Annual Financials · 4 Pillars 3 disclosures for the full 2009 year ... one of the leading commercial banks in Kuwait. 2 3.8 % 09 annual financials Burgan Bank 2009 ratings Rating

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Annual Financials 2009

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driven by youA member of the KIPCO Group

driven by you

البيانات المالية السنوية 2009

عضو في مجموعة مشاريع الكويت

مسارنــا المشــرق

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ويــــ

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ـــرـريـ

تـقال

2009سنوية

ت المالية الالبيانا

Annual Financials

H.H. Sheikh Sabah Al-Ahmad Al-Jaber Al-SabahAmir of the State of Kuwait

H.H. Sheikh Nawaf Al-Ahmad Al-Jaber Al-SabahCrown Prince of the State of Kuwait

سمو الشيخ نواف األحمد الجابر الصباح

ولي عهد دولة الكويت

صاحب السمو الشيخ صباح األحمد الجابر الصباح

أمير دولة الكويت

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Welcome to our Annual Financial Report for the year 2009.

As a member of the KIPCO group, we follow international best practice by making our Financials available to our shareholders in advance of our General Assembly.

This document has been designed to provide you with our financial results in a clear and concise format, providing the highlights of our financial performance for 2009 at a glance, followed by our full financial accounts for the year.

For more details on our performance and activities during 2009, please refer to our separate Annual Review document. For shareholders that require a copy of the review section, this is distributed at our General Assembly meeting. If you cannot attend the General Assembly, a personal copy of the review section can be sent to you by request, or you can download the document from our company website (www.burgan.com).

For further details on how to receive a copy of our full Annual Report, please see page 15 of this document.

We hope you enjoy our review documents of 2009 and invite your comments and suggestions for improving their future presentation.

Burgan Bank

Contents

Burgan Bank S.A.K.P.O. Box 5389, Safat 12170 State of KuwaitTelephone: +965 2298 8000 +965 1804080Fax: +965 2298 8419www.burgan.com

2 Financial Highlights4 Pillars 3 disclosures for the full 2009 year16 Auditors report to the shareholders17 Statement of financial position18 Income statement19 Statement of comprehensive income20 Statement of changes in shareholders’ equity22 Consolidated statement of cash flows23 Notes to the 2009 financial statements

Dear shareholder

++28Increase in

total revenueIncrease in

consolidated assets

%

05 06 07 08 09

42.4

55.7

74.8

37.1

6.2

05 06 07 08 09

247.3260.2

351.1

310.3325.5

05 06 07 08 09

69.6

87.5

105.7

121.1

154.7

05 06 07 08 09

51.9

69.9

80.8

35.8

6.1

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Equ

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- KD

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Net

Pro

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- KD

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Earn

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D F

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Financial highlights2009

Steady progress

Despite the state of global and local financial markets in 2009, Burgan Bank continued to progress positively across all business segments during the year. Net profit reached KD 6.2 million, resulting in earnings per share of 6.1 Fils, while net operating income grew by 28%.

The 2009 results reflect the bank’s strong underlying financial position, as well as the prudent provisioning made in 2008 and 2009 in response to the economic downturn. The bank’s 2009 results include the consolidation of Gulf Bank Algeria and Jordan Kuwait Bank as well as its associate, Bank of Baghdad, in which it has a significant stake.

With a KD 325 million shareholders equity base, the bank holds a healthy Basel II capital adequacy ratio of 16.86%. This positions the bank’s capitalisation very strongly by local and international standards. These indicators clearly demonstrate our growth strategy and our standing as one of the leading commercial banks in Kuwait.

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Burgan Bank 2009 ratings

Rating agency Rating highlights

Standard & Poor’s Counterparty Credit Rating BBB+ / A2 (Long / Short Term)

Moody’s Bank Deposit Rating A2 / P-1 Bank Financial Strength Rating D+ (Baa3)

Capital Intelligence Foreign Currency A- / A2 (Long / Short Term) Financial Strength BBB+

Financial statements highlights

Ratings: Our financial performance and financial strength were acknowledged by Moody’s Investor Service during 2009 by assigning a rating of A2/P-1 for the Bank deposits and D+ (which translates to a Baseline credit of Baa3). Standards and Poor’s Ratings Services affirmed in July 2009 BBB+ and A-2 rating for the counterparty credit rating and for Certificate of Deposits. Similarly, during November 2009, Capital Intelligence acknowledged the financial profile and strength of the Bank and has assigned a BBB+ ratings for the financial strength and A-/A2 rating for the long and short term foreign Currency.

2009

2005 2006 2007 2008 2009

Consolidated balance sheet KD 000’s

Cash and Equivalents 371,389 288,328 431,190 550,955 602,088

Treasury Bills & Bonds & Central Bank Bonds 282,206 388,909 433,709 387,378 417,049

Investment Securities 93,752 107,672 110,146 107,404 140,952

Total Assets 1,889,712 2,210,215 2,847,547 3,942,999 4,093,984

Total Liabilities 1,642,412 1,950,061 2,496,407 3,557,198 3,665,710

Shareholder equity 247,300 260,154 351,140 310,286 325,475

Consolidated Income Statement

Net Interest Income 43,177 53,394 51,113 68,017 101,829

Net fee & Commission income 13,287 19,988 17,089 22,416 29,966

Operating Income 69,635 87,586 105,689 121,105 154,709

Operating Income before provision 49,011 63,867 77,807 87,619 111,173

Net Profit 42,384 55,728 74,818 37,065 6,211

Earnings per share (in fils) 51.9 69.8 80.8 35.8 6.1

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Under the directives of Central Bank of Kuwait (CBK), banks operating in Kuwait are required to apply the Revised Capital Adequacy Standard (RCAS) in line with the Basel Committee’s revised capital adequacy framework issued in June 2004, popularly known as Basel II, with effect from 31 December 2005.

Pillar 3 disclosures for the full 2009 year

1. Introduction

These instructions including subsequent amendments thereto cover both the calculation of the Capital to Risk Assets Ratio (CRAR) under Pillar 1 of RCAS and the disclosure of information under Pillar 3. Given below are the necessary disclosures pertaining to the Bank’s Capital Structure, Risk Management objectives and policies, information relating to the Credit Exposure, Credit Risk Mitigation, Market Risk and Operational Risk as required under the CBK regulations. In arriving at the CRAR, in accordance with the regulations, the Standardised Approach has been used.

2. Subsidiaries and Significant Investments

i The CBK regulations apply to:

Burgan Bank S.A.K

ii Basis of Consolidation

The Bank has three subsidiaries.

During 2008, the Bank acquired certain number of shares of Jordan Kuwait Bank (JKB). This acquisition, along with the then existing shares in the Bank’s books, gave the Bank a controlling stake of 51.10% in the shareholding of this bank, thus making it a subsidiary. The financial statements of JKB have been consolidated in the financial statements of the Bank as at 31st Dec. 2008 and as at 31st Dec. 2009.

During 2009, the Bank has acquired controlling stake of 65.11% in Gulf Bank Algeria (AGB) thus making it a subsidiary. The financial statements of AGB have been consolidated in the financial statements of the Bank as at 31st Dec. 2009.

