50,505 - 262,689

Financial assets at amortized cost 11,863,715 673,122 2,866,517 168,149 48,381 327,886 - 75,265 16,023,035

Financial assets at fair value through

other comprehensive income

228,977

-

15,130

2,445 25,923 - - -

272,475

___________ ___________ ____________ ____________ ____________ ____________ ____________ ____________ ____________

27,450,531 11,455,941 9,052,659 3,428,016 804,039 450,114 580,544 140,760 53,362,604

___________ ___________ ____________ ____________ ____________ ____________ ____________ ____________ ____________

2012

Lebanon

Turkey

MENA

Europe

North America

Asia

Rest of Africa

Rest of the world

Total

LL million LL million LL million LL million LL million LL million LL million LL million LL million Cash and balances with central banks 8,038,803 344,680 829,122 249,775 - - - - 9,462,380 Due from banks and financial institutions 226,145 269,663 521,362 2,764,257 440,939 51,767 - 6,845 4,280,978

Loans to banks and financial institutions and reverse

repurchase agreements

54,452

978,618

-

27,197 -

-

-

-

1,060,267 Derivative financial instruments 13,284 727 1,463 35,176 - 60 32 304 51,046

Financial assets at fair value through profit or loss 373,742 - 40,778 92,697 3,440 - - - 510,657

Loans and advances to customers at amortised cost 6,985,775 1,466,330 5,695,716 566,863 61,016 20,542 417,804 202,357 15,416,403 Loans and advances to related parties at amortised cost 268,787 - 34,517 1,067 - 1 - 139 304,511

Debtors by acceptances 107,164 - 27,957 12,065 4,466 1,522 24,124 5,417 182,715

Financial assets at amortized cost 10,751,890 65,860 3,197,748 323,871 28,633 117,326 - 63,788 14,549,116 Financial assets at fair value through

other comprehensive income

218,602

-

8,891

1,306

16,994

-

-

-

245,793

___________ ___________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ 27,038,644 3,125,878 10,357,554 4,074,274 555,488 191,218 441,960 278,850 46,063,866

___________ ___________ ____________ ____________ ____________ ____________ ____________ ____________ ____________

F - 135

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

93

55 CREDIT RISK (continued)

Industrial analysis

2013

Financial

services and

brokerage

Government Consumers

Retail and whole

sale

Construction and

materials

Manufacturing

and petroleum`

Services and

utilities Agriculture

Total

LL million LL million LL million LL million LL million LL million LL million LL million LL million Cash and balances with central banks 329,293 8,862,815 - - - - - - 9,192,108

Due from banks and financial institutions 4,229,556 - - - - - - - 4,229,556

Loans to banks and financial institutions and reverse

repurchase agreements 657,945 - - - - - - - 657,945

Derivative financial instruments 18,266 - 64,184 8,576 4,075 33,534 3,979 3,448 136,062

Financial assets designated at fair value through profit and

loss 67,151 282,916 - - 48,509 3,290 7,217 - 409,083

Loans and advances to customers at amortised cost 1,466,944 3,822 4,711,811 3,255,934 3,348,179 4,187,201 4,861,850 229,081 22,064,822

Loans and advances to related parties at amortised cost 6 - 78,483 - 10,956 567 24,817 - 114,829

Debtors by acceptances 27,249 - 8,296 109,801 4,922 78,881 33,434 106 262,689

Financial assets at fair value through other comprehensive income 262,347 - 5

- 1,386 4,396 4,341 - 272,475

Financial assets at amortized cost 758,051 14,943,998 12,127 - 82,540 88,106 138,213 - 16,023,035

___________ ___________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ 7,816,808 24,093,551 4,874,906 3,374,311 3,500,567 4,395,975 5,073,851 232,635 53,362,604

___________ ___________ ____________ ____________ ____________ ____________ ____________ ____________ ____________

F - 136

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

94

55 CREDIT RISK (continued)

Industrial analysis (continued)

2012

Financial services and

brokerage

Government Consumers

Retail and whole

sale

Construction and

materials

Manufacturing

and petroleum`

Services and

utilities Agriculture

Total

LL million LL million LL million LL million LL million LL million LL million LL million LL million Cash and balances with central banks 249,347 9,213,033 - - - - - - 9,462,380

Due from banks and financial institutions 4,280,978 - - - - - - - 4,280,978 Financial assets given as collateral and reverse repurchase 1,060,267 - - - - - - - 1,060,267

Derivative financial instruments 15,466 - 34,976 109 1 237 247 10 51,046

Financial assets designated at fair value through profit and loss 64,746 370,136 - - 75,775 - - - 510,657

Loans and advances to customers at amortised cost 1,671,096 3,996 3,558,444 2,278,118 1,142,268 3,111,018 3,521,962 129,501 15,416,403

Loans and advances to related parties at amortised cost 34 - 88,296 - 177,021 - 39,160 - 304,511 Debtors by acceptances 146,791 - 490 13,613 - 21,821 - - 182,715

Financial assets at fair value through

other comprehensive income 239,144 - - - 3,122 1,533 1,994 - 245,793 Financial assets at amortized cost 875,775 13,401,981 - - - 60,080 211,280 - 14,549,116

___________ ___________ ____________ ____________ ____________ ____________ ____________ ____________ ____________

8,603,644 22,989,146 3,682,206 2,291,840 1,398,187 3,194,689 3,774,643 129,511 46,063,866 ___________ ___________ ____________ ____________ ____________ ____________ ____________ ____________ ____________

F - 137

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

95

56 MARKET RISK

Market risk is defined as the potential loss in both on balance sheet and off-balance sheet positions resulting

from movements in market risk factors such as foreign exchange rates, interest rates and equity prices.

The Market Risk unit‟s responsibilities are to identify, measure, report, and monitor all potential and actual

market risks to which the Group is exposed. The purpose is to introduce transparency around the treasury,

investment portfolio, and asset and liability risk profile through consistent and comprehensive risk

measurements, aggregation, management and analysis. Policies are set and limits monitored in order to ensure

the avoidance of large, unexpected losses and the consequent impact on the Group‟s safety and soundness.

Tools developed in-house by a centralized unit of specialists offer a holistic view of risk exposures and are

customized to meet the requirements of all end users (Group Risk, Senior Management, Business Lines and Legal

Compliance). Stress scenarios include the various manifestations of the credit crisis that are relevant to the

Group‟s exposures, as well as scenarios related to the Group‟s environment.

A. CURRENCY RISK

Foreign exchange (or currency) risk is the risk that the value of a portfolio will fall as a result of changes in

foreign exchange rates. The major sources of this type of market risk are imperfect correlations in the

movements of currency prices and fluctuations in interest rates. Therefore, exchange rates and relevant interest

rates are acknowledged as distinct risk factors.

The Central Bank of Lebanon allows the Bank to maintain a currency exchange position, receivable or payable,

that does not exceed at any time 1% of total net equity on condition that the global currency exchange position

does not exceed 40% of total net equity. This is subject to the Bank‟s commitment to comply in a timely and

consistent manner with the required solvency rate.

In addition to regulatory limits, the Board has set limits on positions by currency. These positions are monitored

to ensure they are maintained within established limits.

The following tables present the breakdown of assets and liabilities by currency:

2013

LL USD EUR TRY Other Total

LL million LL million LL million LL million LL million LL million

Assets

Cash and balances with central banks 497,550 6,682,153 1,107,961 79,560 824,884 9,192,108

Due from banks and financial institutions 85,947 2,711,081 427,797 394,220 610,511 4,229,556

Loans to banks and financial institutions and reverse

repurchase agreements 48,268 193,709 91,066

324,902 - 657,945

Derivative financial instruments - 63,215 44,072 2,436 26,339 136,062

Financial assets at fair value through profit or loss 157,383 165,774 57,006 1,843 27,077 409,083

Loans and advances to customers at amortised cost 1,561,410 10,971,012 2,450,084 4,175,895 2,906,421 22,064,822

Loans and advances to related parties at

amortised cost 28,969 84,157 1,265 - 438 114,829

Debtors by acceptances - 173,670 76,720 - 12,299 262,689

Financial assets at amortised cost 6,675,130 6,125,440 73,413 673,122 2,475,930 16,023,035

Financial assets at fair value through other comprehensive

income 56,434 204,588 1,554 - 9,899 272,475

Investments in associates 9,254 14,446 - - 4,915 28,615

Property and equipment 302,915 2,091 1,329 73,750 195,751 575,836

Intangible fixed assets 39,933 - 1,233 34,069 7,024 82,259

Non current assets held for sale 1,108 10,804 643 - 6,763 19,318

Other assets 82,964 79,163 27,897 8,358 80,202 278,584

Goodwill - 54,715 (483) - 156,912 211,144

__________ __________ __________ __________ __________ __________

Total assets 9,547,265 27,536,018 4,361,557 5,768,155 7,345,365 54,558,360

__________ __________ __________ __________ __________ __________

Liabilities and shareholders’ equity

Due to central banks 252,042 - - - - 252,042

Due to banks and financial institutions 29,919 1,188,284 177,391 2,870 201,448 1,599,912

Due to banks under repurchase agreements - - - 156,382 39,798 196,180

Derivative financial instruments - 24,411 28,294 55,155 26,606 134,466

Customers‟ deposits at amortised cost 6,937,614 25,558,715 3,926,353 4,157,274 5,538,261 46,118,217

Deposits from related parties at amortised cost 82,034 599,701 12,149 258 63,448 757,590

Engagements by acceptances - 173,670 76,720 - 12,299 262,689

Other liabilities 131,785 131,500 11,584 83,137 144,765 502,771

Provisions for risks and charges 80,509 7,143 2,400 18,293 24,537 132,882

Subordinated loans and similar debts - 537,101 - - - 537,101

Shareholders‟ equity 1,982,442 1,939,352 (95,360) (243,790) 481,866 4,064,510

__________ __________ __________ __________ __________ __________

Total liabilities and shareholders’ equity 9,496,345 30,159,877 4,139,531 4,229,579 6,533,028 54,558,360

__________ __________ __________ __________ __________ __________

F - 138

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

96

56 MARKET RISK (continued)

A. CURRENCY RISK (continued)

2012

LL USD EUR TRY Other Total

LL million LL million LL million LL million LL million LL million

Assets

Cash and balances with central banks 2,042,183 5,329,506 1,027,787 228,683 834,221 9,462,380

Due from banks and financial institutions 45,840 2,666,196 712,760 204,410 651,772 4,280,978

Loans to banks and financial institutions and reverse

repurchase agreements 53,916 141,069 78,195

787,087 - 1,060,267

Derivative financial instruments - 13,301 21,278 2,387 14,080 51,046

Financial assets at fair value through profit or loss 135,519 269,473 83,619 - 22,046 510,657

Loans and advances to customers at amortised cost 1,333,523 9,098,148 1,268,262 710,502 3,005,968 15,416,403

Loans and advances to related parties at

amortised cost 27,142 272,852 2,429 - 2,088 304,511

Debtors by acceptances - 128,111 44,042 - 10,562 182,715

Financial assets at amortised cost 6,252,800 5,417,652 185,955 65,860 2,626,849 14,549,116

Financial assets at fair value through other comprehensive

income 52,525 176,260 9,483 - 7,525 245,793

Investments in associates 3,553 22,503 - - 8,174 34,230

Property and equipment 292,330 949 7,130 34,774 193,527 528,710

Intangible fixed assets 28,477 - 1,147 14,964 5,012 49,600

Non current assets held for sale 1,738 44,994 616 - 2,706 50,054

Other assets 67,232 59,116 13,545 22,588 79,003 241,484

Goodwill - 54,715 (463) - 168,594 222,846

__________ __________ __________ __________ __________ __________

Total assets 10,336,778 23,694,845 3,455,785 2,071,255 7,632,127 47,190,790

__________ __________ __________ __________ __________ __________

Liabilities and shareholders’ equity

Due to central banks 133,108 - - - - 133,108

Due to banks and financial institutions 17,602 817,118 81,793 33 254,628 1,171,174

Due to banks under repurchase agreements - - - - 681,487 681,487

Derivative financial instruments - 11,995 31,034 - 13,013 56,042

Customers‟ deposits at amortised cost 7,998,960 21,596,458 3,118,954 1,801,847 5,202,671 39,718,890

Deposits from related parties at amortised cost 81,895 517,710 12,203 - 77,293 689,101

Engagements by acceptances - 128,111 44,042 - 10,562 182,715

Other liabilities 131,601 111,422 15,383 20,260 130,199 408,865

Provisions for risks and charges 69,458 4,627 1,238 11,818 24,172 111,313

Non current liabilities held for sale 119 14,680 - - - 14,799

Shareholders‟ equity 1,882,011 1,873,135 (92,869) - 361,019 4,023,296

__________ __________ __________ __________ __________ __________

Total liabilities and shareholders’ equity 10,314,754 25,075,256 3,211,778 1,833,958 6,755,044 47,190,790

__________ __________ __________ __________ __________ __________

The Group’s Exposure to Currency Risk

The Group is subject to currency risk on financial assets and liabilities that are listed in currencies other than the

Lebanese Pounds. Most of these financial assets and liabilities are listed in US Dollars, Euros and Turkish Liras.

The table below shows the currencies to which the Group had significant exposure at 31 December on its non-

trading monetary assets and liabilities and its forecast cash flows. The numbers represent the effect of a

reasonably possible movement of the currency rate against the Lebanese Pound, with all other variables held

constant, first on the income statement (due to the potential change in fair value of currency sensitive non-

trading monetary assets and liabilities) and equity (due to the impact of currency translation gains/losses of

consolidated subsidiaries and the change in fair value of currency swaps used to hedge net investment in foreign

subsidiaries). A negative amount reflects a potential net reduction in income or equity, while a positive amount

reflects a net potential increase.

2013 2012

Increase in Effect on Effect Effect on Effect

currency profit on profit on

Currency rate % before tax equity before tax equity

LL million LL million LL million LL million

USD 1% (9,183) 12,547 (1,579) 6,183

EUR 1% 1,099 (231) (61) 1,297

EGP 1% - 3,136 - 3,676

TRY 1% - 12,488 - 1,970

F - 139

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

97

56 MARKET RISK (continued)

B. INTEREST RATE RISK

Interest rate risk arises from the possibility that changes in interest rates will affect future profitability or the fair

value of financial instruments. The Group is exposed to interest rate risk as a result of mismatches of interest

rate repricing of assets and liabilities. Positions are monitored on a daily basis by management and, whenever

possible, hedging strategies are used to ensure positions are maintained within established limits.

Interest Rate Sensitivity

The table below shows the sensitivity of interest income and shareholders‟ equity to reasonably possible parallel

changes in interest rates, all other variables being held constant.

The impact of interest rate changes on net interest income is due to assumed changes in interest paid and

received on floating rate financial assets and liabilities and to the reinvestment or refunding of fixed rated

financial assets and liabilities at the assumed rates. The result includes the effect of hedging instruments and

assets and liabilities held at 31 December 2013 and 2012. The change in interest income is calculated over a 1-

year period. The impact also incorporates the fact that some monetary items do not immediately respond to

changes in interest rates and are not passed through in full, reflecting sticky interest rate behavior. The pass-

through rate and lag in response time are estimated based on historical statistical analysis and are reflected in the

outcome.

There is no direct effect for the change in interest rates on equity pursuant to the early adoption of IFRS9 in

2011 whereby no debt instruments can be classified at fair value through other comprehensive income.

The effect of any future associated hedges made by the Group is not accounted for. The sensitivity of equity was

calculated for an increase in basis points whereby a similar decrease has an equal and offsetting effect.

Sensitivity of net interest income

2013 2012

LL

million

LL

million

LL

million

LL

million

Change in basis points Increase Decrease Increase Decrease

LBP 100 (4,360) 4,360 2,381 17,249

USD 50 7,978 (7,978) 11,151 (9,644) EUR 25 (1,231) 1,231 1,581 (1,512)

F - 140

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

98

56 MARKET RISK (continued)

B. INTEREST RATE RISK (continued)

The Group‟s interest sensitivity position based on contractual repricing arrangements is shown in the table below. The expected repricing and maturity dates may differ significantly from the

contractual dates particularly with regard to the maturity of customer demand deposits. 2013

Up to 1

month

1 to 3

months

3 months to

1 year

Total less than

1 year

1 to 5

years

Over 5

years

Total more than

1 year

Non interest

bearing

Total

LL million LL million LL million LL million LL million LL million LL million LL million LL million

Assets

Cash and balances with central banks 475,005 426,751 608,276 1,510,032 4,415,700 603,000 5,018,700 2,663,376 9,192,108

Due from banks and financial institutions 2,935,608 71,062 15,959 3,022,629 - 27 27 1,206,900 4,229,556

Loans to banks and financial institutions and reverse repurchase agreements 417,007 136,408 103,951 657,366 - - - 579 657,945

Derivative financial instruments 9,685 26,091 79,426 115,202 20,107 - 20,107 753 136,062

Financial assets at fair value through profit or loss 84,818 48,565 28,946 162,329 53,471 132,275 185,746 61,008 409,083

Loans and advances to customers at amortized cost 5,046,875 5,827,122 5,160,206 16,034,203 4,390,941 1,550,693 5,941,634 88,985 22,064,822

Loans and advances to related parties at amortized cost 53,830 5,338 35,503 94,671 6,268 3,754 10,022 10,136 114,829

Debtors by acceptances 38,780 86,780 72,177 197,737 - - - 64,952 262,689

Financial assets at amortized cost 169,600 943,446 1,909,009 3,022,055 6,397,075 6,425,060 12,822,135 178,845 16,023,035

Financial assets at fair value through other comprehensive income - - 13,327 13,327 - - 259,148 272,475

Investments in associates - - - - - - - 28,615 28,615

Property and equipment - - - - - - - 575,836 575,836

Intangible fixed assets - - - - - - - 82,259 82,259

Non current assets held for sale - - - - - - - 19,318 19,318

Other assets - - - - 188 1,085 1,273 277,311 278,584

Goodwill - - - - - - - 211,144 211,144

____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________

Total assets 9,231,208 7,571,563 8,026,780 24,829,551 15,283,750 8,715,894 23,999,644 5,729,165 54,558,360

____________ ___________ ___________ ___________ ____________ ____________ ____________ ____________ ____________

Liabilities and shareholders equity

Due to central banks - - - - 132,612 118,921 251,533 509 252,042

Due to banks and financial institutions 510,699 304,272 619,908 1,434,879 - - - 165,033 1,599,912

Due to banks under repurchase agreements 161,419 31,648 3,113 196,180 - - - - 196,180

Derivative financial instruments 10,296 19,285 37,429 67,010 17,798 - 17,798 49,658 134,466

Customers‟ deposits at amortized cost 26,039,637 8,672,142 3,680,030 38,391,809 1,644,355 2,233 1,646,588 6,079,820 46,118,217

Deposits from related parties at amortized cost 177,817 118,256 41,772 337,845 149,941 - 149,941 269,804 757,590

Engagements by acceptances 38,780 86,780 72,177 197,737 - - - 64,952 262,689

Other liabilities 95,116 - 1,066 96,182 - - - 406,589 502,771

Provisions for risks and charges - - - - - - - 132,882 132,882

Subordinated loans and similar debt - - - - 537,101 - 537,101 - 537,101

Shareholders‟ equity - - - - - - - 4,064,510 4,064,510

___________ ___________ ___________ ____________ ___________ ____________ ____________ ____________ ____________

Total liabilities and shareholders’ equity 27,033,764 9,232,383 4,455,495 40,721,642 2,481,807 121,154 2,602,961 11,233,757 54,558,360

___________ ___________ ___________ ____________ ___________ ____________ ____________ ____________ ____________ Interest rate sensitivity gap (17,802,556) (1,660,820) 3,571,285 12,801,943 8,594,740 (5,504,592)

___________ ___________ ___________ ___________ ____________ ____________

Cumulative gap (17,802,556) (19,463,376) (15,892,091) (3,090,148) 5,504,592 -

___________ ___________ ___________ ___________ ____________ ____________

F - 141

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

99

56 MARKET RISK (continued)

B. INTEREST RATE RISK (continued)

2012

Up to 1

month

1 to 3

months

3 months to

1 year

Total less than

1 year

1 to 5

years

Over 5

years

Total more than

1 year

Non interest

bearing

Total

LL million LL million LL million LL million LL million LL million LL million LL million LL million

Assets

Cash and balances with central banks 2,633,792 3,341,484 1,661,602 7,636,878 42,979 14,687 57,666 1,767,836 9,462,380

Due from banks and financial institutions 3,521,048 97,851 11,846 3,630,745 - 49 49 650,184 4,280,978

Loans to banks and financial institutions and reverse repurchase agreements 864,624 47,538 147,352 1,059,514 - - - 753 1,060,267

Derivative financial instruments 11,293 4,799 22,202 38,294 9,932 61 9,993 2,759 51,046

Financial assets at fair value through profit or loss 32,931 45,839 34,425 113,195 228,523 113,537 342,060 55,402 510,657

Loans and advances to customers at amortized cost 3,455,179 4,492,166 3,562,551 11,509,896 2,895,533 843,391 3,738,924 167,583 15,416,403

Loans and advances to related parties at amortized cost 232,003 49,556 1,507 283,066 7,736 2,356 10,092 11,353 304,511

Debtors by acceptances 54,430 46,154 50,364 150,948 - - - 31,767 182,715

Financial assets at amortized cost 180,861 441,489 3,246,365 3,868,715 8,472,648 1,989,826 10,462,474 217,927 14,549,116

Financial assets at fair value through other comprehensive income - - - - - - - 245,793 245,793

Investments in associates 18,538 - - 18,538 - - - 15,692 34,230

Property and equipment - - - - - - - 528,710 528,710

Intangible fixed assets - - - - - - - 49,600 49,600

Non current assets held for sale - - - - - - - 50,054 50,054

Other assets - - - - 380 - 380 241,104 241,484

Goodwill - - - - - - - 222,846 222,846

____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________

Total assets 11,004,699 8,566,876 8,738,214 28,309,789 11,657,731 2,963,907 14,621,638 4,259,363 47,190,790

____________ ___________ ___________ ___________ ____________ ____________ ____________ ____________ ____________

Liabilities and shareholders equity

Due to central banks - - 132,612 132,612 - - - 496 133,108

Due to banks and financial institutions 482,776 185,201 409,876 1,077,853 - - - 93,321 1,171,174

Due to banks under repurchase agreements 392,529 288,806 - 681,335 - - - 152 681,487

Derivative financial instruments 10,438 7,871 26,121 44,430 9,357 - 9,357 2,255 56,042

Customers‟ deposits at amortized cost 21,501,121 6,849,744 4,124,497 32,475,362 961,245 9,195 970,440 6,273,088 39,718,890

Deposits from related parties at amortized cost 182,250 138,166 11,876 332,292 112,354 33,076 145,430 211,379 689,101

Engagements by acceptances 54,430 46,154 50,364 150,948 - - - 31,767 182,715

Other liabilities 85,884 1,078 215 87,177 - 35 35 321,653 408,865

Provisions for risks and charges - - - - - - - 111,313 111,313

Non current liabilities held for sale - - - - - - - 14,799 14,799

Shareholders‟ equity - - - - - - - 4,023,296 4,023,296

___________ ___________ ___________ ____________ ___________ ____________ ____________ ____________ ____________

Total liabilities and shareholders’ equity 22,709,428 7,517,020 4,755,561 34,982,009 1,082,956 42,306 1,125,262 11,083,519 47,190,790

___________ ___________ ___________ ____________ ___________ ____________ ____________ ____________ ____________ Interest rate sensitivity gap (11,704,729) 1,049,856 3,982,653 10,574,775 2,921,601 (6,824,156)

___________ ___________ ___________ ___________ ____________ ____________

Cumulative gap (11,704,729) (10,654,873) (6,672,220) 3,902,555 6,824,156 -

___________ ___________ ___________ ___________ ____________ ____________

F - 142

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

100

56 MARKET RISK (continued)

C. PREPAYMENT RISK

Prepayment risk is the risk that the Group will incur a financial loss because its customers and counterparties

repay or request repayment earlier than expected, such as fixed rate mortgages when interest rates fall.

Market risks that lead to prepayments are not material with respect to the markets where the Group operates.

Accordingly, the Group considers prepayment risk on net profits as not material after considering any penalties

arising from prepayments.

D. EQUITY PRICE RISK

Equity price risk is the risk that the value of a portfolio will fall as a result of a change in stock prices. Risk

factors underlying this type of market risk are a whole range of various equity (and index) prices corresponding

to different markets (and currencies / maturities) in which the Group holds equity-related positions.

The Group sets tight limits on equity exposures and the types of equity instruments that traders are allowed to

take positions in. Nevertheless, depending on the complexity of financial instruments, equity risk is measured in

first cash terms, such as the market value of a stock /index position, and also in price sensitivities, such as

sensitivity of the value of a portfolio to changes in the underlying asset price. These measures are applied to an

individual position and/or to a portfolio of equities.

57 LIQUIDITY RISK

Liquidity risk is defined as the risk that the Group will encounter difficulty in meeting obligations associated

with financial liabilities that are settled by delivering cash or another financial asset. Liquidity risk arises

because of the possibility that the Group might be unable to meet its payment obligations when they fall due

under both normal and stress circumstances. To limit this risk, management has arranged diversified funding

sources in addition to its core deposit base, and adopted a policy of managing assets with liquidity in mind and

of monitoring future cash flows and liquidity on a daily basis. The Group has developed internal control

processes and contingency plans for managing liquidity risk. This incorporates an assessment of expected cash

flows and the availability of high grade collateral which could be used to secure additional funding if required.

The Group maintains a portfolio of marketable and diverse assets that can be liquidated in the event of an

unforeseen interruption of cash flow. In addition, the Group maintains statutory deposits with Central Banks. As

per Lebanese banking regulations, the Bank must retain obligatory reserves with the Central Bank of Lebanon

calculated on the basis of 25% of the sight deposits and 15% of term deposits denominated in Lebanese Pounds,

in addition to interest bearing placements equivalent to 15% of all deposits in foreign currencies regardless of

their nature.

The liquidity position is assessed and managed under a variety of scenarios, giving due consideration to stress

factors relating to both the market in general and specifically to the Group. The Group maintains a solid ratio of

highly liquid net assets in foreign currencies to deposits and commitments in foreign currencies taking market

conditions into consideration.

Regulatory ratios and limits

In accordance with the Central Bank of Lebanon circulars, the ratio of net liquid assets to deposits in foreign

currencies should not be less than 10%. The net liquid assets consist of cash and all balances with the Central

Bank of Lebanon (excluding reserve requirements), certificates of deposit issued by the Central Bank of

Lebanon irrespective of their maturities and deposits due from other banks that mature within one year, less

deposits due to the Central Bank of Lebanon and deposits due to banks that mature within one year. Deposits are

composed of total customer deposits (excluding blocked accounts) and due from financial institutions

irrespective of their maturities and all certificates of deposits and acceptances and other debt instruments issued

by the Group and loans from the public sector that mature within one year.

F - 143

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

101

57 LIQUIDITY RISK (continued)

The Group stresses the importance of customer deposits as source of funds to finance its lending activities. This

is monitored by using the advances to deposits ratio, which compares loans and advances to customers as a

percentage of client‟s deposits.

Loans to deposits

2013 2012

% %

Year-end 47 39

Maximum 47 39

Minimum 39 36

Average 43 37

Analysis of Financial Assets and Liabilities by Remaining Contractual Maturities

The table below summarises the maturity profile of the Group‟s financial assets and liabilities as of 31

December based on contractual undiscounted cash flows. The contractual maturities have been determined

based on the period remaining to reach maturity as per the statement of financial position actual commitments.

Repayments which are subject to notice are treated as if notice were to be given immediately. Concerning

deposits, the Group expects that many customers will not request repayment on the earliest date the Group could

be required to pay.

The table does not reflect the expected cash flows indicated by the Group‟s deposit retention history.

2013

Less than

1 month

1 to 3

months

3 to 12

months

1 to 5

years

Over 5

years

Total

LL million LL million LL million LL million LL million LL million

Financial assets:

Cash and balances with central banks 3,066,548 328,099 615,326 4,844,503 1,004,503 9,858,979

Due from banks and financial institutions 4,191,130 77,161 15,959 - 26 4,284,276

Loans to banks and financial institutions

and reverse repurchase agreements 388,124 3,056 219,309 - 72,586 683,075

Derivative financial instruments 9,109 26,017 79,265 20,232 1,439 136,062

Financial assets at fair value through

profit or loss 124,370 50,078 37,044 95,273 179,552 486,317

Loans and advances to customers at

amortised cost 3,597,575 3,449,031 5,566,885 7,700,676 2,503,139 22,817,306

Loans and advances to related parties at

amortised cost 54,351 3,232 37,211 17,590 6,770 119,154

Debtors by acceptances 74,097 101,387 87,205 - - 262,689

Financial assets at amortised cost 417,856 1,093,658 2,570,847 9,013,454 7,786,004 20,881,819

___________ ___________ ___________ ___________ ___________ ____________

Total financial assets 11,923,160 5,131,719 9,229,051 21,691,728 11,554,019 59,529,677

___________ ___________ ___________ ___________ ___________ ____________

Financial liabilities:

Due to central banks - - - 145,885 129,379 275,264

Due to banks and financial institutions 645,651 268,348 408,662 197,155 114,808 1,634,624

Due to banks under repurchase agreements 196,209 - - - - 196,209

Derivative financial instruments 59,897 19,251 37,425 17,893 - 134,466

Customers‟ deposits at amortised cost 32,475,970 8,739,638 3,699,182 2,475,821 3,226 47,393,837

Deposits from related parties at

amortised cost 439,896 121,284 44,745 185,277 - 791,202

Engagements by acceptances 74,097 101,387 87,205 - - 262,689

Subordinated loans and similar debts 11,039 - 18,953 601,771 - 631,763

___________ ___________ ___________ ___________ ___________ ___________

Total financial liabilities 33,902,759 9,249,908 4,296,172 3,623,802 247,413 51,320,054

___________ ___________ ___________ ___________ ___________ ___________

F - 144

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

102

57 LIQUIDITY RISK (continued)

2012

Less than

1 month

1 to 3

months

3 to 12

months

1 to 5

years

Over 5

years

Total

LL million LL million LL million LL million LL million LL million

Financial assets:

Cash and balances with central banks 3,371,590 221,231 1,213,563 3,667,931 2,369,729 10,844,044

Due from banks and financial institutions 4,223,885 88,754 11,734 - 49 4,324,422

Loans to banks and financial institutions

and reverse repurchase agreements 816,257 3,560 187,438 - 80,391 1,087,646

Derivative financial instruments 16,140 4,564 20,395 9,947 - 51,046

Financial assets at fair value through

profit or loss 115,957 325 25,173 283,684 196,671 621,810

Loans and advances to customers at

amortised cost 3,272,618 1,611,583 3,270,397 7,001,782 952,292 16,108,672

Loans and advances to related parties at

amortised cost 251,225 33,927 9,419 6,842 5,075 306,488

Debtors by acceptances 64,971 57,498 55,450 4,796 - 182,715

Financial assets at amortised cost 1,034,583 348,221 4,362,753 9,585,939 2,144,651 17,476,147

___________ ___________ ___________ ___________ ___________ ____________

Total financial assets 13,167,226 2,369,663 9,156,322 20,560,921 5,748,858 51,002,990

___________ ___________ ___________ ___________ ___________ ____________

Financial liabilities:

Due to central banks 585 - - 166,235 - 166,820

Due to banks and financial institutions 577,371 181,298 124,439 181,531 149,943 1,214,582

Due to banks under repurchase agreements 466,561 214,926 - - - 681,487

Derivative financial instruments 15,370 5,506 25,809 9,357 - 56,042

Customers‟ deposits at amortised cost 28,175,881 7,055,421 4,272,165 1,145,780 10,716 40,659,963

Deposits from related parties at

amortised cost 217,691 140,538 12,980 141,584 222,932 735,725

Engagements by acceptances 64,971 57,498 55,450 4,796 - 182,715

____________ ____________ ___________ ____________ ___________ ____________

Total financial liabilities 29,518,430 7,655,187 4,490,843 1,649,283 383,591 43,697,334

___________ ___________ ___________ ___________ ___________ ____________

The table below shows the contractual expiry by maturity of the Group‟s contingent liabilities and

commitments. Each undrawn loan commitment is included in the time band containing the earliest date it can be

drawn down. For issued financial guarantee contracts, the maximum amount of the guarantee is allocated to the

earliest period in which the guarantee could be called.

2013

On

demand

Less than 3

months

3 to 12

months

1 to 5

years

More than

5 years

Total

LL million LL million LL million LL million LL million LL million Financial guarantees 582,615 277,186 745,471 117,662 42,364 1,765,298

Other guarantees 860,519 - - - - 860,519

Documentary credits 132,257 202,085 207,532 28,824 208 570,906

Loan commitments 3,661,620 684 5,457 84,044 3,192 3,754,997

_________ _________ _________ _________ _________ _________

5,237,011 479,955 958,460 230,530 45,764 6,951,720

_________ _________ _________ _________ _________ _________

2012

On

demand

Less than 3

months

3 to 12

months

1 to 5

years

More than

5 years

Total

LL million LL million LL million LL million LL million LL million Financial guarantees 56,844 828,094 426,915 30,529 71,359 1,413,741

Other guarantees 898,455 - - - - 898,455

Documentary credits 2,037 279,501 62,950 9,275 - 353,763

Loan commitments 3,309,318 50,813 122,635 25,258 46 3,508,070

_________ _________ _________ _________ _________ _________

4,266,654 1,158,408 612,500 65,062 71,405 6,174,029

_________ _________ _________ _________ _________ _________

Maturity analysis of assets and liabilities

The table below summarizes the maturity profile of the Group‟s assets and liabilities. The contractual maturities

of assets and liabilities have been determined on the basis of the remaining period at the statement of financial

position date to the contractual maturity date and do not take account of the effective maturities as indicated by

the Group‟s deposit retention history and the availability of liquid funds. The maturity profile is monitored by

management to ensure adequate liquidity is maintained.

F - 145

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

103

57 LIQUIDITY RISK – MATURITY PROFILE (continued)

The maturity profile of the assets and liabilities at 31 December 2013 is as follows:

Less than

1 month

1 to 3

months

3 months to 1

year

Total less than

one year

1 to 5

Years

Over 5

years

Total more than one

year

Amount without

maturity

Total

LL million LL million LL million LL million LL million LL million LL million LL million LL million Assets

Cash and balances with central banks 2,736,641 327,712 613,351 3,677,704 4,556,251 628,860 5,185,111 329,293 9,192,108

Due from banks and financial institutions 4,136,446 77,124 15,958 4,229,528 - 28 28 - 4,229,556

Loans to banks and financial institutions and reverse repurchase

agreements 369,309 21,762 218,763 609,834 - 48,111 48,111 - 657,945

Derivative financial instruments 9,108 26,017 79,265 114,390 20,232 1,440 21,672 - 136,062

Financial assets at fair value through profit or loss 78,812 48,433 29,045 156,290 53,603 134,558 188,161 64,632 409,083

Loans and advances to customers at amortised cost 2,681,882 2,408,945 4,011,330 9,102,157 9,136,285 3,826,380 12,962,665 - 22,064,822

Loans and advances to related parties at amortised cost 64,968 296 37,811 103,075 7,737 4,017 11,754 - 114,829

Debtors by acceptances 74,097 101,387 87,205 262,689 - - - - 262,689

Financial assets at amortised cost 174,514 692,399 1,629,375 2,496,288 6,657,823 6,868,924 13,526,747 - 16,023,035

Financial assets at fair value through other comprehensive income - - - - - - - 272,475 272,475

Investments in associates - - - - - - - 28,615 28,615

Property and Equipment - - - - - - - 575,836 575,836

Intangible fixed assets - - - - - - - 82,259 82,259

Non current assets held for sale - - - - - - - 19,318 19,318

Other assets 166,695 3,702 20,496 190,893 29,655 1,309 30,964 56,727 278,584

Goodwill - - - - - - - 211,144 211,144

___________ ____________ ____________ ____________ ____________ ___________ ___________ ___________ ____________

Total assets 10,492,472 3,707,777 6,742,599 20,942,848 20,461,586 11,513,627 31,975,213 1,640,299 54,558,360

___________ ____________ ____________ ____________ ____________ ___________ ___________ ___________ ____________

Liabilities and shareholders equity

Due to central banks - - - - 133,118 118,924 252,042 - 252,042

Due to banks and financial institutions 468,330 199,445 515,040 1,182,815 229,585 187,512 417,097 - 1,599,912

Due to banks under repurchase agreements 196,180 - - 196,180 - - - - 196,180

Derivative financial instruments 59,897 19,251 37,425 116,573 17,893 - 17,893 - 134,466

Customers‟ deposits at amortised cost 27,509,368 9,699,977 7,123,990 44,333,335 1,782,648 2,234 1,784,882 - 46,118,217

Deposits from related parties at amortised cost 257,411 121,371 228,862 607,644 149,946 - 149,946 - 757,590

Engagements by acceptances 74,097 101,387 87,205 262,689 - - - - 262,689

Other liabilities 275,027 36,021 53,649 364,697 95 81 176 137,898 502,771

Provision for risks and charges - - - - - - - 132,882 132,882

Subordinated loans and similar debts - - - - 537,101 537,101 - 537,101

Shareholders‟ equity - - - - - - - 4,064,510 4,064,510

___________ ___________ ____________ ___________ ____________ ____________ __________ __________ ____________

Total liabilities and shareholders’ equity 28,840,310 10,177,452 8,046,171 47,063,933 2,850,386 308,751 3,159,137 4,335,290 54,558,360

___________ ___________ ____________ ___________ ____________ ____________ __________ __________ ____________ Liquidity gap (18,347,838) (6,469,675) (1,303,572) 17,611,200 11,204,876 (2,694,991)

___________ ___________ ____________ ____________ ____________ __________

Cumulative gap (18,347,838) (24,817,513) (26,121,085) (8,509,885) 2,694,991 -

___________ ___________ ____________ ____________ ____________ __________

F - 146

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

104

57 LIQUIDITY RISK – MATURITY PROFILE (continued)

The maturity profile of the assets and liabilities at 31 December 2012 is as follows:

Less than

1 month

1 to 3

months

3 months to 1

year

Total less than

one year

1 to 5

Years

Over 5

years

Total more than one

year

Amount without

maturity

Total

LL million LL million LL million LL million LL million LL million LL million LL million LL million Assets

Cash and balances with central banks 3,318,055 221,094 1,207,780 4,746,929 3,376,570 1,338,881 4,715,451 - 9,462,380

Due from banks and financial institutions 4,206,838 62,357 11,734 4,280,929 - 49 49 - 4,280,978

Loans to banks and financial institutions and reverse repurchase

agreements 816,321 3,551 186,479 1,006,351 - 53,916 53,916 - 1,060,267

Derivative financial instruments 16,140 4,564 20,395 41,099 9,947 - 9,947 - 51,046

Financial assets at fair value through profit or loss 33,346 45,532 34,370 113,248 231,828 113,359 345,187 52,222 510,657

Loans and advances to customers at amortised cost 2,656,962 1,873,999 3,255,051 7,786,012 6,727,452 898,342 7,625,794 4,597 15,416,403

Loans and advances to related parties at amortised cost 249,846 33,927 10,801 294,574 7,756 2,181 9,937 - 304,511

Debtors by acceptances 64,971 57,498 55,450 177,919 4,796 - 4,796 - 182,715

Financial assets at amortised cost 175,468 183,279 3,330,402 3,689,149 8,650,287 2,209,680 10,859,967 - 14,549,116

Financial assets at fair value through other comprehensive income - - - - - - - 245,793 245,793

Investments in associates - - - - 18,545 - 18,545 15,685 34,230

Property and Equipment - - - - - - - 528,710 528,710

Intangible fixed assets - - - - - - - 49,600 49,600

Non current assets held for sale - - - - - - - 50,054 50,054

Other assets 125,924 19,031 23,556 168,511 10,252 443 10,695 62,278 241,484

Goodwill - - - - - - - 222,846 222,846

___________ ____________ ____________ ____________ ____________ ___________ ___________ ___________ ____________

Total assets 11,663,871 2,504,832 8,136,018 22,304,721 19,037,433 4,616,851 23,654,284 1,231,785 47,190,790

___________ ____________ ____________ ____________ ____________ ___________ ___________ ___________ ____________

Liabilities and shareholders equity

Due to central banks - - - - 133,108 - 133,108 - 133,108

Due to banks and financial institutions 523,894 236,318 278,789 1,039,001 117,090 15,083 132,173 - 1,171,174

Due to banks under repurchase agreements 392,602 288,885 - 681,487 - - - - 681,487

Derivative financial instruments 15,370 5,506 25,809 46,685 9,357 - 9,357 - 56,042

Customers‟ deposits at amortised cost 27,244,497 7,108,325 4,391,195 38,744,017 965,150 9,723 974,873 - 39,718,890

Deposits from related parties at amortised cost 211,830 139,472 16,586 367,888 288,136 33,077 321,213 - 689,101

Engagements by acceptances 64,971 57,498 55,450 177,919 4,796 - 4,796 - 182,715

Other liabilities 229,713 52,666 64,959 347,338 1,361 36 1,397 60,130 408,865

Provision for risks and charges - - - - - - - 111,313 111,313

Non-current liabilities held for sale - - - - - - - 14,799 14,799

Shareholders‟ equity - - - - - - - 4,023,296 4,023,296

___________ ___________ ____________ ___________ ____________ ____________ __________ __________ ____________

Total liabilities and shareholders’ equity 28,682,877 7,888,670 4,832,788 41,404,335 1,518,998 57,919 1,576,917 4,209,538 47,190,790

___________ ___________ ____________ ___________ ____________ ____________ __________ __________ ____________ Liquidity gap (17,019,006) (5,383,838) 3,303,230 17,518,435 4,558,932 (2,977,753)

___________ ___________ ____________ ____________ ____________ __________

Cumulative gap (17,019,006) (22,402,844) (19,099,614) (1,581,179) 2,977,753 -

___________ ___________ ____________ ____________ ____________ __________

F - 147

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

105

58 OPERATIONAL RISK

Operational risk is the risk of loss arising from system failure, human error, fraud or external events. When

controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications,

or lead to financial loss.

The operational risk management framework is implemented by an independent Operational Risk Management

Team, in coordination with other essential elements of the Group‟s control framework such as Internal Audit or

Corporate Information Security and Business Continuity.

Central to this framework are tried-and-tested principles such as redundancy of mission-critical systems,

segregation of duties, strict authorization procedures, daily reconciliation, risk management responsibility at the

operational level and the requirement to be able to price and value independently any proposed transaction.

Incidents are reported, analyzed and fed into a risk map also originating from other sources such as control self

assessments, key risk indicators or audit reports. This risk map is then used as a tool to follow up on outstanding

issues and as the basis for reporting operational risk to management and to the Board.

Insurance coverage is used as an external mitigant and is commensurate with activity, both in terms of volume

and characteristics.

59 CAPITAL MANAGEMENT

By maintaining an actively managed capital base, the Group‟s objectives are to cover risks inherent in the

business, to retain sufficient financial strength and flexibility to support new business growth, and to meet

national and international regulatory capital requirements at all times. The adequacy of the Group‟s capital is

monitored using, among other measures, the rules and ratios established by the Central Bank of Lebanon

according to the provisions of Basic Circular No 44. These ratios measure capital adequacy by comparing the

Group‟s eligible capital with its statement of financial position assets and off-balance sheet commitments at a

weighted amount to reflect their relative risk.

To satisfy Basel III capital requirements, the Central Bank of Lebanon requires maintaining the following ratios

of total regulatory capital to risk-weighted assets for the year ended 31 December 2013 and thereafter:

Common Tier 1 capital

ratio

Tier 1 capital ratio

Total capital ratio

Year ended 31 December 2013 6.0 % 8.5 % 10.5 %

Year ended 31 December 2014 7.0 % 9.5 % 11.5 %

Year ended 31 December 2015 8.0 % 10.0 % 12.0 %

(Restated)

2013 2012

LL million LL million

Risk weighted assets:

Credit risk 29,243,183 21,650,605

Market risk 599,126 653,868

Operational risk 2,469,396 2,251,204

____________ ____________

Total risk weighted assets 32,311,705 24,555,677

____________ ____________

The regulatory capital as of 31 December is as follows:

F - 148

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2013

106

59 CAPITAL MANAGEMENT (continued)

Excluding net income for the

year Including net income for the year less

proposed dividends

Restated Restated

2013 2012 2013 2012

LL million LL million LL million LL million Tier 1 Capital 3,069,255 2,970,097 3,278,970 3,289,704

Of which: Common Tier 1 2,315,505 2,367,097 2,525,220 2,686,704

Tier 2 Capital 626,230 65,885 626,230 65,885

____________ ____________ ____________ ____________

Total Capital 3,695,485 3,035,982 3,905,200 3,355,589

____________ ____________ ____________ ____________

The capital adequacy ratio as of 31 December is as follows:

Excluding net income for the year Including net income for the year

less proposed dividends

Restated Restated

2013 2012 2013 2012

Capital adequacy – Common Tier 1 7.17% 9.64% 7.82% 10.94%

Capital adequacy - Tier 1 9.50% 12.10% 10.15% 13.40%

Capital adequacy -Total Capital 11.44% 12.36% 12.09% 13.67%

____________ ____________ ____________ ____________

The Group manages its capital structure and makes adjustments to it in the light of changes in economic

conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the

Group may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue capital

securities. No changes were made in the objectives, policies and processes from the previous years, however,

they are under constant scrutiny of the Board.

60 SUBSEQUENT EVENTS

During the month of March 2014, the International Finance Corporation (IFC) signed various agreements with

the Group to provide subordinated loans amounting to US$ 150 million for a period of 10 years. The purpose of

these loans is to enhance the private funds base of the Group and support its strategies towards regional

development.

61 COMPARATIVE INFORMATION

In accordance with the current year‟s classification, the Group reclassified an amount of LL 4,526 million from

“Retained Earnings” to “Non-distributable reserves” for the year ended 31 December 2012.

F - 149

BANK AUDI SALAUDI SARADAR GROUP

CONSOLIDATED FINANCIAL STATEMENTS

31 DECEMBER 2012

F - 150

F - 151

Bank Audi SAL – Audi Saradar Group

The attached notes 1 to 60 form part of these consolidated financial statements.2

CONSOLIDATED INCOME STATEMENTFor the year ended 31 December 2012

(Restated)*2012 2011

Notes LL million LL millionCONTINUING OPERATIONS

Interest and similar income 4 2,208,509 2,056,972Interest and similar expense 5 (1,344,819) (1,268,750)

_______________ _______________Net Interest Income 863,690 788,222

_______________ _______________

Fee and commission income 6 330,562 318,952Fee and commission expense 7 (51,197) (50,060)

_______________ _______________Net Fee and Commission Income 279,365 268,892

_______________ _______________

Net gain on financial assets at fair value through profit or loss 8 197,456 126,171Net gain on sale of financial assets at amortized cost 9 265,812 221,014Revenues from financial assets at fair value through othercomprehensive income 27 30,245 27,720

Net gain on sale of subsidiaries and associates 10 - 2,024Other operating income 11 22,251 48,638

_______________ _______________Total Operating Income 1,658,819 1,482,681

Net credit losses 12 (182,585) (137,659)_______________ _______________

Net Operating Income 1,476,234 1,345,022_______________ _______________

Personnel expenses 13 (411,746) (380,856)Depreciation of property and equipment 29 (46,088) (38,796)Amortisation of intangible assets 30 (7,663) (7,045)Impairment of goodwill 33 (21,167) -Other operating expenses 14 (291,959) (242,679)

_______________ _______________Total Operating Expenses (778,623) (669,376)

_______________ _______________Operating Profit 697,611 675,646

Share of profit of associates under equity method 551 5,133Net gain on disposal of fixed assets 850 387

_______________ _______________Profit Before Tax From Continuing Operations 699,012 681,166

Income tax 15 (154,537) (139,514)_______________ _______________

Profit After Tax From Continuing Operations 544,475 541,652

DISCONTINUED OPERATIONS

Profit from discontinued operations, net of tax 16 33,814 8,899_______________ _______________

Profit For The Period 578,289 550,551_______________ _______________

Attributable to:Equity holders of the Bank: 564,737 544,239

Profit for the year from continuing operations 531,419 536,798Profit for the year from discontinued operations 33,318 7,441

Non-controlling interests: 13,552 6,312Profit for the year from continuing operations 13,056 4,854Profit for the year from discontinued operations 496 1,458

_______________ _______________578,289 550,551

_______________ _______________

Earnings per share:LL LL

Basic earnings per share 1,527 1,510Diluted earnings per share 1,526 1,507Basic earnings per share from continuing operations 1,431 1,488Diluted earnings per share from continuing operations 1,430 1,485

* Restated for the effect of separate presentation of profit from discontinued operations and earnings per share information.

F - 152

Bank Audi SAL – Audi Saradar Group

The attached notes 1 to 60 form part of these consolidated financial statements.3

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEFor the year ended 31 December 2012

2012 2011Notes LL million LL million

Profit for the year from continuing operations 544,475 541,652Discontinued operations 33,814 8,899Profit for the year _____________ _____________

578,289 550,551Other comprehensive income (loss)Exchange differences on translation of foreign operations (126,143) (50,362)Net loss / gain on hedge of net investments (3,589) 4,125

_____________ _____________48 (129,732) (46,237)

_____________ _____________Net unrealized loss on financial assets at fair value through other

comprehensive income 5,613 (29,481)Net deferred income taxes (9,667) (232)

_____________ _____________48 (4,054) (29,713)

_____________ _____________Other comprehensive loss for the year, net of tax 48 (133,786) (75,950)

_____________ _____________Total comprehensive income for the year, net of tax 444,503 474,601

_____________ _____________

Attributable to:Equity holders of the Bank 430,951 468,289Non-controlling interest 13,552 6,312

_____________ _____________444,503 474,601

_____________ _____________

F - 153

Bank Audi SAL – Audi Saradar Group

The attached notes 1 to 60 form part of these consolidated financial statements.4

CONSOLIDATED STATEMENT OF FINANCIAL POSITIONAs at 31 December 2012

2012 2011Notes LL million LL million

ASSETSCash and balances with central banks 18 9,462,380 8,703,354Due from banks and financial institutions 19 4,280,978 4,562,602Loans to banks and financial institutions and reverse

repurchase agreements 20 1,060,267 219,084Financial assets given as collateral 21 - 17,424Derivative financial instruments 22 51,046 82,209Financial assets at fair value through profit or loss 23 510,657 823,926Loans and advances to customers at amortized cost 24 15,416,403 12,692,177Loans and advances to related parties at amortized cost 25 304,511 263,666Debtors by acceptances 182,715 280,819Financial assets at amortized cost 26 14,549,116 14,307,303Financial assets at fair value through other comprehensive income 27 245,793 223,984Investments in associates 28 34,230 43,099Property and equipment 29 528,710 511,550Intangible assets 30 49,600 13,508Non current assets held for sale 31 50,054 26,379Other assets 32 238,163 288,171Goodwill 33 222,846 261,431

_______________ _______________TOTAL ASSETS 47,187,469 43,320,686

_______________ _______________LIABILITIESDue to central banks 34 133,108 133,394Due to banks and financial institutions 35 1,171,174 1,007,558Due to banks under repurchase agreements 35 681,487 -Derivative financial instruments 22 56,042 58,246Customers’ deposits at amortized cost 36 39,718,890 37,097,210Deposits from related parties at amortized cost 37 689,101 285,297Engagements by acceptances 182,715 280,819Other liabilities 38 408,865 832,087Provisions for risks and charges 39 95,096 72,925Non current liabilities held for sale 31 14,799 -

_______________ _______________TOTAL LIABILITIES 43,151,277 39,767,536

_______________ _______________

SHAREHOLDERS’ EQUITY – GROUP SHAREShare capital – common shares 40 438,586 438,197Share capital – preferred shares 40 19,124 17,243Issue premium – common shares 41 659,206 657,846Issue premium – preferred shares 41 583,876 359,633Cash contribution to capital 42 72,586 72,586Non distributable reserves 43 808,434 696,360Distributable reserves 44 551,406 380,215Treasury shares 47 (20,245) (103,912)Retained earnings 328,223 328,515Other components of equity 48 (66,579) 21,056Result of the year 564,737 544,239

_______________ _______________3,939,354 3,411,978

NON-CONTROLLING INTEREST 49 96,838 141,172_______________ _______________

TOTAL SHAREHOLDERS’ EQUITY 4,036,192 3,553,150_______________ _______________

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 47,187,469 43,320,686_______________ _______________

F - 154

Bank Audi SAL – Audi Saradar Group

CONSOLIDATED CASH FLOW STATEMENTFor the year ended 31 December 2012

The attached notes 1 to 60 form part of these consolidated financial statements.

5

2012 2011Notes LL million LL million

OPERATING ACTIVITIESProfit before tax from continuing operations 699,012 681,166Profit before tax from discontinued operations 45,581 10,624Adjustments to reconcile profit before tax to net cash flows:Non-cash:

Depreciation and amortisation 29 & 30 55,180 47,380Impairment of assets acquired in settlement of debt reversed 31 (4) (602)Net gain on financial instruments at amortised cost 9 (265,812) (220,930)Provisions for loans and advances 12 202,104 174,436Recoveries of provision for loans and advances 12 (19,628) (36,776)Share of net profit of associates (551) (5,133)Net gain on disposal of assets acquired in settlement of debt 11 (8,297) (5,433)Net gain on sale or disposal of fixed assets (850) (230)Provision for risks and charges 39 24,856 4,448Write back of provisions for risks and charges 39 (7) (4,639)Provision for impairment of financial instruments 12 110 -Provision for end of service benefits 39 12,826 10,303Employees’ share based payments expense 13 - 40Gain on sale of subsidiaries and associates 10 & 16 (48,622) (2,024)Gain on revaluation due to loss of control 16 (20,439) -Impairment of goodwill 33 31,088 -Effect of entities deconsolidated during the year (47,753) -

______________ ______________658,794 652,630

Working capital adjustments:Balances with the Central Banks, banks and financial institutions maturing in more than 3 months (314,259) (1,990,470)Change in derivatives and financial assets held for trading 342,227 152,092Change in financial assets given as collateral 17,424 (17,424)Change in loans and advances to customers and related parties (2,923,486) (198,120)Change in other assets 220,171 (50,316)Change in deposits from customers and related parties 2,704,245 (75,584)Change in other liabilities (300,357) (187,518)Proceeds from sale of assets obtained in settlement of debt 19,068 9,140Change in non controlling interest (44,334) (36,278)

______________ ______________Cash from (used in) operations 379,493 (1,741,848)

Provisions for risks and charges paid 39 (3,997) (4,075)End of service benefits paid 39 (2,908) (1,834)Taxation paid 15 (131,373) (121,485)

______________ ______________Net cash flows from (used in) operating activities 241,215 (1,869,242)

______________ ______________

INVESTING ACTIVITIESChange in financial assets – other than trading 21,776 580,609Purchase of property and equipment and intangibles 29 & 30 (182,499) (65,301)Investments under equity method and related loans 9,420 (7,222)Cash collected from sale of property and equipment and intangibles 18,635 1,927Proceeds from sale of associates and subsidiaries 16 133,212 20,880

______________ ______________Net cash flows from investing activities 544 530,893

______________ ______________

FINANCING ACTIVITIESIssuance of preferred shares series “F” 40 226,125 -Increase in share capital and issue premium from stock options exercise 1,748 4,395Distribution of dividends 40 (236,179) (230,813)Treasury GDR transactions 59,083 (67,942)

______________ ______________Net cash flows from (used in) financing activities 50,777 (294,360)

______________ ______________

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 292,536 (1,632,709)

Net foreign exchange difference 186 6,846

Cash and cash equivalents at 1 January 5,299,740 6,925,603______________ ______________

CASH AND CASH EQUIVALENTS AT 31 DECEMBER 50 5,592,462 5,299,740______________ ______________

Operational cash flows from interest and dividendsInterest paid (1,316,918) (1,288,577)Interest received 2,228,143 2,092,214Dividends received 30,418 30,086

F - 155

Bank Audi SAL – Audi Saradar Group

CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFor the year ended 31 December 2012

The attached notes 1 to 60 form part of these interim consolidated financial statements.

6

Attributable to the equity holders of the Bank

Share capital -common

sharesShare capital -

preferred shares

Issuepremium-

commonshares

Issuepremium-preferred

shares

Cashcontribution to

capital

Nondistributable

reservesDistributable

reservesTreasury

sharesRetainedearnings

Othercomponents of

equityResult

of the year Total

Non-controlling

interest

Totalshareholders’

equityLL million LL million LL million LL million LL million LL million LL million LL million LL million LL million LL million LL million LL million LL million

Balance at 1 January 2012 438,197 17,243 657,846 359,633 72,586 696,360 380,215 (103,912) 328,515 21,056 544,239 3,411,978 141,172 3,553,150Net profits for the year - - - - - - - - - - 564,737 564,737 13,552 578,289Other comprehensive income - - - - - - - - - (133,786) - (133,786) - (133,786)

___________ __________ ___________ ___________ ___________ __________ __________ ___________ ___________ ___________ ___________ ________ __________ _________Total comprehensive income - - - - - - - - - (133,786) 564,737 430,951 13,552 444,503

Appropriation of 2011 profits - - - - - 133,284 1,505 - 172,828 - (307,617) - - -Distribution of dividends on ordinary shares - - - - - 443 - - - - (210,712) (210,269) - (210,269)Distribution of dividends on preferred shares - - - - - - - - - - (25,910) (25,910) - (25,910)Issue of preferred shares - 1,881 - 224,243 - - - - - - - 226,124 - 226,124Employees' share-based payments 389 - 1,360 - - (587) - - (2,247) - - (1,085) - (1,085)Entities deconsolidated during the year - - - - - (8,219) (19,637) - 24,690 420 - (2,746) - (2,746)Entities under equity method - - - - - - - - (723) - - (723) - (723)Treasury shares transactions - - - - - (24,583) - 83,667 - - - 59,084 - 59,084Non controlling interest share of capital - - - - - - - - - - - - (12,840) (12,840)Non controlling interest share of reserves - - - - - (138) (4,308) - 5,682 43,810 - 45,046 (45,046) -Reserve for share option agreements - - - - - - 6,844 - - - - 6,844 - 6,844Transfer between reserves - - - - - 12,086 186,781 - (200,788) 1,921 - - - -Other movements - - - - - (212) 6 - 266 - - 60 - 60

___________ __________ ___________ ___________ _________ ____________ ___________ ____________ ___________ ___________ ___________ ________ __________ _________Balance at 31 December 2012 438,586 19,124 659,206 583,876 72,586 808,434 551,406 (20,245) 328,223 (66,579) 564,737 3,939,354 96,838 4,036,192

___________ __________ ___________ __________ _________ ____________ ___________ ____________ ___________ ___________ ___________ ________ __________ _________

Balance at 1 January 2011 before early adoption of IFRS 9 436,990 17,243 652,938 359,633 72,586 549,550 505,597 (37,163) 209,541 195,814 508,556 3,471,285 177,450 3,648,735Effect of IFRS 9 early adoption - - - - - - - - (5,666) (101,875) - (107,541) - (107,541)

___________ __________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ________ ___________ _________Balance at 1 January 2011 after early adoption of IFRS 9 436,990 17,243 652,938 359,633 72,586 549,550 505,597 (37,163) 203,875 93,939 508,556 3,363,744 177,450 3,541,194

Net profits for the year - - - - - - - - - - 544,239 544,239 6,312 550,551Other comprehensive income - - - - - - - - - (75,950) - (75,950) - (75,950)

___________ __________ ___________ ___________ ___________ __________ __________ ___________ ___________ ___________ ___________ ___________ __________ ___________Total comprehensive income - - - - - - - - - (75,950) 544,239 468,289 6,312 474,601

Appropriation of 2010 profits - - - - - 147,469 18,822 - 111,452 - (277,743) - - -Distribution of dividends on ordinary shares - - - - - - - - - - (208,671) (208,671) - (208,671)Distribution of dividends on preferred shares - - - - - - - - - (22,142) (22,142) - (22,142)Employees' share-based payments 1,207 - 4,908 - - (1,720) - - - - - 4,395 - 4,395Entities deconsolidated during the year - - - - - (348) (4,739) - 2,886 1,140 - (1,061) - (1,061)Entities under equity method - - - - - - - 594 - - 594 - 594Treasury shares transactions - - - - - (1,193) - (66,749) - - - (67,942) - (67,942)Non controlling interest share of capital - - - - - - - - - - - - (41,145) (41,145)Non controlling interest share of reserves - - - - - (7,395) (2,295) - 11,810 (675) - 1,445 (1,445) -Reserve for share option agreements - - - - - - (126,992) - - - - (126,992) - (126,992)Transfer between reserves - - - - - 9,628 (10,187) - (2,043) 2,602 - - - -Other movements - - - - - 369 9 - (59) - - 319 - 319

___________ __________ ___________ ___________ _________ ____________ ___________ ____________ ___________ ___________ ___________ ________ __________ _________Balance at 31 December 2011 438,197 17,243 657,846 359,633 72,586 696,360 380,215 (103,912) 328,515 21,056 544,239 3,411,978 141,172 3,553,150

___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ___________ ________ ___________ _________

F - 156

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

7

1 CORPORATE INFORMATION

Bank Audi SAL – Audi Saradar Group (the Bank) is a Lebanese joint stock company registered since 1962 inLebanon under No 11347 at the Register of Commerce and under No 56 on the Banks’ list at the Bank ofLebanon. The Bank’s head office is located in Bank Audi Plaza, Omar Daouk Street, Beirut, Lebanon. TheBank’s shares are listed on the Beirut Stock Exchange and London SEAQ.

The Bank, together with its affiliated banks and subsidiaries (collectively “the Group”), provides a full range ofretail, commercial, investment and private banking activities through its headquarter as well as its branches inLebanon and its presence in Europe, the Middle East and North Africa.

During 2012, the Group started its operations in Turkey under its newly established subsidiary, Odeabank.Besides, the Group decided to discontinue its banking operations through Bank Audi Monaco SAM pursuant tothe decision of the General Assembly of Bank Audi Monaco dated 27 July 2012.

The consolidated financial statements were authorized for issue in accordance with the Board of Directors’resolution on 21 March 2013.

2 ACCOUNTING POLICIES

2.1 Basis of preparationThe consolidated financial statements have been prepared on a historical cost basis except for: a) the restatementof certain tangible real estate properties in Lebanon according to the provisions of law No 282 dated 30December 1993, and b) the measurement at fair value of derivative financial instruments, financial assets at fairvalue through profit or loss and financial assets at fair value through other comprehensive income.

The carrying values of recognised assets and liabilities that are hedged items in fair value hedges, and otherwisecarried at amortised cost, are adjusted to record changes in fair value attributable to the risks that are beinghedged.

The consolidated financial statements are presented in Lebanese Pounds (LL) and all values are rounded to thenearest million, except when otherwise indicated.

Statement of complianceThe consolidated financial statements have been prepared in accordance with International Financial ReportingStandards (IFRS) as issued by the International Accounting Standards Board (IASB), and the regulations of theCentral Bank of Lebanon and the Banking Control Commission (BCC).

Presentation of financial statementsThe Group presents its statement of financial position broadly in order of liquidity. An analysis regardingrecovery or settlement within one year after the statement of financial position date (current) and more than oneyear after the statement of financial position date (non-current) is presented in the risk management notes.

Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement offinancial position only when there is a legally enforceable right to offset the recognised amounts and there is anintention to settle on a net basis, or to realise the assets and settle the liability simultaneously. This is notgenerally the case with master netting agreements, therefore the related assets and liabilities are presented grossin the consolidated statement of financial position. Income and expense will not be offset in the consolidatedincome statement unless required or permitted by any accounting standard or interpretation, as specificallydisclosed in the accounting policies of the Group.

Basis of consolidationThe consolidated financial statements comprise the financial statements of the Group and its subsidiaries as at31 December 2012.

Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtainscontrol, and continue to be consolidated until the date when such control ceases. Control is achieved where theGroup has the power to govern the financial and operating policies of an entity so as to obtain benefits from itsactivities. The financial statements of the subsidiaries are prepared for the same reporting period as the parentcompany, using consistent accounting policies. All intra-group balances, transactions, unrealised gains andlosses resulting from intra-group transactions and dividends are eliminated in full.

F - 157

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

8

2 ACCOUNTING POLICIES (continued)

2.1 Basis of preparation (continued)

Basis of consolidation (continued)Non-controlling interest represent the portion of profit or loss and net assets of subsidiaries not owned, directlyor indirectly by the Bank. Non-controlling interests are presented separately in the consolidated incomestatement, consolidated statement of comprehensive income and within equity in the consolidated statement offinancial position, but separate from parent shareholders’ equity. Losses within a subsidiary are attributed to thenon-controlling interest even if that results in a deficit balance.A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equitytransaction. If the Group loses control over a subsidiary, it:

- Derecognises the assets (including goodwill) and liabilities of the subsidiary- Derecognises the carrying amount of any non-controlling interest- Derecognises the cumulative translation differences, recorded in equity- Recognises the fair value of the consideration received- Recognises the fair value of any investment retained- Recognises any surplus or deficit in profit or loss- Reclassifies the parent’s share of components previously recognised in other comprehensive income to

profit or loss or retained earnings, as appropriate.

Where the Group loses control of a subsidiary, such that the former subsidiary becomes an associate accountedfor under the equity method, the effect is that the Group's interest in the former subsidiary (associate) isreported:

- using the equity method from the date on which control is lost in the current reporting period; and- using full consolidation for any earlier part of the current reporting period, and of any earlier reporting period,

during which the associate was controlled.

2.2 Changes in accounting policiesThe accounting policies adopted are consistent with those of the previous financial year, except for thefollowing new and amended IFRS effective as of 1 January 2012:

IFRS 7 Financial Instruments: Disclosures — Enhanced Derecognition Disclosure RequirementsThe amendment requires additional disclosure about financial assets that have been transferred but notderecognised to enable the user of the Group’s financial statements to understand the relationship with thoseassets that have not been derecognised and their associated liabilities. In addition, the amendment requiresdisclosures about the entity’s continuing involvement in derecognised assets to enable the users to evaluate thenature of, and risks associated with, such involvement. The amendment is effective for annual periods beginningon or after 1 July 2011. The Group does not have any assets with these characteristics so there has been noeffect on the presentation of its financial statements.

2.3 Early adoption of phase I of IFRS 9In compliance with Circular 265 of the Lebanese Banking Control Commission issued on 23 September 2010,the Group adopted, effective 1 January 2011, Phase I of IFRS 9 as issued in November 2009 and reissued inOctober 2010 and related consequential amendments to other International Financial Reporting Standards. Theeffective application date stipulated by the standard is annual periods beginning on or after 1 January 2015. Theinitial application date of this standard with respect to the Group is 1 January 2011 in accordance with thetransitional provisions of the standard.

Phase I of IFRS 9 addresses the classification and measurement of financial assets and financial liabilities. IAS39 is still being followed for impairment of financial assets and hedge accounting, as these will be covered whenthe IASB completes phases 2 and 3 of IFRS 9.

The Group did not restate comparative information as permitted by the transitional provisions of IFRS 9 and hasrecognised impact of early adoption of IFRS 9 as at 1 January 2011, in the opening retained earnings and othercomponents of equity as of that date.

F - 158

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

9

2 ACCOUNTING POLICIES (continued)

2.3 Early adoption of phase I of IFRS 9 (continued)The schedule below summarizes the new classification and amendments to the Group financial statements as at1 January 2011 following the early adoption of IFRS 9 which resulted in adjustment to the opening retainedearnings and cumulative changes in fair value of financial instruments designated at fair value through othercomprehensive income as at 1 January 2011:

Available Financial assets Financialfor sale classified as instruments

Financial assets financial loans and held toheld for trading instruments receivables maturity Total

LL million LL million LL million LL million LL million

Carrying value as at 31 December2010 according to IAS 39 1,009,099 7,677,662 7,011,522 215,031 15,913,314

_____________ _____________ ____________ ____________ ____________Reclassification following early

adoption of IFRS 9:Financial instruments reclassified to

fair value through profit or loss:Debt securities 782,159 5,481 137,920 - 925,560Equity instruments 74,588 32,397 - - 106,985

Debt securities reclassified atamortised cost 138,994 7,260,479 6,872,357 215,031 14,486,861

Equity instruments reclassified to fairvalue through other comprehensiveincome 6,293 255,716 - - 262,009

_____________ _____________ ____________ ____________ ____________Total reclassified 1,002,034 7,554,073 7,010,277 215,031 15,781,415

_____________ _____________ ____________ ____________ ____________

Effect on opening cumulative fairvalue changes on financialinstruments designated at fair

value through othercomprehensive income - (126,233) - - (126,233)

Less: Deferred taxes - 16,437 - - 16,437Effect of previous amendments to

IAS 39 - 7,921 - - 7,921_____________ _____________ ____________ ____________ ____________

Effect on opening cumulative fairvalue changes on financialinstruments at fairvalue through other

comprehensive income, net - (101,875) - - (101,875)_____________ _____________ ____________ ____________ ____________

Effect on opening retained earnings (7,065) 2,644 (1,245) - (5,666)_____________ _____________ ____________ ____________ ____________

2.4 Standards issued but not yet effectiveStandards issued but not yet effective up to the date of issuance of the Group’s financial statements are listedbelow. This listing of standards and interpretations issued are those that the Group reasonably expects to have animpact on disclosures, financial position or performance when applied at a future date. The Group intends toadopt these standards when they become effective.

IAS 1 Financial Statement Presentation – Presentation of Items of Other Comprehensive Income (OCI)The amendments to IAS 1 change the grouping of items presented in OCI. Items that could be reclassified (or‘recycled’) to profit or loss at a future point in time (for example net gain on hedge of net investment, exchangedifferences on translation of foreign operations and net movement on cash flow hedges) would be presentedseparately from items that will never be reclassified (for example actuarial gains and losses on defined benefitplans, revaluation of land and buildings and net loss or gain on financial assets at fair value through OCI). Theamendment affects presentation only and has no impact on the Group’s financial position or performance. Theamendment becomes effective for annual periods beginning on or after 1 July 2012.

F - 159

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

10

2 ACCOUNTING POLICIES (continued)

2.4 Standards issued but not yet effective (continued)

IAS 19 Employee Benefits (Revised)The IASB has issued numerous amendments to IAS 19. These range from fundamental changes such asremoving the corridor mechanism and the concept of expected returns on plan assets to simple clarifications andre-wording. The Group is currently assessing the impact that this standard will have on the financial positionand performance, but based on the preliminary analyses, no material impact is expected. These amendmentsbecome effective for annual periods beginning on or after 1 January 2013.

IAS 28 Investments in Associates and Joint Ventures (as revised in 2011)As a consequence of the new IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in OtherEntities, IAS 28 Investments in Associates has been renamed IAS 28 Investments in Associates and JointVentures, and describes the application of the equity method to investments in joint ventures in addition toassociates. The revised standard is not expected to impact the Group’s financial position or performance andbecomes effective for annual periods beginning on or after 1 January 2013.

IAS 32 Offsetting Financial Assets and Financial Liabilities — Amendments to IAS 32These amendments clarify the meaning of “currently has a legally enforceable right to set-off”. The amendmentsalso clarify the application of the IAS 32 offsetting criteria to settlement systems (such as central clearing housesystems) which apply gross settlement mechanisms that are not simultaneous. These amendments are notexpected to impact the Group’s financial position or performance and become effective for annual periodsbeginning on or after 1 January 2014.

IFRS 7 Disclosures — Offsetting Financial Assets and Financial Liabilities — Amendments to IFRS 7These amendments require an entity to disclose information about rights to set-off and related arrangements(e.g., collateral agreements). The disclosures would provide users with information that is useful in evaluatingthe effect of netting arrangements on an entity’s financial position. The new disclosures are required for allrecognised financial instruments that are set off in accordance with IAS 32 Financial Instruments: Presentation.The disclosures also apply to recognised financial instruments that are subject to an enforceable master nettingarrangement or similar agreement, irrespective of whether they are set off in accordance with IAS 32. Theseamendments will not impact the Group’s financial position or performance and become effective for annualperiods beginning on or after 1 January 2013.

IFRS 10 Consolidated Financial StatementsIFRS 10 replaces the portion of IAS 27 Consolidated and Separate Financial Statements that addresses theaccounting for consolidated financial statements. It also includes the issues raised in SIC-12 Consolidation —Special Purpose Entities. IFRS 10 establishes a single control model that applies to all entities including specialpurpose entities. The changes introduced by IFRS 10 will require management to exercise significant judgmentto determine which entities are controlled, and therefore, are required to be consolidated by a parent, comparedwith the requirements that were in IAS 27. The Group is currently assessing the impact that this standard willhave on its financial position and performance. This standard becomes effective for annual periods beginning onor after 1 January 2013.

IFRS 11 Joint ArrangementsIFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-Controlled Entities — Non-monetaryContributions by Venturers. IFRS 11 removes the option to account for jointly controlled entities (JCEs) usingproportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted forusing the equity method. IFRS 11 is not expected to impact the Group’s financial position or performance andbecomes effective for annual periods beginning on or after 1 January 2013.

IFRS 12 Disclosure of Involvement with Other EntitiesIFRS 12 includes all of the disclosures that were previously in IAS 27 related to consolidated financialstatements, as well as all of the disclosures that were previously included in IAS 31 and IAS 28. Thesedisclosures relate to an entity’s interests in subsidiaries, joint arrangements, associates and structured entities. Anumber of new disclosures are also required, but has no impact on the Group’s financial position orperformance. This standard becomes effective for annual periods beginning on or after 1 January 2013.

F - 160

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

11

2 ACCOUNTING POLICIES (continued)

2.4 Standards issued but not yet effective (continued)

IFRS 13 Fair Value MeasurementIFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does notchange when an entity is required to use fair value, but rather provides guidance on how to measure fair valueunder IFRS when fair value is required or permitted. This standard will require the Group to review its fair valuemeasurement policies across all asset and liabilities classes. The Group is currently assessing the impact that thisstandard will have on the financial position and performance, but based on the preliminary analyses, no materialimpact is expected. This standard becomes effective for annual periods beginning on or after 1 January 2013.

Annual Improvements May 2012These improvements will not have an impact on the Group, but include:

IAS 1 Presentation of Financial StatementsThis improvement clarifies the difference between voluntary additional comparative information and theminimum required comparative information. Generally, the minimum required comparative information is theprevious period.

IAS 32 Financial Instruments, PresentationThis improvement clarifies that income taxes arising from distributions to equity holders are accounted for inaccordance with IAS 12 Income Taxes.

IAS 34 Interim Financial ReportingThe amendment aligns the disclosure requirements for total segment assets with total segment liabilities ininterim financial statements. This clarification also ensures that interim disclosures are aligned with annualdisclosures.

These improvements are effective for annual periods beginning on or after 1 January 2013.

2.5 Summary of significant accounting policies

Foreign currency translationThe consolidated financial statements are presented in Lebanese Lira which is the Group’s presentationcurrency. Each entity in the Group determines its own functional currency and items included in the financialstatements of each entity are measured using that functional currency.

(i) Transactions and balancesTransactions in foreign currencies are initially recorded at the functional currency rate of exchange ruling at thedate of the transaction.

Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rateof exchange at the date of the statement of financial position. All differences are taken to “net gain on financialassets at fair value through profit or loss” in the consolidated income statement.

Non–monetary items that are measured in terms of historical cost in a foreign currency are translated using theexchange rates as at the dates of the initial transactions. Non–monetary items measured at fair value in a foreigncurrency are translated using the exchange rates at the date when the fair value was determined. The gain or lossarising on retranslation of non-monetary items is treated in line with the recognition of gain or loss on change infair value of the item (i.e., translation differences on items whose fair value gain or loss is recognised in othercomprehensive income or profit or loss is also recognised in other comprehensive income or profit or lossrespectively).

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carryingamounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreignoperations and translated at closing rate.

F - 161

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

12

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

Foreign currency translation (continued)

(ii) Group companiesOn consolidation, the assets and liabilities of subsidiaries and overseas branches are translated into the Bank’spresentation currency at the rate of exchange as at the reporting date, and their income statements are translatedat the weighted average exchange rates for the year. Exchange differences arising on translation are takendirectly to a separate component of equity. On disposal of a foreign entity, the deferred cumulative amountrecognised in equity relating to that particular foreign operation is recognised in the consolidated incomestatement.

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carryingamounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreignoperations and translated at closing rate.