Third subsidiary is Burgan International Holding, a company incorporated in Luxembourg with a paid up capital of USD 2,329,200 (equivalent to KD 668,015). The net worth of this subsidiary as per annual financial statements as at 30 September 2008 is USD 2,782,631 (equivalent KD 767,867). While the Bank’s financial statements have not consolidated this subsidiary due to it not being material, for the purposes of arriving at the eligible capital of the Bank for computation of CRAR, the Bank’s investment in this subsidiary has been deducted from the capital.

The Bank also has a significant stake of 45.31% in Bank of Baghdad (BOB) valued at KD 15.434 million. The value of this investment, in line with CBK instructions, has been deducted from the capital of the Bank. Subsequent to the year end, the Bank has acquired a further 5.3% stake in BOB taking its stake to a controlling 50.61% and the financials of BOB would be consolidated in the Bank’s financials effective 2010.

Apart from this, there are no other deductions that are required to be made, under the CBK instructions, from the capital of the Bank on account of its investments, either in the form of significant minority investments in banking, securities or other financial entities or significant investments in commercial entities.

Comments have been made, where appropriate, in respect of the current approach of JKB & AGB; it is expected that differing practices as between Group entities will be largely harmonized once current integration work is complete — except to the extent that they have arisen because of distinct regulatory requirements that a particular jurisdiction has made to the common Basel II framework.

iii. Restriction/Impediments on Fund Transfers

There are no restrictions or other major impediments on transfer of funds or regulatory capital between the Bank and its subsidiaries, apart from obtaining the necessary approvals from the respective regulators, including CBK, Central Bank of Jordan (CBJ) and Bank of Algeria (CBA).

3. Capital Structure

i. Main features of Capital Instruments

The Bank’s paid up capital entirely consists of ordinary shares which have proportionate voting rights. These are listed in the Kuwait Stock Exchange and are actively traded thereon. The Bank does not have any other type of capital instruments.

As at 31 December 2009, the share capital comprised of 1,041,330,766 authorized, issued and fully paid up equity shares of 100 fils each.

The Bank has sub-ordinated debt of KD 96,233 thousand, eligible to be treated as Tier 2 Capital. This debt was raised with the due approval of CBK and is repayable at the end of six years.

2009

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Table I – Insurance Subsidiaries and Significant Investments KD’000s

Current book value of investment in insurance entities, which are risk weighted*

* Had the amount been deducted from the capital, the CRAR would have been 16.861%, instead of 16.862% as shown.

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Name of the insurance company

Country of incorporation

Ownership %

Kuwait Reinsurance Company K.S.C.C

Kuwait

0.075

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4. Capital Adequacy

i. Bank’s Approach to Capital Adequacy Assessment

The Bank has in place a system under which the capital adequacy of the Bank as well as the CRAR are being calculated at regular intervals, based on the CBK circular instructions dated 12/12/2005 and subsequent amendments. Based on this system, the CRAR of the Bank has been above the required threshold of 12% during the year 2009. The Bank also has in place an Internal Capital Adequacy Assessment Policy (ICAAP) that has been duly approved by its Board of Directors which lays down the requirements for ensuring that the CRAR does not fall below the minimum level stipulated by the CBK. A copy of this policy document has also been sent to CBK for their information and records.

The Bank takes into account the CRAR calculations in respect of all its future business plans so as to ensure that, at all times, the level of its eligible capital is sufficient to meet the expected increase in business and particularly the level of Risk Weighted Assets (RWA’s). The Bank takes into consideration developments locally and in the region, the expected changes in the banking environment and the fact that the CRAR prescribed by the CBK is considerably above the international norm of 8% as recommended by the Basel Committee while examining the level of capital that it would like to maintain. The Board also takes into consideration other relevant factors such as the Bank’s future business plans, the new areas of business under examination and the nature of the attendant risks etc. The Board may mandate, from time to time, a level of cushion over the regulatory minimum as considered necessary and appropriate giving due consideration to all factors of business and prudence. Such cushion will then be maintained in future, conditions permitting and in line with the applicable regulations of CBK. The budget for the year 2010 and the Long Range Plan (LRP) developed by the Bank take into account this quantum of the cushion. During the year 2008, there were some regulatory changes in regard to the risk weightage of loans against certain defined assets and also changes in the rules

concerning risk mitigation. These have had an effect on the computation of risk weighted assets of the bank and consequently on the CRAR.

The Bank has put in place a system that will enable it to compute the CRAR under the CBK instructions of December 2005 and subsequent amendments thereto at such periodic intervals as may be deemed necessary, taking into account all the necessary details of its asset portfolio including Credit Risk Mitigation (CRM) techniques, the factors that give rise to market risk as also the capital necessary for operational risks. The internal budgetary and performance measurement systems of the Bank take into account the impact of the future growth and performance of its various business groups on the capital allocated to each such business group. It is the intention of the Bank, in due course, to develop a system that will allocate an economic capital to each business group that factors-in the applicable cushion on the capital adequacy then required by the Board.

The Bank also plans to develop strategies that will enable it to anticipate increases in capital as may be necessary for its growth plans based on the LRP and at the appropriate time and issue capital instruments eligible under the three tiers of capital in accordance with the regulations applicable to each.

As regards JKB, the Jordanian banking regulator, CBJ has instructed banks to comply with Pillar 1 of Basel II beginning the year 2008. The computation of CRAR for JKB has also been done using the Standardised Approach. The Tier 1 CRAR for JKB is 22.97% and the total CRAR is 24.27%.

As regards AGB, the Algerian banking regulator, CBA requires Banks to comply with Basel I regulations only. However, the Bank has computed its capital requirement under Pillar 1 of Basel II beginning the year 2009. The computation of CRAR for AGB has also been done using the Standardised Approach. The Tier 1 CRAR for JKB is 25.01% and the total CRAR is 26.17 %.

Table II – Capital Structure of the BankKD’000s

Paid up share capital 104,133

Reserves 227,185

Less: Treasury shares (18,290)

Less: Goodwill (91,387)

Less: Investments in unconsolidated subsidiaries & significant minority investment

(8,051)

Minority interest 102,799

T I E R 1 Capital 316,389

45% of fair valuation reserves 5,601

General provision subject to 1.25% of the total credit risk weighted assets

31,059

Subordinated debt 96,233

Less: Investments in unconsolidated subsidiaries & significant minority investment

(8,051)

T I E R 2 Capital 124,842

T I E R 3 Capital –

Total Eligible Capital after deductions 441,231

Table III – Capital requirement for each Standard PortfolioKD’000s

Claims on sovereigns 11,161

Claims on public sector entities 5,069

Claims on banks 16,862

Claims on corporates 138,668

Regulatory retail exposures 46,854

RHL Eligible for 35% RW 242

Past due exposures 19,341

Other exposures 59,968

Total 298,165

Less: General provision in excess of 1.25% of RWA’s

(5,966)