The table below presents the exchange rates of the currencies used to translate assets, liabilities and statement ofincome items of foreign branches and subsidiaries:

2012 2011Year end rate Average rate Year end rate Average rate

LBP LBP LBP LBP

US Dollar 1,507.50 1,507.50 1,507.50 1,507.50Euro 1,987.79 1,948.85 1,948.59 2,102.20Swiss Franc 1,645.38 1,616.84 1602.87 1,704.78Syrian Lira 19.48 22.4 27.05 31.30Turkish Lira 841.14 837.52 786.18 902.69Jordanian Dinar 2,123.24 2,127.09 2,126.23 2,126.62Egyptian Pound 243.58 248.2 249.97 253.67Sudanese Dinar 251.15 402.81 563.15 566.19Saudi Riyal 401.94 401.97 401.98 401.97Qatari Riyal 414.05 414.03 413.99 413.98

Financial instruments –classification and measurement

(i) Date of recognitionAll financial assets and liabilities are initially recognised on the trade date, i.e. the date that the Group becomes aparty to the contractual provisions of the instrument. This includes “regular way trades”: purchases or sales offinancial assets that require delivery of assets within the time frame generally established by regulation orconvention in the market place.

(ii) Classification and measurement of financial instruments

a. Financial assetsThe classification of financial assets depends on the basis of each entity's business model for managing thefinancial assets and the contractual cash flow characteristics of the financial asset. Assets are initially measuredat fair value plus, in the case of a financial asset not at fair value through profit or loss, particular transactioncosts. Assets are subsequently measured at amortised cost or fair value.

An entity may, at initial recognition, irrevocably designate a financial asset as measured at fair value throughprofit or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency(sometimes referred to as an 'accounting mismatch') that would otherwise arise from measuring assets orliabilities or recognising the gains and losses on them on different bases. An entity is required to disclose suchfinancial assets separately from those mandatorily measured at fair value.

F - 162

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

13

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

(ii) Classification and measurement of financial instruments (continued)

a. Financial assets (continued)

Financial assets at amortised costDebt instruments are subsequently measured at amortised cost less any impairment loss (except for debtinstruments that are designated at fair value through profit or loss upon initial recognition) if they meet thefollowing two conditions:

The asset is held within a business model whose objective is to hold assets in order to collectcontractual cash flows; and

The contractual terms of the instrument give rise on specified dates to cash flows that are solelypayments of principal and interest on the principal amount outstanding.

These financial assets are initially recognised at cost, being the fair value of the consideration paid for theacquisition of the investment. All transaction costs directly attributed to the acquisition are also included in thecost of investment. After initial measurement, these financial assets are measured at amortised cost using theeffective interest rate method (EIR), less allowance for impairment. Amortised cost is calculated by taking intoaccount any discount of premium on acquisition and fees and costs that are an integral part of the effectiveinterest rate. The amortization is included in “Interest and similar income” in the income statement. The lossesarising from impairment are recognised in the income statement in “Impairment losses on other financialassets”.

Although the objective of an entity's business model may be to hold financial assets in order to collectcontractual cash flows, the entity need not hold all of those instruments until maturity. Thus an entity's businessmodel can be to hold financial assets to collect contractual cash flows even when sales of financial assets occur.However, if more than an infrequent number of sales are made out of a portfolio, the entity needs to assesswhether and how such sales are consistent with an objective of collecting contractual cash flows. If the objectiveof the entity's business model for managing those financial assets changes, the entity is required to reclassifyfinancial assets.

Gains and losses arising from the derecognition of financial assets measured at amortised cost are reflectedunder “Net gain on sale of financial assets at amortised cost” in the consolidated income statement.

Balances with central banks, due from banks and financial institutions, and loans and advances to customersand related parties – at amortized costAfter initial measurement, “Balances with central banks”, “Due from banks and financial institutions”, and“Loans and advances to customers and related parties” are subsequently measured at amortised cost using theEIR, less allowance for impairment. Amortised cost is calculated by taking into account any discount orpremium on acquisition and fees and costs that are an integral part of the EIR. The amortisation is included in‘Interest and similar income’ in the consolidated income statement. The losses arising from impairment arerecognised in the consolidated income statement in “Net credit losses”.

Financial assets at fair value through profit or lossIncluded in this category are those debt instruments that do not meet the conditions in “Financial assets atamortised cost” above, debt instruments designated at fair value through profit or loss upon initial recognition,and equity instruments at fair value through profit or loss.

Debt instruments at fair value through profit or lossThese financial assets are recorded in the consolidated statement of financial position at fair value. Changes infair value and interest income are recorded under “net gain on financial assets at fair value through profit or loss”in the consolidated income statement showing separately, those related to financial assets designated at fair valueupon initial recognition from those mandatorily measured at fair value. Gains and losses arising from thederecognition of debt instruments and other financial assets at fair value through profit or loss are also reflectedunder “net gain on financial assets at fair value through profit or loss” in the consolidated income statementshowing separately, those related to financial assets designated at fair value upon initial recognition from thosemandatorily measured at fair value.

F - 163

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

14

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

(ii) Classification and measurement of financial instruments (continued)

a. Financial assets (continued)

Equity instruments at fair value through profit or lossInvestments in equity instruments are classified at fair value through profit or loss, unless the Group designatesat initial recognition an investment that is not held for trading as at fair value through other comprehensiveincome.

These financial assets are recorded in the consolidated statement of financial position at fair value. Changes infair value and dividend income are recorded under “net gain on financial assets at fair value through profit orloss” in the consolidated income statement. Gains and losses arising from the derecognition of equityinstruments at fair value through profit or loss are also reflected under “net gain from financial assets at fairvalue through profit or loss” in the consolidated income statement.

Financial assets at fair value through other comprehensive incomeInvestments in equity instruments designated at initial recognition as not held for trading are classified at fairvalue through other comprehensive income.

These financial assets are initially measured at fair value plus transaction costs. Subsequently, they are measuredat fair value, with gains and losses arising from changes in fair value recognised in other comprehensive incomeand accumulated under equity. The cumulative gain or loss will not be reclassified to the consolidated incomestatement on disposal of the investments.

Dividends on these investments are recognised under “ Revenue from financial assets at fair value through othercomprehensive income” in the consolidated income statement when the Group’s right to receive payment ofdividend is established in accordance with IAS 18: “Revenue”, unless the dividends clearly represent a recoveryof part of the cost of the investment.

b. Financial liabilitiesLiabilities are initially measured at fair value plus, in the case of a financial liability not at fair value throughprofit or loss, particular transaction costs. Liabilities are subsequently measured at amortised cost or fair value.

The Group classifies all financial liabilities as subsequently measured at amortised cost using the effectiveinterest method, except for:- financial liabilities at fair value through profit or loss (including derivatives);- financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or when

the continuing involvement approach applies.- financial guarantee contracts and commitments to provide a loan at a below-market interest rate which after

initial recognition are subsequently measured at the higher of the amount determined in accordance with IAS37 Provisions, Contingent Liabilities and Contingent Assets and the amount initially recognised less, whenappropriate, cumulative amortisation recognised in accordance with IAS 18 Revenue.

The Group may, at initial recognition, irrevocably designate a financial liability as measured at fair valuethrough profit or loss when:- doing so results in more relevant information, because it either eliminates or significantly reduces a

measurement or recognition inconsistency (sometimes referred to as 'an accounting mismatch') that wouldotherwise arise from measuring assets or liabilities or recognising the gains and losses on them on differentbases; or

- a group of financial liabilities or financial assets and financial liabilities is managed and its performance isevaluated on a fair value basis, in accordance with a documented risk management or investment strategy,and information about the group is provided internally on that basis to the Group's key managementpersonnel.

F - 164

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

15

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

(ii) Classification and measurement of financial instruments (continued)

b. Financial liabilities (continued)The amount of changes in fair value of a financial liability designated at fair value through profit or loss at initialrecognition that is attributable to changes in credit risk of that liability is recognised in other comprehensiveincome, unless such recognition would create an accounting mismatch in the consolidated income statement.Changes in fair value attributable to changes in credit risk are not reclassified to consolidated income statement.

Debt issued and other borrowed funds and subordinated notesFinancial instruments issued by the Group, which are not designated at fair value through profit or loss, areclassified as liabilities where the substance of the contractual arrangement results in the Group having anobligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than bythe exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares.

After initial measurement, debt issued and other borrowings and subordinated notes are subsequently measuredat amortised cost using the effective interest rate method. Amortised cost is calculated by taking into accountany discount or premium on the issue and costs that are an integral part of the effective interest rate method.

A compound financial instrument which contains both a liability and an equity component is separated at theissue date. A portion of the net proceeds of the instrument is allocated to the debt component on the date of issuebased on its fair value (which is generally determined based on the quoted market prices for similar debtinstruments). The equity component is assigned the residual amount after deducting from the fair value of theinstrument as a whole the amount separately determined for the debt component. The value of any derivativefeatures (such as a call option) embedded in the compound financial instrument other than the equity componentis included in the debt component.

Due to central banks, banks and financial institutions and customers’ and related parties’ depositsAfter initial measurement, due to banks and financial institutions, customers’ and related parties’ deposits aremeasured at amortised cost less amounts repaid using the effective interest rate method. Amortised cost iscalculated by taking into account any discount or premium on the issue and costs that are an integral part of theeffective interest rate method.

c. Derivatives recorded at fair value through profit or lossThe Group uses derivatives such as interest rate swaps and futures, credit default swaps, cross currency swaps,forward foreign exchange contracts and options on interest rates, foreign currencies and equities.

Derivatives are recorded at fair value and carried as assets when their fair value is positive and as liabilities whentheir fair value is negative. Changes in the fair value of derivatives are recognised in “Net gain on financialassets at fair value through profit or loss” in the consolidated income statement.

An embedded derivative is separated from the host and accounted for as a derivative if, and only if:(a) the hybrid contract contains a host that is not an asset within the scope of IFRS 9(b) the economic characteristics and risks of the embedded derivative are not closely related to the

economic characteristics and risks of the host(c) a separate instrument with the same terms as the embedded derivative would meet the definition of a

derivative; and(d) the hybrid contract is not measured at fair value with changes in fair value recognised in profit or loss

F - 165

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

16

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

(iii) Day 1 profit or lossWhen the transaction price differs from the fair value of other observable current market transactions in thesame instrument or based on a valuation technique whose variables include only data from observable markets,the Group immediately recognizes the difference between the transaction price and fair value (a “Day 1” profitor loss) in the consolidated income statement. In cases where fair value is determined using data which is notobservable, the difference between the transaction price and model value is only recognised in the consolidatedincome statement when the inputs become observable, or when the instrument is derecognised.

(iv) Reclassification of financial assetsThe Group reclassifies financial assets if the objective of the business model for managing those financial assetschanges. Such changes are expected to be very infrequent. Such changes are determined by the Group’s seniormanagement as a result of external or internal changes when significant to the Group’s operations anddemonstrable to external parties.

If financial assets are reclassified, the reclassification is applied prospectively from the reclassification date,which is the first day of the first reporting period following the change in business model that results in thereclassification of financial assets. Any previously recognised gains, losses or interest are not restated.

If a financial asset is reclassified so that it is measured at fair value, its fair value is determined at thereclassification date. Any gain or loss arising from a difference between the previous carrying amount and fairvalue is recognised in profit or loss. If a financial asset is reclassified so that it is measured at amortised cost, itsfair value at the reclassification date becomes its new carrying amount.

Derecognition of financial assets and financial liabilities

(i) Financial assetsA financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) isderecognised when:

The rights to receive cash flows from the asset have expired.

The Group has transferred its rights to receive cash flows from the asset or has assumed an obligationto pay the received cash flows in full without material delay to a third party under a “pass-through”arrangement; and either:

► The Group has transferred substantially all the risks and rewards of the asset, or ► The Group has neither transferred nor retained substantially all the risks and rewards of the

asset, but has transferred control of the asset.

When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-througharrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nortransferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in theasset. In that case, the Group also recognizes an associated liability. The transferred asset and the associatedliability are measured on a basis that reflects the rights and obligations that the Group has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower ofthe original carrying amount of the asset and the maximum amount of consideration that the Group could berequired to repay.

F - 166

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

17

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

Derecognition of financial assets and financial liabilities (continued)

(ii) Financial liabilitiesA financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.Where an existing financial liability is replaced by another from the same lender on substantially different terms,or the terms of an existing liability are substantially modified, such an exchange or modification is treated as aderecognition of the original liability and the recognition of a new liability. The difference between the carryingvalue of the original financial liability and the consideration paid is recognised in the consolidated incomestatement.

Repurchase and reverse repurchase agreementsSecurities sold under agreements to repurchase at a specified future date are not derecognised from theconsolidated statement of financial position as the Group retains substantially all the risks and rewards ofownership. The corresponding cash received is recognised in the consolidated statement of financial position asan asset with a corresponding obligation to return it, including accrued interest as a liability within “Cashcollateral on securities lent and repurchase agreements”, reflecting the transaction’s economic substances as aloan to the Group. The difference between the sale and repurchase prices is treated as interest expense and isaccrued over the life of the agreement using the EIR. When the counterparty has the right to sell or repledge thesecurities, the Group reclassifies those securities in its statement of financial position to “Financial assets givenas collateral”.

Conversely, securities purchased under agreements to resell at a specified future date are not recognised in theconsolidated statement of financial position. The consideration paid, including accrued interest is recorded in theconsolidated statement of financial position within “Cash collateral on securities borrowed and reverse purchaseagreements”, reflecting the transaction’s economic substance as a loan by the Group. The difference between thepurchase and resale prices is recorded in “Net interest income” and is accrued over the life of the agreementusing the EIR.

If securities purchased under agreement to resell are subsequently sold to third parties, the obligation to returnthe securities is recorded as a short sale within “Financial liabilities at fair value through profit or loss” andmeasured at fair value with any gains or losses included in “Net gain on financial instruments at fair valuethrough profit or loss” in the consolidated income statement.

Determination of fair valueThe fair value for financial instruments traded in active markets at the statement of financial position date isbased on their quoted market price or dealer price quotations (bid price for long positions and ask price for shortpositions), without any deduction for transaction cost.

For all other financial instruments not traded in an active market, the fair value is determined by usingappropriate valuation techniques. Valuation techniques include the discounted cash flow method, comparison tosimilar instruments for which market observable prices exist, options pricing models and other relevantvaluation models.

Certain financial instruments are recorded at fair value using valuation techniques in which current markettransactions or observable market data are not available. Their fair value is determined using a valuation modelthat has been tested against prices or inputs to actual market transactions and using the Group’s best estimate ofthe most appropriate model assumptions. Models are adjusted to reflect the spread for bid and ask prices toreflect costs to close out positions, credit and debit valuation adjustments, liquidity spread and limitations in themodels, credit models and other relevant valuation models. Also, profit or loss calculated when such financialinstruments are first recorded (“Day 1” profit or loss) is deferred and recognized only when the inputs becomeobservable or on derecognition of the instrument.

F - 167

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

18

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

Impairment of financial assetsThe Group assesses at each statement of financial position date whether there is any objective evidence that afinancial asset or a group of financial assets is impaired. A financial asset or a group of financial assets isdeemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more eventsthat has occurred after the initial recognition of the asset (an incurred “loss event”) and that loss event (orevents) has an impact on the estimated future cash flows of the financial asset or the group of financial assetsthat can be reliably estimated.

Evidence of impairment may include indications that the borrower or a group of borrowers is experiencingsignificant financial difficulty, the probability that they will enter bankruptcy or other financial reorganizationdefault or delinquency in interest or principal payments, and where observable data indicates that there is ameasurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions thatcorrelate with defaults.

(i) Financial assets at amortised costFor financial assets carried at amortised cost (such as due from banks and financial institutions, debt instrumentsat amortised cost, loans and advances to customers and related parties, the Group first assesses individuallywhether objective evidence of impairment exists for financial assets that are individually significant, orcollectively for financial assets that are not individually significant. If the Group determines that no objectiveevidence of impairment exists for an individually assessed financial asset, it includes the asset in a group offinancial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets thatare individually assessed for impairment and for which an impairment loss is, or continues to be, recognised arenot included in a collective assessment of impairment.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured asthe difference between the asset’s carrying amount and the present value of estimated future cash flows(excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset isreduced through the use of an allowance account and the amount of the loss is recognised in the consolidatedincome statement.

Loans together with the associated allowance are written off when there is no realistic prospect of futurerecovery and all collateral has been realised or has been transferred to the Group. If, in a subsequent year, theamount of the estimated impairment loss increases or decreases because of an event occurring after theimpairment was recognised; the previously recognised impairment loss is increased or reduced by adjusting theallowance account. If a future write-off is later recovered, the recovery is credited to the “Net credit losses” inthe consolidated income statement.

The present value of the estimated future cash flows is discounted at the financial asset’s original effectiveinterest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is thecurrent effective interest rate. The calculation of the present value of the estimated future cash flows of acollateralized financial asset reflects the cash flows that may result from foreclosure less costs of obtaining andselling the collateral, whether or not the foreclosure is probable.

For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of theGroup’s internal credit grading system, that considers credit risk characteristics such as asset type, industry,geographical location, collateral type, past-due status and other relevant factors.

Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated onthe basis of historical loss experience for assets with credit risk characteristics similar to those in the Group.Historical loss experience is adjusted on the basis of current observable data to reflect the effects of currentconditions on which the historical loss experience is based and to remove the effects of conditions in thehistorical period that do not exist currently.

Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in relatedobservable data from year to year (such as changes in unemployment rates, property prices, commodity prices,payment status, or other factors that are indicative of incurred losses in the Group and their magnitude). Themethodology and assumptions used for estimating future cash flows are reviewed regularly to reduce anydifferences between loss estimates and actual loss experience.

F - 168

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

19

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

Impairment of financial assets (continued)

(ii) Renegotiated loansWhere possible, the Group seeks to restructure loans rather than to take possession of collateral. This mayinvolve extending the payment arrangements and the agreement of new loan conditions. Once the terms havebeen renegotiated any impairment is measured using the original effective interest rate as calculated before themodification of terms and the loan is no longer considered past due. The loans continue to be subject to anindividual or collective impairment assessment, calculated using the loan’s original effective interest rate.

(iii) Collateral repossessedThe Group occasionally acquires properties in settlement of loans and advances. Upon initial recognition, thoseassets are measured at fair value as approved by the regulatory authorities. Subsequently these properties aremeasured at the lower of carrying value or net realisable value.

Upon sale of repossessed assets, any gain or loss realized is recognized in the consolidated income statementunder “Other operating income” or “Other operating expenses”. Gains resulting from the sale of repossessedassets are transferred to “Reserves for capital increase” in the following financial year.

Hedge accountingThe Group makes use of derivative instruments to manage exposures to interest rate, foreign currency and creditrisks, including exposures arising from forecast transactions and firm commitments. In order to manageparticular risks, the Group applies hedge accounting for transactions which meet the specified criteria.

At inception of the hedge relationship, the Group formally documents the relationship between the hedged itemand the hedging instrument, including the nature of the risk, the objective and strategy for undertaking the hedgeand the method that will be used to assess the effectiveness of the hedging relationship.

At each hedge effectiveness assessment date, a hedge relationship must be expected to be highly effective on aprospective basis and demonstrate that it was effective (retrospective effectiveness) for the designated period inorder to qualify for hedge accounting. A formal assessment is undertaken to ensure the hedging instrument isexpected to be highly effective in offsetting the designated risk in the hedged item, both at inception and at eachquarter end on an ongoing basis. A hedge is expected to be highly effective if the changes in fair value or cashflows attributable to the hedged risk during the period for which the hedge is designated are expected to offset ina range of 80% to 125% and are expected to achieve such offset in future periods. Hedge ineffectiveness isrecognized in the consolidated income statement in “Net gain (loss) from financial instruments at fair valuethrough profit or loss”. For situations where that hedged item is a forecast transaction, the Group also assesseswhether the transaction is highly probable and presents an exposure to variations in cash flows that couldultimately affect the consolidated income statement.

(i) Fair value hedgesFor designated and qualifying fair value hedges, the change in the fair value of a hedging derivative isrecognised in the consolidated income statement. Meanwhile, the change in the fair value of the hedged itemattributable to the risk hedged is recorded as part of the carrying value of the hedged item and is also recognisedin “Net gain on financial assets at fair value through profit or loss” in the consolidated income statement.

If the hedging instrument expires or is sold, terminated or exercised, or where the hedge no longer meets thecriteria for hedge accounting, the hedge relationship is terminated. For hedged items recorded at amortised cost,the difference between the carrying value of the hedged item on termination and the face value is amortised overthe remaining term of the original hedge using the effective interest rate. If the hedged item is derecognised, theunamortised fair value adjustment is recognised immediately in the consolidated income statement.

F - 169

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

20

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

Hedge accounting (continued)

(ii) Cash flow hedgesFor designated and qualifying cash flow hedges, the effective portion of the gain or loss on the hedginginstrument is initially recognised directly in equity in the “Cash flow hedge” reserve. The ineffective portion ofthe gain or loss on the hedging instrument is recognised immediately in the consolidated income statement.When the forecast transaction subsequently results in the recognition of a non-financial asset or a non-financialliability, the gains and losses previously recognised in the other comprehensive income are removed from thereserve and included in the initial cost of the asset or liability.

When the hedged cash flow affects the consolidated income statement, the gain or loss on the hedginginstrument is recorded in the corresponding income or expense line of the consolidated income statement. Whena hedging instrument expires, or is sold, terminated, exercised, or when a hedge no longer meets the criteria forhedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognisedwhen the hedged forecast transaction is ultimately recognised in the consolidated income statement. When aforecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity isimmediately transferred to the consolidated income statement.

(iii) Hedge of a net investmentHedges of net investments in a foreign operation, including a hedge of a monetary item that is accounted for aspart of the net investment, are accounted for in a way similar to cash flow hedges. Gains or losses on thehedging instrument relating to the effective portion of the hedge are recognised directly in equity while anygains or losses relating to the ineffective portion are recognised in the consolidated income statement. Ondisposal of the foreign operation, the cumulative value of any such gains or losses recognised directly in equityis transferred to the consolidated income statement.

LeasingThe determination of whether an arrangement is a lease, or it contains a lease, is based on the substance of thearrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use ofa specific asset or assets and the arrangement conveys a right to use the asset.

Group as a lesseeLeases which do not transfer to the Group substantially all the risks and benefits incidental to ownership of theleased items are operating leases. Operating lease payments are recognised as an expense in the consolidatedincome statement on a straight line basis over the lease term. Contingent rental payable are recognised as anexpense in the period in which they are incurred.

Group as a lessorLeases where the Group does not transfer substantially all the risks and benefits of ownership of the asset areclassified as operating leases. Initial direct costs incurred in negotiating operating leases are added to thecarrying amount of the leased asset and recognised over the lease term on the same basis as rental income.Contingent rents are recognised as revenue in the period in which they are earned.

Recognition of income and expensesRevenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and therevenue can be reliably measured. The following specific recognition criteria must also be met before revenue isrecognised.

(i) Interest and similar income and expenseFor all financial instruments measured at amortised cost, , interest income or expense is recorded using the EIR,which is the rate that exactly discounts estimated future cash payments or receipts through the expected life ofthe financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial assetor financial liability. The calculation takes into account all contractual terms of the financial instrument andincludes any fees or incremental costs that are directly attributable to the instrument and are an integral part ofthe effective interest rate, but not future credit losses.

F - 170

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

21

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

(i) Interest and similar income and expense (continued)The carrying amount of the financial asset or financial liability is adjusted if the Group revises its estimates ofpayments or receipts. The adjusted carrying amount is calculated based on the original effective interest rateand the change in the carrying amount is recorded as “Interest and similar income” for financial assets and“Interest and similar expense” for financial liabilities.

Once the recorded value of a financial asset on a group of similar financial assets has been reduced due to animpairment loss, interest income continue to be recognised using the rate of interest used to discount the futurecash flows for the purpose of measuring the impairment loss.

(ii) Fee and commission incomeThe Group earns fee and commission income from a diverse range of services it provides to its customers. Feeincome can be divided into the following two categories:

Fee income earned from services that are provided over a certain period of timeFees earned for the provision of services over a period of time are accrued over that period. These fees includecommission income and asset management, custody and other management and advisory fees.

Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred(together with any incremental costs) and recognised as an adjustment to the EIR on the loan. When it isunlikely that a loan be drawn down, the loan commitment fees are recognised over the commitment period on astraight line basis.

Fee income from providing transaction servicesFee arising from negotiating or participating in the negotiation of a transaction for a third party, such as thearrangement of the acquisition of shares or other securities or the purchase or sale of businesses, are recognisedon completion of the underlying transaction. Fee or components of fee that are linked to a certain performanceare recognised after fulfilling the corresponding criteria.

(iii) Dividend incomeDividend income is recognised when the right to receive the payment is established.

(iv) Net gain on financial assets at fair value through profit or lossResults arising from financial assets at fair value through profit or loss, include all gains and losses fromchanges in fair value and related income or expense and dividends for financial assets at fair value throughprofit or loss. This includes any ineffectiveness recorded in hedging transactions. This caption also includes theresults arising from trading activities including all gains and losses from changes in fair value and relatedincome or expense and dividends for financial assets held for trading.

(v) Insurance revenueFor the insurance subsidiary, net premiums and accessories (gross premiums) are taken to income over the termsof the policies to which they relate using the prorate temporise method for non-marine business and 25% ofgross premiums for marine business. Unearned premiums reserve represents the portion of the gross premiumswritten relating to the unexpired period of coverage. If the unearned premiums reserve is not consideredadequate to cover future claims arising on these premiums a premium deficiency reserve is created.

Cash and cash equivalentsCash and cash equivalents as referred to in the cash flow statement comprise balances with original maturities of aperiod of three months or less including: cash and balances with the central banks, deposits with banks andfinancial institutions, and deposits due to banks and financial institutions.

F - 171

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

22

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

Property and equipmentProperty and equipment is stated at cost excluding the costs of day-to-day servicing, less accumulated depreciationand accumulated impairment in value. Such cost includes the cost of replacing part of the property andequipment. When significant parts of property and equipment are required to be replaced at intervals, the Grouprecognises such parts as individual assets with specific useful lives and depreciates them accordingly. Likewise,when a major inspection is performed, its cost is recognised in the carrying amount of the equipment as areplacement if the recognition criteria are satisfied. All other repair and maintenance costs are recognised in theconsolidated income statement as incurred. The present value of the expected cost for the decommissioning ofan asset after its use is included in the cost of the respective asset if the recognition criteria for a provision aremet.

Changes in the expected useful life are accounted for by changing the depreciation period or method, asappropriate and treated as changes in accounting estimates.

Depreciation is calculated using the straight line method to write down the cost of property and equipment to theirresidual values over their estimated useful lives. Land is not depreciated. The estimated useful lives are as follows:

Buildings 40 to 50 years Installations and fixtures 5 to 11 years Motor vehicles 5 to 7 years Office equipment and computer hardware 5 to 11 years Office machinery and furniture 5 to 11 years

Property and equipment is derecognised on disposal or when no future economic benefits are expected from itsuse. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposalproceeds and the carrying amount of the asset) is recognised in “Net gain on disposal of fixed assets” in the yearthe asset is derecognised.

The asset’s residual lives and methods of depreciation are reviewed at each financial year end and adjustedprospectively if applicable.

Non-current assets held for sale and discontinued operationsNon-current assets held for sale are measured at the lower of their carrying amount and fair value less costs tosell. Non-current assets and disposal groups are classified as held for sale if their carrying amounts will berecovered principally through a sale transaction rather than through continuing use. This condition is regarded asmet only when the sale is highly probable and the asset or disposal group is available for immediate sale in itspresent condition, management has committed to the sale, and the sale is expected to have been completedwithin one year from the date of classification.

In the consolidated statement of comprehensive income of the reporting period, and of the comparable period ofthe previous year, income and expenses from discontinued operations are reported separately from income andexpenses from continuing operations, down to the level of profit after taxes, even when the bank retains a noncontrolling interest in the subsidiary after the sale. The resulting profit or loss (after taxes) is reported separatelyin the statement of comprehensive income.

Business combinations and goodwillBusiness combinations are accounted for using the acquisition method. The cost of an acquisition is measured asthe aggregate of the consideration transferred, measured at acquisition date fair value and the amount of anynon-controlling interest in the acquiree. For each business combination, the Group measures the non controllinginterest in the acquiree at the proportionate share of the acquiree’s identifiable net assets. Acquisition costsincurred are expensed and included in administrative expenses.

F - 172

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

23

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

Business combinations and goodwill (continued)When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriateclassification and designation in accordance with the contractual terms, economic circumstances and pertinentconditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts bythe acquiree.

If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously heldequity interest in the acquiree is remeasured to fair value at the acquisition date through the consolidated incomestatement.

Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisitiondate. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset orliability will be recognised either in profit or loss or as a change to other comprehensive income. If thecontingent consideration is classified as equity, it should not be remeasured until it is finally settled withinequity.

Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and theamount recognised for non-controlling interest over the net identifiable assets acquired and liabilities assumed.If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference isrecognised in profit or loss.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purposeof impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated toeach of the Group’s cash-generating units that are expected to benefit from the combination, irrespective ofwhether other assets or liabilities of the acquiree are assigned to those units.

Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, thegoodwill associated with the operation disposed of is included in the carrying amount of the operation whendetermining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measuredbased on the relative values of the operation disposed of and the portion of the cash-generating unit retained.

Intangible fixed assetsAn intangible asset is recognised only when its cost can be measured reliably and it is probable that the expectedfuture economic benefits that are attributable to it will flow to the Group.

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assetsacquired in a business combination is their fair value as at the date of acquisition. Following initial recognition,intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses.

The useful lives of intangible assets are assessed to be either finite of indefinite. Intangible assets with finitelives are amortised over the useful economic life. The amortisation period and the amortisation method for anintangible asset with a finite useful life are reviewed at least at each financial year-end. Changes in the expecteduseful life or the expected pattern of consumption of future economic benefits embodied in the asset areaccounted for by changing the amortisation period or method, as appropriate, and treated as changes inaccounting estimates. The amortisation expense on intangible assets with finite lives is recognised in theconsolidated income statement.

Amortisation is calculated using the straight-line method to write down the cost of intangible assets to theirresidual values over their estimated useful lives as follows:

Computer software 5 years Key money 70 years Others 7 to 10 years

F - 173

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

24

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

Impairment of non-financial assetsThe Group assesses at each reporting date whether there is an indication that an asset may be impaired. If anyindication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’srecoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s fairvalue less costs to sell and its value in use. Where the carrying amount of an asset or cash-generating unitexceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-taxdiscount rate that reflects current market assessments of the time value of money and the risks specific to theasset. In determining fair value less costs to sell, an appropriate valuation model is used. These calculations arecorroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fairvalue indicators.

For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indicationthat previously recognised impairment losses may no longer exist or may have decreased. If such indicationexists, the recoverable amount is estimated. A previously recognised impairment loss is reversed only if therehas been a change in the estimates used to determine the asset’s recoverable amount since the last impairmentloss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed itsrecoverable amount, nor exceeds the carrying amount that would have been determined, net of depreciation, hadno impairment loss been recognised for the asset in prior years. Such reversal is recognised in the consolidatedincome statement.

Impairment losses relating to goodwill cannot be reversed in future periods.

Provisions for risks and chargesProvisions are recognised when the Group has a present obligation (legal or constructive) as a result of a pastevent, and it is probable that an outflow of resources embodying economic benefits will be required to settle theobligation and a reliable estimate can be made of the amount of the obligation. The expense relating to anyprovision is presented in the consolidated income statement net of any reimbursement.

Employees’ end-of-service benefitsThe Group provides retirement benefits obligation to its employees under defined benefit plans. The cost ofproviding these benefits is determined using actuarial valuation which involves making assumptions about discountrates, expected rates of return on assets, future salary increases, mortality rates and future pension increases. Thoseassumptions are unbiased and mutually compatible.

The rate used to discount estimated cash flows should be determined by reference to the market yields at the dateof the statement of financial position on high quality corporate bonds.If the accumulated unrecognized actuarial gains and losses exceed 10% of the greater of the defined benefitobligation or the fair value of plan assets, a portion of that net gain or loss is required to be recognized immediatelyas income or expense.

The portion recognized in the total comprehensive income is the excess divided by the expected average remainingworking lives of the participating employees. Actuarial gains and losses that do not breach the 10% limits need notto be recognized.

The amount recognized in the balance sheet is the present value of the defined obligation adjusted for unrecognizedactuarial gains and losses and unrecognized past service cost and reduced by the fair value of plan assets at the dateof the statement of financial position.

TaxesTaxes are provided for in accordance with regulations and laws that are effective in the countries where theGroup operates.

(i) Current taxCurrent tax assets and liabilities for the current and prior years are measured at the amount expected to berecovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount arethose that are enacted or substantively enacted by the statement of financial position date.

F - 174

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

25

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

Taxes (continued)

(ii) Deferred taxDeferred tax is provided on temporary differences at the statement of financial position date between the taxbases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognised for all taxable temporary differences, except: Where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability

in a transaction that is not a business combination and, at the time of the transaction, affects neither theaccounting profit nor taxable profit or loss.

In respect of taxable temporary differences associated with investments in subsidiaries and associates,where the timing of the reversal of the temporary differences can be controlled and it is probable thatthe temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax creditsand unused tax losses, to the extent that it is probable that taxable profit will be available against which thedeductible temporary differences, and the carry forward of unused tax credits and unused tax losses can beutilised except:

Where the deferred tax asset relating to the deductible temporary difference arises from the initialrecognition of an asset or liability in a transaction that is not a business combination and, at the time ofthe transaction, affects neither the accounting profit nor taxable profit or loss.

In respect of deductible temporary differences associated with investments in subsidiaries andassociates, deferred tax assets are recognised only to the extent that it is probable that the temporarydifferences will reverse in the foreseeable future and taxable profit will be available against which thetemporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at each statement of financial position date and reducedto the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of thedeferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each statement of financialposition date and are recognised to the extent that it has become probable that future taxable profit will allow thedeferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when theasset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted orsubstantively enacted at the statement of financial position date.

Current tax and deferred tax relating to items recognised directly in equity are also recognised in equity and notin the consolidated income statement.

Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current taxassets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxationauthority.

Assets under management and assets held in custody and under administrationThe Group provides custody and administration services that result in the holding or investing of assets onbehalf of its clients. Assets held in trust, under management or under custody or under administration, are nottreated as assets of the Group and accordingly are recorded as off balance sheet items.

Dividends on ordinary sharesDividends on ordinary shares are recognized as a liability and deducted from equity when they are approved bythe Bank’s shareholders. Interim dividends are deducted from equity when they are declared and no longer atthe discretion of the Bank.

Dividends for the year that are approved after the reporting date are disclosed as an event after the reportingdate.

F - 175

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

26

2 ACCOUNTING POLICIES (continued)

2.5 Summary of significant accounting policies (continued)

Treasury sharesOwn equity instruments of the Bank which are acquired by it or by any of its subsidiaries (treasury shares) arededucted from equity and accounted for at weighted average cost. Consideration paid or received on thepurchase sale, issue or cancellation of the Bank’s own equity instruments is recognised directly in equity. Nogain or loss is recognised in the consolidated income statement on the purchase, sale, issue or cancellation of theBank’s own equity instruments.

When the Group holds own equity instruments on behalf of its clients, those holdings are not included in theGroup’s consolidated statement of financial position.

Contracts on own shares that require physical settlement of a fixed number of own shares for a fixedconsideration are classified as equity and added to or deducted from equity. Contracts on own shares that requirenet cash settlement or provide a choice of settlement are classified as trading instruments and changes in the fairvalue are reported in the consolidated income statement.

Financial guaranteesIn the ordinary course of business, the Group gives financial guarantees, consisting of letters of credit,guarantees and acceptances. Financial guarantees are initially recognised in the financial statements (within“Other liabilities”) at fair value, being the premium received. Subsequent to initial recognition, the Group’sliability under each guarantee is measured at the higher of the amount initially recognised less, whenappropriate, cumulative amortization recognised in the consolidated income statement, and the best estimate ofexpenditure required to settle any financial obligation arising as a result of the guarantee. Any increase in theliability relating to financial guarantees is recorded in the consolidated income statement. The premium receivedis recognised in the consolidated income statement on a straight line basis over the life of the guarantee.

Customers’ acceptancesCustomers’ acceptances represent term documentary credits which the Group has committed to settle on behalfof its clients against commitments by those clients (acceptances). The commitments resulting from theseacceptances are stated as a liability in the statement of financial position for the same amount.

Share-based payments planEmployees (including senior executives) of the Bank receive remuneration in the form of share-based paymenttransactions, whereby employees render services as consideration for equity instruments (equity-settledtransactions).

The cost of equity-settled transactions is measured by reference to the fair value at the date on which they aregranted and is recognised together with a corresponding increase in equity, over the period in which theperformance and/or service conditions are fulfilled, ending on the date on which the relevant employees becomefully entitled to the award (the vesting date). The cumulative expense recognised for equity-settled transactionsat each reporting date until the vesting date reflects the extent to which the vesting period has expired and theBank’s best estimate of the number of equity instruments that will ultimately vest. The income statementexpense or credit for a period is recorded under “Personnel expenses” and represents the movement incumulative expense recognised as at the beginning and end of that period.

Where the terms of an equity-settled award are modified, the minimum expense is recognised in “Personnelexpenses” in the consolidated income statement as if the terms had not been modified. An additional expense isrecognised for any modification which increases the total fair value of the share-based payment arrangement, oris otherwise beneficial to the employee as measured at the date of modification.

Where any equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and anyexpense not yet recognised for the award is recognised immediately. This includes any award where non-investing conditions within the control of either the entity or the counterparty are not met. However, if a newaward is substituted for the cancelled award, and designated as a replacement award on the date that it isgranted, the cancelled and new awards are treated as if they were a modification of the original award, asdescribed in the previous paragraph.The dilutive effect of outstanding options is reflected as additional share dilution in the computation of dilutedearnings per common share.

F - 176

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

27

2 ACCOUNTING POLICIES (continued)

2.6 Significant accounting judgements and estimates

In the process of applying the Group’s accounting policies, management has made the following judgments,apart from those involving estimations, which have the most significant effect in the amounts recognised in thefinancial statements:

Going concernThe Group’s management has made an assessment of the Group’s ability to continue as a going concern and issatisfied that the Group has the resources to continue in business for the foreseeable future. Furthermore,management is not aware of any material uncertainties that may cast significant doubt upon the Group’s abilityto continue as a going concern. Therefore, the financial statements continue to be prepared on the going concernbasis.