Total Credit risk weighted exposure 292,199

Market risk exposure under Standardised approach

1,050

Operational risk exposure 20,758

Grand Total 314,007

Total Capital Ratio (%) 16.86

TIER I Capital Ratio (%) 12.09

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5. Risk Management

The Bank has set up a Risk Management Group headed by a Chief Risk Officer who reports directly to the Chief Executive Officer, in order to ensure the independence of the function. The Risk Management Group does not have any business targets in terms of either levels of business or income/profits to be achieved, with a view to ensuring its objectivity in analyzing the various risks. The mission of the Group is to identify, measure and control various risks and report to the top management of the Bank on the effects and, where possible, mitigations. The Bank has a well documented Risk and Disclosure Policy that classifies the risks faced by it in its day-to-day activities into certain families of risks and accordingly specific responsibilities have been given to various officers for the identification, measurement, control and reporting of these identified families of risks. Among the families of risks are:

i. Credit Risk which includes default risk of clients and counterparties

ii. Market Risk which includes interest rate, foreign exchange and equity risks

iii. Operational Risk which includes risks due to operational failures

The Risk Management Group is organized into, among others, three departments each responsible for one of the above three families, viz. the Credit Risk, Market Risk and Operational Risk departments.

As regards JKB, the Risk Management Department in that bank is headed by an Executive Manager reporting directly to its General Manager. This Risk Management department is also organized into, among others, three sections responsible for the three families of risk stated above. JKB has a Risk Policy which forms the basis of risk management in that bank. JKB is in the process of developing an ICAAP with the due approval of its Board of Directors, taking into account the applicable rules of CBJ.

AGB Board of Directors has recently approved the new organisational structure of the Bank whereby a separate Risk Management Department is being set-up headed by an Assistant General Manager reporting directly to its General Manager and organized into four sections responsible for the three families of risk viz. the Credit, Market Risks & Operational Risk departments as well as a Compliance Unit that will also be in charge of Reporting Money Laundering issues. AGB is implementing a Risk Policy which forms the basis of risk management in that bank.

A. Credit Risk

i. Strategies and Processes

The Bank has a well-documented Credit Policy that complies with CBK regulations and defines the appetite of the Bank for assumption of risks in its various business groups viz. the Corporate Banking, Private Banking, Retail Banking and Financial Institutions groups. The Credit Policy has been developed by the Risk Management Group in consultation with the business groups and under the guidance and approval of the Board. All the business groups are required to market for business and present credit proposals in accordance with the general and specific guidelines stated in the Credit Policy. Subject to the guidelines of the Policy, each business group may draw up its own business strategy, which is deliberated at the Management Executive Committee of the Bank and approved by the Board Executive Committee. The Policy also defines the

types of products that the various business groups can market to their clients and counterparties. Any new product is required to undergo a specific validation process before its launch.

JKB also has a Credit Policy that governs the grant of its credit facilities to clients segmented into Corporate Banking and Retail Banking. Similarly, the Management Executive Committee of this bank deliberates its business strategy and the new products offered by this bank are required to undergo a validation process.

AGB also has a Credit Policy that governs advancing credit facilities to clients segmented into Corporate Banking, Retail Banking, Financial Institutions, Islamic Banking and leasing.

ii. Structure and Organisation

The Credit Risk Department is headed by a Chief Credit Risk Officer and has independent teams that are respectively responsible for Credit Analysis and Credit Control. The Credit Analysis function is responsible for making independent financial analysis and appraisal of credit proposals that are marketed by the business groups. There are detailed guidelines for financial analysis that are followed by this department which gives its independent views/recommendations on credit proposals brought to it by the Relationship Managers of the various business groups. These proposals are then further processed in accordance with the delegation of powers approved by the Board. The Bank’s structure of delegation of powers envisages that a credit approval requires, in addition to the recommendation of the concerned business group, the concurrence of an official of the Risk Management Group at an appropriate level. This ensures that the approval process has an in-built mechanism of checks and balances with the concurrence of an independent functionary before a credit proposal can be approved.

The credit analysis function in JKB is however in the business group, viz. Corporate Banking. The Credit Risk section of the Risk Management department is responsible for credit portfolio analysis and supervision and is not involved in the decision making as regards specific credit proposals. The delegation for credit approval is given to various committees at different levels. This is expected to change in the near future with the setting up of an independent Risk Management Department that has already been approved by JKB’s Board.

At AGB, the credit analysis function is also with the business groups. The bank is in the process of recruiting qualified manpower to support the segregation between business units and credit analysts. The Credit Risk section is currently responsible for credit portfolio analysis and supervision (not involved in the decision).

iii. Scope and Nature of Reporting Systems

After the approval of the credit proposal, the Credit Control unit of the Credit department is entrusted with the responsibility of checking that the conditions precedent for the draw-down of the credit facilities as approved are fulfilled before the facilities are made available to the client/counterparty. This unit, which is independent of the Credit Analysis unit of the Department, also follows up on the conduct of the accounts by the client/counterparty in accordance with the terms of approval and reports any irregularities for necessary corrective action. This unit is also responsible to ensure that the relevant details for measurement of the risk and allocation of the appropriate risk weights to the exposures are

Pillar 3 disclosures for the full 2009 yearContinued

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made available in the system or otherwise, so that the computation of the RWAs can be made appropriately.

Since the Bank is at present required to follow the Standardised Approach for calculation of the RWAs, the internal ratings ascribed by the Bank for the obligors are not used in the process. However, bearing in mind the future needs of the Bank in the event of application of the more advanced methods, the Bank has introduced a revised Internal Rating System, Burgan Credit Rating (BCR). This system which consists of various steps to be followed by both the Credit Analysis team as well as the Relationship Managers indicates the BCR score. The Bank realizes that this system will need to be adjusted and fine-tuned based on the experience gained progressively in the use of the system and the results indicated by it. This system will thus be subjected to an iterative process for progressive adjustment and fine-tuning so that it may, in due course and subject to availability of statistically meaningful past default data, be used to arrive at an enhanced tool for measurement of credit risks. All the credit proposals approved under delegated authorities are reported with relevant details to the Board Credit Committee at regular intervals.

In JKB, the Credit Operations unit reporting to the Deputy General Manager- Support Services is entrusted with the functions of credit control. JKB also has an internal credit rating system.

At AGB, after the approval of the credit proposal, the Credit Administration unit of the Credit risk department is entrusted with the responsibility of checking that the conditions precedent for the draw-down of the credit facilities as approved are fulfilled before the facilities are made available to the client/counterparty. This unit is independent of the Credit Analysis unit of the Department. AGB is starting to use internal credit rating system.

iv. Hedges and Mitigants

The Credit Policy of the Bank, while outlining the risk appetite as regards credit risk, has also laid down guidelines for mitigating risks in terms of availability of credit enhancements and/or collaterals to support the exposure, the ratio of collateral value to the loan to be granted, the threshold levels for top-up of security and liquidation. The policy and procedures of the Bank also lay down the required methods and intervals for valuation of the different collaterals so as to determine the necessity for top-up by the client and/or procedure for liquidation. Since there are limited avenues for other types of hedges such as Credit Default Swaps etc. in the Kuwaiti banking environment, the chief mitigants considered are eligible collaterals and/or guarantee of acceptable third parties.