Fair value of financial instrumentsWhere the fair values of financial assets and financial liabilities recorded on the statement of financial positioncannot be derived from active markets, they are determined using a variety of valuation techniques that includethe use of mathematical models. The inputs to these models are derived from observable market data wherepossible, but where observable market data are not available, judgment is required to establish fair values. Thejudgments include considerations of liquidity and model inputs such as volatility for longer dated derivativesand discount rates, prepayment rates and default rate assumptions for asset backed securities.

Impairment losses on loans and advancesThe Group reviews its individually significant loans and advances at each statement of financial position date toassess whether an impairment loss should be recorded in the consolidated income statement. In particular,judgment by management is required in the estimation of the amount and timing of future cash flows whendetermining the impairment loss. In estimating these cash flows, the Group makes judgments about theborrower’s financial situation and the net realizable value of collateral. These estimates are based onassumptions about a number of factors and actual results may differ, resulting in future changes to theallowance.

Loans and advances that have been assessed individually and found not to be impaired and all individuallyinsignificant loans and advances are then assessed collectively, in groups of assets with similar riskcharacteristics, to determine whether provision should be made due to incurred loss events for which there isobjective evidence but whose effects are not yet evident. The collective assessment takes account of data fromthe loan portfolio (such as credit quality, levels of arrears, credit utilization, loan to collateral ratios etc.),concentrations of risks and economic data (including levels of unemployment, real estate price indices, countryrisk and the performance of different individual groups).

Deferred tax assetsDeferred tax assets are recognised in respect of tax losses to the extent that it is probable that taxable profit willbe available against which the losses can be utilized. Judgment is required to determine the amount of deferredtax assets that can be recognised, based upon the likely timing and level of future taxable profits, together withfuture tax planning strategies.

Business modelIn making an assessment whether a business model’s objective is to hold assets in order to collect contractualcash flows, the Group considers at which level of its business activities such assessment should be made.Generally, a business model is a matter of fact which can be evidenced by the way business is managed and theinformation provided to management. However, in some circumstances it may not be clear whether a particularactivity involves one business model with some infrequent asset sales or whether the anticipated sales indicatethat there are two different business models.

In determining whether its business model for managing financial assets is to hold assets in order to collectcontractual cash flows the Group considers:

- management’s stated policies and objectives for the portfolio and the operation of those policies inpractice;

- how management evaluates the performance of the portfolio;- whether management’s strategy focuses on earning contractual interest revenues;- the degree of frequency of any expected asset sales;- the reason for any asset sales; and- whether assets that are sold are held for an extended period of time relative to their contractual maturity.

F - 177

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

28

2 ACCOUNTING POLICIES (continued)

2.6 Significant accounting judgements and estimates (continued)

Contractual cash flows of financial assetsThe Group exercises judgment in determining whether the contractual terms of financial assets it originates oracquires give rise on specific dates to cash flows that are solely payments of principal and interest on theprincipal outstanding and so may qualify for amortised cost measurement. In making the assessment the Groupconsiders all contractual terms, including any prepayment terms or provisions to extend the maturity of theassets, terms that change the amount and timing of cash flows and whether the contractual terms containleverage.

Consolidation of special purpose entities (SPEs)The Bank sponsors the formation of SPEs, which may or may not be directly or indirectly owned subsidiaries.The Bank consolidates those SPEs it controls. In assessing and determining if the Bank controls SPEs, judgmentis exercised to determine whether the activities of the SPE are being conducted on behalf of the Bank to obtainbenefits from the SPE’s operation; whether the Bank has the decision-making powers to control or to obtaincontrol of the SPE or its assets; whether the Bank has rights to obtain the majority of the benefits of the SPE’sactivities; and whether the Bank retains the majority of the risks related to the SPE or its assets in order to obtainbenefits from its activities.

Pensions obligationThe cost of the defined benefit pension plan is determined using an actuarial valuation. The actuarial valuationinvolves making assumptions about discount rates, expected rates of return on assets, future salary increases,mortality rates and future pension increases. Due to the long-term nature of these plans, such estimates aresubject to significant uncertainty.

3 SEGMENT REPORTING

Management monitors the operating results of its business units separately for the purpose of making decisionsabout resource allocation and performance assessment. Segments are evaluated based on net operating income.Income taxes and depreciation are managed on a group basis and are not allocated to operating segments.

Interest income is reported net, since management monitors net interest income not the gross income and expenseamounts. Net interest income is allocated to the business segment based on the assumption that all positions arefunded or invested via a central funding unit. An internal Funds Transfer Pricing (FTP) mechanism wasimplemented between operating segments.

The assets and liabilities that are reported in the segments are net from inter-segments’ assets and liabilitiessince they constitute the basis of the management measures of the segments’ assets and liabilities and the basisof the allocation of resources between segments.

F - 178

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

29

3 SEGMENT REPORTING (continued)

a) Business Segments

The Group operates in four main business segments which are corporate and commercial banking, treasury andcapital markets, retail and personal banking and group functions and head office.

Corporate and Commercial Banking Provides diverse products and services to the corporate andcommercial customers including loans, deposits, trade finance,exchange of foreign currencies as well as all regular corporate andcommercial banking activities.

Retail and Personal Banking Provides individual customers’ deposits and consumer loans,overdrafts, credit cards, and funds transfer facilities, as well as allregular retail and private banking activities.

Treasury and Capital Markets Provides treasury services including transactions in money andcapital markets for the Group’s customers, manages investment andtrading transactions (locally and internationally), and managesliquidity and market risks. This segment also offers investmentbanking and brokerage services and manages the Group’s ownportfolio of stocks, bonds, and other financial instruments.

Group Functions and Head Office Consists of capital and strategic investments, exceptional profitsand losses as well as operating results of subsidiaries which offernon-banking services.

Transfer prices between operating segments are on an arm’s length basis in a manner similar to transactions withthird parties.

The following table presents net operating income, total assets and total liabilities and shareholders’ equity ofthe Group’s business segments.

2012Corporate and Retail Treasury Group

Commercial and Personal and Capital Functions andBanking Banking Markets Head Office Total

LL million LL million LL million LL million LL million

Net interest income 272,432 170,736 368,505 52,017 863,690___________ ____________ ____________ ____________ ____________

Non interest incomeNet fee and commission income 112,113 139,524 22,331 5,397 279,365Foreign exchange operations 4,231 20,886 114,150 132 139,399Financial operations 20 8,618 315,441 30,035 354,114Other operating income 43 8,570 364 13,274 22,251

____________ ____________ ____________ ____________ ____________Total non interest income 116,407 177,598 452,286 48,838 795,129

____________ ____________ ____________ ____________ ____________Total operating income 388,839 348,334 820,791 100,855 1,658,819

____________ ____________ ____________ ____________ ____________

Net credit losses (136,351) (46,184) (50) - (182,585)____________ ____________ ____________ ____________ ____________

Net operating income 252,488 302,150 820,741 100,855 1,476,234___________ ____________ ____________ ____________ ____________

Share of profit or loss of associate - - - 551 551____________ ____________ ____________ ____________ ____________

Investments in associates - - - 34,230 34,230____________ ____________ ____________ ____________ ____________

Total assets 12,248,359 5,413,046 24,813,627 4,712,437 47,187,469____________ ____________ ____________ ____________ ____________

Total liabilities and shareholders’ equity 8,577,415 32,378,828 1,766,123 4,465,103 47,187,469____________ ____________ ____________ ____________ ____________

Capital expenditures - 2,298 264 180,111 182,673____________ ____________ ____________ ____________ ____________

F - 179

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

30

3 SEGMENT REPORTING (continued)

2011Corporate and Retail Treasury Group

Commercial and Personal and Capital Functions andBanking Banking Markets Head Office Total

LL million LL million LL million LL million LL million

Net interest income 253,241 150,022 330,217 54,742 788,222____________ ____________ ____________ ____________ ____________

Non interest incomeNet fee and commission income 116,689 112,107 30,734 9,362 268,892Foreign exchange operations 3,623 24,467 48,796 (84) 76,802Financial operations - 7,039 264,512 28,576 300,127Other operating income 978 3,984 190 43,486 48,638

____________ ____________ ____________ ____________ ____________Total non interest income 121,290 147,597 344,232 81,340 694,459

____________ ____________ ____________ ____________ ____________Total operating income 374,531 297,619 674,449 136,082 1,482,681

____________ ____________ ____________ ____________ ____________

Net credit losses (114,823) (22,836) - - (137,659)____________ ____________ ____________ ____________ ____________

Net operating income 259,708 274,783 674,449 136,082 1,345,022____________ ____________ ____________ ____________ ____________

Share of profit or loss of associate - - - 5,133 5,133____________ ____________ ____________ ____________ ____________

Investments in associates - - - 43,099 43,099____________ ____________ ____________ ____________ ____________

Total assets 9,814,067 4,660,599 25,253,300 3,592,720 43,320,686____________ ____________ ____________ ____________ ____________

Total liabilities and shareholders’ equity 8,951,327 29,174,083 914,630 4,280,646 43,320,686____________ ____________ ____________ ____________ ____________

Capital expenditures - 1,652 242 63,406 65,300____________ ____________ ____________ ____________ ____________

b) Geographical SegmentsThe Group operates in three geographical segments, Lebanon, Middle East and North Africa and Turkey(MENAT) and Europe, as such, is subject to different risks and returns. The following tables show thedistribution of the Groups’ external net operating income, assets and liabilities and shareholders’ equityallocated based on the location of the subsidiaries reporting the results or advancing the funds. Transactionsbetween segments are carried at market prices and within pure trading conditions.

2012

Lebanon MENAT Europe TotalLL million LL million LL million LL million

Net interest income 526,293 289,667 47,730 863,690____________ ____________ ____________ ____________

Non interest incomeNet fee and commission income 155,343 78,214 45,808 279,365Foreign exchange operations 18,051 103,511 17,837 139,399Financial operations 333,298 10,380 10,436 354,114Other operating income 19,770 1,349 1,132 22,251

____________ ____________ ____________ ____________Total non interest income 526,462 193,454 75,213 795,129

____________ ____________ ____________ ____________Total external operating income 1,052,755 483,121 122,943 1,658,819

____________ ____________ ____________ ____________

Net credit losses (123,405) (49,874) (9,306) (182,585)____________ ____________ ____________ ____________

Net operating income 929,350 433,247 113,637 1,476,234____________ ____________ ____________ ____________

Capital expenditures 83,194 98,042 1,437 182,673____________ ____________ ____________ ____________

Total assets 33,868,338 9,890,071 3,429,060 47,187,469____________ ____________ ____________ ____________

Total liabilities and shareholders’ equity 34,129,524 9,827,239 3,230,706 47,187,469____________ ____________ ____________ ____________

F - 180

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

31

3 SEGMENT REPORTING (continued)

b) Geographical Segments (continued)

2011

Lebanon MENAT Europe TotalLL million LL million LL million LL million

Net interest income 501,643 238,316 48,263 788,222____________ ____________ ____________ ____________

Non interest incomeNet fee and commission income 148,135 78,747 42,010 268,892Foreign exchange operations 17,665 37,051 22,086 76,802Financial operations 294,928 3,860 1,339 300,127Other operating income 28,806 5,134 14,698 48,638

____________ ____________ ____________ ____________Total non interest income 489,534 124,792 80,133 694,459

____________ ____________ ____________ ____________Total external operating income 991,177 363,108 128,396 1,482,681

____________ ____________ ____________ ____________

Net credit losses (15,907) (117,406) (4,346) (137,659)____________ ____________ ____________ ____________

Net external operating income 975,270 245,702 124,050 1,345,022____________ ____________ ____________ ____________

Capital expenditures 50,102 10,168 5,030 65,300____________ ____________ ____________ ____________

Total assets 31,566,706 8,621,701 3,132,279 43,320,686____________ ____________ ____________ ____________

Total liabilities and shareholders’ equity 32,674,178 7,496,310 3,150,198 43,320,686____________ ____________ ____________ ____________

4 INTEREST AND SIMILAR INCOME

2012 2011LL million LL million

Balances with central banks 278,433 154,226Due from banks and financial institutions 49,828 49,269Loans and advances to customers at amortised cost 890,902 828,286Loans and advances to related parties at amortised cost 19,902 17,132Financial assets classified at amortised cost 967,550 1,007,687Other interest income 1,894 372

____________ ____________2,208,509 2,056,972

____________ ____________

The components of interest and similar income from financial assets classified at amortised cost are detailed asfollows:

2012 2011LL million LL million

Lebanese sovereign 678,934 803,126Other sovereign 249,951 154,351Private sector and other securities 38,665 50,210

____________ ____________967,550 1,007,687

____________ ____________

F - 181

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

32

5 INTEREST AND SIMILAR EXPENSE

2012 2011LL million LL million

Due to central banks 41,216 7,740Due to banks and financial institutions 31,350 22,341Customers’ deposits at amortised cost 1,243,161 1,226,869Deposits from related parties at amortised cost 26,117 10,592Other interest expense 2,975 1,208

____________ ____________1,344,819 1,268,750

____________ ____________

Due to Central banks include interest expense on repurchase agreements amounting to LL 1,787 million for theyear ended 31 December 2012 (2011: nil).

6 FEE AND COMMISSION INCOME

2012 2011LL million LL million

Commercial banking income 66,704 59,343Credit related fees and commissions 47,452 42,524Brokerage and custody income 53,212 51,659Trust and fiduciary activities 5,130 5,470Trade finance income 49,586 59,373Electronic banking 75,045 68,161Insurance brokerage income 2,797 2,453Corporate finance fees 25,854 25,815Other fees and commissions 4,782 4,154

____________ ____________330,562 318,952

____________ ____________

7 FEE AND COMMISSION EXPENSE

2012 2011LL million LL million

Commercial banking expenses 5,221 4,846Insurance brokerage fees 386 258Brokerage and custody fees 7,755 8,861Electronic banking 35,387 34,313Other fees and commissions 2,448 1,782

____________ ____________51,197 50,060

____________ ____________

F - 182

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

33

8 NET GAIN ON FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

2012 2011

Tradingincome (loss)

Interestincome Total

Tradingincome (loss)

Interestincome Total

LL million LL million LL million LL million LL million LL milliona) Net gain on financial instruments

Lebanese sovereign and CentralBank of Lebanon

Certificates of deposits (89) 216 127 3 - 3Treasury bills 10,169 16,629 26,798 2,300 25,090 27,390Eurobonds 5,247 12,202 17,449 4,967 6,250 11,217

___________ ___________ ___________ ___________ ___________ ___________15,327 29,047 44,374 7,270 31,340 38,610

___________ ___________ ___________ ___________ ___________ ___________

Other sovereignTreasury bills 479 103 582 85 - 85Other governmental securities (25) 93 68 33 266 299Eurobonds 93 26 119 137 26 163

___________ ___________ ___________ ___________ ___________ ___________547 222 769 255 292 547

___________ ___________ ___________ ___________ ___________ ___________

Private sector and other securitiesBanks and financial institutionsdebt instruments 693 7,079 7,772 1,863 7,979 9,842

Corporate debt instruments 1,114 2,073 3,187 206 777 983Structured products 8 - 8 (12) - (12)Mutual funds 2,657 - 2,657 1,138 - 1,138Equity instruments 437 - 437 (5,671) - (5,671)

___________ ___________ ___________ ___________ ___________ ___________4,909 9,152 14,061 (2,476) 8,756 6,280

___________ ___________ ___________ ___________ ___________ ___________b) Other trading income

Derivatives (1,320) - (1,320) 1,670 - 1,670Foreign exchange 139,399 - 139,399 76,802 - 76,802Dividends 173 - 173 2,262 - 2,262

___________ ___________ ___________ ___________ ___________ ___________138,252 - 138,252 80,734 - 80,734

___________ ___________ ___________ ___________ ___________ ___________159,035 38,421 197,456 85,783 40,388 126,171

___________ ___________ ___________ ___________ ___________ ___________

Trading gain on financial assets at fair value through profit or loss includes the results of trading in the aboveclasses of securities, as well as the result of the change in their fair values.

Foreign exchange income includes gains and losses from spot and forward currency contracts and therevaluation of the daily open trading position.

For the year ended 31 December 2012, derivatives include a loss of LL 4,126 million (2011: LL 1,608 million)representing the change in fair value of the credit default swaps related to the Lebanese sovereign risk andembedded in some of the Bank’s deposits as discussed in note 36 to these consolidated financial statements.

9 NET GAIN ON SALE OF FINANCIAL ASSETS AT AMORTISED COST

The Group derecognises some debt instruments classified at amortised cost due to the following reasons:- Deterioration of the credit rating below the ceiling allowed in the Group’s investment policy;- Liquidity gap and yield management;- Swap of certificates of deposit by the Lebanese Central Bank;- Currency risk management as a result of change in the currency base of deposits; or- Liquidity for capital expenditures.

F - 183

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

34

9 NET GAIN ON SALE OF FINANCIAL ASSETS AT AMORTISED COST (continued)

The schedule below details the gains and losses arising from the derecognition of these financial assets:

2012 2011Gains Losses Net Gains Losses Net

LL million LL million LL million LL million LL million LL million

Lebanese sovereign and CentralBank of Lebanon

Central Bank’s certificates of deposits 160,268 (172) 160,096 98,694 (20) 98,674Bank placements 47,548 - 47,548 - - -Treasury bills 12,033 (1,959) 10,074 15,171 (471) 14,700Eurobonds 29,559 (171) 29,388 83,237 (112) 83,125

__________ __________ __________ __________ __________ __________249,408 (2,302) 247,106 197,102 (603) 196,499

__________ __________ __________ __________ __________ __________Other sovereign

Treasury bills 3,479 (10) 3,469 1,197 (7) 1,190Other governmental securities 2,969 - 2,969 - (666) (666)Eurobonds 1,139 - 1,139 405 - 405

__________ __________ __________ __________ __________ __________7,587 (10) 7,577 1,602 (673) 929

__________ __________ __________ __________ __________ __________Private sector and other securities

Banks and financial institutions debt instruments - (6) (6) 12,873 (2,534) 10,339Corporate and other debt instruments 5,796 (1,096) 4,700 9,383 - 9,383Structured products 6,556 (121) 6,435 3,864 - 3,864

__________ __________ __________ __________ __________ _________12,352 (1,223) 11,129 26,120 (2,534) 23,586

__________ __________ __________ __________ __________ _________269,347 (3,535) 265,812 224,824 (3,810) 221,014

__________ __________ __________ __________ __________ __________

During December 2012, the Bank discounted long-term placements at the Central Bank of Lebanon originallymaturing on 1 April 2016, which resulted in a gain of US$ 32 million (equivalent to LL 47,548 million).

10 NET GAIN ON SALE OF SUBSIDIARIES AND ASSOCIATES

During December 2011, Capital Outsourcing Limited (Dubai) exchanged a liability due to a related partyamounting to the equivalent of LL 5,276 million in US Dollars for 50% ownership in the company through theissuance of new shares. This was treated as a deemed disposal by the Group whereby its ownership droppedfrom 75% to 37.5% as of 31 December 2011. The investment was recognised at its fair value under“Investments in associates”. The loss from the sale amounted to LL 161 million for the year ended 31 December2011.

During December 2011, the Group sold its 49% stake in Globalcom Holding SAL, an associate, for a totalconsideration equivalent to LL 13,567 million in US Dollars in addition to 33% of future dividends up to end ofyear 2016. The gain from the sale amounted to LL 4,236 million for the year ended 31 December 2011.

During June 2011, the Executive Committee of the Bank approved the sale of the Bank’s investment in ArabianOpportunities Fund (“AOF”) and the sale was completed before year end. The loss from the sale amounted toLL 2,547 million for the year ended 31 December 2011.

During June 2011, the Group sold to a related party 79 shares of the share capital of Conseil et GestionImmobiliere SAL (“CGI”) representing 79% of its share capital for a total consideration equivalent to LL 7,312million in US Dollars. The gain from the sale amounted to LL 1 million for the year ended 31 December 2011.As such the Group’s ownership as of 31 December 2011 dropped to 19% and the investment was recordedunder “financial assets at fair value through other comprehensive income”.

Other gains in the amount of LL 495 million resulted from the liquidation of Orion System SAL and the sale ofSafwa Fund, which was previously consolidated, by Audi Capital KSA, a subsidiary.

F - 184

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

35

11 OTHER OPERATING INCOME2012 2011

LL million LL million

Revenues from non-core activities - 30,532Income from disposal of assets acquired against debts 8,297 5,433Net provision recoveries (note 39) 7 2,909Other income 13,947 9,764

____________ ____________22,251 48,638

____________ ____________

Revenue from non-core activities substantially represent the revenues generated by Capital Outsourcing Limited(Dubai) in 2011 in the amount of LL 29,205 million from providing information technology services.

During 2011, the Group entered into profit sharing agreements under which it become entitled to 30% of CGI’sprofits for a period of 5 years ending during the second quarter of 2016 and 33% of Global Com Holding SALprofits up to 31 December 2016. The Group’s share of these profits for the year 2012 amounted to LL 5,907million (2011: LL 411 million).

12 NET CREDIT LOSSES2012 2011

LL million LL millionCharges for the year

Loans and advances to customers at amortised cost (note 24) 201,900 174,435Loans directly written off 203 -Impairment of financial instruments 110 -

____________ ____________202,213 174,435

____________ ____________Recoveries for the year – loans and advances to customersImpairment allowance recovered (note 24) (11,636) (22,022)Unrealized interest recovered (note 24) (2,082) (2,335)Recoveries of debts previously written off (5,877) (12,419)

Recoveries for the year – banks and financial institutionsImpairment allowance recovered (33) -

____________ ____________(19,628) (36,776)

____________ ____________182,585 137,659

____________ ____________

13 PERSONNEL EXPENSES2012 2011

LL million LL million

Salaries and related benefits 328,739 303,232Social security contributions 33,023 32,340End of service benefits (note 39) 12,826 10,217Transportation 12,179 10,252Schooling 6,241 6,129Medical expenses 4,489 3,600Food and beverage 4,227 4,054Training and seminars 4,173 5,075Share-based payments (note 46) - 40Other staff expenses 5,849 5,917

____________ ____________411,746 380,856

____________ ____________

F - 185

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

36

14 OTHER OPERATING EXPENSES

2012 2011LL million LL million

Operating leases 29,371 26,409Professional fees 27,116 26,138Executive management bonuses 26,381 24,120Advertising fees 22,742 21,834Taxes and similar disbursements 19,258 13,532Outsourcing services 16,935 9,873Premium for guarantee of deposits 16,315 16,144Information technology 14,619 10,423Donations and social aids 13,552 2,073Provisions for risks and charges (note 39) 13,088 4,388Travel and related expenses 12,240 10,886Telephone and mail 10,380 12,978Electricity, water and fuel 8,310 8,434Maintenance 7,692 6,467Insurance premiums 7,617 8,078Facilities services 6,363 6,224Subscription to communication services 6,116 5,485Office supplies 5,806 5,342Receptions and gifts 4,457 3,729Credit cards expenses 3,654 2,543Board of Directors fees 3,643 3,388Regulatory charges 3,448 2,644Documentation and miscellaneous subscriptions 2,379 2,155Others 10,477 9,392

____________ ____________291,959 242,679

____________ ____________

15 INCOME TAX

The components of income tax expense for the year ended 31 December are detailed as follows:

2012 2011LL million LL million

Current taxCurrent income tax 151,252 133,170Adjustment in respect of current income tax of prior years 756 6,805Other taxes treated as income tax 11,811 3,037

____________ ____________163,819 143,012

Deferred taxRelating to origination and reversal of temporary differences (9,282) (3,498)

____________ ____________154,537 139,514

____________ ____________

The tax rates applicable to the parent and subsidiaries vary from 0% to 40% in accordance with the income taxlaws of the countries where the Group operates. For the purpose of determining the taxable results of thesubsidiaries for the year, the accounting results have been adjusted for tax purposes. Such adjustments includeitems relating to both income and expense and are based on the current understanding of the existing tax lawsand regulations and tax practices.

F - 186

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

37

15 INCOME TAX (continued)

The relationship between taxable profit and accounting profit is as follows:

2012 2011Balance Tax Balance Tax

LL million LL million LL million LL million

Accounting profit before tax 699,012 104,852 681,166 102,175

Add:Non deductible expenses 112,707 16,906 79,660 11,949Non deductible provisions 194,127 29,119 71,675 10,751Other non deductibles 10,067 1,510 6,809 1,022

__________ __________ __________ __________316,901 47,535 158,144 23,722

__________ __________ __________ __________Less:Revenues previously subject to tax 29,542 4,431 34,423 5,163Provision recoveries previously subject to tax 4,736 710 15,466 2,320Provisions write-off previously subject to tax 111 17 6,530 980Exempted revenues 189,884 28,483 30,472 4,571Unrealized gains on financial instruments 21,100 3,165 1,616 242Other deductibles 79,147 11,872 25,118 3,768

__________ __________ __________ __________324,520 48,678 113,625 17,044

__________ __________ __________ __________Impact subject to tax 691,393 103,709 725,685 108,853

__________ __________ __________ __________Impact of differently taxed profits 47,543 24,317

__________ __________Tax due 151,252 133,170

__________ __________Effective income tax rate 21.63% 19.55%

__________ __________

The movement of current tax liabilities during the year is as follows:

2012 2011LL million LL million

Balance at 1 January 86,756 65,185____________ ____________

Charges for the year 163,819 143,012Transfers (1,144) 40

____________ ____________162,675 143,052

____________ ____________Less taxes paid:

Current year tax liability * 68,315 67,473Prior years tax liabilities 57,834 53,048Foreign exchange difference 5,224 960

____________ ____________131,373 121,481

____________ ____________Balance at 31 December 118,058 86,756

____________ ____________

(*) Represents taxes paid on interest received from treasury bills and central banks’ certificates of deposits.

F - 187

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

38

15 INCOME TAX (continued)

Deferred taxes recorded in the consolidated statement of financial position result from the following items:

2012Deferred tax

assetsDeferred tax

liabilitiesLL million LL million

Provisions 3,731 (1,292)Impairment allowance for loans and advances 13,794 -Fair value of financial instruments 546 10,508Carried forward taxable losses 1,282 -Difference in depreciation rates - 3,962Other temporary differences 276 162

____________ ____________19,629 13,340

____________ ____________

2011Deferred tax

assetsDeferred tax

liabilitiesLL million LL million

Provisions 6,117 (495)Fair value of financial instruments (125) 169Carried forward taxable losses 1,282 -Difference in depreciation rates - 1,921Other temporary differences 358 158

____________ ____________7,632 1,753

____________ ____________

16 PROFIT FROM DISCONTINUED OPERATIONS

During May 2012, the Bank entered into a Sale and Purchase Agreement through which it sold 81% (926,437shares) of its investment in LIA Insurance SAL (“LIA”), the insurance arm of the Group. Consideration receivedamounted to US$ 89 million (equivalent to LL 133 billion) in cash.

The business of LIA Insurance SAL was included in the “Group Functions and Head Office” business segmentand “Lebanon” geographic segment. The cash flows generated by the sale of the discontinued operation during2012 have been considered in the consolidated statement of cash flows as part of the investing activities.

On 26 July 2012, the directors of Banaudi Holding Limited, sole shareholder of Bank Audi SAM, decided tocease the activities of the subsidiary bank and to liquidate it and withdraw its banking license.

Bank Audi SAM, exercised banking activities in Monaco under banking license provided by “Autorite deControl Prudential”. The cessation of activities involves restitution of the assets of the clients, transfer of creditin process and cancellation of all arrangements concluded with the external services providers.

F - 188

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

39

16 PROFIT FROM DISCONTINUED OPERATIONS (continued)

The results of LIA Insurance SAL and Bank Audi SAM are as follows:

2012 2011

Bank AudiSAM

LIAInsurance

SAL TotalBank Audi

SAM

LIAInsurance

SAL TotalLL million LL million LL million LL million LL million LL million

Interest and similar income 3,467 8,870 12,337 4,717 18,705 23,422Interest and similar expense (1,874) (15) (1,889) (1,980) (41) (2,021)

__________ __________ __________ __________ __________ __________Net interest income 1,593 8,855 10,448 2,737 18,664 21,401

__________ __________ __________ __________ __________ __________

Fee and commission income 813 8,620 9,433 919 20,088 21,007Fee and commission expense (429) (4,889) (5,318) (440) (9,600) (10,040)

__________ __________ __________ __________ __________ __________Net fee and commission income 384 3,731 4,115 479 10,488 10,967

__________ __________ __________ __________ __________ __________Other operating income 79 334 413 424 909 1,333

__________ __________ __________ __________ __________ __________Total operating income 2,056 12,920 14,976 3,640 30,061 33,701

__________ __________ __________ __________ __________ __________

Total operating expenses (16,146) (6,342) (22,488) (11,709) (11,368) (23,077)__________ __________ __________ __________ __________ __________

Operating (loss) profit (14,090) 6,578 (7,512) (8,069) 18,693 10,624

Non- operating expenses (6,046) - (6,046) - - -Tax attributable to operating profit - (793) (793) - (1,725) (1,725)

__________ __________ __________ __________ __________ __________Loss for the period from discontinued operations (20,136) 5,785 (14,351) (8,069) 16,968 8,899

(Loss) gain recognised from fair valueremeasurement (9,922) 20,439 10,517 - - -

Tax attributable to fair value remeasurement - (3,065) (3,065) - - -

(Loss) gain on disposal - 48,621 48,621 - - -Tax attributable to gain on disposal - (7,908) (7,908) - - -

__________ __________ __________ __________ __________ __________(30,058) 63,872 33,814 (8,069) 16,968 8,899

__________ __________ __________ __________ __________ __________Cash inflow from sale:Total consideration received 133,212Cash included as cash and cash equivalents on

January 1 in the cash flow statements (14,506)__________

118,706__________

LL LLEarnings per share:Basic, from discontinued operations 96 22Diluted, from discontinued operations 96 22

After remeasurement to fair value, the remaining investment in LIA Insurance SAL amounted to LL 32,199million and was classified under financial assets at fair value through other comprehensive income.

17 EARNINGS PER SHARE

Basic earnings per share is calculated by dividing the profit for the year attributable to ordinary equity holders ofthe Bank by the weighted average number of ordinary shares outstanding during the year .

Diluted earnings per share is calculated by the same manner after adding to the weighted average number ofcommon shares outstanding the weighted average number of dilutive shares that would have been issuedpursuant to the Bank’s share-based payments plan. The number of shares issued has been calculated at the dateof the statement of financial position for the purpose of calculating diluted earnings per share based on therealization of accomplishment conditions as if the accomplishment date is the current statement of financialposition date.

F - 189

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

40

17 EARNINGS PER SHARE (continued)

The following table shows the income and share data used to calculate basic and diluted earnings per share:

2012 2011LL million LL million

Profit attributable to equity holders of the Bank 564,737 544,239Less: dividends attributable to preferred shares (34,955) (25,910)

____________ ____________Profit available to holders of ordinary shares 529,782 518,329

____________ ____________

Weighted average number of shares outstanding 346,903,074 343,334,701Weighted average number of common shares outstanding

after dilutive effect of share-based payments 347,048,590 344,036,106Basic earnings per share 1,527 1,510Diluted earnings per share 1,526 1,507

There were no transactions involving common shares or potential common shares between the reporting dateand the date of the completion of these consolidated financial statements which would require the restatement ofearnings per share.

18 CASH AND BALANCES WITH CENTRAL BANKS

2012 2011LL million LL million

Cash on hand 249,347 278,110____________ ____________

Central Bank of LebanonCurrent accounts 541,387 680,068Time deposits 7,287,985 6,420,737Accrued interest 53,382 59,587

____________ ____________7,882,754 7,160,392

____________ ____________Other Central Banks

Current accounts 845,468 899,368Time deposits 484,777 365,356Accrued interest 34 128

____________ ____________1,330,279 1,264,852

____________ ____________9,462,380 8,703,354

____________ ____________

Obligatory reserves:- In accordance with the Central Bank of Lebanon’s rules and regulations, banks operating in Lebanon are

required to deposit with the Central Bank of Lebanon an obligatory reserve calculated on the basis of 25% ofsight commitments and 15% of term commitments denominated in Lebanese Pounds. This is not applicable forinvestment banks which are exempt from obligatory reserve requirements on commitments denominated inLebanese Pounds. Additionally, all banks operating in Lebanon are required to deposit with the Central Bankof Lebanon interest-bearing placements representing 15% of total deposits in foreign currencies regardless ofnature.

- Subsidiary banks operating in foreign countries are also subject to obligatory reserve requirements determinedbased on the banking rules and regulations of the countries in which they operate.

F - 190

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

41

18 CASH AND BALANCES WITH CENTRAL BANKS (continued)

Obligatory reserves (continued)Compulsory reserve deposits are not available for use in the Bank’s day-to-day operations. The following tablesummarises the Group’s placements in Central Banks available against the compulsory reserves as of 31December:

2012 2011LL million LL million

Placements in Lebanese Pounds 453,024 614,151Placements in foreign currencies 3,885,816 3,723,652

____________ ____________4,338,840 4,337,803

____________ ____________

19 DUE FROM BANKS AND FINANCIAL INSTITUTIONS

2012 2011LL million LL million

Current accounts 1,582,867 1,230,400Time deposits 2,493,183 3,080,621Checks for collection 171,449 158,363Other amounts due 34,080 89,172Accrued interest 397 5,074Less: impairment allowance (998) (1,028)

____________ ____________4,280,978 4,562,602

____________ ____________

The movement of the impairment allowance was as follows:

2012 2011LL million LL million

Balance at 1 January 1,028 1,031Recoveries (33) -Foreign exchange difference 3 (3)

____________ ____________998 1,028

____________ ____________

20 LOANS TO BANKS AND FINANCIAL INSTITUTIONS AND REVERSE REPURCHASEAGREEMENTS

2012 2011LL million LL million

Loans and advances 272,282 218,556Reverse repurchase agreements 787,087 -Accrued interest 898 528

____________ ____________1,060,267 219,084

____________ ____________

F - 191

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

42

21 FINANCIAL ASSETS GIVEN AS COLLATERAL2012 2011

LL million LL million

Due from banks - 16,975Due from other counterparties - 449

____________ ____________- 17,424

____________ ____________

22 DERIVATIVE FINANCIAL INSTRUMENTS

The tables below show the positive and negative fair values of derivative financial instruments, together with thenotional amounts analysed by the term to maturity. The notional amount is the amount of a derivative’sunderlying asset, reference rate or index and is the basis upon which changes in the value of derivatives aremeasured. The notional amounts indicate the volume of transactions outstanding at year end and are indicativeof neither the market risk nor the credit risk.

Credit risk in respect of derivative financial instruments arises from the potential for a counterparty to default onits contractual obligations and is limited to the positive market value of instruments that are favorable to theGroup.

The Group has positions in the following types of derivatives:

Notional amount by term to maturity

31 December 2012Positive fair

valueNegative fair

valueNotionalamount

Within3 months

3 to12months

1 to 5years

Over5 years

LL million LL million LL million LL million LL million LL million LL million

Derivatives held for tradingForward foreign exchange contracts 7,218 4,992 72,825 46,796 26,029 - -Forward precious metals contracts 134 44 10,545 9,045 1,500 - -Currency swaps 15,293 15,842 2,449,196 2,201,792 247,404 - -Precious metals swaps 477 30 42,204 35,374 6,830 - -Currency options 25,449 25,557 2,122,281 719,125 1,403,156 - -Indices swaps and options 135 - 76,544 - 76,544 - -Credit default swaps 2,339 829 1,442,219 779,425 647,169 15,625 -

___________ ___________ ___________ ___________ ___________ ___________ ___________Total 51,045 47,294 6,193,351 3,791,557 2,408,632 15,625 -

___________ ___________ ___________ ___________ ___________ ___________ ___________Derivatives held to hedge netinvestments in foreign operationsForward foreign exchange contracts - 552 40,036 40,036 - - -Currency swaps - 8,196 167,968 51,682 116,286 - -

___________ ___________ ___________ ___________ ___________ ___________ ___________- 8,748 208,004 91,718 116,286 - -

___________ ___________ ___________ ___________ ___________ ___________ ___________Derivatives used as cash flows hedge

Interest rate swaps 1 - 30,128 - 4,844 25,284 -___________ ___________ ___________ ___________ ___________ ___________ ___________

51,046 56,042 6,453,946 3,883,275 2,529,762 40,909 -___________ ___________ ___________ ___________ ___________ ___________ ___________

Notional amount by term to maturity

31 December 2011Positive fair

valueNegative fair

valueNotional

amountWithin

3 months3 to12

months1 to 5years

Over5 years

LL million LL million LL million LL million LL million LL million LL millionDerivatives held for trading

Forward foreign exchange contracts 6,598 3,669 464,765 412,338 52,427 - -Forward precious metals contracts 568 49 19,940 9,970 9,970 - -Precious metals swaps 1,695 1 26,374 25,371 1,003 - -Currency swaps 11,623 15,289 1,687,318 1,652,309 35,009 - -Currency options 39,239 39,238 1,958,561 891,480 1,067,081 - -Indices swaps and options - - 21,182 21,182 - - -Credit default swaps 5,636 - 1,616,854 1,484,200 77,503 55,151 -Equity options 290 - 8,906 - - 3,576 5,330

___________ ___________ ___________ ____________ ___________ ___________ ___________Total 65,649 58,246 5,803,900 4,496,850 1,242,993 58,727 5,330

___________ ___________ ___________ ___________ ___________ ___________ ___________Derivatives held to hedge netinvestments in foreign operations

Currency swap 16,560 - 164,558 - 164,558 - -___________ ___________ ___________ ___________ ___________ ___________ ___________

82,209 58,246 5,968,458 4,496,850 1,407,551 58,727 5,330___________ ___________ ___________ ___________ ___________ ___________ ___________

F - 192

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

43

22 DERIVATIVE FINANCIAL INSTRUMENTS (continued)

Derivative financial instruments held for trading purposesMost of the Group’s derivative trading activities relate to deals with customers which are normally offset bytransactions with other counterparties. Also included under this heading are any derivatives entered into for riskmanagement purposes which do not meet the IAS 39 hedge accounting criteria.

Derivative financial instruments held for hedging purposesAs part of its asset and liability management, the bank uses derivatives for hedging purposes in order to reduceits exposure to credit and market risks. This is achieved by hedging specific financial instruments, portfolios offixed rate financial instruments and forecast transaction as well as strategic hedging against overall financialposition exposures.