The collaterals accepted by the bank normally consist of cash in the form of deposits with the Bank, shares, bonds and units of mutual funds, various forms of real estate such as vacant lands, residential and commercial buildings, projects under construction etc. The scope to obtain any other type of collateral such as movables etc. is limited since the law does not recognize a hypothecation charge or a chattel mortgage. For the purposes of credit risk mitigation, only such of the collaterals that are permitted by the CBK and where the conditions stipulated are fully met are considered.

As regards shares, bonds etc., the Bank fulfills the stipulated regulatory requirements for their periodic valuation, application of haircuts etc. In regard to real estate assets, the Bank has employed independent, professional and govt. recognized valuers who are required to assess the

value of the collateral before they are accepted as security. The valuation is done normally on an annual basis by two independent valuers, approved by the Bank, the lower of the valuation being considered for risk mitigation.

The periodicity of the valuation is again in line with the regulatory requirements. The amount of a secured facility that a borrower can avail of is based on the valuation of security, after applying the necessary ratios on the same, in terms of the conditions of approval.

The Credit Policy of JKB also defines the collaterals acceptable for its credit facilities. JKB normally seeks to have three valuations for real estate assets taken as collateral and the least of the three values is normally considered.

The Credit Policy of AGB, while outlining the risk appetite as regards credit risk, has also laid down guidelines for mitigating risks in terms of acceptable collateral and the ratio of collateral value to the loan to be granted. In regard to real estate assets, the Bank has employed independent & professional valuers who are required to assess the value of the collateral before they are accepted as security.

B. Market Risk


The operations of the Bank’s Treasury and Investment Banking Group give rise to the market risks assumed by the Bank. The Bank has a well-defined and CBK compliant Treasury Policy that outlines its risk appetite in regard to undertaking transactions that result in exposures to market risk. Being a specialized area that requires particular knowledge of the market and various products and players therein, the policy document is prepared by the Treasury Group with inputs/concurrence from the Risk Management, under the guidance and approval of the Board. The Policy covers rules concerning the positions that the Bank assumes in the course of its trading in foreign exchange, equities and fixed-income securities as also the interest rate risk positions of its banking book in terms of mismatches in maturity and/or re-pricing periods. At present, the Bank does not trade in commodities nor takes up any positions in regard to commodity-based derivatives or other products. The strategies that the Treasury Group plans to adopt during the coming year are decided on the basis of market forecasts that are made at the time of preparation of the annual budget. These are, on an ongoing basis, discussed at the Asset Liability Committee (ALCO) meetings and corrective actions, if any are decided at these meetings. These meetings are chaired by the Chief Executive Officer and are convened by the Market Risk Controller in the Risk Management Group. The ALCO discusses and deliberates on all aspects of market and liquidity risks.

JKB has a well defined ALCO policy as well as an Investment Policy covering the main areas of market risk.

AGB has recently set an Asset Liability Committee (ALCO). It discusses and deliberates on all aspects of market and liquidity risks.The policy covering the main areas of market risk is under implementation. ALCO is chaired by the General Manager and will be convened by the Head of Credit and Market Risks in the Risk Management department.

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The Treasury group, in consultation with the Risk Management, lays down the various limits and rules under which the members of the Treasury Dealing Room are allowed to take up positions. These limits are approved by the Board Executive Committee and where so required under the regulations, also by CBK. These limits relate to intra-day and overnight positions as well as positions under different maturity buckets, counterparty exposure limits, stop-loss levels etc. While the adherence of these limits are monitored by the Chief Treasury Officer, they are also independently monitored by the Market Risk Controller who is placed in the dealing room but reports to the Chief Risk Officer – Risk Management. The Market Risk Controller reports relevant information on the treasury activities of the Bank including the various positions taken by the Treasury to the Chief Risk Officer - Risk Management on a daily basis or more frequently if necessary.

While quantifying market risks, the Bank considers risks arising out of movements in interest rates (for each of the currencies in which it holds positions), foreign exchange and price of trading investments. As stated earlier, the Bank does not assume positions in commodities. Based on the composition of the risk assets that give rise to these risks, the bank applies internal rules to determine the value at risk. These are in line with the applicable regulatory guidelines and are considered commensurate with the positions assumed by the bank from time to time. These positions are marked to market at regular intervals as prescribed by the regulatory guidelines and these valuations are independently computed/ verified by the Middle Office of the Bank. Middle Office has no reporting relationship to the Front Office that assumes and manages these positions.

As regards JKB, apart from cover operations to meet the client requests for foreign currency transactions, it does not actively trade in foreign currencies or assume proprietary positions in such currencies. The bank’s positions are subject to a ceiling of 5% of its equity for a single currency and 15% in aggregate for all foreign currencies and limits within these ceilings are approved by the Board. In view of JKB’s decision to restrict itself to cover operations against client requests and not take any proprietary positions in any foreign currency, the Middle Office in this case reports to the Treasury. However, the Market Risk section under the Risk Management monitors the market risks arising from all treasury activities including investments.

As regards AGB, apart from cover operations to meet the client requests for foreign currency transactions, it does not actively trade in foreign currencies or assume material proprietary positions in such currencies. The bank’s positions are subject to a ceiling of 10% of its equity for a single currency and 30% in aggregate for all foreign currencies.


The Bank, during 2007, implemented new software that will allow independent, on-line monitoring of the intra-day positions from outside the dealing room. This system also enables the Market Risk Controller to monitor the activities of the various members of the Treasury Dealing Room simultaneously as the dealing transactions are made.


A major part of the banking book of the Bank is in Kuwaiti Dinars (KD’s), the other important currencies being the internationally actively traded currencies. Due to the limited scope for hedging interest rate positions in KD’s arising from a limited range of hedging products, the Bank enters into, where reasonably possible, variable interest rate transactions structured to enable it to minimize maturity/re-pricing mismatches. As regards the other currencies, the open positions taken by the Bank are within pre-set limits and tenors for the respective currency. The Bank also makes use of interest rate and currency swaps to hedge its interest rate and currency positions in foreign currencies. The Bank normally makes use of derivatives for hedging purposes and also meets the requests of its clients for derivative products on a fully matched basis.

C. Operational Risk


The Operations Risk Department is headed by a Chief Operational Risk Officer, referred to herein as the Operational Risk Controller, who reports to the Chief Risk Officer - Risk Management. This department oversees the operational procedures and controls with a view to identifying the areas of weakness in the operating procedures and processes of the various operating departments of the Bank and correcting them from time to time. The Risk and Disclosure Policy of the Bank classifies the various areas of operational risks and identifies specific officers who are primarily responsible for these risks. Thus, for example, the legal risks fall under the direct responsibility of the legal officer whereas the Information Technology (IT) risks fall under the responsibility of the Head of IT Department. The specific procedural guidelines for all departments under the Operations Group are overseen by the Operational Risk Controller who also collates various incidents that give rise to operational risks, an actual or potential loss situation.

For the purpose of separation of the functions of IT development/operations from IT Security, the Operational Risk Controller is also responsible to independently ensure the adequacy and effectiveness of IT security systems and procedures. These include both internal and external IT security measures.

The Bank also has a Business Continuity and Recovery Plan, which was developed with necessary inputs from all the concerned groups in the bank and external consultants.

In JKB, the IT security function directly reports to the Executive Manager, Risk Department, which also takes the responsibility for Business Continuity Management.

In AGB, the processing of the various operational functions and transactions is governed by Operating Procedures laid down for each of the operating departments. The IT security function directly reports to the General Manager. For the purpose of separation of the functions of IT development/operations from IT Security, the Head of IT Security and Business Continuity Management in the Operational Risk is also responsible to independently ensure the adequacy and effectiveness of IT security systems and procedures. These include both internal and external IT security measures. He also takes the responsibility for business continuity management.


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The various operational functions of the Bank come under the Operations Group headed by the Chief Operations Officer (COO) who oversees the day-to-day operational and support functions. In order to ensure the independence of the various operating departments, the COO reports directly to the Chief Executive Officer. Also, the processing of the various transactions is governed by Standard Operating Procedures (SOPs) laid down for each of the operating departments with the necessary inputs/concurrence from, among others, the Operational Risk Controller.

The operational functions in JKB are under the charge of the Deputy General Manager- Support Services who directly reports to the General Manager.

The operational functions in AGB are under the charge of two Deputy General Manager who directly reports to the General Manager. DGM, Core Business is in charge of corporate banking; retail banking, branch network and corporate communication. DGM, Support Services is in charge of HR, Trade Finance and IT.


As regards the scope and nature of risk reporting in this area, the Bank has laid down Internal Control Charts (ICCs) that are required to be submitted by the various functionaries at critical levels and with differing periodicities. These are required to be submitted to specified supervisors who conduct the necessary follow up in regard to exceptions and ensure corrective action. The ICCs at present cover all the branches and operating departments in the head office. The Bank will, in due course, extend the ICCs to cover all areas of the Bank.

JKB has in place a Control & Risk Self Assessment scheme that covers all the functions of the bank. This bank also identifies key risk areas in its branches for control and follow up, which are in the process of being implemented in all departments. . JKB is in the process of applying the same ICC system existing at Burgan Bank.

AGB has in place an Internal Control Unit in the Operational Risk unit. It is responsible for identifying key risk areas mainly in the branches for control and follow up, which are in the process of being implemented in all departments. AGB is also in the process of applying the same ICC system existing at Burgan Bank.


The Bank has set up an Incident Management System (IMS) under which various incidents of operational risks are noted and registered with all the relevant details. These incidents may relate to either actual or potential loss resulting from an operational failure or dysfunction, either due to external or internal causes. These incidents are analysed to effect necessary changes in the SOPs so as to enhance the operational controls and to eliminate or minimize the operational loss. These incidents are, at appropriate intervals, reported to the top management of the Bank and the appropriate Board Committee.

The Bank has also developed Risk Dashboards in some of its operational areas which serve to provide a snapshot of the concerned units in regard to the operational risks in these operating units. The Bank intends to extend these Risk Dashboards progressively to cover more units of the bank.

JKB also has a mechanism to collect and analyse operational risk incidents that lead to actual and/or potential losses.

AGB has started the process of implementing a mechanism to collect and analyze operational risk incidents that lead to actual and/or potential losses.

6. Credit Exposures

i. Definition of Past Due and Impaired Assets

In regard to income recognition, asset classification and provisioning requirements, the Bank, as a matter of policy, follows the relevant regulations of CBK. Where considered appropriate for reasons of prudence, a more conservative policy is followed in regard to the amounts of loan loss provisions than those calculated by using the norms laid down in these regulations. The Bank considers an asset or an exposure to be impaired if, in its opinion, the realizable value of the asset or the exposure is less than the value at which it is carried in the books of the Bank before it considers the necessity of making a specific provision for the same. As defined under the regulations of CBK, a past due exposure is considered to be one where the client or counterparty has failed to meet his contractual obligation to the Bank towards payment of the interest or the principal or a part thereof on the date on which such payment is due. Thus, if a client is required to pay interest at monthly rests and if the interest is not paid upon its debit to the account on the first day of the following month, the loan is considered to be past due. Similarly, if the principal amount of the loan or an installment thereof is not paid on the day it falls due for payment under the contract entered into by the client with the Bank, such loan is considered as past due from the next day. However, as is the international practice in the banking industry and as laid down under the CBK regulations, an exposure is considered as non-performing if it continues to remain past due for more than 90 days. In respect of retail banking loans, an asset is considered as non-performing if more than 3 installments remain unpaid. In all such cases, the exposure will be considered to be impaired.

JKB also applies such prudent policies which are in line with the relevant CBJ regulations.

AGB also applies policies which are in line with international practice in the banking industry and as laid down under the CBA regulations, an exposure is considered as non-performing if it continues to remain past due for more than 90 days. In respect of retail banking loans, an asset is considered as non-performing if more than 3 installments remain unpaid.

ii. Approaches for Specific and General Provisions

As required under the CBK regulations, the Bank maintains two types of loan loss reserves. On the Bank’s exposure to non-bank clients and counterparties which are not covered by collateral in the form of cash or demand/term deposits with the Bank, the Bank was required to maintain a general provision of 2% of the outstanding exposure, both on and off-balance sheet. If the exposure to a third party is covered by the guarantee of a bank that is rated below ‘A’, in such cases also, the Bank was required to maintain a general provision of 2% of the outstanding exposure. However, with effect from 12.03.07, the CBK amended these rules and banks in Kuwait are, after that date, required to maintain only 1% (instead of 2%) general reserve in respect of cash exposures and 0.5% for

9

non-cash exposures. The past level of general provisions as of 31.12.2006 however cannot be reversed unless, under special circumstances, CBK approval is obtained for the same. The Bank has not reversed any past provision in this regard in 2007, 2008 and 2009. Further the Bank, as part of its internal policies, may from time to time, make incremental general provision (over and above the CBK norms). Out of the total general provision so maintained, a sum equal to 1.25% of the RWA in the case of on-balance sheet exposures and after the application of Credit Conversion Factors and Risk Weights for off-balance sheet exposures is considered to be part of the Tier 2 capital of the Bank and the remaining amount is given the same treatment for the purpose of CRAR as if it was a specific provision, i.e., it is reduced from the RWA of the Bank.

In regard to impaired assets, the Bank determines the necessary level of specific provision in terms of the norms laid down under the CBK regulations. These regulations require the Bank to make a provision of at least 20% of the value of the exposure (net of the value of eligible collateral as defined therein) if it remains past due for more than 90 days but less than 180 days, 50% if the period of past due is more than 180 days but less than 1 year and 100% if the past due period exceeds 1 year. However, based on the circumstances of a particular exposure, if and when the Bank considers it necessary, a higher level of provisioning is made even if these default periods are not attained.

In all cases of non-performing exposures, the Bank does not recognize any accrued income. Interest/commission on such exposure is recognized as income only on actual receipt.