During 2012, the Bank renewed its currency swap contracts designated to hedge the net investment in itssubsidiaries in Cyprus and France. The notional amount of these contracts amounted to LL 167,968 million as of31 December 2012 (2011: LL 164,558). In order to maintain the effectiveness of the hedge, the Group enteredinto forward contracts with a notional amount of LL 40,036 million to reduce the hedged amount. The negativefair value of these contracts amounted to LL 8,476 million (2011: positive fair value of LL 16,560) and wastransferred to “Foreign currency translation reserve” in equity to offset gains on translation of the net investmentin the subsidiaries. No ineffectiveness from hedges of net investments in foreign operations was recognized inprofit or loss during the year.

Forwards and futuresForwards and futures contracts are contractual agreements to buy or sell a specified financial instrument at aspecific price and date in the future. Forwards are customized contracts transacted in the over-the-countermarket. Futures contracts are transacted in standardised amounts on regulated exchanges and are subject to dailycash margin requirements.

OptionsOptions are contractual agreements that convey the right, but not the obligation, for the purchaser either to buyor to sell a specific amount of a financial instrument at a fixed price, either at a fixed future date or at any timewithin a specified period.

SwapsSwaps are contractual agreements between two parties to exchange movements in interest or foreign currencyrates as well as the contracted upon amounts for currency swaps.

In a currency swap, the bank pays a specified amount in one currency and receives a specified amount inanother currency. Currency swaps are mostly gross-settled.

A credit default swap (CDS) is a credit derivative between two counterparties, whereby they isolate the creditrisk of at least one third party and trade it. Under the agreement, one party makes periodic payments to the otherand receives the promise of a payoff if the third party defaults. The former party receives credit protection and issaid to be the “buyer” while the other party provides credit protection and is said to be the “seller”. The thirdparty is known as the “reference entity”.

The notional amount of credit default swaps represents the carrying value of certain time deposits held by theGroup as of 31 December 2012 and 2011 (note 36).

F - 193

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

44

23 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

2012 2011LL million LL million

Lebanese sovereign and Central Bank of LebanonCentral Bank certificates of deposit 11,268 -Treasury bills 124,843 461,941Eurobonds 232,410 158,999

_____________ _____________368,521 620,940

_____________ _____________Other sovereign

Eurobonds 1,615 322_____________ _____________

Private sector and other securitiesBanks and financial institutions debt instruments 2,404 133,522Loans and advances to customers 75,555 -Corporate debt instruments 10,340 15,520Structured products - 1,882Mutual funds 49,010 48,653Equity instruments 3,212 3,087

_____________ _____________140,521 202,664

_____________ _____________510,657 823,926

_____________ _____________

The classification of the above instruments according to the type of interest is as follows:

2012 2011LL million LL million

Fixed interestLebanese sovereign and Central Bank of Lebanon 368,521 620,940Other sovereign 1,615 322Private sector and other securities 88,300 149,042

____________ ____________458,436 770,304

____________ ____________Non-interest bearing

Private sector and other securities 52,221 53,622____________ ____________

510,657 823,926____________ ____________

During 2012, the Group acquired through its two wholly owned subsidiaries Bank Audi Suisse and BeryteInternational NV a European real estate mortgage loan extended to Wel 1: Euro Elysee II real estate fund. Theloan is fully secured by first mortgage deeds against properties in Germany.

This loan matures in September 2014, with option to extend by one year. It is remunerated at a fixed interest rateof 4.75% per annum on the face amount.

F - 194

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

45

24 LOANS AND ADVANCES TO CUSTOMERS AT AMORTISED COST

2012

Corporate SMERetail and

personal bankingPublicsector Total

LL million LL million LL million LL million LL million

Overdraft accounts 2,408,650 764,158 634,556 65,560 3,872,924Loans 7,403,071 1,681,182 2,695,458 56,264 11,835,975Discounted bills and commercial paper 111,132 58,440 24,609 15,250 209,431

____________ ___________ ____________ _____________ ____________9,922,853 2,503,780 3,354,623 137,074 15,918,330

Impairment allowance (308,129) (28,540) (101,342) (3,732) (441,743)Unrealized interest (40,403) (4,424) (15,357) - (60,184)

____________ ___________ ____________ _____________ ____________9,574,321 2,470,816 3,237,924 133,342 15,416,403

____________ ___________ ____________ _____________ ____________

2011

Corporate SMERetail and

personal bankingPublicsector Total

LL million LL million LL million LL million LL million

Overdraft accounts 2,123,667 763,413 514,140 640 3,401,860Loans 5,792,815 1,167,612 2,377,051 162,130 9,499,608Discounted bills and commercial paper 136,708 74,716 26,522 20,741 258,687

____________ ___________ ____________ _____________ ____________8,053,190 2,005,741 2,917,713 183,511 13,160,155

Impairment allowance (191,395) (56,788) (115,780) (4,575) (368,538)Unrealized interest (37,512) (30,888) (31,040) - (99,440)

____________ ___________ ____________ _____________ ____________7,824,283 1,918,065 2,770,893 178,936 12,692,177

____________ ___________ ____________ _____________ ____________

The breakdown and movement of the impairment allowance during the year are as follows:

2012

Corporate SMERetail and

personal bankingPublicsector Total

LL million LL million LL million LL million LL million

Balance at 1 January 191,395 56,788 115,780 4,575 368,538

Add:Charges for the year (note 12) 150,832 7,018 41,306 2,744 201,900Transfers 4,726 (4,726) 363 (582) (219)

Less:Recoveries (note 12) (4,000) (2,879) (3,914) (843) (11,636)Write offs (20,684) (27,728) (45,976) - (94,388)

Foreign exchange difference (14,140) 67 (6,217) (2,162) (22,452)__________ ___________ ___________ __________ ____________

Balance at 31 December 308,129 28,540 101,342 3,732 441,743__________ ___________ ___________ __________ ____________

Individual impairment 196,703 14,284 61,917 2,187 275,091Collective impairment 111,426 14,256 39,425 1,545 166,652

__________ ___________ ___________ ___________ ___________308,129 28,540 101,342 3,732 441,743

__________ ___________ ___________ ___________ ___________

F - 195

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

46

24 LOANS AND ADVANCES TO CUSTOMERS AT AMORTISED COST (continued)

2011

Corporate SMERetail and

personal bankingPublicsector Total

LL million LL million LL million LL million LL million

Balance at 1 January 89,858 67,536 79,364 1,062 237,820

Add:Charges for the year (note 12) 118,050 5,071 46,830 4,484 174,435Transfers (178) 315 127 - 264

Less:Recoveries (note 12) (10,063) (6,920) (4,106) (933) (22,022)Write offs (190) (8,286) (3,141) - (11,617)

Foreign exchange difference (6,082) (928) (3,294) (38) (10,342)__________ ___________ ___________ __________ ____________

Balance at 31 December 191,395 56,788 115,780 4,575 368,538__________ ___________ ___________ __________ ____________

Individual impairment 97,538 40,730 78,747 - 217,015Collective impairment 93,857 16,058 37,033 4,575 151,523

___________ ___________ ____________ __________ ____________191,395 56,788 115,780 4,575 368,538

__________ ___________ ____________ __________ ____________

The movement of unrealized interest during the year is as follows:

2012

Corporate SMERetail and personal

banking TotalLL million LL million LL million LL million

Balance at 1 January 37,512 30,888 31,040 99,440

Add:Unrealized interest applied on non-performing loans 20,948 3,643 8,648 33,239

Less:Unrealized interest written off (16,993) (28,954) (23,394) (69,341)Unrealized interest recovered (note 12) (587) (746) (749) (2,082)

Foreign exchange difference (477) (407) (188) (1,072)___________ ___________ ____________ ____________

Balance at 31 December 40,403 4,424 15,357 60,184___________ ___________ ____________ ____________

2011

Corporate SMERetail and personal

banking TotalLL million LL million LL million LL million

Balance at 1 January 21,592 28,470 26,476 76,538

Add:Unrealized interest applied on non-performing loans 17,104 5,280 5,905 28,289

Less:Unrealized interest written off (103) (2,112) (473) (2,688)Unrealized interest recovered (note 12) (767) (710) (858) (2,335)

Foreign exchange difference (314) (40) (10) (364)___________ ___________ ____________ ____________

Balance at 31 December 37,512 30,888 31,040 99,440___________ ___________ ____________ ____________

In accordance with the Banking Control Commission Circular No. 240, bad loans and related provisions andunrealized interest which fulfill certain requirements have been transferred to off balance sheet accounts. Thegross balance of these loans amounted to LL 163,729 million as of 31 December 2012 (2011: LL 14,305 million).Besides, amounts recovered from off balance sheet accounts during 2012 amounted to LL 5,877 million (2011:12,419 million).

F - 196

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

47

24 LOANS AND ADVANCES TO CUSTOMERS AT AMORTISED COST (continued)

The distribution by economic sector of loans and advances to customers at amortised cost is as follows:

2012 2011LL million LL million

Manufacturing industries 3,091,234 2,167,091Individuals – excluding housing 2,528,147 2,276,419Wholesale and retail trade 2,278,118 1,843,934Financial services and brokerage 1,671,096 1,502,606Real estate services 1,222,188 885,883Construction 1,142,268 1,038,408Transportation and warehousing 1,134,051 970,876Individuals – housing 1,030,297 853,001Hotels and restaurants 451,869 364,125Electricity, gas, water and telecommunication 304,378 362,352Professional services 292,191 238,013Agriculture 129,501 53,764Extractive industry 19,784 31,902Public administration 3,194 3,535Regional and international organizations 802 2,048Others 117,285 98,220

_____________ _____________15,416,403 12,692,177

_____________ _____________

25 LOANS AND ADVANCES TO RELATED PARTIES AT AMORTISED COST

2012

Corporate SMERetail and personal

banking TotalLL million LL million LL million LL million

Overdraft accounts - 187,284 38,659 225,943Loans 8,172 - 70,396 78,568

___________ ___________ ___________ ___________8,172 187,284 109,055 304,511

___________ ___________ ___________ ___________

2011

Corporate SMERetail and personal

banking TotalLL million LL million LL million LL million

Overdraft accounts - 169,166 37,836 207,002Loans 8,295 1,076 47,293 56,664

___________ ___________ ___________ ___________8,295 170,242 85,129 263,666

___________ ___________ ___________ ___________

The distribution by economic sector of loans and advances to related parties at amortised cost is as follows:

2012 2011LL million LL million

Construction 177,021 167,979Individuals – excluding housing 66,339 57,593Real estate services 36,865 29,020Individuals – housing 21,957 7,945Hotels and restaurants 2,104 1,103Financial services and brokerage 33 26Others 192 -

_____________ _____________304,511 263,666

_____________ _____________

F - 197

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

48

26 FINANCIAL ASSETS AT AMORTISED COST

2012 2011LL million LL million

Lebanese sovereign and Central Bank of LebanonCentral Bank’s certificates of deposits 5,008,977 5,423,957Treasury bills 3,379,072 2,823,032Eurobonds 2,222,422 2,750,853

__________ __________10,610,471 10,997,842

__________ __________Other sovereign

Treasury bills 2,425,358 1,716,371Eurobonds 121,725 165,673Other governmental securities 244,427 327,543

__________ __________2,791,510 2,209,587

__________ __________Private sector and other securities

Banks and financial institutions debt instruments 853,948 660,692Corporate debt instruments 299,713 446,451Loans related to investments in equity instruments 539 482

__________ __________1,154,200 1,107,625

__________ __________14,556,181 14,315,054

Less: impairment allowance (7,065) (7,751)__________ __________

14,549,116 14,307,303__________ __________

The classification of the above instruments according to the type of interest is as follows:

2012 2011LL million LL million

Fixed interestLebanese sovereign and Central Bank of Lebanon 10,610,471 10,997,842Other sovereign 2,757,698 2,209,587Private sector and other securities 1,130,621 1,063,302

_____________ _____________14,498,790 14,270,731

_____________ _____________Variable interest

Private sector and other securities 16,370 36,429Other sovereign 33,813 -Loans related to investments in equity instruments 143 143

_____________ _____________50,326 36,572

_____________ _____________14,549,116 14,307,303

_____________ _____________

F - 198

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

49

27 FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME

The Group classified the following instruments at fair value through other comprehensive income as it intendsto hold them for strategic reasons.

The tables below list those equity instruments and dividends received:

2012Number of shares Fair value Dividends

LL million LL million

AZA Holding SAL 49,900 125,371 6,110LIA Insurance SAL (note 16) 217,063 32,199 9BankMed SAL 7.75% series “1” preferred shares 100,000 15,075 1,168Visa NC – Class “C” 63,438 14,216 66Phoenicia – Aer Rianta Co. SAL 16,354 10,729 15,076Banque de l’Habitat SAL 502,599 10,125 56Solidere International Limited 58,083 6,479 131Liban Lait SAL 8,500 5,232 -Saraya Aqaba Real Estate Development 1,965,396 3,015 2,156Master Card Inc Class B 3,814 2,778 4Kafa Holding SAL 3,268 2,049 -Kafalat 3,800 1,628 -International payment Network SAL 6,496 1,392 122Arab Trade Finance Program 122 1,366 -Abdel Wahab 618 Holding SAL 232 1,272 -Fransabank SAL 28,923 1,221 52Societe ABC SAL (bearer) 41,093 1,022 174D.F. Arem, Media Ltd 255 841 1,843Kayan 150,000 736 -C-Mobile Group Holding Ltd 5,487,273 - -Other equity instruments 9,047 3,278

___________ __________245,793 30,245

___________ __________

2011Number of shares Fair value Dividends

LL million LL million

AZA Holding SAL 49,900 118,186 6,037BBAC 8.25% N-CP preferred shares series “A” 1,200,000 18,090 1,493BankMed SAL 7.75% series “1” preferred shares 100,000 15,075 1,168C-Mobile Group Holding Ltd 5,487,273 12,795 -Phoenicia – Aer Rianta Co SAL 16,354 10,729 14,820Visa NC – Class “C” 63,364 9,698 30Liban Lait SAL 8,500 5,232 -Solidere International Limited 58,083 7,005 -Banque de l’Habitat SAL 517,599 4,359 382Saraya Aqaba Real Estate Development 1,965,396 4,179 -Kafa Holding SAL 3,268 2,049 -Blom Bank SAL “GDR” 167,900 1,886 107Fransabank SAL 28,923 1,221 47Arab Trade Finance Program 122 1,280 2Abdel Wahab 618 Holding SAL 232 1,272 -Kayan 150,000 1,049 -Societe ABC SAL (bearer) 41,093 1,022 309D.F. Arem Media Ltd 255 1 2,260Other equity instruments 8,856 1,065

__________ ____________223,984 27,720

__________ ___________

During 2012, the Group realized a gain of LL 1,416 million (2011: LL 679 million) in equity reserves upondisposal of financial assets at fair value through other comprehensive income.

F - 199

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

50

28 INVESTMENTS IN ASSOCIATES

2012 2011Country of

incorporationOwnership

%Cost

LL millionOwnership

%Cost

LL million

InvestmentsAssurex SAL Lebanon 23.82 3,540 23.92 3,555Syrian Arab for Insurance SAL Syria 36.00 8,175 49.50 14,929Pinpay SAL Lebanon 24.93 480 39.00 648Capital Outsourcing Ltd (Dubai) UAE 37.50 3,958 37.50 3,958

____________ ____________16,153 23,090

Related loansCapital Outsourcing Ltd (Dubai) UAE 18,077 20,009

____________ ____________34,230 43,099

____________ ____________

During 2012 Pinpay increased it's share capital in cash by an amount equal to LBP 1,500 million representing10,000 new shares in addition to LL 200,010 issue premium per share, conferring equal rights to theshareholders as the existing shares. The share capital of Pin-Pay after the capital increase amounts to LL 3,000million. The Bank did not subscribe in the capital increase and as a result its ownership percentage was diluted.

The Bank’s investments accounted for under the equity method are not listed on public exchanges. Thefollowing table illustrates the summarized financial information of these investments:

2012 2011LL million LL million

Share of associates’ statement of financial positionCurrent assets 23,516 41,362Non current assets 11,647 6,280Current liabilities (4,936) (6,686)Non current liabilities (18,159) (21,473)

_____________ _____________Net assets 12,068 19,483

_____________ _____________Share of associates revenues and profits

Revenues 6,348 23,886_____________ _____________

Share of profits for the year 551 5,133_____________ _____________

F - 200

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

51

29 PROPERTY AND EQUIPMENT

Land andbuildings

Installationsand fixtures

Motorvehicles

Officeequipment

andcomputerhardware

Officemachinery

and furnitureOther fixed

assets TotalLL million LL million LL million LL million LL million LL million LL million

Cost or revaluation:At 1 January 2012 436,163 159,600 4,104 104,493 92,389 16,031 812,780Entities deconsolidated during theyear (7,283) (1,056) (91) (1,043) (316) (69) (9,858)

Additions 40,496 48,897 552 30,086 15,177 1,358 136,566Disposals (19,886) (5,520) (513) (2,195) (3,498) - (31,612)Transfers to non current assetsheld for sale (32,303) (77) (189) (445) (90) (23) (33,127)

Other transfers - - - 29 (29) (88) (88)Foreign exchange difference (9,440) (6,178) (346) (2,763) (4,032) (443) (23,202)

__________ __________ ___________ ___________ ___________ __________ __________At 31 December 2012 407,747 195,666 3,517 128,162 99,601 16,766 851,459

__________ __________ __________ __________ ___________ __________ __________

Depreciation:At 1 January 2012 69,712 97,629 2,222 69,425 52,225 10,017 301,230Entities deconsolidated during theyear (576) (647) (46) (894) (269) (51) (2,483)

Charge for continuing operations 8,421 16,247 425 12,508 7,528 959 46,088Charge for discontinued operations - 624 - 382 423 - 1,429Disposals (3,541) (4,811) (283) (2,050) (3,142) - (13,827)Transfers to non current assetsheld for sale (2,076) (14) (23) (105) (79) - (2,297)

Other transfers 9 - - - (9) - -Foreign exchange difference (1,219) (2,163) (208) (2,043) (1,836) 78 (7,391)

__________ __________ __________ __________ ___________ __________ __________At 31 December 2012 70,730 106,865 2,087 77,223 54,841 11,003 322,749

__________ __________ __________ __________ ___________ __________ __________

Net book value:At 31 December 2012 337,017 88,801 1,430 50,939 44,760 5,763 528,710

__________ __________ __________ __________ ___________ __________ __________

Land andbuildings

Installationsand fixtures

Motorvehicles

Officeequipment

andcomputerhardware

Officemachinery

and furnitureOther fixed

assets TotalLL million LL million LL million LL million LL million LL million LL million

Cost or revaluation:At 1 January 2011 439,648 145,985 4,351 92,094 87,766 15,001 784,845Entities deconsolidatedduring the year - (4,148) (60) (4,851) (502) - (9,561)

Additions 3,086 23,161 608 20,963 8,763 1,342 57,923Disposals (1,932) (634) (668) (2,509) (265) (10) (6,018)Transfers - 75 - 488 (563) - -Foreign exchange difference (4,639) (4,839) (127) (1,692) (2,810) (302) (14,409)

__________ __________ ___________ ___________ ___________ __________ __________At 31 December 2011 436,163 159,600 4,104 104,493 92,389 16,031 812,780

__________ __________ __________ __________ ___________ __________ __________

Depreciation:At 1 January 2011 61,853 88,114 2,286 65,904 47,547 9,212 274,916Entities deconsolidatedduring the year - (1,212) (60) (2,696) (291) (20) (4,279)

Charge for continuing operations 8,546 12,711 550 9,244 6,806 939 38,796Charge for discontinued operations 212 122 28 147 139 1 649Disposals (564) (522) (502) (2,479) (249) (4) (4,320)Transfers - 84 - 290 (374) - -Foreign exchange difference (335) (1,668) (80) (985) (1,353) (111) (4,532)

__________ __________ __________ __________ ___________ __________ __________At 31 December 2011 69,712 97,629 2,222 69,425 52,225 10,017 301,230

__________ __________ __________ __________ ___________ __________ __________

Net book value:At 31 December 2011 366,451 61,971 1,882 35,068 40,164 6,014 511,550

__________ __________ __________ __________ ___________ __________ __________

F - 201

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

52

30 INTANGIBLE FIXED ASSETS

Keymoney

Computersoftware

Existingtechnology

Customerrelationships Other Total

LL million LL million LL million LL million LL million LL million

Cost:At 1 January 2012 5,021 47,938 - - - 52,959Entities deconsolidated

during the year - (1,104) - - - (1,104)Additions 38 45,781 - - 289 46,108Disposals - (276) - - - (276)Transfers to non current assets held

for sale (1) (160) - - - (161)Foreign exchange difference (656) (1,028) - - 2 (1,682)

___________ __________ __________ ___________ ___________ _________At 31 December 2012 4,402 91,151 - - 291 95,844

___________ __________ __________ ___________ ___________ _________Amortization:

At 1 January 2012 891 38,560 - - - 39,451Entities deconsolidated

during the year - (943) - - - (943)Charge for the year 28 7,608 - - 27 7,663Disposals - (276) - - - (276)Transfers to non current assets held

for sale (1) (147) - - - (148)Foreign exchange difference 1,317 (820) - - - 497

___________ __________ __________ ___________ ___________ _________At 31 December 2012 2,235 43,982 - - (27) 46,244

___________ __________ __________ ___________ ___________ _________Net book value:

At 31 December 2012 2,167 47,169 - - 264 49,600___________ __________ __________ ___________ ___________ _________

Key moneyComputer

softwareExisting

technologyCustomer

relationships Other TotalLL million LL million LL million LL million LL million LL million

Cost:At 1 January 2011 3,879 54,177 2,542 5,738 1,183 67,519Entities deconsolidatedduring the year - (10,881) (2,542) (5,738) (1,183) (20,344)

Additions 1,868 5,509 7,377Disposals (102) (130) - - - (232)Foreign exchange difference (624) (737) - - - (1,361)

___________ __________ __________ ___________ ___________ _________At 31 December 2011 5,021 47,938 - - - 52,959

___________ __________ __________ ___________ ___________ _________Amortization:

At 1 January 2011 352 40,157 469 1,060 13 42,051Entities deconsolidatedduring the year - (7,136) (704) (1,590) (154) (9,584)

Charge for the year 39 6,100 235 530 141 7,045Charge for discontinued operations 688 202 - - - 890Disposals (102) (130) - - - (232)Foreign exchange difference (86) (633) - - - (719)

___________ __________ __________ ___________ ___________ _________At 31 December 2011 891 38,560 - - - 39,451

___________ __________ __________ ___________ ___________ _________Net book value:

At 31 December 2011 4,130 9,378 - - - 13,508___________ __________ __________ ___________ ___________ _________

F - 202

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

53

31 NON CURRENT ASSETS HELD FOR SALE

The Group occasionally takes possession of properties in settlement of loans and advances. The Group is in theprocess of selling these properties and are as such included in non-current assets held for sale. Gains or losses ondisposal and revaluation losses are recognized in the consolidated income statement for the year.

Besides, as at 31 December 2012, the Bank continued to recognise in its financial statements the assets andliabilities from three subsidiaries which represent non-core businesses. Management expects to complete thesale of these disposal groups during 2013.

Properties acquiredin settlement of debts

Investments acquiredin settlement of debts

Other disposalgroups Total

LL million LL million LL million LL million

Cost:At 1 January 2012 27,001 - - 27,001Additions 211 - - 211Transfers 254 - 34,941 35,195Disposals (11,025) - - (11,025)Foreign exchange difference (698) - - (698)

_____________ _____________ _____________ ____________At 31 December 2012 15,743 - 34,941 50,684

_____________ _____________ _____________ ____________Impairment:

At 1 January 2011 622 - - 622Reversal due to disposals (4) - - (4)Foreign exchange difference 12 - - 12

_____________ _____________ _____________ ____________At 31 December 2012 630 - - 630

_____________ _____________ _____________ ____________

Net book value:At 31 December 2012 15,113 - 34,941 50,054

_____________ _____________ _____________ ____________

Properties acquiredin settlement of debts

Investments acquiredin settlement of debts

Other disposalgroups Total

LL million LL million LL million LL million

Cost:At 1 January 2011 30,478 15 - 30,493Additions 4,468 - - 4,468Transfers (806) (15) 706 (115)Disposals (2,886) - (706) (3,592)Adjustment (3,723) - - (3,723)Foreign exchange difference (530) - - (530)

_____________ _____________ _____________ ____________At 31 December 2011 27,001 - - 27,001

_____________ _____________ _____________ ____________Impairment:

At 1 January 2011 1,239 - - 1,239Reversal due to disposals (602) - - (602)Foreign exchange difference (15) - - (15)

_____________ _____________ _____________ ____________At 31 December 2011 622 - - 622

_____________ _____________ _____________ ____________

Net book value:At 31 December 2011 26,379 - - 26,379

_____________ _____________ _____________ ____________

F - 203

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

54

31 NON CURRENT ASSETS HELD FOR SALE (continued)

The major classes of assets and liabilities of the entities classified as held for sale as at 31 December 2012 are asfollows:

Agence Saradard’Assurances

SALClover Building

SAL

Eagle One ThirdInvestment

Company SAL TotalLL million LL million LL million LL million

AssetsIntangible fixed assets 13 - - 13Property and equipment 969 29,000 861 30,830Other assets 3,985 111 2 4,098

____________ ____________ ____________ ____________4,967 29,111 863 34,941

____________ ____________ ____________ ____________LiabilitiesOther Liabilities 3,634 11,143 22 14,799

____________ ____________ ____________ ____________3,634 11,143 22 14,799

____________ ____________ ____________ ____________

There is no cumulative income or expenses in other comprehensive income relating to assets held for sale.

32 OTHER ASSETS

2012 2011LL million LL million

Advances on acquisition of tangible fixed assets 67,819 69,932Advances on acquisition of intangible fixed assets 6,460 13,794Prepaid charges 36,194 50,480Reinsurers shares in technical provisions - 20,566Electronic cards and regularization accounts 21,790 19,181Trade receivables related to non-banking operations 2,345 17,038Advances to staff 8,124 14,849Hospitalization and medical care under collection 14,980 11,920Advances on investments 7,123 7,837Deferred tax assets (note 15) 19,629 7,632Interest and commissions to be received 3,225 5,445Funds management fees 3,152 3,737Consolidation differences - 2,860Fiscal stamps, bullions and commemorative coins 1,672 1,606Management and advisory fees receivable 495 535Miscellaneous debtors and other debtor accounts 45,155 40,759

_____________ ____________238,163 288,171

_____________ ____________

33 GOODWILL

Lebanon Switzerland Egypt Sudan United States Monaco Others TotalLL million LL million LL million LL million LL million LL million LL million LL million

Cost:At 1 January 2012 54,716 45,064 144,216 5,587 - 9,846 2,002 261,431Entities deconsolidatedduring the year - - - - - - (1,996) (1,996)

Impairment – continuingoperations - - (21,167) - - - (21,167)

Impairment – discontinuedoperations - - - - - (9,922) - (9,922)

Foreign exchangedifference - 1,667 (4,150) (3,087) - 76 (6) (5,500)

________ __________ __________ __________ __________ __________ __________ __________At 31 December 2012 54,716 46,731 118,899 2,500 - - - 222,846

________ __________ __________ __________ __________ __________ __________ __________

F - 204

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

55

33 GOODWILL (continued)

Lebanon Switzerland Egypt Sudan United States Monaco Others TotalLL million LL million LL million LL million LL million LL million LL million LL million

Cost:At 1 January 2011 54,716 45,108 149,824 5,652 8,128 10,093 3,683 277,204Entities deconsolidatedduring the year - - - - (8,128) - - (8,128)

Foreign exchangedifference - (44) (5,608) (65) - (247) (1,681) (7,645)

________ __________ __________ __________ __________ __________ __________ __________At 31 December 2011 54,716 45,064 144,216 5,587 - 9,846 2,002 261,431

________ __________ __________ __________ __________ __________ __________ __________

For the purpose of impairment testing, goodwill is allocated to the Cash Generating Units (CGUs), whichrepresent the lowest level within the Group at which the goodwill is monitored for internal managementpurposes. The cost of equity assigned to an individual CGU and used to discount its future cash flows can have asignificant effect on its valuation. The cost of equity percentage is generally derived from an appropriate capitalasset pricing model, which itself depends on inputs reflecting a number of financial and economic variablesincluding the risk rate in the country concerned and a premium to reflect the inherent risk of the business beingevaluated.

Management judgment is required in estimating the future cash flows of the CGUs. These values are sensitive tocash flows projected for the periods for which detailed forecasts are available, and to assumptions regarding theterm sustainable pattern of cash flows thereafter. While the acceptable range within which underlyingassumptions can be applied is governed by the requirement for resulting forecasts to be compared with actualperformance and verifiable economic data in future years, the cash flow forecasts necessarily and appropriatelyreflect management view of future business prospects.

The online brokerage CGU in Egypt (Arabeya Online) is a separate legal entity performing brokerage activitiesto its customers and is reported under Retail and Personal Banking business segment and MENA geographicsegment. Due to the adverse events currently witnessed in Egypt, the volume of trading activities has drasticallydropped in that market and accordingly the earnings of this CGU were significantly affected. As a result, animpairment loss on goodwill amounting to USD 14 million (equivalent to LL 21,167 million) has beenrecognised during the year ended 31 December 2012 (2011: nil). The recoverable amount of this cash-generating unit is its value in use.

Pursuant to management's decision to discontinue its banking operations carried through Bank Audi SAM(Monaco), operations in Monaco, the Goodwill attributable to that Private Banking CGU was deemed to beimpaired by effect of discontinuing the operations. The Group's activities in Monaco were included in the“Retail and Personal Banking” business segment and “Europe” geographic segment. The net results of BankAudi SAM were included under “Profit from of Discontinued Operations” in the Income Statement for the yearsended 31 December 2012 and 2011.

The following CGUs include in their carrying value goodwill that is a significant proportion of total goodwillreported by the Group. These CGUs do not carry on their statement of financial position any intangible assetswith indefinite lives, other than goodwill. The following schedule shows the discount and terminal growth ratesused for CGUs subject to impairment testing.

2012 2011

Discount Terminal Discount Terminalrate growth rate rate growth rate

% % % %Cash Generating UnitsCommercial and Private Banking – Lebanon 17.00 2.00 15.50 2.00Private Banking – Switzerland 10.00 2.00 10.00 2.00Commercial Banking – Egypt 17.00 3.00 16.50 3.00Commercial Banking – Sudan 22.00 2.00 18.00 2.00Private Banking – Monaco - - 13.00 2.00Online Brokerage – Egypt 17.00 4.00 16.50 4.00

At 31 December 2011, aggregate goodwill of LL million 2,002 was allocated to CGUs that were not consideredindividually significant.

The key assumptions described above may change as economic and market conditions change. The Groupestimates that reasonably possible changes in these assumptions are not expected to cause the recoverableamount of either unit to decline below the carrying amount.

F - 205

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

56

34 DUE TO CENTRAL BANKS

2012 2011LL million LL million

Subsidised loan 132,612 132,612Accrued interest 496 782

______________ ______________133,108 133,394

______________ ______________

During 2009, the Bank signed a credit agreement with the Central Bank of Lebanon based on the provisions ofarticle 102 of the Code of Money and Credit. The purpose of this loan is to finance subsidised loans. Interestexpense on the loan amounted to LL 4,797 million and LL 6,341 million for the years ended 31 December 2012and 2011, respectively.

35 DUE TO BANKS AND FINANCIAL INSTITUTIONS

2012 2011LL million LL million

Current accounts 180,579 308,920Term loans 512,337 324,000Time deposits 475,488 372,311Accrued interest 2,770 2,327

____________ ____________1,171,174 1,007,558

Repurchase agreements 681,487 -____________ ____________

1,852,661 1,007,558____________ ____________

The commitments arising from bank facilities received are disclosed in note 52 to these consolidated financialstatements.

During the last quarter of 2012, the Group entered into repurchase agreements against pledging treasury bills ascollateral. The terms of these agreements are as follows:

Jordan Egypt TotalLL million LL million LL million

Central Banks 126,697 114,613 241,310Other Banks - 440,177 440,177

____________ ____________ ____________126,697 554,790 681,487

____________ ____________ ____________

Carrying value of collateral 127,171 567,968 695,139Interest expense 1,787 3,364 5,151Annual interest rate 4.25% 9.75% - 10.15%

Maturity date 6 December 2013Between 2 January

and 25 February 2013

F - 206

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

57

36 CUSTOMERS’ DEPOSITS AT AMORTISED COST

2012

Corporate andSME

Retail andpersonalbanking

Publicsector Other Total

LL million LL million LL million LL million LL million

Sight deposits 1,830,807 4,632,182 42,575 547 6,506,111Time deposits 5,286,250 24,369,381 246,110 2,434 29,904,175Saving accounts 11,366 1,720,479 - - 1,731,845Certificates of deposits 9,389 850,902 - - 860,291Margins on LC’s and LG’s 286,492 58,926 - 6 345,424Other margins 66,474 149,735 - 2 216,211Other deposits 72,224 82,598 - 11 154,833

____________ _____________ _____________ ____________ _____________7,563,002 31,864,203 288,685 3,000 39,718,890

____________ ____________ ____________ ____________ ____________

Deposits pledged as collateral 3,586,547____________

2011

Corporate andSME

Retail andpersonalbanking

Publicsector Other Total

LL million LL million LL million LL million LL million

Sight deposits 1,564,690 4,065,442 39,299 1,165 5,670,596Time deposits 6,648,552 22,435,674 211,727 1 29,295,954Saving accounts 104,361 472,013 - - 576,374Certificates of deposits 648,130 18,297 - - 666,427Margins on LC’s and LG’s 345,378 63,670 - 15 409,063Other margins 148,089 107,587 - 2 255,678Other deposits 72,693 149,747 669 9 223,118

____________ _____________ _____________ ____________ _____________9,531,893 27,312,430 251,695 1,192 37,097,210

____________ ____________ ____________ ____________ ____________

Deposits pledged as collateral 3,247,424____________

Time deposits include special deposits amounting to LL 1,442,219 million as at 31 December 2012 (2011: LL1,616,854 million) that pay a preferential (simple) interest rate. The principal is settled at maturity according tothe full discretion of the Bank either in cash or in Lebanese Government Eurobonds denominated in US Dollarsand having the same nominal amount. As these deposits are linked to the credit risk of the Lebanese Republic,the Bank separated the embedded derivative and accounted for it at fair value through profit or loss.

37 DEPOSITS FROM RELATED PARTIES AT AMORTISED COST

2012Corporateand SME

Retail and personalbanking Total

LL million LL million LL million

Sight deposits 21,122 177,504 198,626Time deposits 304,578 177,703 482,281Saving accounts - 1,268 1,268Other deposits and margin accounts 6,781 145 6,926

_____________ ____________ ____________332,481 356,620 689,101

_____________ ____________ ____________

Deposits pledged as collateral 66,557____________

F - 207

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

58

37 DEPOSITS FROM RELATED PARTIES AT AMORTISED COST (continued)

2011Corporateand SME

Retail and personalbanking Total

LL million LL million LL million

Sight deposits 32,229 956 33,185Time deposits 235,128 15,243 250,371Saving accounts - 468 468Other deposits and margin accounts 483 790 1,273

_____________ ____________ ____________267,840 17,457 285,297

_____________ ____________ ____________Deposits pledged as collateral 56,732

____________

38 OTHER LIABILITIES

2012 2011LL million LL million

Current tax liabilities (note 15) 118,058 86,756Accrued expenses 59,545 52,484Miscellaneous suppliers and other payables 58,803 23,736Credit balances of factoring clients 56,740 72,218Operational taxes 32,620 32,766Employee accrued benefits 29,195 24,594Unearned commissions and premiums 12,267 14,847Deferred tax liabilities (note 15) 13,340 1,753Electronic cards and regularization accounts 6,493 5,554Social security dues 6,258 5,749Consolidation difference 2,054 -Due to National Institute for Guarantee of Deposits 1,330 271Provisions for technical reserves related to insurance operations - 312,968Reinsurers and brokers accounts - 8,270Liabilities on revaluation of share option agreements (note 44) - 185,858Other credit balances 12,162 4,263

_____________ _____________408,865 832,087

_____________ _____________

39 PROVISIONS FOR RISKS AND CHARGES

2012 2011LL million LL million

Provisions for risks and charges (a) 38,571 24,523End of service benefits (b) 56,525 48,402

_____________ _____________95,096 72,925

_____________ _____________

F - 208

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

59

39 PROVISIONS FOR RISKS AND CHARGES (continued)

a) Provisions for risks and charges2012 2011

LL million LL million

Provision for contingencies 19,510 18,638Provision for insurance risks - 1,718Provision for legal claims 1,723 1,539Provision for bonus 11,818 -Other provisions 5,520 2,628

_____________ _____________38,571 24,523

_____________ _____________

The movement of provision for risks and charges is as follows:

2012 2011LL million LL million

Balance at 1 January 24,523 27,044

Add:Charge for operating expenses (note 14) 13,088 4,388Charge for personnel expenses 11,767 -Transfer from other liabilities - 1,928

_____________ _____________24,855 6,316

_____________ _____________Less:

Paid during the year 3,997 4,075Net provisions recoveries – continued operations (note 11) 7 2,909Net provisions recoveries – discontinued operations - 750Entities deconsolidated during the year 2,019 -Transfer to other liabilities 3,981 -Foreign exchange difference 803 1,103

_____________ _____________10,807 8,837

_____________ _____________Balance at 31 December 38,571 24,523

_____________ _____________

b) End of service benefits

The movement of provision for staff retirement benefit obligation is as follows:

Defined benefitplan

Other retirementobligations Total

LL million LL million LL million

Balance at 1 January 2012 40,861 7,541 48,402Charge for the year (note 13) 9,778 3,048 12,826Transfer from deconsolidated entities 114 - 114Paid during the year (1,366) (1,542) (2,908)Transfer to non current assets held for sale (502) - (502)Deconsolidated entities (977) - (977)Foreign exchange difference (430) - (430)

_____________ _____________ _____________Balance at 31 December 2012 47,478 9,047 56,525

_____________ _____________ _____________

Balance at 1 January 2011 36,746 4,194 40,940Charge for the year (note 13) 6,668 3,549 10,217Charge for the year - discontinued operations 86 - 86Paid during the year (1,632) (202) (1,834)Provision no more required (979) - (979)Foreign exchange difference (28) - (28)

_____________ _____________ _____________Balance at 31 December 2011 40,861 7,541 48,402

_____________ _____________ _____________

F - 209

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

60

39 PROVISIONS FOR RISKS AND CHARGES (continued)

The amount provided during the year is as follows:

2012 2011LL million LL million

Current service cost 6,736 6,077Interest on obligation 4,475 4,002Expected return on plan assets (1,636) (1,602)Other termination benefits 3,048 3,549Gain on curtailments and settlements - (1,809)Net actuarial losses recognised during the year 203 -

_____________ _____________Total charge for the year 12,826 10,217

_____________ _____________

The key assumptions used in the calculation of retirement benefit obligation are as follows:

2012 2011Economic assumptionsDiscount rate (p.a.) 2.15% - 8.50% 2.90% - 8.00%Salary increase (p.a.) 2.50% - 8% 2.50% - 6.00%Interest rate credited to account balance 2.50% - 6 % 3.00% - 6.00%

Demographic assumptionsRetirement 64 - 65 64 - 65Pre – termination mortality None NonePre – termination turnover rates (age related with average of) 2.00% - 13.00% 2.00% - 15.00

40 SHARE CAPITAL

The share capital of Bank Audi SAL – Audi Saradar Group as at 31 December is as follows:

2012 2011Stock exchange Number of Number of

listing shares LL million shares LL million

Ordinary shares Beirut 247,731,553 310,656 249,358,514 312,695

Global depository receiptsLondon SEAQ and

Beirut 102,017,651 127,930 100,081,430 125,502__________ ___________ __________ ___________349,749,204 438,586 349,439,944 438,197__________ ___________ __________ ___________

Preferred shares series “D” Beirut 12,500,000 15,675 12,500,000 15,675Preferred shares series “E” Beirut 1,250,000 1,568 1,250,000 1,568Preferred shares series “F” Beirut 1,500,000 1,881 - -

__________ ___________ __________ ___________15,250,000 19,124 13,750,000 17,243

__________ ___________ __________ ___________364,999,204 457,710 363,189,944 455,440__________ ___________ __________ ___________

Pursuant to the resolution of the extraordinary general assembly of shareholders held on 10 April 2012, the Bankissued preferred shares series “F” under the following terms:

Number of shares: 1,500,000Share’s issue price: USD 100Share’s nominal value: LL 1,254Issue premium: Calculated in USD as the difference between USD 100 and the counter value

of the par value per share based on the exchange rate at the underwriting dates.Benefits: Annual dividends of USD 6 per share, non cumulative (exceptional for the 2012

fiscal year was set to USD 4 per share).Repurchase right: The Bank has the right to purchase the shares in 5 years after issuance, as well as

to call them off by that date.