The Loan Review and Provisioning Committee of the Bank examines, at monthly intervals, all the delinquent accounts to determine if a specific provision needs to be made for any particular account. The Committee is chaired by the Chief Risk Officer - Risk Management or in his absence, by the Chief Financial Officer to ensure an objective assessment of the concerned exposure without taking into consideration the performance of the Bank or its profits/profitability.

JKB follows the relevant CBJ regulations in regard to impaired assets and provisioning requirements. Under these regulatory requirements, in addition to the above levels of provisions, JKB is also required to make a specific provision of 3% of the value of its exposure in respect of its past due assets below 90 days. For past due loans of 90 days or more but less than 180 days, it is required to make a provision of 25% of the value of its exposure. While it is not required to make any general provisions, the bank makes an allocation out of its profits towards a general reserve for its credit facilities.

As regards the provisioning committee of JKB, it does not have a representative of Risk Management department and the decisions are taken by the committee headed by the Deputy General Manager, Banking Group.

Currently, at the Provisioning Committee of AGB, decisions are taken by a committee headed by the General Manager and comprising the Deputy General Manger, Core Business, the Assistant General Manger, Credit and the Head of Finance department. The Committee examines, at monthly intervals, all the delinquent accounts to determine if a specific provision needs to be made for any particular account. AGB complies with the CBA rule imposing a 1-3% provision on regular credits. For

classified credits, AGB follows CBA regulations. These regulations require the Bank to make a provision of at least 30% of the value of the exposure (net of the value of eligible collateral as defined therein) if it remains past due for more than 90 days but less than 180 days, 50% if the period of past due is more than 180 days but less than 360 days and 100% if the past due period exceeds 360 days.

iii. Credit Risk Management Policy

In regard to the credit portfolio of the Bank, the Credit Policy, as stated earlier, defines the risk appetite of the Bank. The Bank gives, in addition to the financial position of the client/counterparty, due consideration to the sector of activity of the client/counterparty, the exposure of the Bank to the group to which the client/counterparty belongs, the quantum of exposure vis-à-vis the capital funds of the Bank, the exposure to the country of origin of the main cash flow of the client/counterparty, the nature of credit facilities, their purpose and the source of repayment and any other considerations that are essential for the credit assessment. The availability or otherwise of acceptable collateral, the standing and reputation of the client/counterparty, market reports, the exposures assumed by other banks on the same client/counterparty etc. are some of the considerations that are examined before approving credit facilities. As a rule, all credit exposures are reviewed at least once in a year. In the case of locally incorporated unlisted companies and partnerships with limited liability, the personal guarantees of the main promoters of the enterprise are normally also required.

Since the Bank is at present required to follow the Standardised Approach for credit risk, it does not follow any statistical methods to estimate either the probability of default or exposure at default or loss given default. Based on the public ratings given to the clients/counterparties by recognized and approved External Credit Assessment Institutions (ECAIs), the exposures are risk weighted in accordance with the CBK regulations.

iv. ECAIs and Mapping Process

An exercise to map these ratings to the exposure of the Bank where applicable is carried out. Where a general issuer rating is available, the same is used for the relevant exposure of the rated client/counterparty. Where only an issue rating is available, if the rated issue has comparable characteristics to the Bank’s exposure both in terms of the tenor and other features such as availability of credit enhancement etc. such rating is considered. CBK at present considers Moody’s, Standard and Poor’s and Fitch as the Approved ECAIs and only those clients/counterparties who have a solicited rating from one or more of these ECAIs, are considered to be rated. The CBJ has also approved these same ECAIs for this purpose. Based on the rating systems as declared by the ECAIs, the ratings are classified into Investment Grade and Non-Investment Grade ratings. Those who are not rated by any of these three ECAIs are considered to be unrated. In order to ensure that the ratings are not considered selectively, if a current rating from one of these ECAIs is available in respect of any client/counterparty, it is always taken into account and in such cases, the client/counterparty is not considered as unrated. In the case of AGB, since CBA has only stipulated Basel I regulations, no guidelines have been stipulated about the mapping of ECAIs so far. However, for the purpose of consolidation, the mapping policy followed is similar to that of the parent Bank - Burgan.


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Table V – Geographic Distribution of Gross Credit ExposuresKD’000s

Kuwait Other Middle

East

Europe USA Rest of the

world

Total

Claims on sovereigns

305,234 312,917 – – 62,432 680,583

Claims on public sector entities

– 50,595 – – – 50,595

Claims on banks

100,600 335,007 51,986 1,694 92,585 581,872

Claims on corporates

1,296,642 481,027 277 182 164,190 1,942,318

Cash items

28,504 9,837 – – 3,569 41,910

Regulatory retail exposures

370,811 35,186 127 47 22,574 428,745

RHL Eligible for 35% RW

– 11,132 – – – 11,132

Past due exposures

159,064 21,963 – 23,687 3,611 208,325

Other exposures

802,330 27,855 534 – 77,435 908,154

Total 3,063,185 1,285,519 52,924 25,610 426,396 4,853,634

Table IV – Credit Risk Exposure KD’000s

Gross credit exposure

Gross average credit exposure

Funded Unfunded Funded Unfunded


678,039 2,544 609,904 5,361


41,827 8,768 35,218 4,329

Claims on banks 562,460 19,412 563,774 8,902


1,242,706 699,612 1,226,076 645,164

Cash items 41,910 – 32,504 1,856


388,011 40,734 385,359 38,613


11,132 – 10,702 –

Past due exposures 206,120 2,205 164,235 13,605

Other exposures 881,387 26,767 710,062 32,864

Total 4,053,592 800,042 3,737,834 750,694

Table VI – Gross Credit risk exposures by Residual Contractual Maturity

KD’000s

Up to 3 months

3 to 6 months

6 to 12 months

Over 12 months

Total


352,510 99,139 69,764 159,170 680,583


2,159 20,214 2,444 25,778 50,595

Claims on banks

518,415 36,218 160 27,079 581,872


778,738 310,134 211,643 641,803 1,942,318

Cash items 41,910 – – – 41,910


31,150 9,863 9,425 378,307 428,745


6,207 1,210 1,180 2,535 11,132

Past due exposures

208,325 – – – 208,325

Other exposures

389,583 75,137 101,657 341,777 908,154

Total 2,328,997 551,915 396,273 1,576,449 4,853,634

Table VII – Impaired loans and provisions by standard portfolio KD’000s

Impaired loans (net of

suspended interest and

collateral)

Specific provision

General provision

Specific provision charge /

charge off (-)

Claims on banks

10,736 8,596 – 6,488


172,365 71,917 65,532 63,399


20,075 17,044 9,045 3,089

Other exposures

1,210 797 6,197 405

Total 204,386 98,354 80,774 73,381

Table VIII – Geographical distribution of impaired loans (net)KD’000s

Kuwait Other Middle

East

Europe USA Rest of the

world

Total

Claims on banks

– 1,457 – – 9,279 10,736


89,840 31,806 – 47,374 3,345 172,365


19,455 574 4 2 40 20,075

Other exposures

1,210 – – – – 1,210

Total 110,505 33,837 4 47,376 12,664 204,386

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Table IX – Reconciliation of changes in the provision KD’000s

Funded Unfunded Total

Specific General Specific General

Provisions as on 1 Jan 2009

25,674 63,389 1,517 8,995 99,575

Acquisition of a subsidiary

373 1,161 – 755 2,289

Exchange adjustment

110 434 – 32 576

Ceded to the Central Bank of Kuwait

(1) – – – (1)

Amounts written off

(2,700) – – – (2,700)

Statement of income

72,852 6,639 529 (631) 79,389

Provisions as on 31 Dec 2009

96,308 71,623 2,046 9,151 179,128

7. Credit Risk Mitigation (CRM)

The main CRM techniques applied by the Bank are based on eligible collaterals. Cases where the guarantee of a better-rated client/counterparty is obtained for exposures to a lower rated client/counterparty are few, mainly due to the limited number of Kuwaiti corporates for which ratings by approved ECAIs are available. In cases where specific pledge or blocking of deposits is available, on and off- balance sheet netting is also used to mitigate client risks.

i. On and Off-Balance Sheet Netting

The generic legal documents that the Bank obtains from its clients normally include a clause that permits the Bank to offset the client’s dues to the Bank against the Bank’s dues to the client. Thus, if the same legal entity that has obtained credit facilities from the Bank also maintains credit balances in its accounts, the Bank would normally have the legal right to set off the credit balances against its dues. In respect of some counterparty banks, there are specific agreements that provide for netting on and/or off-balance sheet exposures. Additionally, in specific cases, the Bank approves credit facilities to a client against pledge/block of his deposits to cover the whole or part of his dues. For the purposes of computation of CRAR (also for calculation of general provisions), as a prudential measure, the Bank does not take into account the general lien available to it under the generic documentation but only considers cases where specific pledge/block of deposits is in place.

ii. Collateral Policy

It is the Bank’s endeavor to obtain acceptable collateral cover for its exposures as far as commercially practicable. The collateral normally consists of real estate properties, shares listed in Kuwait and other leading stock exchanges, other traded and untraded securities such as bonds, mutual funds etc. In some cases, in order to ensure the promoter’s commitment, the Bank also obtains other forms of collateral such as unlisted shares/securities etc. These securities of course are not considered for CRM purposes. While the Bank will be willing to accept other eligible

collaterals as defined by the CBK such as gold, eligible debt instruments etc. these are not generally offered by clients/counterparties to the Bank. Accordingly, the eligible collateral predominantly consists of shares listed and traded on the recognised stock exchanges which form part of their respective main indices and eligible real estates as per CBK rules.

Under Kuwaiti laws, the repossession and enforcement of a mortgage on the primary residence of a borrower is not permitted except under specific conditions. The bulk of the residential mortgage loans of the Bank in its Retail Banking Group are therefore not considered to be collateralized by the primary residence, even though mortgage documents are obtained from some of the clients. Only in some cases, where the legal conditions for enforcement are fulfilled, these are considered to be retail exposures collateralized by residential mortgages and are applied the relevant weight.

However, as regards the operations of JKB & AGB, the Jordanian & Algerian laws permit enforcement of the mortgage on the primary residence and hence these constraints do not apply in their case.

iii. Main Types of Collateral

The Credit Policy of the Bank defines the types of collateral that are acceptable and the collateral coverage ratio, which is the ratio of the value of the collateral to the exposure, for each type of acceptable collateral. The policy also stipulates that the terms of credit facilities should stipulate a top-up level. If the value of collateral falls to a level where the actual coverage available breaches the top-up level, the client is required to either lodge additional collateral or reduce his outstanding dues accordingly. If the client fails to do either of these and the value of collateral falls further, the terms also stipulate a liquidation threshold, which is the level of coverage at which the Bank may proceed to liquidate the collateral to realize its dues. These various ratios, after approval, are monitored independently by the Credit Control unit and reported to the concerned business group for follow up with the client.

iv. Collateral Valuation and Management

The Bank follows a system under which the collateral valuation is independently verified. In respect of real estate accepted as collateral, the valuation is done normally on an annual basis by two independent valuers, approved by the Bank, the lower of the valuation being considered for risk mitigation. In respect of shares and other securities listed on the Kuwait Stock Exchange, the valuation is computed daily, based on the prices declared by the Stock Exchange at the end of the day. The valuation of other collateral such as unlisted shares is done on such bases as may be considered appropriate, on a case-by-case basis. The valuation process is handled by the Credit Control unit of the Bank with no involvement of the concerned business group who are kept informed of the value of client collateral.

v. Guarantees for Credit Enhancement

As stated earlier, there are very few cases where guarantee of a better-rated entity is obtained for the exposure to a lower rated entity. In these cases, where the rating is given by an approved ECAI, the guarantor’s rating is substituted in place of the rating of the borrower, for the purpose of computation of RWAs. Where the guarantor and/or the borrower are/


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is not rated by an approved ECAI, the Bank uses its internal assessment to determine the acceptability of the guarantee but for the purpose of computation of RWA, this has no effect.

vi. Concentration

The Bank makes an endeavour to avoid concentration of collateral as far as possible. To this intent, when collateral in the form of listed shares is accepted, the year-to-date daily traded volumes of the concerned share and the average number of trades are examined and these are, among other points, taken into consideration in making a decision to accept the collateral and stipulating the concerned threshold ratios stated above. The Bank classifies listed shares into various categories based on the liquidity and volatility of the concerned share, derived from the data available with the Kuwait Stock Exchange. The ratios would vary depending on the classification of the shares.

As regards JKB, this bank accepts all shares listed on the Amman Stock Exchange and these shares are not subject to any classification. Similarly, AGB accepts all shares listed on the Algerian Stock Exchange as collateral given that very few shares are listed and hence these are not subject to any classification.

8. Market Risk for Trading Portfolio, Foreign Exchange and Commodities Exposures

The Bank applies the Standardised Approach for computing the market risk on its trading portfolio and at present does not use the Internal Model Approach (IMA). Under the Standardised Approach, the risk exposure is quantified according to the levels stipulated by CBK.

9. Operational Risk

As stipulated by CBK, the Bank uses the Standardised Approach for computation of Operational Risk and the capital required for the same. Out of the eight business lines defined by CBK, the Bank’s operations are confined only to five, and the Bank does not presently operate in Corporate Finance, Agency Services and Retail Brokerage. For the remaining business lines, the Bank uses the stipulated beta factors. Additionally, as stated earlier, the Bank has put in place an Incident Management System to track operational risk incidents and eventually, the system is expected to assist the Bank develop a more advanced approach for operational risk, if and when this is approved or mandated by the authorities.

As regards JKB, this bank applies the Basic Indicator Approach for computing operational risk under the CBJ regulations. However, during the consolidation process, the operational risks are considered under the Standardised Approach. For this purpose, the activities of this bank are considered under 5 business lines which are, Trading and sales, Commercial banking, Retail banking, Asset management and Retail brokerage.