F - 210

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

61

40 SHARE CAPITAL (continued)

Pursuant to the resolution of the extraordinary general assembly of shareholders held on 2 March 2010, the Bankissued 1,250,000 preferred shares series “E” according to the following terms:

Number of shares: 1,250,000Share’s issue price: USD 100Share’s nominal value: LL 1,225 (later became LBP 1,254 upon increasing the nominal value).Issue premium: Calculated in USD as the difference between USD 100 and the counter value

of the par value per share based on the exchange rate at the underwriting datesBenefits: Annual dividends of USD 6 per share, non cumulative

Repurchase right: The Bank has the right to purchase the shares in 5 years after issuance, as well asto call them off by that date

Pursuant to the resolution of the extraordinary general assembly held on 5 September 2005, the Bank issued1,250,000 preferred shares series “D” according to the following terms:

- Number of shares: 12,500,000 (after the stock split)- Share’s issue price: USD 100- Share’s nominal value: LL 10,000 (subsequently increased to LL 12,250 due to the increase of the share’s

nominal value).- Issue premium : Calculated in USD as the difference between USD 100 and the counter value

of the par value per share (LL 10,000).- Benefits: Annual dividends of USD 7.75 per share, non cumulative.- Repurchase right: The Bank has the right to purchase the shares in 5 years after issuance, as well as

to call them off by that date.

During 2012, 1,936,221 common shares were transferred to Global Depository Receipts (2011: 6,393,576shares).

In accordance with the resolution of the extraordinary general assembly of shareholders held on 22 June 2012,the Bank increased the share capital by LL 389 million by issuing 309,260 common shares at the nominal valueof LL 1,254 per share, entirely designated for options holders who exercised their rights (2011: increased theshare capital by LL 1,207 million by issuing 962,830 common shares at the nominal value of LL 1,254 pershare).

Paid dividendsIn accordance with the resolution of the general assembly of shareholders held on 10 April 2012, dividends weredistributed as follows:

2012Number of Distribution

shares per share TotalLL LL million

Preferred shares series “D” 12,500,000 1,168 14,604Preferred shares series “E” 1,250,000 9,045 11,306Common shares and Global Depository Receipts 349,439,944 603 210,712

____________236,622

____________

In accordance with the resolution of the general assembly of shareholders held on 4 April 2011, dividends weredistributed as follows:

2011Number of Distribution

shares per share TotalLL LL million

Preferred shares series “D” 12,500,000 1,168 14,604Preferred shares series “E” 1,250,000 6,030 7,538Common shares and Global Depository Receipts 346,055,290 603 208,671

____________230,813

____________

F - 211

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

62

41 ISSUE PREMIUMS

2012 2011LL million LL million

Issue premium – common shares 659,206 657,846Issue premium – preferred shares 583,876 359,633

___________ _____________1,243,082 1,017,479

___________ _____________

The movements on the issue and merger premiums are detailed as follows as at 31 December 2012 and 2011:

- The increase in common shares issue premium due to the issuance of 309,260 common shares pursuant tothe exercise of stock options (note 40). The subscribers paid the difference between USD 2.719 and thenominal amount per share based on the exchange rates at the exercise dates. Besides, an amount of LL587 million was transferred from the employees’ share-based payments reserve to the issue premium ofsubscribed shares (note 46).

- The increase in the issue premium of preferred shares for the year ended 31 December 2012 amounting toLL 224,243 million resulted from the issuance of 1,500,000 preferred shares series “F” (note 40).

- In 2011, the increase in common shares issue premium was due to the issuance of 962,830 commonshares pursuant to the exercise of stock options. The subscribers paid the difference between USD 2.719and the nominal amount per share based on the exchange rates at the exercise dates for 708,610 sharesand the difference between USD 4.033 and the nominal amount per share based on the exchange rates atthe exercise dates for 254,220 shares. An amount of LL 1,720 million was transferred from theemployees’ share-based payments reserve to the issue premium of subscribed shares (note 46).

42 CASH CONTRIBUTION TO CAPITAL

In previous years, agreements were entered between the Bank and its shareholders whereby the shareholdersgranted cash contributions to the Bank amounting to LL 72,586 million (USD 48,150,000) as at 31 December2012 and 2011subject to the following conditions:

- These contributions will remain placed as a fixed deposit as long as the Bank performs banking activities;- If the Bank incurs losses and has to reconstitute its capital, these contributions may be used to cover the losses

if needed;- The shareholders have the right to use these contributions to settle their share in any increase of capital;- No interest is due on the above contributions;- The above cash contributions are considered as part of Tier I capital for the purpose of determining the Bank’s

capital adequacy ratio; and- The right to these cash contributions is for the present and future shareholders of the Bank.

43 NON DISTRIBUTABLE RESERVES

Legalreserve

Reservesappropriated

for capitalincrease

Gain onsale of

treasuryshares

Reserve forgeneral

banking risks

Employees’share based

payments

Reserve forforeclosed

assetsOther

reserves TotalLL million LL million LL million LL million LL million LL million LL million LL million

Balance at 1 January 2012 286,273 33,453 47,076 323,971 587 5,000 - 696,360Appropriation of 2011 profits 57,901 11,174 - 63,705 - 351 153 133,284Distribution of dividends on

ordinary shares - - 443 - - --

443Employees’ share-based

payments - - - - (587) --

(587)Entities deconsolidated

during the year (8,219) - - - - --

(8,219)Treasury shares transactions - - (24,583) - - - - (24,583)Non-controlling interest share

of reserves (137) (1) - - - --

(138)Transfers between reserves 1,649 - - 6,223 - (1,626) 5,840 12,086Other movements (212) - - - - - - (212)

__________ __________ __________ __________ _________ _________ _________ __________Balance at 31 December2012 337,255 44,626 22,936 393,899 - 3,725 5,993 808,434

__________ __________ __________ _________ _________ _________ _________ __________

F - 212

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

63

43 NON DISTRIBUTABLE RESERVES (continued)

Legalreserve

Reservesappropriated

for capitalincrease

Gain onsale of

treasuryshares

Reserve forgeneral

banking risks

Employees’share based

payments

Reserve forforeclosed

assetsOther

reserves TotalLL million LL million LL million LL million LL million LL million LL million LL million

Balance at 1 January 2011 229,167 12,602 48,269 252,423 2,307 4,782 - 549,550Appropriation of 2010 profits 59,872 14,361 - 72,840 - 396 - 147,469Employees’ share-basedpayments - - - - (1,720) - - (1,720)Entities deconsolidated

during the year (348) - - - - - - (348)Treasury shares transactions - - (1,193) - - - - (1,193)Non-controlling interest

share of reserves (2,418) - - (4,977) - - - (7,395)Transfers between reserves - 6,490 - 3,316 - (178) - 9,628Other movements - - - 369 - - - 369

__________ __________ __________ __________ _________ _________ _________ __________Balance at 31 December2011 286,273 33,453 47,076 323,971 587 5,000 - 696,360

__________ __________ __________ _________ _________ __________ __________ __________

Legal reserveThe Lebanese Commercial Law and the Bank’s articles of association stipulate that 10% of the net annualprofits be transferred to legal reserve. In addition, subsidiaries and branches are also subject to legal reserverequirements based on the rules and regulations of the countries in which they operate. This reserve is notavailable for dividend distribution.

The Bank and different subsidiaries transferred to legal reserve an amount of LL 57,901 million (2011:LL 59,872 million) as required by the laws applicable in the countries in which they operate.

Reserves appropriated for capital increaseThe Bank and the subsidiaries transferred LL 11,174 million from 2012 profits (2011: LL 14,361 million) toreserves appropriated for capital increase. This amount represents the net gain on the disposal of fixed assetsacquired in settlement of debt, in addition to reserves on recovered provisions for doubtful loans and debtspreviously written off, whenever recoveries exceed booked allowances

Gain on sale of treasury sharesThese gains arise from the Global Depository Receipts (GDRs) owned by the Group. Based on the applicableregulations, the Bank does not have the right to distribute these gains.

The net loss arising from the treasury GDRs amounted to LL 24,583 million for the year ended 31 December2012 (2011: LL 1,193 million).

Reserves for general banking risksAccording to the Bank of Lebanon’s regulations, banks are required to appropriate from their annual net profit aminimum of 0.2 percent and a maximum of 0.3 percent of total risk weighted assets and off-balance sheet accountsbased on rates specified by the Central Bank of Lebanon to cover general banking risks. The consolidated ratioshould not be less than 1.25 percent of these risks by the year 2017 and 2 percent by the year 2027. This reserve ispart of the Group’s equity and is not available for distribution.

Reserve for foreclosed assetsThe reserve for foreclosed assets represents appropriation against assets acquired in settlement of debt inaccordance with the circulars of the Lebanese Banking Control Commission. Appropriations against assetsacquired in settlement of debt shall be transferred to unrestricted reserves upon the disposal of the related assets.

Other reservesIn accordance with decision 362 of the Council of Money and Credit of Syria, unrealized accumulated foreignexchange profits from the revaluation of the structural position in foreign currency maintained by the subsidiarybank in Syria are non-distributable.

F - 213

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

64

44 DISTRIBUTABLE RESERVES

Generalreserves

Reserve for shareoption

agreementsOther

reserves TotalLL million LL million LL million LL million

Balance at 1 January 2012 567,742 (185,858) (1,669) 380,215Appropriation of 2011 profits 1,505 - - 1,505Entities deconsolidated during the year (19,637) - - (19,637)Non controlling interest share of reserves (4,308) - - (4,308)Reserves for share option agreements - 6,844 - 6,844Transfers between reserves 7,767 179,014 - 186,781Other movements 6 - - 6

____________ ____________ ____________ ____________Balance at 31 December 2012 553,075 - (1,669) 551,406

____________ ____________ ____________ ____________

Generalreserves

Reserve for shareoption

agreementsOther

reserves TotalLL million LL million LL million LL million

Balance at 1 January 2011 566,218 (58,866) (1,755) 505,597Appropriation of 2010 profits 18,822 - - 18,822Entities deconsolidated during the year (4,825) - 86 (4,739)Non controlling interest share of reserves (2,295) - - (2,295)Reserves for share option agreements - (126,992) - (126,992)Transfers between reserves (10,187) - - (10,187)Other movements 9 - - 9

____________ ____________ ____________ ____________Balance at 31 December 2011 567,742 (185,858) (1,669) 380,215

____________ ____________ ____________ ____________

Reserve for share option agreementsDuring January 2010, the Bank entered into share option agreements with two structured investment vehicles(SIVs) who undertook the issuance of 5% callable notes exchangeable into shares of the Bank and maturing on19 July 2013 (the “series 1” notes). The nominal value of the issued notes amounted to USD 355 million. Theshare option agreement provides the Bank with the right but not the obligation, in its sole discretion, to purchaseor cause to be purchased, all or any part of the shares held by the SIVs. The share option agreements also causethe purchase, subject to all necessary approvals and authorisations or procure the purchase, of all or part of theBank’s shares to fund the cash reserves of the SIVs in case they were insufficient to pay their obligations whenthey fall due.

During 2012, the Bank settled an amount of LL 179,014 million to finance the cash reserves of the SIVs pursuantto their early redemption of the series 1 notes. Besides, the SIVs issued new “series 2” notes with a nominalamount of USD 205 million exchangeable into shares of the Bank, bearing 5% annual interest and maturing on 11May 2016. The series 2 notes are subject to terms and conditions similar to those described above which used to beapplicable to the series 1 notes.

45 PROPOSED DIVIDENDS

In its meeting held on 21 March 2012, the Board of Directors of Bank Audi SAL – Audi Saradar Group resolvedto propose to the annual Ordinary General Assembly the distribution of dividends of LL 603 per common shareand GDR which amounts to LL 210,194 million in total after deductions made on treasury shares held on thedate of record. Proposed dividends related to preferred shares amounted to LL 34,955 million. These dividendsare subject to the General Assembly’s approval.

F - 214

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

65

46 SHARE-BASED PAYMENTS

According to the Extraordinary General Assembly dated 2 February 2006, the Board of Directors wasauthorised to initiate a stock option plan and to issue, in accordance with law 308/2001, up to 5,000,000common shares of the Bank’s capital.

As part of the initial phase of the stock option plan, the Board of Directors resolved on 24 April 2006 to grant3,200,000 stock options. Furthermore, on 26 April 2006 the Board of Directors specified the names of thebeneficiaries and the number of rights that will be granted to each along with the related terms and conditions.On 6 May 2006, the Central Bank of Lebanon approved the share-based payment plan whereby the Bank cangrant stock options to all or certain individuals specified in article 3 of the law number 308 dated 3 April 2001.

As a result, the individuals referred to above were granted the right to subscribe in 3,200,000 common shares ofthe Bank’s capital. These stock option are vested over a period of four years and upon completion of each yearfrom the grant date. The Board of Directors can set certain growth targets to be achieved in its consolidatedearnings per share for the options to be vested. The exercise price for each option was set at USD 27.19 (USD2.719 after the stock split). The options are exercisable over a period of 2 years from the vesting date.

The Board of Directors also resolved that the vesting of one-half of the granted options is not contingent on anyconditions or target achievement. As such these options become exercisable after specified periods of timeregardless of achieving any earnings thresholds. The other half will vest and become exercisable only if theBank achieves certain growth targets in its adjusted consolidated earnings per share. For this purpose, thedetermination of the consolidated earnings per share will be based on the consolidated net income of the Group,less the amount paid in dividends in respect of preferred shares and adding back the expenses relating to theshare-based payment plan.

The growth in earnings per share is measured at each year in which these options vest against the earningsachieved at the end of the fiscal year preceding the grant date and was set at 10%, 20%, 30% and 40% to beachieved at year end 2006, 2007, 2008, and 2009, respectively. At any vesting date, in case 50% of the targetedgrowth was achieved, 50% of the performance options will vest. In case 50% to 100% of the targeted growthwas achieved, a proportionate percentage of performance options will vest. However, in case less than 50% ofthe targeted growth was achieved, then no stock options vest. The non achievement of the target leads to rollingforward the vesting date to the next year. In case the targeted growth rates were not achieved by the end of thefourth year from the grant date, the remaining unvested options will be cancelled.

Based on the above, the vested and exercised stock options are as follows:

Vested Exercised

DateNumber of

stock options DateNumber of stockoptions

26 April 2007 745,394 3 September 2007 (136,069)26 April 2008 724,765 8 July 2008 (1,230,442)26 April 2009 708,667 27 July 2009 (220,848)26 April 2010 (after the stock split) 6,929,340 1 October 2010 (after the stock split) (11,717,760 )

27 July 2011 (708,610)22 June 2012 (309,260)

The fair value of the options was determined at the grant date by using the Black-Scholes Model after takinginto consideration the terms and conditions according to which these options were granted. The following tableillustrates the model inputs used:

Dividend Yield 5% Weighted Risk-Free rate 5.7%Expected Volatility 12.1% Expected life of the option 4 yearsHistorical Volatility 12.1% Fair value per share USD 39

The expected life of the option is based on historical data and is not necessarily indicative of the exercisepatterns that may actually occur. The expected volatility reflects the assumption that the historical volatility isindicative of future trends, which may also not necessarily be the actual outcome. No other features of optionsgrants were incorporated into the measurement of fair values.

F - 215

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

66

46 SHARE-BASED PAYMENTS (continued)

In its meeting dated 10 May 2007, the Board of Directors was notified that 218,424 options related to 100beneficiaries were nullified. Furthermore, the Board of Directors resolved to grant 170,112 new Stock Optionsto 31 beneficiaries, in connection with the 5,000,000 stock-option plan. These stock options vest as follows:- 90,000 stock options over a period of four years- 80,112 stock options over a period of three years (50% during 2008; 25% during 2009 and 25% during

2010).

The exercise price for each option was set at USD 40.33 (USD 4.033 after stock split). The options areexercisable over a period of 1 or 2 years from the vesting date. The Board of Directors also resolved that thevesting of one-half of the 90,000 granted options is not contingent on any condition or target achievement. Assuch these options become exercisable after specified periods of time regardless of achieving any earningsthresholds. The other half will vest and become exercisable only if the Group achieves certain growth targets inits adjusted consolidated earnings per share against the adjusted earnings per share for the Group’s fiscal yearimmediately preceding the date of grant (2006). Regarding the 80,112 granted options, the Board of Directorsresolved that the vesting of 62.5% of these options is not contingent on any conditions or target achievement;whereas the remaining 37.5% is related to the Group’s achievement of certain growth targets in its adjustedconsolidated earnings per share on each year during the vesting period, against the adjusted earnings per sharefor the Group’s fiscal year ending on 31 December 2005.

Based on the above, the vested and exercised stock options are as follows:

Vested Exercised

DateNumber of

stock options DateNumber of

stock options

26 April 2008 57,960 8 July 2008 (56,638)26 April 2009 36,258 27 July 2009 (8,704)26 April 2010 (after the stock split) 346,860 1 October 2010 (after the stock split) (599,700)

25 July 2011 (254,220)

Targets were set as follows:- 90,000 stock options:

The growth in earnings per share is measured at each year in which these options vest against the earningsachieved at the end of the fiscal year preceding the grant date (2006) and was set at 10%, 20%, 30% and40% to be achieved at year end 2007, 2008, 2009, and 2010, respectively.

- 80,112 stock options:The growth in earnings per share is measured at each year in which these options vest against the earningsachieved at the end of the fiscal year 2005 and was set at 20%, 30% and 40% to be achieved at year end2007, 2008, and 2009, respectively.

At any vesting date, in case 50% to 100% of the target was achieved, then a proportionate percentage ofperformance options will vest. However, in case less than 50% of the targeted growth was achieved, then noperformance options vest. The non achievement of the target leads to rolling forward the vesting date to the nextyear. In case the targeted growth rates were not achieved by the end of the last year, the remaining unvestedperformance options will be cancelled.

The fair value of the options was determined by using the Black-Scholes Model after taking into considerationthe terms and conditions according to which these options were granted. The following table illustrates themodel inputs used:

Dividend Yield 3.96% Weighted Risk-Free rate 5.7%Expected Volatility 20% Expected life of the option 3 or 4 yearsHistorical Volatility 20% Fair value per share USD 53

The expected life of the option is based on historical data and is not necessarily indicative of exercise patternsthat may actually occur. The expected volatility reflects the assumption that the historical volatility is indicativeof future trends, which may also not necessarily be the actual outcome. No other features of options grants wereincorporated into the measurement of fair values.

F - 216

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

67

46 SHARE-BASED PAYMENTS (continued)

The cost of share based payments amounted to LL 40 million for the year ended 31 December 2011. This costwas accounted for under personnel expenses in the consolidated income statement and under reserve for share-based payments in shareholders’ equity (note 13).

The following table illustrates the movement in share-based payments reserve for the year ended 31 December:

2012 2011LL million LL million

Balance at 1 January 587 2,308Cost of share based payments (note 13) - 40

Less:Stock options nullified (unrealized) 107 96Stock options exercised 480 1,665

___________ ___________Balance at 31 December - 587

___________ ___________

The following table illustrates the movement in stock options granted for the year ended 31 December:

2012 2011Number of stock

optionsWeighted

average priceNumber of stock

optionsWeighted

average priceUS$ US$

Number of shares at 1 January 363,660 2.72 1,387,170 2.97

Stock options nullified (unrealized) (54,400) 2.72 (60,680) 2.86Stock options exercised (note 41) (309,260) 2.72 (962,830) 3.07

___________ ___________Number of shares at 31 December - - 363,660 2.72

___________ ___________

47 TREASURY SHARES

2012Number of Cost

GDRs LL million

Balance at 1 January 8,497,399 103,912

Purchase of treasury shares 16,087,963 49,923Sale of treasury shares (14,924,528) (133,590)

___________ ___________Balance at 31 December 9,660,834 20,245

___________ ___________

2011Number of Cost

GDRs LL million

Balance at 1 January 2,891,629 37,163

Purchase of treasury shares 6,674,434 80,054Sale of treasury shares (1,068,664) (13,305)

___________ ___________Balance at 31 December 8,497,399 103,912

___________ ___________

F - 217

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

68

48 OTHER COMPONENTS OF EQUITY

2012

Reserve for realestate revaluation

Cumulativechanges in fair

valueForeign currency

translation reserve TotalLL million LL million LL million LL million

Balance at 1 January 2012 20,375 87,228 (86,547) 21,056Other comprehensive income - (4,054) (129,732) (133,786)Entities deconsolidated during the year - 275 145 420Non-controlling interest share of reserves - 130 43,680 43,810Transfers between reserves - 3,226 (1,305) 1,921

__________ ___________ __________ __________Balance at 31 December 2012 20,375 86,805 (173,759) (66,579)

__________ ___________ ___________ __________

2011

Reserve for realestate revaluation

Cumulativechanges in fair

valueForeign currency

translation reserve TotalLL million LL million LL million LL million

Balance at 1 January 2011 18,600 217,524 (40,310) 195,814Effect of IFRS 9 early adoption - (101,875) - (101,875)Other comprehensive income - (29,713) (46,237) (75,950)Entities deconsolidated during

the year - 1,140 - 1,140Non-controlling interest share of reserves (544) (131) - (675)Transfers between reserves 2,319 283 - 2,602

__________ ___________ __________ __________Balance at 31 December 2011 20,375 87,228 (86,547) 21,056

__________ ___________ ___________ __________

Reserve for real estate revaluationDuring the year 1995, the Bank revalued certain real estate properties based on the provisions of law number282 dated 30 December 1993 and decree number 5451 dated 26 July 1994. The revaluation differencesamounted to LL 16,600 million. Another LL 2,000 million relate to the revaluation of some of the Bank’s assetsin 1994 and LL 2,319 is due to the reclassification of real estate revaluation differences made during 2011 bythe National Bank of Sudan.

Cumulative changes in fair valueThe cumulative changes as at 31 December 2012 represent the fair value differences from the revaluation offinancial assets measured at fair value through other comprehensive income.

The movement of the cumulative changes in fair value is as follows:

Change infair value

Deferredtax Net

LL million LL million LL million

Balance at 1 January 2012 87,522 (294) 87,228Other comprehensive income 5,613 (9,667) (4,054)Entities deconsolidated during the year 275 - 275Non-controlling interest share of reserves 130 - 130Transfers between reserves 3,226 - 3,226

___________ ___________ ___________Balance at 31 December 2012 96,766 (9,961) 86,805

___________ ___________ ___________

Balance at 1 January 2011 235,466 (17,942) 217,524Effect of IFRS 9 early adoption (119,755) 17,880 (101,875)Other comprehensive income (29,481) (232) (29,713)Entities deconsolidated during the year 1,140 - 1,140Non-controlling interest share of reserves (131) - (131)Transfers between reserves 283 - 283

___________ ___________ ___________87,522 (294) 87,228

___________ ___________ ___________

F - 218

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

69

49 NON-CONTROLLING INTEREST

2012 2011LL million LL million

Capital 118,613 125,141Capital reserves 21,380 16,935Retained earnings 6,781 12,461Profit for the year 13,552 6,312Other components of equity (63,488) (19,677)

___________ ___________96,838 141,172

___________ ___________

50 CASH AND CASH EQUIVALENTS2012 2011

LL million LL million

Cash and balances with Central Banks 2,160,406 1,576,501Due from banks and financial institutions 4,025,200 4,317,250Loans to banks and financial institutions and reverse repurchase

agreements 819,808 46,145Due to banks and financial institutions (731,465) (640,156)Due to banks under repurchase agreements (681,487) -

___________ ___________5,592,462 5,299,740

___________ ___________

51 FAIR VALUE OF FINANCIAL INSTRUMENTS

The following describes the methodologies and assumptions used to determine the fair values of the financialinstruments which are not recorded at fair value in the financial statements.

Assets for which fair value approximates carrying valueFor financial assets and financial liabilities that are liquid or have a short term maturity (less than three months),the Group assumed that the carrying values approximate the fair values. This assumption is also applied todemand deposits which have no specific maturity and financial instruments with variable rates.

Fixed rate financial instrumentsThe fair value of fixed rate financial assets and liabilities carried at amortised cost are estimated by comparingmarket interest rates when they were first recognised with current market rates offered for similar financialinstruments. The estimated fair value of fixed interest bearing deposits is based on discounted cash flows usingprevailing market interest rates for debts with similar credit risk and maturity. The fair value of quoted debtinstruments is determined based on quoted market prices. For those debt instruments where quoted marketprices are not available, a discounted cash flow model is used with the discount rate being the current marketyield to maturity.

Fair value of loans and advancesIn order to compute the fair value of loans and advances to customers, the Group considers that these loans willmature in principal and interest at the first day in which interest is repriced. These future cash flows have beendiscounted using the appropriate benchmark rate at the statement of financial position date for the remainingterm to maturity plus the appropriate risk premium of the customer.

F - 219

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

70

51 FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

The fair value of financial instruments that are carried at amortised cost as of 31 December 2012 is as follows:

2012Fair value Book value Unrealized gain (loss)

LL million LL million LL millionFinancial assetsCash and balances with central banks 9,462,172 9,462,380 (208)Due from banks and financial institutions 4,281,096 4,280,978 118Loans to banks and financial institutions and reverse repurchase

agreements 1,060,265 1,060,267 (2)Loans and advances to customers at amortised cost 15,497,755 15,416,403 81,352Loans and advances to related parties at amortised cost 305,040 304,511 529Financial assets at amortised cost 14,694,614 14,549,116 145,498

______________ ______________ ______________45,300,942 45,073,655 227,287

______________ ______________ ______________Financial liabilitiesDue to central banks 133,108 133,108 -Due to banks and financial institutions 1,171,265 1,171,174 (91)Due to banks under agreements 681,487 681,487 -Customers’ deposits at amortised cost 39,725,231 39,718,890 (6,341)Deposits from related parties at amortised cost 690,350 689,101 (1,249)

______________ ______________ ______________42,401,441 42,393,760 (7,681)

______________ ______________ ______________

The breakdown by major class of financial assets is as follows:

2012Fair value Book value Unrealized gain (loss)

LL million LL million LL millionNet loans and advances to customers at amortized costCorporate 9,610,690 9,574,321 36,369SME 2,487,608 2,470,816 16,792Retail and personal banking 3,266,118 3,237,924 28,194Public Sector 133,339 133,342 (3)

______________ ______________ ______________15,497,755 15,416,403 81,352

______________ ______________ ______________Net loans and advances to related parties at amortized costCorporate 8,172 8,172 -SME 187,284 187,284 -Retail and personal banking 109,584 109,055 529

______________ ______________ ______________305,040 304,511 529

______________ ______________ ______________Financial assets classified at amortized costLebanese sovereign and Central Bank 10,731,384 10,610,471 120,913Other sovereign 2,811,325 2,791,510 19,815Private sector and other securities 1,151,762 1,146,992 4,770Loans related to other comprehensive income investments 143 143 -

______________ ______________ ______________14,694,614 14,549,116 145,498

______________ ______________ ______________

The fair value of financial instruments that are carried at amortised cost as of 31 December 2011 is as follows:

2011Fair value Book value Unrealized gain (loss)

LL million LL million LL millionFinancial assetsCash and balances with central banks 8,703,068 8,703,354 (286)Due from banks and financial institutions 4,549,159 4,562,602 (13,443)Loans to banks and financial institutions and reverse repurchase

agreements 218,306 219,084 (778)Financial assets given as collateral 17,424 17,424 -Loans and advances to customers at amortised cost 12,761,582 12,692,177 69,405Loans and advances to related parties at amortised cost 264,054 263,666 388Financial assets at amortised cost 14,547,891 14,307,303 240,588

______________ ______________ ______________41,061,484 40,765,610 295,874

______________ ______________ ______________Financial liabilitiesDue to central banks 133,446 133,394 (52)Due to banks and financial institutions 1,007,724 1,007,558 (166)Due to banks under repurchase agreements - - -Customers’ deposits at amortised cost 37,097,811 37,097,210 (601)Deposits from related parties at amortised cost 285,528 285,297 (231)

______________ ______________ ______________38,524,509 38,523,459 (1,050)

______________ ______________ ______________

F - 220

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

71

51 FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

The breakdown by major class of financial assets is as follows:

2011Fair value Book value Unrealized gain (loss)

LL million LL million LL millionNet loans and advances to customers at amortized costCorporate 7,852,715 7,824,283 28,432SME 1,938,255 1,918,065 20,190Retail and personal banking 2,791,676 2,770,893 20,783Public Sector 178,936 178,936 -

______________ ______________ ______________12,761,582 12,692,177 69,405

______________ ______________ ______________Net loans and advances to related parties at amortized costCorporate 8,313 8,295 18SME 170,242 170,242 -Retail and personal banking 85,499 85,129 370

______________ ______________ ______________264,054 263,666 388

______________ ______________ ______________Financial assets classified at amortized costLebanese sovereign and Central Bank 11,285,928 10,997,842 288,086Other sovereign 2,163,162 2,209,587 (46,425)Private sector and other securities 1,098,658 1,099,731 (1,073)Loans related to other comprehensive income investments 143 143 -

______________ ______________ ______________14,547,891 14,307,303 240,588

______________ ______________ ______________

The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments byvaluation technique;

Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;

Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value areobservable market data, either directly or indirectly.

The following table shows an analysis of financial instruments recorded at fair value by fair value hierarchy at31 December:

2012Level 1 Level 2 Total

LL million LL million LL millionFINANCIAL ASSETS

Derivative financial assets 43,815 7,231 51,046____________ ____________ ____________

Financial assets at fair value through profit or lossLebanese sovereign

Central Bank’s certificates of deposits 592 10,676 11,268Treasury bills - 124,843 124,843Eurobonds 232,410 - 232,410

Other sovereignEurobonds 1,615 - 1,615

Private sector and other securities -Banks and financial institutions debt instruments 617 1,787 2,404Corporate debt instruments 10,338 2 10,340Loans and advances to customers at amortized cost - 75,555 75,555Investment and mutual funds 30,810 18,200 49,010Equity instruments 3,212 - 3,212

____________ ____________ ____________279,594 231,063 510,657

____________ ____________ ____________Financial assets designated at fair value through other comprehensive

incomePrivate sector and other securities

Equity instruments 4,308 241,485 245,793____________ ____________ ____________

4,308 241,485 245,793____________ ____________ ____________

FINANCIAL LIABILITIES

Derivative financial liabilities 51,462 4,580 56,042____________ ____________ ____________

F - 221

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

72

51 FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

2011Level 1 Level 2 Total

LL million LL million LL millionFINANCIAL ASSETS

Derivative financial assets 59,069 23,140 82,209____________ ____________ ____________

Financial assets designated at fair value through profit or lossLebanese sovereign

Treasury bills 112 461,829 461,941Eurobonds 158,999 - 158,999

Other sovereignEurobonds 322 - 322

Private sector and other securitiesBanks and financial institutions debt instruments 88,758 44,764 133,522Corporate debt instruments 15,520 - 15,520Structured products 1,029 853 1,882Investment and mutual funds 30,878 17,775 48,653Equity instruments 3,087 - 3,087

____________ ____________ ____________298,705 525,221 823,926

____________ ____________ ____________Financial assets designated at fair value through other comprehensive

incomePrivate sector and other securities

Equity instruments 5,927 218,057 223,984____________ ____________ ____________

5,927 218,057 223,984____________ ____________ ____________

FINANCIAL LIABILITIES

Derivative financial liabilities 51,248 6,999 58,247____________ ____________ ____________

The Group did not transfer any amount between level 1 and level 2 during the year ended 31 December 2012.

52 CONTINGENT LIABILITIES, COMMITMENTS AND LEASING ARRANGEMENTS

Credit-related commitments and contingent liabilitiesTo meet the financial needs of customers, the Group enters into various commitments, guarantees and othercontingent liabilities, which are mainly credit-related instruments including both financial and non-financialguarantees and commitments to extend credit. Even though these obligations may not be recognised on thestatement of financial position, they do contain credit risk and are therefore part of the overall risk of the Group.The table below discloses the nominal principal amounts of credit-related commitments and contingentliabilities. Nominal principal amounts represent the amount at risk should the contracts be fully drawn upon andclients default. As a significant portion of guarantees and commitments is expected to expire without beingwithdrawn, the total of the nominal principal amount is not indicative of future liquidity requirements.

2012Banks Customers Total

LL million LL million LL million

Guarantees and contingent liabilitiesFinancial guarantees 314,140 1,099,601 1,413,741Other guarantees 76,764 821,691 898,455

_________ _________ _________390,904 1,921,292 2,312,196

_________ _________ _________CommitmentsDocumentary credits - 353,763 353,763Undrawn credit lines - 3,508,070 3,508,070

_________ _________ _________- 3,861,833 3,861,833

_________ _________ _________

F - 222

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

73

52 CONTINGENT LIABILITIES, COMMITMENTS AND LEASING ARRANGEMENTS(continued)

2011Banks Customers Total

LL million LL million LL million

Guarantees and contingent liabilitiesFinancial guarantees 274,500 1,359,604 1,634,104Other guarantees 144,280 894,998 1,039,278

_________ _________ _________418,780 2,254,602 2,673,382

_________ _________ _________CommitmentsDocumentary credits - 387,781 387,781Undrawn credit lines - 3,527,229 3,527,229

_________ _________ _________- 3,915,010 3,915,010

_________ _________ _________

GuaranteesGuarantees are given as security to support the performance of a customer to third parties. The main types ofguarantees provided are:• Financial guarantees given to banks and financial institutions on behalf of customers to secure loans, overdrafts,

and other banking facilities; and• Other guarantees are contracts that have similar factures to the financial guarantee contracts but fail to meet the

strict definition of a financial guarantee contract under IFRS. These include mainly performance and tenderguarantees.

Documentary creditsDocumentary credits commit the Group to make payments to third parties, on production of documents, whichare usually reimbursed immediately by customers.

Undrawn credit linesUndrawn credit lines and other commitments to lend are agreements to lend a customer in the future, subject tocertain conditions. Such commitments are either made for a fixed period, or have no specific maturity but arecancellable by the lender subject to notice requirements.

Legal claimsLitigation is a common occurrence in the banking industry due to the nature of the business. The Group has anestablished protocol for dealing with such legal claims. Once professional advice has been obtained and theamount of damages reasonably estimated, the Group makes adjustments to account for any adverse effectswhich the claims may have on its financial standing. At year end, the Group had several unresolved legal claims.Based on advice from legal counsel, management believes that legal claims will not result in any materialfinancial loss to the Group.

Operating lease and capital expenditure commitments2012 2011

LL million LL million

Capital expenditure commitments 13,421 13,247Operating lease commitments – Group as lessee 50,838 63,774

Within one year 12,663 12,446One to five years 32,617 41,900More than five years 5,558 9,428

______________ ______________64,259 77,021

______________ ______________

F - 223

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

74

52 CONTINGENT LIABILITIES, COMMITMENTS AND LEASING ARRANGEMENTS(continued)

Commitments resulting from credit facilitiesThe Bank has the following commitments resulting from the credit facilities received from non-residentfinancial institutions:- The net past due loans (after the deduction of provisions) should not exceed 5 percent of the net credit

facilities granted- The provision for past due loans which includes specific and collective provisions and unrealized interest

should not fall below 70 percent of the past due loans- The net doubtful loans should not exceed 20 percent of the tier 1 capital- Sustaining a liquidity ratio exceeding 115 percent- Sustaining a capital adequacy exceeding the minimum ratio as per the regulations applied by the Central

Bank of Lebanon and the requirements of the Basel agreements to the extent it is applied by the CentralBank of Lebanon.

Other commitments and contingenciesFinancial assets at amortized cost include Lebanese government treasury bills amounting to LL 133,714 million(2011: same) pledged to the Central Bank of Lebanon against credit facilities. They also include Jordanian andEgyptian treasury bills amounting to LL 695,139 million pledged against repurchase agreements (note 35).

The extraordinary general assembly, in its meeting held on 22 June 2012, decided to acquire 29,500 shares inDawra Real Estate Company SAL representing 98.33% of its total shares for the amount of USD 3 million. Thesale contract was signed on 5 November 2012 with LIA Insurance SAL. The Bank obtained the approval for thepurchase transaction from the Central Bank of Lebanon on 29 January 2013.

The board of directors of the Bank decided, in its meeting held on 22 August 2012, to acquire 30% of EliteInsurance and Reinsurance Brokers for an amount not exceeding USD 4.5 million. The Bank obtained theapproval of the purchase transaction from the Central Bank of Lebanon on 20 November 2012. The investmenttransaction is pending on the approval of the Saudi regulatory authorities.

The Bank’s books in Lebanon remain subject to the review of the tax authorities for the period from 1 January2008 to 31 December 2012 and the review of the National Social Security Fund (NSSF) for the period from 30September 2011 to 31 December 2012. In addition, the subsidiaries’ books and records are subject to review bythe tax and social security authorities in the countries in which they operate. Management believes that adequateprovisions were recorded against possible review results to the extent that they can be reliably estimated.

During 2011, Syria, one of the significant credit markets of the Group, witnessed a period of political and civilunrest together with adverse events which can affect the economic environment of future periods. As part of itscollective provisioning process, management performed a stress test on the loan portfolio exposed to the Syrianmarket risks and, as a result, the necessary provisions were booked. The Group’s management continues tomonitor its loan portfolio and evaluate the impact of these events during 2012.

53 ASSETS UNDER MANAGEMENT

Assets under management include client assets managed or deposited with the Group. For the most part, theclients decide how these assets are to be invested.

2012 2011LL million LL million

Assets under management 11,274,636 10,522,174___________ ___________

F - 224

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

75

54 RELATED PARTY TRANSACTIONS

Parties are considered to be related if one party has the ability to control the other party or exercise significantinfluence over the other party in making financial or operation decisions, or one other party controls both. Thedefinition includes subsidiaries, associates, key management personnel and their close family members, as well asentities controlled or jointly controlled by them.

Key management personnel are defined as those persons having authority and responsibility for planning, directingand controlling the activities of the Bank, directly or indirectly. At the level of the Group, key managementpersonnel include the Chairman of the Board and members of the Group Executive Committee.

Loans to related parties, (a) were made in the ordinary course of business, (b) were made on substantially thesame terms, including interest rates and collateral, as those prevailing at the same time for comparabletransactions with others and (c) did not involve more than a normal risk of collectability or present otherunfavorable features.

Related party balances included in the Group’s Statement of Financial Position are as follows as of 31December:

2012 2011LL million LL million

Loans and advances 304,511 263,666of which: granted to key management personnel 33,207 17,431Indirect facilities 3,957 2,807Deposits 467,122 63,319Cash collateral received against loans 221,979 221,978

Related party balances included in the Group’s Income Statement are as follows for the year ended 31December:

2012 2011LL million LL million

Interest income on loans 19,902 17,132Interest expense on deposits 26,117 10,592

SubsidiariesTransactions between the Bank and its subsidiaries meet the definition of related party transactions. However,where these are eliminated on consolidation, they are not disclosed in the Group’s financial statements. Thefollowing table shows information related to the significant subsidiaries of the Bank.

Percentage of ownership Country of Principal Functional2012 2011 incorporation activity currency

Bank Audi Saradar (France) SA 100.00% 100.00% France Banking (Commercial) EURAudi Saradar Investment Bank SAL (ASIB) 100.00% 100.00% Lebanon Banking (Investment) LBPAudi Saradar Private Bank SAL (ASPB) 100.00% 100.00% Lebanon Banking (Private) LBPBanque Audi (Suisse) SA 100.00% 100.00% Switzerland Banking (Private) CHFBank Audi Syria SA * 47.00% 47.00% Syria Banking (Commercial) SYPNational Bank of Sudan 76.56% 76.56% Sudan Banking (Commercial) SDDBank Audi SAE (Egypt) 100.00% 100.00% Egypt Banking (Commercial) EGPAudi Capital (KSA) 99.99% 99.99% Saudi Arabia Financial Services SARBank Audi LLC Qatar 100.00% 100.00% Qatar Banking Services USDSociete Libanaise de Factoring SAL 90.85% 91.00% Lebanon Factoring LBPODEA Bank SA 100.00% - Turkey Banking (Commercial) TRYLIA Insurance SAL - 91.42% Lebanon Insurance LBPInfi Gamma Holding SAL 99.97% 99.97% Lebanon Investment USD

* Bank Audi SAL – Audi Saradar Group established Bank Audi Syria SA, signed a technical assistance agreement and retained de facto control over it.

F - 225

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

76

54 RELATED PARTY TRANSACTIONS (continued)

AssociatesThe Group provides banking services to its associates and to entities under common directorships. As such,loans, overdrafts, interest and non-interest bearing deposits and current accounts are provided to these entities aswell as other services. These transactions are conducted on the same terms as third-party transactions.Summarised financial information for the Group’s associates is set out in note 28 to these financial statements.Interest income on loans granted to associates amounted to LL 920 million (2011: LL 231 million).

Key Management PersonnelTotal remuneration awarded to key management personnel represents the awards made to individuals that havebeen approved by the Board Remuneration Committee as part of the latest payround decisions. Figures areprovided for the period that individuals met the definition of key management personnel.

2012 2011LL million LL million

Short-term benefits 43,703 42,702Post-employment benefits 677 488

Short-term benefits comprise of salaries, bonuses, profit-sharing, attendance fees and other benefits.

During 2011, key management personnel exercised 225,350 options.

55 RISK MANAGEMENT

As a growing financial institution with operations on three continents, the Group is faced with a constantlychanging array of business risks, some of which are:

- Credit Risk: The risk of default or deterioration in the ability of a borrower to repay a loan.

- Market risk: The risk of loss in balance sheet and off-balance sheet positions arising from movementsin market prices. Movements in market prices include changes in interest rates (including creditspreads), exchange rates and equity prices.

- Liquidity risk: The risk that the Bank cannot meet its financial obligations when they come due in atimely manner and at reasonable cost.

- Operational risk: The risk of loss resulting from inadequate or failed internal processes, people andsystems, or from external events.

- Other risks faced by the Group include concentration risk, reputation risk, legal risk andbusiness/strategic risk.

F - 226

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

77

55 RISK MANAGEMENT (continued)

Risks are managed through a process of ongoing identification, measurement and monitoring, mitigating andcontrol while being subject to risk limits and procedural controls. Risk management is important for thecontinuous profitability and solvency of the Group and every employee is tasked with the prudent managementof risks within the parameters of his or her responsibilities.

Governance

Board of DirectorsThe Board of Directors (the Board) is ultimately responsible for identifying and setting the level of tolerablerisks to which the Group is exposed, and as such defines the risk appetite for the Group. In addition, the Boardapproves policies and procedures related to all types of risks. Periodic reporting is made to the Board on existingand emerging risks in the Group. A number of management committees and departments are also responsible forvarious levels of risk management, as set out below.

Board Group Risk CommitteeThe role of the Board’s Group Risk Committee (BGRC) is to oversee the risk management framework andassess its effectiveness, review and recommend to the Board the group risk policies and risk appetite, monitorthe group risk profile, review stress tests scenarios and results, and provide access for the Group Chief RiskOfficer (CRO) to the Board. The members of the BGRC are the Group Chief Financial Officer and StrategyDirector (CFO) and two non-executive directors. The BGRC meets at least every quarter in the presence of theCRO.

Executive CommitteeThe Group Executive Committee whose mandate is to support the Board in the implementation of its strategy, tosupport the Group CEO in the day-to-day management of the Group, and to develop and implement businesspolicies for the Group and issue guidance for the Group within the strategy approved by the Board. TheExecutive Committee is involved in drafting and submitting to the Board the risk policy and risk tolerances andappetite. Executive Committee members include the Group CEO, Group Chief Risk Officer (CRO), Group CFO& Strategy Director and a number of Board members and senior managers.

Asset Liability CommitteeThe Asset Liability Committee (ALCO) is a management committee responsible in part for managing marketrisk exposures, liquidity, funding needs and contingencies. It is the responsibility of this committee to set upstrategies for managing market risk exposures and ensuring that treasury implements those strategies so thatexposures are managed within approved limits and in a manner consistent with the risk policy and limitsapproved by the Board.

Internal AuditAll risk management processes are independently audited by the internal audit department at least annually. Thisincludes the examination of both the adequacy and effectiveness of risk control procedures. Internal auditdiscusses the results of its assessments with management and reports its findings and recommendations to theaudit committee of the Board.

Group Risk DivisionThe Group Risk Division (GRD) is a function independent of business lines and headed by the Group’s CRO.The Division has the responsibility to ensure that risks are properly identified, measured, monitored, andreported to heads of business lines, senior management, ALCO, the Board Group Risk Committee and the Board.In addition, GRD works closely with senior management to assist in ensuring proper controls are set up in orderto mitigate various operational risks. GRD has the responsibility to set policies and procedures at the Group levelfor its final adoption at each entity within the Group. In addition, GRD is in charge of monitoring risks acrossthe Group and aggregating such risks. From time to time, GRD provides technical support for the variousentities within the Group in their effort to develop the local risk function within the parameters set at the Grouplevel.

Local Risk Management FunctionsLocal risk management functions vary in size depending on local needs and any additional need in humanresources is met by GRD. The roles of local risk managers are to comply with GRD policies, to assess risksusing a blend of methodologies developed at the Group level and others sometimes more attuned to their localcircumstances, to provide an independent opinion on risks and to report on them to their senior management andto their board of directors and to adapt to local needs and regulations.

F - 227

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

78

55 RISK MANAGEMENT (continued)

Risk Monitoring and ControlThe primary drivers behind monitoring and controlling risks are the Risk Appetite and Limits established by theBoard. These limits reflect the business strategy and market environment of the Group, as well as the level ofrisks that the Group is willing to tolerate.

Risk Appetite and Limits are formalized in a document which is reviewed by the Executive Committee and theBoard Group Risk Committee and approved by the Board. The Risk Appetite and Limits comprise limits tovarious types of risk and to which the Bank is exposed to.

Information independently compiled from all business lines and risk-taking units is examined and processed inorder to identify and measure the risk profile. The results are reported and presented on a regular basis toManagement and to the Board.

56 CREDIT RISK

Credit risk is the risk that the Group will incur a loss because its customers or counterparties fail to dischargetheir contractual obligations. Credit risk appetites and strategies are set at the Group level by the Board and arecommunicated to senior management, which in turn formulates credit policies and procedures in line with thesestrategies. These policies are approved by the Executive Committee and the Board and are reviewed on anannual basis.

Credit LimitsThe Group controls credit risk by setting limits on the amount of risk it is willing to accept for individualcounterparties and for geographical and industry concentration, and by monitoring exposures in relation to suchlimits. These limits are set for the following classes of assets:

Financial institutionsPercentage floors and absolute limits are set on the Group’s deposits that should be placed with highly ratedfinancial institutions.

Sovereign exposure and other financial instrumentsLimits are placed on sovereign exposures and other financial instruments according to ratings of the instrumentsand risk appetite of the Group as determined by the Board mainly for foreign currency-denominated issues.

Loans and advances to customersThe Group sets limits per country, economic sector, tenor of the loan, rating, and group of obligors amongothers in order to avoid significant risk concentrations.

Credit Granting and Monitoring ProcessesThe Group has set clearly established processes related to loan origination, documentation and maintenance ofextensions of credits.

InitiationInitiation of the credit facilities is done by the business originating function which is shared between branchesand the corporate and commercial departments.

AnalysisCredit analysis is performed within the business originating function and is reviewed independently by the creditrisk management department, which in turn prepares a written opinion about the credit facilities and submits itto the respective credit committees.

F - 228

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

79

56 CREDIT RISK (continued)

Credit Granting and Monitoring Processes (continued)

ApprovalCredit committees are exclusively responsible for the approval of facilities per obligor and geographical entityup to the limit assigned to them. The Group has various levels of credit approving authorities, depending on thenature and limit of the requested facilities, namely:

The Board of Directors The Executive Committee Other Credit Committees, depending on the limit and region.

Once approved by the credit committee, facilities are disbursed when all requirements set by the respectivecommittee are met and documents intended as security are reviewed and verified by the credit administrationfunction.

MonitoringThe Group maintains continuous monitoring in the quality of its portfolio. Timely reports are sent to theExecutive Committee and to the Board detailing credit risk profile including Group follow-up accounts, largeexposures, risk ratings and concentration by industry, geography and group of obligors.

Recovery and RestructuringThe Group assesses impaired loans by evaluating the exposure to loss, on a case by case basis. They are directlymanaged by the recovery and restructuring department which is responsible for formulating a workout strategy,in coordination with the legal & compliance department. Credit committees are responsible for approving theseworkout strategies.

Provisioning PolicyIn the normal course of business, some loans may become unrecoverable. Such loans would then be required tobe partially or fully written-off after taking into consideration the following guidelines:

a) The loan is written-off with proper approval when: All efforts to recover the bad debt have failed. The borrower’s bankruptcy or inability to repay is established. Legal remedies have proved to be futile and/or cost prohibitive.

b) Requests for write-offs are to be submitted to the Remedial Committee for approval. Approvedwrite-offs are notified to the Executive Committee and then to the Board.

As part of the conservative approach to sustain the quality of the Group’s loan portfolio, an evaluation of loanloss provisions is made on a quarterly basis. As such, all adversely classified accounts are reviewed on aquarterly basis (earlier if need be) and the recovery and restructuring department makes recommendation forspecific provisions against the accounts. These recommendations are submitted to the remedial committee forapproval before they are implemented. In this regard, mainly for tax reasons, specific approval from regulatoryauthority might be necessary depending on the regulatory environment of the concerned entity.

Besides, impairment is assessed on a collective basis for loans that are not individually impaired.

Derivative Financial InstrumentsCredit risk arising from derivative financial instruments is, at any time, limited to those with positive fair values,as recorded in the statement of financial position. In the case of credit derivatives, the Group is also exposed toor protected from the risk of default of the underlying entity referred by the derivative.

F - 229

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

80

56 CREDIT RISK (continued)

Management of Risk ConcentrationCredit concentrations arise when a number of counterparties are engaged in similar business activities in thesame geographic region or have similar economic features that would cause their ability to meet contractualobligations to be similarly affected by changes in economic, political and other conditions. Concentrationsindicate the relative sensitivity of the Group’s performance to developments affecting a particular industry orgeographical location. Similarly for liquidity, concentration is measured with respect to the source and type offunding.

In order to avoid excessive concentrations of risk, the Group’s Risk Appetite and Limits document includespecific guidelines and limits to maintain a diversified funding and portfolio, including board-approvedmeasures in line with the pillar 2 requirements.

Credit-Related Commitments RisksThe Group makes available to its customers guarantees which may require payments on their behalf. Suchpayments are collected from customers based on the terms of the letter of credit. They expose the Group to similarrisks to loans and these are mitigated by the same control processes and policies.

Where financial instruments are recorded at fair value, the amounts shown below represent the current credit riskexposure but not the maximum risk exposure that could arise in the future as a result of changes in values.

F - 230

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

81

56 CREDIT RISK (continued)

Analysis to maximum exposure to credit risk and collateral and other credit enhancementsThe following table shows the maximum exposure to credit risk by class of financial asset. It further shows the total fair value of collateral, capped to the maximum exposure to which it relates and thenet exposure to credit risk.

2012

Maximumexposure

Cash collateraland margins Securities

Guarantees receivedfrom banks and

financial institutionsReal

estateOther

guaranteesNetting

agreementsNet creditexposure

LL million LL million LL million LL million LL million LL million LL million LL million

Cash and balances with central banks 9,213,033 - - - - - - 9,213,033Due from banks and financial institutions 4,280,978 - - 1,149 - - - 4,279,829Loans to banks and financial institutions and reverse repurchase

agreements 1,060,267 - 786,466 - - - - 273,801Derivative financial instruments 48,707 - - - - - - 48,707Financial assets at fair value through profit or loss 458,435 - - - - - - 458,435

Loans and advances to customers at amortised cost 15,416,403 2,593,801 1,750,630 356,700 2,919,554 662,665 13,727 7,119,326Corporate 9,574,321 1,184,225 1,491,882 266,781 1,400,670 403,783 618 4,826,362SME 2,470,816 511,548 20,226 82,125 398,446 122,354 13,109 1,323,008Retail and personal banking 3,237,924 898,028 238,522 7,794 1,120,438 136,528 - 836,614Public sector 133,342 - - - - - - 133,342

Loans and advances to related parties at amortized cost 304,511 221,979 - 225 33,705 1,314 - 47,288Debtors by acceptances 182,715 17,883 - 251 7,378 9,949 1 147,253Financial assets at amortized cost 14,549,116 - - - - - 1,463,553 13,085,563

Contingent liabilities 1,767,504 191,060 9,507 35,712 86,694 3,306 3 1,441,222Letters of credit 353,763 52,308 - 90 8,260 2,528 - 290,577Letters of guarantee given to banks and financial institutions 314,140 43,586 - 13,849 - - - 256,705Letters of guarantee given to customers 1,099,601 95,166 9,507 21,773 78,434 778 3 893,940

____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________Total 47,281,669 3,024,723 2,546,603 394,037 3,047,331 677,234 1,477,284 36,114,457

____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________Guarantees received from banks, financial institutions and

customersUtilized collateral 3,024,723 2,546,603 394,037 3,047,331 677,234 - 9,689,928Surplus of collateral before undrawn credit lines 628,382 619,724 53,902 630,893 1,905,166 - 3,838,067

____________ ____________ ____________ ____________ ____________ ____________ ____________3,653,105 3,166,327 447,939 3,678,224 2,582,400 - 13,527,995

____________ ____________ ____________ ____________ ____________ ____________ ____________

The surplus of collateral mentioned above is presented before offsetting additional credit commitments given to customers amounting to LL 3,508,070 million as at 31 December 2012.

F - 231

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

82

56 CREDIT RISK (continued)

2011

Maximumexposure

Cash collateraland margins Securities

Guarantees receivedfrom banks and

financial institutionsReal

estateOther

guaranteesNetting

agreementsNet creditexposure

LL million LL million LL million LL million LL million LL million LL million LL million

Cash and balances with central banks 8,425,244 - - - - - - 8,425,244Due from banks and financial institutions 4,562,602 - - - - - - 4,562,602Loans to banks and financial institutions and reverse repurchase

agreements 219,084 - --

- - - 219,084Financial assets given as collateral 17,424 - - - - - - 17,424Derivative financial instruments 76,573 - - - - - - 76,573Financial assets at fair value through profit or loss 772,186 - - - - - - 772,186

Loans and advances to customers at amortised cost 12,692,177 2,208,033 1,529,788 388,858 2,362,275 727,451 4,611 5,471,161Corporate loans 7,824,283 844,174 1,257,236 306,830 1,008,576 541,922 382 3,865,163SME loans 1,918,065 559,184 76,638 66,770 499,998 107,639 2,064 605,772Retail loans and personal banking 2,770,893 804,675 195,914 15,258 853,701 77,890 2,165 821,290Public sector 178,936 - - - - - - 178,936

Loans and advances to related parties at amortized cost 263,666 221,978 - 388 15,870 304 - 25,126Debtors by acceptances 280,819 30,361 1,110 34,261 17,499 4,908 67 192,613Financial assets at amortized cost 14,307,303 - - - - - 1,657,474 12,649,829

Contingent liabilities 2,021,885 343,077 7,748 27,842 18,723 131,048 33 1,493,414Letters of credit 387,781 81,740 775 387 5,692 15,455 - 283,732Letters of guarantee given to banks and financial institutions 274,500 52,492 - 3,101 - - - 218,907Letters of guarantee given to customers 1,359,604 208,845 6,973 24,354 13,031 115,593 33 990,775

____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________Total 43,638,963 2,803,449 1,538,646 451,349 2,414,367 863,711 1,662,185 33,905,256

____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________Guarantees received from banks, financial institutions and

customersUtilized collateral 2,803,449 1,538,646 451,349 2,414,367 863,711 - 8,071,522Surplus of collateral before undrawn credit lines 500,708 690,153 61,597 854,614 2,177,599 - 4,284,671

____________ ____________ ____________ ____________ ____________ ____________ ____________3,304,157 2,228,799 512,946 3,268,981 3,041,310 - 12,356,193

____________ ____________ ____________ ____________ ____________ ____________ ____________

The surplus of collateral mentioned above is presented before offsetting additional credit commitments given to customers amounting to LL 3,527,229 million as at 31 December 2011.

F - 232

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

83

56 CREDIT RISK (continued)

Analysis to maximum exposure to credit risk and collateral and other credit enhancements

Collateral and Other Credit EnhancementsThe amount and type of collateral required depends on an assessment of the credit risk of the counterparty.Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters.

Management monitors the market value of collateral, requests additional collateral in accordance with theunderlying agreement and monitors the market value of collateral obtained during its review of the adequacy of theallowance for impairment losses.

The main types of collateral obtained are as follows:

Securities: The balances shown above represent the fair value of the securities.

Letters of credit / guarantees: The Group holds in some cases guarantees, letters of credit and similarinstruments from banks and financial institutions which enable it to claim settlement in the event of default onthe part of the counterparty. The balances shown represent the notional amount of these types of guarantees heldby the Group.

Real estate (commercial and residential): The Group holds in some cases a first degree mortgage overresidential property (for housing loans) and commercial property (for commercial loans). The value shownabove reflects the fair value of the property limited to the related mortgaged amount.

Netting agreements: The Group makes use of netting agreements where there is a legally enforceable right tooffset in the event of counterparty default and where as a result there is a net exposure for credit risk. However,there is no intention to settle these balances on a net basis under normal circumstances, and they do not qualifyfor offset. The amounts above represent available netting agreements in the event of default of the counterparty.

This includes netting agreements for loans and advances to customers and financial assets at amortized cost. Inaddition, derivatives may also be settled net when there is a netting agreement in place providing for this in theevent of default, reducing the Group’s exposure to counterparties on derivative asset positions. The reduction inrisk is the amount of liability held.

In addition to the above, the Group also obtains guarantees from parent companies for loans to their subsidiaries,personal guarantees for loans to companies owned by individuals, second degree mortgages, and assignments ofinsurance or bills proceeds and revenues, which are not reflected in the above table.

Renegotiated LoansRestructuring activity aims to manage customer relationships, maximize collection opportunities and, ifpossible, avoid foreclosure or repossession. Such activities include extended payment arrangements, deferringforeclosure, modification, loan rewrites and/or deferral of payments pending a change in circumstances.

Restructuring policies and practices are based on indicators or criteria which, in the judgment of localmanagement, indicate that repayment will probably continue. The application of these policies varies accordingto the nature of the market and the type of the facility.

2012 2011LL million LL million

Corporate 181,371 181,264SME 11,203 14,544Retail and personal banking 1,359 232

______________ ______________193,933 196,040

______________ ______________

F - 233

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

84

56 CREDIT RISK (continued)

Credit Rating SystemThe Group assesses the quality of its credit portfolio using the following credit rating methods:

(i) External ratings from approved credit rating agencies for financial institutions, financial assets andlarge corporate borrowers.

(ii) Expert-judgment models which take into consideration financial factors as well as non-financialfactors such as observations on management quality, operating environment and companystanding. In addition to the exiting Corporate model, two SMEs models have been designed androlled out in 2012. The Bank has also initiated the design of a Project Finance model tocomplement the existing models and accurately rate and rank-order Project Finance obligors.

(iii) Scorecards for retail borrowers which help in assessing their creditworthiness, evaluating potentialrisk and arriving at a final credit decision.

(iv) Supervisory ratings, comprising six main categories: (a) Regular includes borrowers demonstratinggood to excellent financial condition, risk factors, and capacity to repay. These loans demonstrateregular and timely payment of dues, adequacy of cash flows, timely presentation of financialstatements, and sufficient collateral / guarantee when required. (b) Follow-up represents a lack ofdocumentation related to a borrower’s activity, an inconsistency between facilities’ type andrelated conditions. (c) Follow-up and regularisation includes credit worthy borrowers requiringclose monitoring without being impaired. These loans might be showing weaknesses; insufficientor inadequate cash flows; highly leveraged; deterioration in economic sector or country where thefacility is used; loan rescheduling more than once since initiation; or excess utilization above limit.(d) Substandard loans include borrowers with incapacity to repay from identified cash flows. Alsoincluded under this category are loans where full repayments supposes the liquidation of assets /collateral or those with recurrent late payments and financial difficulties. (e) Doubtful loans wherefull repayment is questioned even after asset liquidation of collateral. It also includes loansstagnating for over 6 months and debtors who are unable to repay restructured loans. Finally, (f)Bad loans with no or little expected inflows from business or assets. This category also includesborrowers who witness significant delays and are insolvent.

Credit QualityThe table below shows the credit quality by class of asset for all financial assets exposed to credit risk, based onthe Group’s internal credit rating system. The amounts presented are gross of impairment allowances.

2012Past due and impaired

Neither past duenor impaired

Past due butnot impaired Substandard

Doubtful andbad Total

LL million LL million LL million LL million LL million

Cash and balances with central banks 9,213,033 - - - 9,213,033Due from banks and financial institutions 4,280,978 - - 998 4,281,976Loans to banks and financial institutions and

reverse repurchase agreements 1,060,267 - - - 1,060,267Derivative financial instruments 48,707 - - - 48,707Financial assets at fair value through

profit or loss 458,435 - - - 458,435Loans and advances to customers at amortised

cost 15,072,862 390,484 17,750 437,234 15,918,330Loans and advances to related parties at

amortised cost 304,511 - - - 304,511Financial assets at amortised cost 14,547,829 - - 8,352 14,556,181

_____________ ___________ ___________ ___________ ____________44,986,622 390,484 17,750 446,584 45,841,440

_____________ ___________ ___________ ___________ ____________Loans and advances:Corporate 9,358,813 242,450 12,867 316,895 9,931,025SME 2,639,902 28,772 1,761 20,629 2,691,064Retail and personal banking 3,246,170 119,262 3,122 95,124 3,463,678Public sector 132,488 - - 4,586 137,074

____________ ___________ ___________ ___________ ____________15,377,373 390,484 17,750 437,234 16,222,841

____________ ___________ ___________ ___________ ____________

F - 234

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

85

56 CREDIT RISK (continued)

Credit Quality (continued)2011Past due and impaired

Neither past duenor impaired

Past due butnot impaired Substandard

Doubtful andbad Total

LL million LL million LL million LL million LL million

Cash and balances with central banks 8,425,244 - - - 8,425,244Due from banks and financial institutions 4,562,260 - - 1,370 4,563,630Loans to banks and financial institutions and

reverse repurchase agreements 219,084 - - - 219,084Financial assets given as collateral 17,424 - - - 17,424Derivative financial instruments 76,573 - 76,573Financial assets at fair value through profit or

loss 771,333 - - - 771,333Loans and advances to customers at amortised

cost 12,248,030 389,310 133,414 389,401 13,160,155Loans and advances to related parties at

amortised cost 263,666 - - - 263,666Financial assets at amortised cost 14,306,085 - - 8,969 14,315,054

_____________ ___________ ___________ ___________ ____________40,889,699 389,310 133,414 399,740 41,812,163

_____________ ___________ ___________ ___________ ____________Loans and advances:Corporate 7,538,137 213,114 123,539 186,695 8,061,485SME 2,052,885 43,687 2,348 77,063 2,175,983Retail and personal banking 2,737,163 132,509 7,527 125,643 3,002,842Public sector 183,511 - - - 183,511

____________ ___________ ___________ ___________ ____________12,511,696 389,310 133,414 389,401 13,423,821

____________ ___________ ___________ ___________ ____________

The aging analysis of past due but not impaired loans and advances to customers at amortised cost as at 31December are as follows:

2012Less than 30

days31 to 60

days61 to 90

daysMore than

91 days TotalLL million LL million LL million LL million LL million

Corporate 32,992 76,609 6,919 125,930 242,450SME 3,701 8,190 1,527 15,354 28,772Retail and personal banking 51,435 27,305 19,382 21,140 119,262

___________ ___________ ___________ ___________ ___________88,128 112,104 27,828 162,424 390,484

___________ ___________ ___________ ___________ ___________

2011Less than 30

days31 to 60

days61 to 90

daysMore than 91

days TotalLL million LL million LL million LL million LL million

Corporate 58,246 51,204 23,734 79,930 213,114SME 7,148 6,571 7,501 22,466 43,686Retail and personal banking 73,651 23,988 19,911 14,960 132,510

___________ ___________ ___________ ___________ ___________139,045 81,763 51,146 117,356 389,310

___________ ___________ ___________ ___________ ___________

F - 235

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAt 31 December 2012

86

56 CREDIT RISK (continued)

The classification of loans and advances to customers and related parties at amortised cost as in accordance withthe ratings of Central Bank of Lebanon circular 58 are as follows:

2012Gross

balanceUnrealised

interestImpairmentallowances

Netbalance

LL million LL million LL million LL million

Regular 14,501,112 - - 14,501,112Follow up 228,875 - - 228,875Follow up and regularization 1,037,870 - - 1,037,870Substandard 17,750 (1,835) - 15,915Doubtful 220,530 (28,388) (112,097) 80,045Bad 216,704 (29,961) (162,994) 23,749

_____________ _____________ _____________ _____________16,222,841 (60,184) (275,091) 15,887,566

_____________ _____________ _____________ _____________Collective impairment - - (166,652) (166,652)

_____________ _____________ _____________ _____________16,222,841 (60,184) (441,743) 15,720,914

_____________ _____________ _____________ _____________

2011Gross

balanceUnrealised

interestImpairmentallowances

Netbalance

LL million LL million LL million LL million

Regular 11,903,653 - - 11,903,653Follow up 154,795 - - 154,795Follow up and regularization 842,558 - - 842,558Substandard 133,414 (15,988) - 117,426Doubtful 157,860 (30,070) (60,082) 67,708Bad 231,541 (53,382) (156,933) 21,226

_____________ _____________ _____________ _____________13,423,821 (99,440) (217,015) 13,107,366

_____________ _____________ _____________ _____________Collective impairment - - (151,523) (151,523)

_____________ _____________ _____________ _____________13,423,821 (99,440) (368,538) 12,955,843

_____________ _____________ _____________ _____________

F - 236

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 31 December 2012

87

56 CREDIT RISK (continued)

The classification of the Group financial instruments and balances due from banks and financial institutions as per international ratings are as follows:

2012Sovereign and Central Banks Non – Sovereign

AAA to AA- A+ to BBB- BB+ to B- Unrated Total AAA to AA- A+ to BBB- BB+ to B- Unrated Total Grand totalLL million LL million LL million LL million LL million LL million LL million LL million LL million LL million LL million

Cash and balances withcentral banks 449,366 339,480 8,395,262 28,925 9,213,033 - - - - - 9,213,033

Due from banks andfinancial institutions - - - - - 1,180,968 2,624,431 114,388 361,191 4,280,978 4,280,978

Loans to banks and financialinstitutions and reverserepurchase agreements - - - - - - 892,480 91,185 76,602 1,060,267 1,060,267

Financial assets at fair valuethrough profit or loss 1,614 - 368,521 - 370,135 82,605 3,905 1,788 2 88,300 458,435

Financial assets at amortisedcost 146,431 79,124 13,142,614 33,813 13,401,982 123,163 839,192 148,797 35,982 1,147,134 14,549,116

__________ __________ ___________ _________ _________ __________ ____________ __________ ___________ ___________ ___________597,411 418,604 21,906,397 62,738 22,985,150 1,386,736 4,360,008 356,158 473,777 6,576,679 29,561,829

__________ __________ ___________ _________ _________ __________ ____________ __________ ___________ ___________ ___________

2011Sovereign and Central Banks Non – Sovereign

AAA to AA- A+ to BBB- BB+ to B- Unrated Total AAA to AA- A+ to BBB- BB+ to B- Unrated Total Grand totalLL million LL million LL million LL million LL million LL million LL million LL million LL million LL million LL million

Cash and balances withcentral banks 309,977 19,632 8,095,636 - 8,425,245 - - - - - 8,425,245

Due from banks andfinancial institutions - - - - - 2,728,964 1,231,993 189,597 412,048 4,562,602 4,562,602

Loans to banks and financialinstitutions and reverserepurchase agreements - - - - - - 101,337 56,979 60,768 219,084 219,084

Financial assets given ascollateral - - - - - 16,935 40 - 449 17,424 17,424

Financial assets at fair valuethrough profit or loss 322 - 620,940 - 621,262 15,601 - 134,470 - 150,071 771,333

Financial assets at amortisedcost 224,189 16,407 12,966,833 - 13,207,429 386,291 434,994 222,517 56,072 1,099,874 14,307,303

__________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________534,488 36,039 21,683,409 - 22,253,936 3,147,791 1,768,364 603,563 529,337 6,049,055 28,302,991

__________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________

F - 237

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 31 December 2012

88

56 CREDIT RISK (continued)

The Group controls credit risk by setting credit limits on the amount of risk its is willing to accept by geographic location. The distribution of financial assets by geographic region as of 31 Decemberare as follows:

2012

Lebanon Turkey MENA EuropeNorth

America AsiaRest ofAfrica

Rest of theworld Total

LL million LL million LL million LL million LL million LL million LL million LL million LL million

Cash and balances with central banks 8,038,803 344,680 829,122 249,775 - - - - 9,462,380Due from banks and financial institutions 226,145 269,663 521,362 2,764,257 440,939 51,767 - 6,845 4,280,978Loans to banks and financial institutions and reverse

repurchase agreements 54,452 978,618 - 27,197 - - - - 1,060,267Derivative financial instruments 13,284 727 1,463 35,176 - 60 32 304 51,046Financial assets at fair value through profit or loss 373,742 - 40,778 92,697 3,440 - - - 510,657Loans and advances to customers at amortised cost 6,985,775 1,466,330 5,695,716 566,863 61,016 20,542 417,804 202,357 15,416,403Loans and advances to related parties at amortised cost 268,787 - 34,517 1,067 - 1 - 139 304,511Debtors by acceptances 107,164 - 27,957 12,065 4,466 1,522 24,124 5,417 182,715Financial assets at amortized cost 10,751,890 65,860 3,197,748 323,871 28,633 117,326 - 63,788 14,549,116Financial assets at fair value through

other comprehensive income 218,602 - 8,891 1,306 16,994 - - - 245,793___________ ___________ ____________ ____________ ____________ ____________ ____________ ____________ ____________

27,038,644 3,125,878 10,357,554 4,074,274 555,488 191,218 441,960 278,850 46,063,866___________ ___________ ____________ ____________ ____________ ____________ ____________ ____________ ____________

2011Lebanon Turkey MENA Europe North America Asia Rest of Africa Rest of the world Total

LL million LL million LL million LL million LL million LL million LL million LL million LL million

Cash and balances with central banks 7,319,870 - 1,051,684 331,800 - - - - 8,703,354Due from banks and financial institutions 304,388 - 355,128 3,123,353 472,661 187,939 - 119,133 4,562,602Loans to banks and financial institutions and reverse

repurchase agreements 56,127 56,630 79,146 27,181 - - - - 219,084Financial assets given as collateral 8,978 - 489 7,957 - - - - 17,424Derivative financial instruments 8,890 - 2,485 66,579 21 1,483 1,751 1,000 82,209Financial assets at fair value through profit or loss 758,754 - 49,584 15,588 - - - - 823,926Loans and advances to customers at amortised cost 5,635,084 - 5,714,396 792,248 3,920 14,505 440,400 91,624 12,692,177Loans and advances to related parties at amortised cost 228,752 - 34,893 - - - - 21 263,666Debtors by acceptances 114,365 - 119,269 1,312 - 152 37,304 8,417 280,819Financial assets at amortised cost 11,119,357 - 2,560,630 389,654 104,149 114,682 - 18,831 14,307,303Financial assets at fair value through

other comprehensive income 186,972 - 13,199 1,142 9,710 166 - 12,795 223,984____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________

25,741,537 56,630 9,980,903 4,756,814 590,461 318,927 479,455 251,821 42,176,548____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________

F - 238

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 31 December 2012

89

57 MARKET RISK

Market risk is defined as the potential loss in both on balance sheet and off-balance sheet positions resultingfrom movements in market risk factors such as foreign exchange rates, interest rates and equity prices.

The market risk unit’s responsibilities are to identify, measure, report, and monitor all potential and actualmarket risks to which the Group is exposed. The purpose is to introduce transparency around the treasury,investment portfolio, and asset and liability risk profile through consistent and comprehensive riskmeasurements, aggregation, management and analysis. Policies are set and limits monitored in order to ensurethe avoidance of large, unexpected losses and the consequent impact on the Group’s safety and soundness.

Tools developed in-house by a centralized unit of specialists offer a holistic view of risk exposures and arecustomized to meet the requirements of all end users (Group Risk, Senior Management, Business Lines and LegalCompliance). Stress scenarios now include the various manifestations of the credit crisis such as increasedvolatilities and correlations and widening of credit spreads.

A. CURRENCY RISKForeign exchange (or currency) risk is the risk that the value of a portfolio will fall as a result of changes inforeign exchange rates. The major sources of this type of market risk are imperfect correlations in themovements of currency prices and fluctuations in interest rates. Therefore, exchange rates and relevant interestrates are acknowledged as distinct risk factors.

The Central Bank of Lebanon allows the Bank to maintain a currency exchange position, receivable or payable,that does not exceed at any time 1% of total net equity on condition that the global currency exchange positiondoes not exceed 40% of total net equity. This is subject to the Bank’s commitment to comply in a timely andconsistent manner with the required solvency rate.

In addition to regulatory limits, the Board has set limits on positions by currency. These positions are monitoredconstantly to ensure they are maintained within established limits.

The following tables present the breakdown of assets and liabilities by currency:

2012LL USD GBP EUR TRY Other Total

LL million LL million LL million LL million LL million LL million LL millionAssetsCash and balances with central banks 2,042,183 5,329,506 4,942 1,027,787 228,683 829,279 9,462,380Due from banks and financial institutions 45,840 2,666,196 164,240 712,760 204,410 487,532 4,280,978Loans to banks and financial institutions and reverse

repurchase agreements 53,916 141,069 - 78,195 787,087 - 1,060,267Derivative financial instruments - 13,301 3,646 21,278 2,387 10,434 51,046Financial assets at fair value through profit or loss 135,519 269,473 - 83,619 - 22,046 510,657Loans and advances to customers at amortised cost 1,333,523 9,098,148 154,923 1,268,262 710,502 2,851,045 15,416,403Loans and advances to related parties at

amortised cost 27,142 272,852 21 2,429 - 2,067 304,511Debtors by acceptances - 128,111 1,320 44,042 - 9,242 182,715Financial assets at amortised cost 6,252,800 5,417,652 - 185,955 65,860 2,626,849 14,549,116Financial assets at fair value through other

comprehensive income 52,525 176,260 - 9,483 - 7,525 245,793Investments in associates 3,553 22,503 - - - 8,174 34,230Non current assets held for sale 1,738 44,994 - 616 - 2,706 50,054Property and equipment 292,330 949 - 7,130 34,774 193,527 528,710Intangible fixed assets 28,477 - - 1,147 14,964 5,012 49,600Other assets 66,104 59,116 92 13,545 22,588 76,718 238,163Goodwill - 54,715 - (463) - 168,594 222,846

__________ __________ __________ __________ __________ __________ __________Total assets 10,335,650 23,694,845 329,184 3,455,785 2,071,255 7,300,750 47,187,469

__________ __________ __________ __________ __________ __________ __________Liabilities and shareholders’ equityDue to central banks 133,108 - - - - - 133,108Due to banks and financial institutions 17,602 817,118 2,135 81,793 33 252,493 1,171,174Due to banks under repurchase agreements - - - - - 681,487 681,487Derivative financial instruments - 11,995 3,805 31,034 - 9,208 56,042Customers’ deposits at amortised cost 7,998,960 21,596,458 386,718 3,118,954 1,801,847 4,815,953 39,718,890Deposits from related parties at amortised cost 81,895 517,710 1,698 12,203 - 75,595 689,101Engagements by acceptances - 128,111 1,320 44,042 - 9,242 182,715Other liabilities 131,601 111,422 439 15,383 20,260 129,760 408,865Provisions for risks and charges 61,943 4,627 - 1,238 11,818 15,470 95,096Non current liabilities held for sale 119 14,680 - - - - 14,799Shareholders’ equity 1,266,855 2,494,678 - 85,747 - 188,912 4,036,192

__________ __________ __________ __________ __________ __________ __________Total liabilities and shareholders’ equity 9,692,083 25,696,799 396,115 3,390,394 1,833,958 6,178,120 47,187,469

__________ __________ __________ __________ __________ __________ __________

F - 239

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 31 December 2012

90

57 MARKET RISK (continued)

A. CURRENCY RISK (continued)

2011LL USD GBP EUR TRY Other Total

LL million LL million LL million LL million LL million LL million LL millionAssetsCash and balances with central banks 1,499,579 5,316,465 3,503 793,600 - 1,090,207 8,703,354Due from banks and financial institutions 25,740 2,730,399 121,054 1,011,457 - 673,952 4,562,602Loans to banks and financial institutions and reverse

repurchase agreements 55,737 114,946 - 43,829 - 4,572 219,084Financial assets given as collateral - 17,424 - - - 17,424Derivative financial instruments 943 13,818 6,670 47,877 - 12,901 82,209Financial assets at fair value through profit or loss 461,941 311,453 3,035 23,083 - 24,414 823,926Loans and advances to customers at amortised cost 1,125,205 7,689,478 121,375 1,021,162 - 2,734,957 12,692,177Loans and advances to related parties

at amortised cost 31,335 228,400 13 1,293 - 2,625 263,666Debtors by acceptances - 198,578 1,329 66,436 - 14,476 280,819Financial assets at amortised cost 6,181,869 5,613,436 - 440,833 - 2,071,165 14,307,303Financial assets at fair value through other

comprehensive income 11,519 204,439 - 221 - 7,805 223,984Investments in associates 3,555 20,657 - - - 18,887 43,099Non current assets held for sale 828 21,701 - 604 - 3,246 26,379Property and equipment 284,725 16,841 - 3,172 - 206,812 511,550Intangible fixed assets 5,349 16 - 2,319 - 5,824 13,508Other assets 89,447 104,450 323 10,465 - 83,486 288,171Goodwill 992 54,715 - 7,076 - 198,648 261,431

__________ __________ __________ __________ __________ __________ __________Total assets 9,778,764 22,657,216 257,302 3,473,427 - 7,153,977 43,320,686

__________ __________ __________ __________ __________ __________ __________Liabilities and shareholders’ equityDue to central banks 133,394 - - - - - 133,394Due to banks and financial institutions 30,264 698,892 13,410 102,911 - 162,081 1,007,558Derivative financial instruments - 9,478 7,669 31,287 - 9,812 58,246Customers’ deposits at amortised cost 7,749,829 20,541,903 386,941 3,102,042 - 5,316,495 37,097,210Deposits from related parties at amortised cost 30,975 161,835 1,395 5,236 - 85,856 285,297Engagements by acceptances - 198,578 1,329 66,436 - 14,476 280,819Other liabilities 133,403 595,233 931 14,527 - 87,993 832,087Provisions for risks and charges 52,687 8,903 - 250 - 11,085 72,925Shareholders’ equity 1,863,211 1,137,909 - 74,152 - 477,878 3,553,150

__________ __________ __________ __________ __________ __________ __________Total liabilities and shareholders’ equity 9,993,763 23,352,731 411,675 3,396,841 - 6,165,676 43,320,686

__________ __________ __________ __________ __________ __________ __________

The Group’s Exposure to Currency RiskThe Group is subject to currency risk on financial assets and liabilities that are listed in currencies other than theLebanese Pounds. Most of these financial assets and liabilities are listed in US Dollars or Euros.

The table below shows the currencies to which the Group had significant exposure at 31 December on its non-trading monetary assets and liabilities and its forecast cash flows. The numbers represent the effect of areasonably possible movement of the currency rate against the Lebanese Pound, with all other variables heldconstant, first on the income statement (due to the potential change in fair value of currency sensitive non-trading monetary assets and liabilities) and equity (due to the impact of currency translation gains/losses ofconsolidated subsidiaries and the change in fair value of currency swaps used to hedge net investment in foreignsubsidiaries). A negative amount reflects a potential net reduction in income or equity, while a positive amountreflects a net potential increase.

2012 2011Increase in Effect on Effect Effect on Effect

currency profit on profit onCurrency rate % before tax equity before tax equity

LL million LL million LL million LL million

USD 1% (1,579) 6,183 3,760 4,435EUR 1% (61) 1,297 (1,575) 2,974GBP 1% (75) (594) (1,104) (418)EGP 1% - 3,676 - 2,982SYP 1% - 162 (814) 507TRY 1% - 1,970 - -

F - 240

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 31 December 2012

91

57 MARKET RISK (continued)

B. INTEREST RATE RISKInterest rate risk arises from the possibility that changes in interest rates will affect future profitability or the fairvalue of financial instruments. The Group is exposed to interest rate risk as a result of mismatches of interestrate repricing of assets and liabilities. Positions are monitored on a daily basis by management and, wheneverpossible, hedging strategies are used to ensure positions are maintained within established limits.

Interest Rate SensitivityThe table below shows the sensitivity of interest income and shareholders’ equity to reasonably possible parallelchanges in interest rates, all other variables being held constant.

The impact of interest rate changes on net interest income is due to assumed changes in interest paid andreceived on floating rate financial assets and liabilities and to the reinvestment or refunding of fixed ratedfinancial assets and liabilities at the assumed rates. The result includes the effect of hedging instruments andassets and liabilities held at 31 December 2012 and 2011. The change in interest income is calculated over a 1-year period. The impact also incorporates the fact that some monetary items do not immediately respond tochanges in interest rates and are not passed through in full, reflecting sticky interest rate behavior. The pass-through rate and lag in response time are estimated based on historical statistical analysis and are reflected in theoutcome.

There is no direct effect for the change in interest rates on equity pursuant to the early adoption of IFRS9 in2011 whereby no debt instruments can be classified at fair value through other comprehensive income.

The effect of any future associated hedges made by the Group is not accounted for. The sensitivity of equity wascalculated for an increase in basis points whereby a similar decrease has an equal and offsetting effect.

Sensitivity of net interest income2012 2011

LLmillion

LLmillion

LLmillion

LLmillion

Change in basis points Increase Decrease Increase Decrease

LBP 100 2,381 17,249 (30,187) 108USD 50 11,151 (9,644) 17,169 2,350EUR 25 1,581 (1,512) 740 (340)

F - 241

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 31 December 2012

92

57 MARKET RISK (continued)

B. INTEREST RATE RISK (continued)

The Group’s interest sensitivity position based on contractual repricing arrangements is shown in the table below. The expected repricing and maturity dates may differ significantly from thecontractual dates particularly with regard to the maturity of customer demand deposits.

2012Up to 1month

1 to 3months

3 months to1 year

Total less than1 year

1 to 5years

Over 5years

Total more than1 year

Non interestbearing Total

LL million LL million LL million LL million LL million LL million LL million LL million LL millionAssetsCash and balances with central banks 2,633,792 3,341,484 1,661,602 7,636,878 42,979 14,687 57,666 1,767,836 9,462,380Due from banks and financial institutions 3,521,048 97,851 11,846 3,630,745 - 49 49 650,184 4,280,978Loans to banks and financial institutions and reverse repurchase agreements 864,624 47,538 147,352 1,059,514 - - - 753 1,060,267Derivative financial instruments 11,293 4,799 22,202 38,294 9,932 61 9,993 2,759 51,046Financial assets at fair value through profit or loss 32,931 45,839 34,425 113,195 228,523 113,537 342,060 55,402 510,657Loans and advances to customers at amortized cost 3,455,179 4,492,166 3,562,551 11,509,896 2,895,533 843,391 3,738,924 167,583 15,416,403Loans and advances to related parties at amortized cost 232,003 49,556 1,507 283,066 7,736 2,356 10,092 11,353 304,511Debtors by acceptances 54,430 46,154 50,364 150,948 - - - 31,767 182,715Financial assets at amortized cost 180,861 441,489 3,246,365 3,868,715 8,472,648 1,989,826 10,462,474 217,927 14,549,116Financial assets at fair value through other comprehensive income - - - - - - - 245,793 245,793Investments in associates 18,538 - - 18,538 - - - 15,692 34,230Non current assets held for sale - - - - - - - 50,054 50,054Property and equipment - - - - - - - 528,710 528,710Intangible fixed assets - - - - - - - 49,600 49,600Other assets - - - - 380 - 380 237,783 238,163Goodwill - - - - - - - 222,846 222,846

____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________ ____________Total assets 11,004,699 8,566,876 8,738,214 28,309,789 11,657,731 2,963,907 14,621,638 4,256,042 47,187,469

____________ ___________ ___________ ___________ ____________ ____________ ____________ ____________ ____________Liabilities and shareholders equityDue to central banks - - 132,612 132,612 - - - 496 133,108Due to banks and financial institutions 482,776 185,201 409,876 1,077,853 - - - 93,321 1,171,174Due to banks under repurchase agreements 392,529 288,806 - 681,335 - - - 152 681,487Derivative financial instruments 10,438 7,871 26,121 44,430 9,357 - 9,357 2,255 56,042Customers’ deposits at amortized cost 21,501,121 6,849,744 4,124,497 32,475,362 961,245 9,195 970,440 6,273,088 39,718,890Deposits from related parties at amortized cost 182,250 138,166 11,876 332,292 112,354 33,076 145,430 211,379 689,101Engagements by acceptances 54,430 46,154 50,364 150,948 - - - 31,767 182,715Other liabilities 85,884 1,078 215 87,177 - 35 35 321,653 408,865Provisions for risks and charges - - - - - - - 95,096 95,096Non current liabilities held for sale - - - - - - - 14,799 14,799Shareholders’ equity - - - - - - - 4,036,192 4,036,192

___________ ___________ ___________ ____________ ___________ ____________ ____________ ____________ ____________Total liabilities and shareholders’ equity 22,709,428 7,517,020 4,755,561 34,982,009 1,082,956 42,306 1,125,262 11,080,198 47,187,469

___________ ___________ ___________ ____________ ___________ ____________ ____________ ____________ ____________

Interest rate sensitivity gap (11,704,729) 1,049,856 3,982,653 10,574,775 2,921,601 (6,824,156)___________ ___________ ___________ ___________ ____________ ____________

Cumulative gap (11,704,729) (10,654,873) (6,672,220) 3,902,555 6,824,156 -___________ ___________ ___________ ___________ ____________ ____________

F - 242

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 31 December 2012

93

57 MARKET RISK (continued)

B. INTEREST RATE RISK (continued)

2011Up to 1

month1 to 3

months3 months to 1

yearTotal less than

1 year1 to 5years

Over 5years

Total more than1 year

Non interestbearing Total

LL million LL million LL million LL million LL million LL million LL million LL million LL millionAssetsCash and balances with central banks 2,301,569 3,214,723 1,110,882 6,627,174 340,685 16,357 357,042 1,719,138 8,703,354Due from banks and financial institutions 3,350,845 209,324 52,936 3,613,105 4,370 68 4,438 945,059 4,562,602Loans to banks and financial institutions and reverse repurchase agreements 85,247 26,159 78,191 189,597 - - - 29,487 219,084Financials assets given as collateral 5,057 12,359 - 17,416 - - - 8 17,424Derivative financial instruments 4,712 2,707 19,031 26,450 109 200 309 55,450 82,209Financial assets at fair value through profit or loss 27 547 527,609 528,183 94,771 137,886 232,657 63,086 823,926Loans and advances to customers at amortised cost 1,920,182 4,398,110 2,144,476 8,462,768 2,605,771 575,046 3,180,817 1,048,592 12,692,177Loans and advances to related parties at amortised cost 211,550 33,727 1,881 247,158 5,289 1,027 6,316 10,192 263,666Debtors by acceptances 165,171 5,257 38,899 209,327 - - - 71,492 280,819Financial assets at amortised cost 329,812 202,643 2,858,166 3,390,621 8,511,100 2,399,327 10,910,427 6,255 14,307,303Financial assets at fair value through other comprehensive income - - - - - - - 223,984 223,984Investments in associates - - - - - - - 43,099 43,099Non current assets held for sale - - - - - - - 26,379 26,379Property and equipment - - - - - - - 511,550 511,550Intangible fixed assets - - - - - - - 13,508 13,508Other assets - - - - - - - 288,171 288,171Goodwill - - - - - - - 261,431 261,431

____________ ___________ ___________ ___________ ____________ ____________ ___________ ____________ ____________Total assets 8,374,172 8,105,556 6,832,071 23,311,799 11,562,095 3,129,911 14,692,006 5,316,881 43,320,686

____________ ___________ ___________ ___________ ____________ ____________ ___________ ____________ ____________Liabilities and shareholders equityDue to central banks - - 132,612 132,612 - - - 782 133,394Due to banks and financial institutions 579,951 83,692 297,720 961,363 - - - 46,195 1,007,558Derivative financial instruments 6,110 652 237 6,999 - - - 51,247 58,246Customers’ deposits at amortised cost 21,913,037 6,145,381 2,601,204 30,659,622 828,210 13,223 841,433 5,596,155 37,097,210Deposits from related parties at amortised cost 181,527 12,468 42,557 236,552 - - - 48,745 285,297Engagements by acceptances 161,112 289 24,612 186,013 - - - 94,806 280,819Other liabilities 84,434 10 70,496 154,940 38,722 156,368 195,090 482,057 832,087Provisions for risks and charges - - - - - - - 72,925 72,925Shareholders’ equity - - - - - - - 3,553,150 3,553,150

___________ ___________ ___________ ____________ ___________ ____________ ____________ ____________ ____________Total liabilities and shareholders’ equity 22,926,171 6,242,492 3,169,438 32,338,101 866,932 169,591 1,036,523 9,946,062 43,320,686

___________ ___________ ___________ ____________ ___________ ____________ ____________ ____________ ____________

Interest rate sensitivity gap (14,551,999) 1,863,064 3,662,633 10,695,163 2,960,320 (4,629,181)___________ ___________ ___________ ___________ ____________ ____________

Cumulative gap (14,551,999) (12,688,935) (9,026,302) 1,668,861 4,629,181 -___________ ___________ ___________ ___________ ____________ ____________

F - 243

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 31 December 2012

94

57 MARKET RISK (continued)

C. PREPAYMENT RISKPrepayment risk is the risk that the Group will incur a financial loss because its customers and counterpartiesrepay or request repayment earlier than expected, such as fixed rate mortgages when interest rates fall.

Market risks that lead to prepayments are not material with respect to the markets where the Group operates.Accordingly, the Group considers prepayment risk on net profits as not material after considering any penaltiesarising from prepayments.

D. EQUITY PRICE RISKEquity price risk is the risk that the value of a portfolio will fall as a result of a change in stock prices. Riskfactors underlying this type of market risk are a whole range of various equity (and index) prices correspondingto different markets (and currencies / maturities) in which the Group holds equity-related positions.

The Group sets tight limits on equity exposures and the types of equity instruments that traders are allowed totake positions in. Nevertheless, depending on the complexity of financial instruments, equity risk is measured infirst cash terms, such as the market value of a stock /index position, and also in price sensitivities, such assensitivity of the value of a portfolio to changes in the underlying asset price. These measures are applied to anindividual position and/or to a portfolio of equities.

58 LIQUIDITY RISK

Liquidity risk is defined as the risk that the Group will encounter difficulty in meeting obligations associatedwith financial liabilities that are settled by delivering cash or another financial asset. Liquidity risk arisesbecause of the possibility that the Group might be unable to meet its payment obligations when they fall dueunder both normal and stress circumstances. To limit this risk, management has arranged diversified fundingsources in addition to its core deposit base, and adopted a policy of managing assets with liquidity in mind andof monitoring future cash flows and liquidity on a daily basis. The Group has developed internal controlprocesses and contingency plans for managing liquidity risk. This incorporates an assessment of expected cashflows and the availability of high grade collateral which could be used to secure additional funding if required.

The Group maintains a portfolio of marketable and diverse assets that can be liquidated in the event of anunforeseen interruption of cash flow. In addition, the Group maintains statutory deposits with Central Banks. Asper Lebanese banking regulations, the Bank must retain obligatory reserves with the Central Bank of Lebanoncalculated on the basis of 25% of the sight deposits and 15% of term deposits denominated in Lebanese Pounds,in addition to interest bearing placements equivalent to 15% of all deposits in foreign currencies regardless oftheir nature.

The liquidity position is assessed and managed under a variety of scenarios, giving due consideration to stressfactors relating to both the market in general and specifically to the Group. The Group maintains a solid ratio ofhighly liquid net assets in foreign currencies to deposits and commitments in foreign currencies taking marketconditions into consideration.

Regulatory ratios and limitsIn accordance with the Central Bank of Lebanon circulars, the ratio of net liquid assets to deposits in foreigncurrencies should not be less than 10%. The net liquid assets consist of cash and all balances with the CentralBank of Lebanon (excluding reserve requirements), certificates of deposit issued by the Central Bank ofLebanon irrespective of their maturities and deposits due from other banks that mature within one year, lessdeposits due to the Central Bank of Lebanon and deposits due to banks that mature within one year. Deposits arecomposed of total customer deposits (excluding blocked accounts) and due from financial institutionsirrespective of their maturities and all certificates of deposits and acceptances and other debt instruments issuedby the Group and loans from the public sector that mature within one year.

F - 244

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 31 December 2012

95

58 LIQUIDITY RISK (continued)

The Group stresses the importance of customer deposits as source of funds to finance its lending activities. Thisis monitored by using the advances to deposits ratio, which compares loans and advances to customers as apercentage of client’s deposits.

Loans to deposits2012 2011

% %

Year-end 39 35Maximum 39 36Minimum 36 34Average 37 35

Analysis of Financial Assets and Liabilities by Remaining Contractual MaturitiesThe table below summarises the maturity profile of the Group’s financial assets and liabilities as of 31December based on contractual undiscounted cash flows. The contractual maturities have been determinedbased on the period remaining to reach maturity as per the statement of financial position actual commitments.Repayments which are subject to notice are treated as if notice were to be given immediately. Concerningdeposits, the Group expects that many customers will not request repayment on the earliest date the Group couldbe required to pay.

The table does not reflect the expected cash flows indicated by the Group’s deposit retention history.

2012Less than

1 month1 to 3

months3 to 12

months1 to 5years

Over 5years Total

LL million LL million LL million LL million LL million LL millionFinancial assets:Cash and balances with central banks 3,371,590 221,231 1,213,563 3,667,931 2,369,729 10,844,044Due from banks and financial institutions 4,223,885 88,754 11,734 - 49 4,324,422Loans to banks and financial institutions

and reverse repurchase agreements 816,257 3,560 187,438 - 80,391 1,087,646Derivative financial instruments 16,140 4,564 20,395 9,947 - 51,046Financial assets at fair value through

profit or loss 115,957 325 25,173 283,684 196,671 621,810Loans and advances to customers at

amortised cost 3,272,618 1,611,583 3,270,397 7,001,782 952,292 16,108,672Loans and advances to related parties at

amortised cost 251,225 33,927 9,419 6,842 5,075 306,488Debtors by acceptances 64,971 57,498 55,450 4,796 - 182,715Financial assets at amortised cost 1,034,583 348,221 4,362,753 9,585,939 2,144,651 17,476,147

___________ ___________ ___________ ___________ ___________ ____________Total financial assets 13,167,226 2,369,663 9,156,322 20,560,921 5,748,858 51,002,990

___________ ___________ ___________ ___________ ___________ ____________

Financial liabilities:Due to central banks 585 - - 166,235 - 166,820Due to banks and financial institutions 595,006 179,540 245,456 130,103 176,386 1,326,491Due to banks under repurchase agreements 466,561 214,926 - - - 681,487Derivative financial instruments 15,370 5,506 25,809 9,357 - 56,042Customers’ deposits at amortised cost 28,175,881 7,055,421 4,272,165 1,145,780 10,716 40,659,963Deposits from related parties at

amortised cost 217,691 140,538 12,980 141,584 222,932 735,725Engagements by acceptances 57,481 64,988 55,450 4,796 - 182,715

____________ ____________ ___________ ____________ ___________ ____________Total financial liabilities 29,528,575 7,660,919 4,611,860 1,597,855 410,034 43,809,243

___________ ___________ ___________ ___________ ___________ ____________

F - 245

Bank Audi SAL – Audi Saradar Group

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the year ended 31 December 2012

96

58 LIQUIDITY RISK (continued)

2011Less than

1 month1 to 3

months3 to 12months

1 to 5years

Over 5years Total

LL million LL million LL million LL million LL million LL millionFinancial assets:Cash and balances with central banks 2,525,967 144,900 530,498 5,359,703 1,418,639 9,979,707Due from banks and financial institutions 4,399,661 91,466 67,357 4,370 68 4,562,922Loans to banks and financial institutions

and reverse repurchase agreements 33,626 16,771 113,291 - 87,055 250,743Financial assets given as collateral 15,672 1,820 189 - - 17,681Derivative financial instruments 5,418 40,207 36,282 102 200 82,209Financial assets measured at fair value 8,231 7,166 556,777 135,678 179,571 887,423Loans and advances to customers at

amortised cost 3,410,722 1,409,460 1,954,430 5,333,251 1,337,437 13,445,300Loans and advances to related parties at

amortised cost 215,626 33,399 9,006 5,158 3,934 267,123Debtors by acceptances 102,699 98,859 79,213 49 - 280,820Financial assets at amortised cost 405,672 292,563 3,686,717 9,741,400 2,660,187 16,786,539

___________ ___________ ___________ ___________ ___________ ____________Total financial assets 11,123,294 2,136,611 7,033,760 20,579,711 5,687,091 46,560,467

___________ ___________ ___________ ___________ ___________ ____________Financial liabilities:Due to central banks 782 - - 135,758 - 136,540Due to banks and financial institutions 627,711 67,978 49,224 178,201 178,085 1,101,199Derivative financial instruments 7,055 35,159 16,032 - - 58,246Customers’ deposits at amortised cost 27,604,649 6,173,561 2,671,589 897,264 14,074 37,361,137Deposits from related parties at

amortised cost 67,128 14,308 44,734 188,133 30,999 345,302Engagements by acceptances 102,698 98,858 79,214 49 - 280,819

____________ ____________ ___________ ____________ ___________ ____________Total financial liabilities 28,410,023 6,389,864 2,860,793 1,399,405 223,158 39,283,243

___________ ___________ ___________ ___________ ___________ ____________

The table below shows the contractual expiry by maturity of the Group’s contingent liabilities andcommitments. Each undrawn loan commitment is included in the time band containing the earliest date it can bedrawn down. For issued financial guarantee contracts, the maximum amount of the guarantee is allocated to theearliest period in which the guarantee could be called.

2012

Ondemand

Less than 3months

3 to 12months

1 to 5years

More than5 years Total

LL million LL million LL million LL million LL million LL million

Financial guarantees 56,844 828,094 426,915 30,529 71,359 1,413,741Other guarantees 898,455 - - - - 898,455Documentary credits 2,037 279,501 62,950 9,275 - 353,763Undrawn credit lines 3,309,318 50,813 122,635 25,258 46 3,508,070

_________ _________ _________ _________ _________ _________4,266,654 1,158,408 612,500 65,062 71,405 6,174,029

_________ _________ _________ _________ _________ _________

2011

Ondemand

Less than 3months

3 to 12months

1 to 5years

More than5 years Total

LL million LL million LL million LL million LL million LL million

Financial guarantees 95,531 1,210,232 166,510 32,101 129,730 1,634,104Other guarantees 1,039,278 - - - - 1,039,278Documentary credits 7,204 292,975 72,087 15,515 - 387,781Undrawn credit lines 3,014,156 160,677 23,563 310,905 17,928 3,527,229

_________ _________ _________ _________ _________ _________4,156,169 1,663,884 262,160 358,521 147,658 6,588,392

_________ _________ _________ _________ _________ _________

Maturity analysis of assets and liabilitiesThe table below summarizes the maturity profile of the Group’s assets and liabilities. The contractual maturitiesof assets and liabilities have been determined on the basis of the remaining period at the statement of financialposition date to the contractual maturity date and do not take account of the effective maturities as indicated bythe Group’s deposit retention history and the availability of liquid funds. The maturity profile is monitored bymanagement to ensure adequate liquidity is maintained

F - 246

Bank Audi SAL – Audi Saradar Group

NOTES TO CONSOLIDTES FINANCIAL STATEMENTSFor the year ended 31 December 2012

97

58 LIQUIDITY RISK – MATURITY PROFILE (continued)

The maturity profile of the assets and liabilities at 31 December 2012 is as follows:

Less than1 month

1 to 3months

3 months to 1year

Total less thanone year

1 to 5years

Over 5years

Total more than oneyear

Amount withoutmaturity Total

LL million LL million LL million LL million LL million LL million LL million LL million LL million

AssetsCash and balances with central banks 3,318,055 221,094 1,207,780 4,746,929 3,376,570 1,338,881 4,715,451 - 9,462,380Due from banks and financial institutions 4,206,838 62,357 11,734 4,280,929 - 49 49 - 4,280,978Loans to banks and financial institutions and reverse repurchase

agreements 816,321 3,551 186,479 1,006,351 - 53,916 53,916 - 1,060,267Derivative financial instruments 16,140 4,564 20,395 41,099 9,947 - 9,947 - 51,046Financial assets at fair value through profit or loss 33,346 45,532 34,370 113,248 231,828 113,359 345,187 52,222 510,657Loans and advances to customers at amortised cost 2,656,962 1,873,999 3,255,051 7,786,012 6,727,452 898,342 7,625,794 4,597 15,416,403Loans and advances to related parties at amortised cost 249,846 33,927 10,801 294,574 7,756 2,181 9,937 - 304,511Debtors by acceptances 64,971 57,498 55,450 177,919 4,796 - 4,796 - 182,715Financial assets at amortised cost 175,468 183,279 3,330,402 3,689,149 8,650,287 2,209,680 10,859,967 - 14,549,116Financial assets at fair value through other comprehensive income - - - - - - - 245,793 245,793Investments in associates - - - - 18,545 - 18,545 15,685 34,230Non current assets held for sale - - - - - - - 50,054 50,054Property and Equipment - - - - - - - 528,710 528,710Intangible fixed assets - - - - - - - 49,600 49,600Other assets 125,924 19,031 23,556 168,511 10,252 443 10,695 58,957 238,163Goodwill - - - - - - - 222,846 222,846

___________ ____________ ____________ ____________ ____________ ___________ ___________ ___________ ____________Total assets 11,663,871 2,504,832 8,136,018 22,304,721 19,037,433 4,616,851 23,654,284 1,228,464 47,187,469

___________ ____________ ____________ ____________ ____________ ___________ ___________ ___________ ____________Liabilities and shareholders equityDue to central banks - - - - 133,108 - 133,108 - 133,108Due to banks and financial institutions 523,894 236,318 278,789 1,039,001 117,090 15,083 132,173 - 1,171,174Due to banks under repurchase agreements 392,602 288,885 - 681,487 - - - - 681,487Derivative financial instruments 15,370 5,506 25,809 46,685 9,357 - 9,357 - 56,042Customers’ deposits at amortised cost 27,244,497 7,108,325 4,391,195 38,744,017 965,150 9,723 974,873 - 39,718,890Deposits from related parties at amortised cost 211,830 139,472 16,586 367,888 288,136 33,077 321,213 - 689,101Engagements by acceptances 57,481 64,988 55,450 177,919 4,796 - 4,796 - 182,715Other liabilities 229,713 52,666 64,959 347,338 1,361 36 1,397 60,130 408,865Provision for risks and charges - - 149 149 448 - 448 94,499 95,096Non-current liabilities held for sale - - - - - - - 14,799 14,799Shareholders’ equity - - - - - - - 4,036,192 4,036,192

___________ ___________ ____________ ___________ ____________ ____________ __________ __________ ____________Total liabilities and shareholders’ equity 28,675,387 7,896,160 4,832,937 41,404,484 1,519,446 57,919 1,577,365 4,205,620 47,187,469

___________ ___________ ____________ ___________ ____________ ____________ __________ __________ ____________

Liquidity gap (1,7011,516) (5,391,328) 3,303,081 17,517,987 4,558,932 (2,977,156)___________ ___________ ____________ ____________ ____________ __________

Cumulative gap (17,011,516) (22,402,844) (19,099,763) (1,581,776) 2,977,156 -___________ ___________ ____________ ____________ ____________ __________

F - 247

Bank Audi SAL – Audi Saradar Group

NOTES TO CONSOLIDTES FINANCIAL STATEMENTSFor the year ended 31 December 2012

98

58 LIQUIDITY RISK – MATURITY PROFILE (continued)

The maturity profile of the assets and liabilities at 31 December 2011 is as follows:

Less than1 month

1 to 3months

3 months to1 year

Total less thanone year

1 to 5years

Over 5years

Total more thanone year

Amount withoutmaturity Total

LL million LL million LL million LL million LL million LL million LL million LL million LL million

AssetsCash and balances with central banks 2,466,641 144,514 527,151 3,138,306 4,792,950 772,098 5,565,048 - 8,703,354Due from banks and financial institutions 4,400,687 91,208 66,269 4,558,164 4,370 68 4,438 - 4,562,602Loans to banks and financial institutions and reverse

repurchase agreements 33,588 16,750 113,012 163,350 - 55,734 55,734 - 219,084Financial assets given as collateral 15,578 1,806 40 17,424 - - - - 17,424Derivative financial instruments 5,418 40,207 36,283 81,908 101 200 301 - 82,209Financial assets at fair value through profit or loss 6,428 4,077 527,635 538,140 95,307 137,886 233,193 52,593 823,926Loans and advances to customers at amortised cost 3,356,714 1,378,898 1,872,507 6,608,119 4,954,365 1,125,926 6,080,291 3,767 12,692,177Loans and advances to related parties at amortised cost 214,409 33,476 9,454 257,339 5,300 1,027 6,327 - 263,666Debtors by acceptances 102,699 98,858 79,213 280,770 49 - 49 - 280,819Financial assets at amortised cost 333,928 194,115 2,867,886 3,395,929 8,542,124 2,369,250 10,911,374 - 14,307,303Financial assets at fair value through other

comprehensive income - - - - - - - 223,984 223,984Investments in associates - - - - - - - 43,099 43,099Non current assets held for sale - - - - - - - 26,379 26,379Property and Equipment - - - - - - - 511,550 511,550Intangible fixed assets - - - - - - - 13,508 13,508Other assets 29,690 13,514 66,106 109,310 9,792 1,374 11,166 167,695 288,171Goodwill - - - - - - - 261,431 261,431

___________ ____________ ____________ ____________ ____________ ___________ ___________ ___________ ____________Total assets 10,965,780 2,017,423 6,165,556 19,148,759 18,404,358 4,463,563 22,867,921 1,304,006 43,320,686

___________ ____________ ____________ ____________ ____________ ___________ ___________ ___________ ____________Liabilities and shareholders equityDue to central banks - - - - 133,394 - 133,394 - 133,394Due to banks and financial institutions 624,625 66,623 38,034 729,282 143,398 134,878 278,276 - 1,007,558Derivative financial instruments 7,055 35,159 16,032 58,246 - - - - 58,246Customers’ deposits at amortized cost 27,501,168 6,126,130 2,628,342 36,255,640 828,346 13,224 841,570 - 37,097,210Deposits from related parties at amortized cost 55,402 13,667 46,559 115,628 169,669 - 169,669 - 285,297Engagements by acceptances 102,699 98,859 79,212 280,770 49 - 49 - 280,819Other liabilities 124,131 39,698 224,141 387,970 226,361 156,441 382,802 61,315 832,087Provisions for risks and charges - - - - - - - 72,925 72,925Shareholders’ equity - - - - - - - 3,553,150 3,553,150

___________ ___________ ____________ ___________ ____________ ____________ __________ __________ ____________Total liabilities and shareholders’ equity 28,415,080 6,380,136 3,032,320 37,827,536 1,501,217 304,543 1,805,760 3,687,390 43,320,686

___________ ___________ ____________ ___________ ____________ ____________ __________ __________ ____________

Liquidity gap (17,449,300) (4,362,713) 3,133,236 16,903,141 4,159,020 (2,383,384)___________ ___________ ____________ ____________ ____________ __________

Cumulative gap (17,449,300) (21,812,013) (18,678,777) (1,775,636) 2,383,384 -___________ ___________ ____________ ____________ ____________ __________

F - 248

Bank Audi SAL – Audi Saradar Group

NOTES TO CONSOLIDTES FINANCIAL STATEMENTSFor the year ended 31 December 2012

99

59 OPERATIONAL RISK

Operational risk is the risk of loss arising from system failure, human error, fraud or external events. Whencontrols fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications,or lead to financial loss.

The operational risk management framework is implemented by an independent Operational Risk ManagementTeam, in coordination with other essential elements of the Group’s control framework such as Internal Audit orCorporate Information Security and Business Continuity.

Central to this framework are tried-and-tested principles such as redundancy of mission-critical systems,segregation of duties, strict authorization procedures, daily reconciliation, risk management responsibility at theoperational level and the requirement to be able to price and value independently any proposed transaction.

Incidents are reported, analyzed and fed into a risk map also originating from other sources such as control selfassessments, key risk indicators or audit reports. This risk map is then used as a tool to follow up on outstandingissues and as the basis for reporting operational risk to management and to the Board.

Insurance coverage is used as an external mitigant and is commensurate with activity, both in terms of volumeand characteristics.

60 CAPITAL MANAGEMENT

By maintaining an actively managed capital base, the Group’s objectives are to cover risks inherent in thebusiness, to retain sufficient financial strength and flexibility to support new business growth, and to meetnational and international regulatory capital requirements at all times. The adequacy of the Group’s capital ismonitored using, among other measures, the rules and ratios established by the Central Bank of Lebanon. Theseratios measure capital adequacy by comparing the Group’s eligible capital with its statement of financialposition assets and off-balance sheet commitments at a weighted amount to reflect their relative risk. To satisfyBasel III capital requirements, the Central Bank of Lebanon requires maintaining a ratio of total regulatorycapital to risk-weighted assets at or above 12% to be achieved in 2015. The limit of the Common Equity Tier 1Ratio is expected to increase to 8%, the Tier 1 ratio to 10% and the Total Capital Ratio to 12% by the end of2015. The first step of this increase was due by the end of 2012.

Each banking subsidiary is directly regulated by its local banking supervisor, which sets and monitors its capitaladequacy requirements. In addition, Bank Audi SAL - Audi Saradar Group monitors capital adequacy at theGroup level.

2012 2011LL million LL million

Risk weighted assets:Credit risk 25,670,611 24,734,378Market risk 653,868 622,866Operational risk 2,251,204 1,974,927

____________ ____________Total risk weighted assets 28,575,683 27,332,171

____________ ____________

The capital base as per Basel II requirements as of 31 December (including profit for the year less proposeddividends) is as follows:

2012 2011LL million LL million

Tier 1 Capital 3,302,459 2,855,238Tier 2 Capital 65,885 65,235

____________ ____________Total Capital 3,368,344 2,920,473

____________ ____________

F - 249

Bank Audi SAL – Audi Saradar Group

NOTES TO CONSOLIDTES FINANCIAL STATEMENTSFor the year ended 31 December 2012

100

60 CAPITAL MANAGEMENT (continued)

The capital adequacy ratio as of 31 December (including profit for the year less proposed dividends) is asfollows:

2012 2011

Capital adequacy - Tier 1 11.56% 10.45%Capital adequacy -Total Capital 11.79% 10.69%

____________ ____________

Tier 1 Capital consists of share capital, share premium, reserves, retained earnings including current year profitless proposed dividends, foreign currency translation losses, gross unrealized losses from financial instruments atfair value through other comprehensive income and corresponding amounts of non-controlling interest. Tier 2capital consists of revaluation variance recognized in the complementary equity, subordinated loans, preferredshares, a percentage of foreign currency translation gains, a percentage of gross unrealized gains from financialinstruments at fair value through other comprehensive income and corresponding amounts of non-controllinginterest. Certain adjustments are made to IFRS based results, reserves, retained earnings, preferred shares,subordinated loans and non-controlling interests as prescribed by the Central Bank of Lebanon and the BankingControl Commission.

In accordance with the Central Bank of Lebanon Main Circular 44, the Group should maintain the followingminimum required capital adequacy ratio for the years ended 31 December 2012 and thereafter:

Tier 1 capital ratio Total capital ratioYear ended 31 December 2012 8.0 % 10.0 %Year ended 31 December 2013 8.5 % 10.5 %Year ended 31 December 2014 9.5 % 11.5 %Year ended 31 December 2015 10.0 % 12.0 %

The Group manages its capital structure and makes adjustments to it in the light of changes in economicconditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, theGroup may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue capitalsecurities. No changes were made in the objectives, policies and processes from the previous years, however,they are under constant scrutiny of the Board.

F - 250