On a standalone basis, AGB does not have to follow Basel II guidelines / compute operational risk. However, during consolidation process, the operational risks have been considered under the Standardised Approach. For this purpose, the activities of this bank are classified under Commercial Banking.

Table X – Net Credit exposure after risk mitigation and credit conversion factor

KD’000s

After CCF Before CRM

CRM Net Exposure

Claims on sovereigns 678,940 46 678,894


43,581 1,339 42,242

Claims on banks - Rated

514,204 – 514,204

Claims on banks - Unrated

53,717 – 53,717

Claims on corporates 1,550,838 395,662 1,155,176

Cash items 41,910 – 41,910


408,722 10,803 397,919


11,132 5,364 5,768

Past due exposures 206,561 1,674 204,887

Other exposures 904,584 491,090 413,494

Total 4,414,189 905,978 3,508,211

Table XI – Exposure covered by eligible collateral and guarantee KD’000s

Covered by:

Exposure after CCF, net of Suspended Interest

Financial collateral after application of haircuts

as stipulated by CBK

Claims on sovereigns 678,940 46


43,581 1,339

Claims on banks 567,921 –

Claims on corporates 1,550,838 395,662

Cash items 41,910 –

Regulatory retail exposures 408,722 10,803

RHL Eligible for 35% RW 11,132 5,364

Past due exposures 206,561 1,674

Other exposures 904,584 491,090

Total 4,414,189 905,978

Table XII – Capital Requirement for Market Risk KD’000s

Equity position risk 215

Foreign exchange risk 835

Total 1,050

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10. Equity Position in the Banking Book

i. Classification of Investments

Except for the shares of its three subsidiaries, Burgan International Holding, S.A., Jordan Kuwait Bank and Gulf Algeria Bank & that of its Associate – Bank of Baghdad, all of the Bank’s investments in equities are classified either as ‘Available for Sale’, ‹Held to Maturity› or ‘At fair value through profit or loss’. Investments in equities that are acquired principally for the purpose of selling in the short term or if they are managed and their performance are evaluated on reliable fair value basis in accordance with the documented investment strategy are classified as at fair value through profit or loss and all other investments are classified as available for sale or as held to maturity. The equity shares classified as investments at fair value through profit or loss are in the trading book of the bank while the other investments are in the banking book.

ii. Accounting Policy and Valuation Methodology

The accounting policies concerning investments and their valuation methodologies are described in detail under the “Summary of Significant Accounting Policies” elsewhere in this Annual Report. During the year 2009, there has been no significant change in these policies and methodologies.

The Bank’s Investment Committee examines proposals for investments that come from the Investment Department which is under the Chief Treasury Officer. The Committee deliberates on these proposals before sending them for the final decision of the Board Executive Committee. The Investment Committee also takes a view on appropriate classification of the concerned investment, based on the Bank’s objective in making the investment.

11. Interest Rate Risk in the Banking Book (IRRBB)

The interest rate risk on the banking book arises due to maturity/re-pricing mismatches of the assets and liabilities in the banking book. For the purpose of monitoring such interest rate risk, the Bank has in place a system that tracks the residual contractual maturities of all its interest bearing assets and liabilities as also their re-pricing periods. From such data, a cash flow is prepared showing the relevant mismatches in re-pricing periods, classified into various maturity buckets. The interest rate cash flow disregards any non-interest bearing assets and liabilities since they do not affect the IRRBB. However, these are assumed to re-price on an overnight basis to provide for their replacement by interest bearing liabilities or assets.

As regards JKB, the cash flows do not consider non-interest bearing deposits in its interest rate cash flows. Currently, AGB does not undertake any interest rate risk analysis.

The Bank normally levies a pre-payment charge for both its assets and liabilities that a client/counterparty offers to liquidate before its contractual maturity date, unless specifically waived. Such pre-payment charge takes into account the interest rate risk faced by the Bank on account of such a pre-payment request and the resultant replacement cost of such asset or liability at market rates as on the date of pre-payment. Therefore, in cases where the Bank levies such a charge, no need is felt, from the point of view of IRRBB (and not from the point of view of liquidity), to make assumptions regarding pre-payments, as the Bank reserves the right to decline the pre-payment request. The cases where such pre-payment charge is not to be levied are referred to the relevant authorities with the necessary powers.

All non-maturity deposits are considered repayable on demand and are accordingly placed in the overnight maturity bucket as required under CBK regulations. Due to this prescription in the CBK rules that the banks must follow, all non-maturity deposits are assumed to be re-priced the next day, instead of their placement in appropriate buckets based on a behavioral/trend analysis of such deposits. Certain details related to IRRBB are prepared and presented at the monthly meetings of the ALCO, which also deliberates in the matter.

For an even 25/50/100 basis point shock along the yield curve, net interest income for one year (from Jan-10 to Dec-10) including derivatives is affected as shown on the following page:

Capital requirement by equity groupingsKD’000s

Investments available for sale 15,599

Investments held to maturity 1,073

Investments at fair value through profit or loss 215

Total 16,888

Table XIII – Investments KD’000s

Type Publicly traded

Privately held

Equities 13,630 41,784

Fixed income instruments 18,462 38,244

Any other investments – 28,832

Total 32,092 108,860

Realised gains / (losses) recorded in the statement of income

3,993

Unrealised gains / (losses) recognised in the shareholder’s equity

12,447

45% of the above included in Tier 2 Capital 5,601


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The interest rate sensitivity analysis conducted by the Bank indicated that for an even increase in interest rates by 100 basis points (1%) the annual interest income of the Bank would have gone up by 11% whereas an even reduction in interest rates by the same level would have resulted in a reduction of net interest income by 9%. Since the banking book is predominantly in KD’s, this exercise is conducted on the consolidated book. This analysis is now being conducted at monthly intervals. JKB conducts a similar interest rate sensitivity analysis on a monthly basis taking an interest rate movement of 100 basis points. Currently AGB does not conduct interest rate sensitivity analysis.

12. Overview and Conclusion

It is considered by the Board and Management of the Bank that, as at the end of 2009, the institution has in place a risk management, control and evaluation system that is:

• Responsivetopresentpriorityriskmanagementneeds,

• Compliant both with historic regulatory instructions andsubstantially in conformity with the enhanced Basel II driven requirements detailed by CBK in their December 2005 instruction document including subsequent amendments, and

• Meetsgenerallyacceptedinternationalriskmanagementstandardsfor a financial institution of the size and complexity of the Bank.

The Bank now has in place detailed procedures for all its major departments/functions aimed to achieve full operational conformity with the policies set out in this section in an integrated and cost efficient manner. With this objective,

• Anewfully integratedTreasurySystemhasnowbeenintroducedand is operational

• Detailedoperatingproceduresare inplace inrespectofallmajorfunctions and the concerned staff members may refer to them as and when necessary so as to ensure their compliance

• The Bank’s IT security and control structure has beenindependently evaluated by outside specialist consultants and their recommendations are being examined for implementation where considered necessary

30,000

40,000

50,000

60,000

70,000

80,000

20,000

10,000

0

(20,000)

(10,000)

15%

5%

0%

10%

-5%

-10%

-15%

KD

000

Down 100 Down 50 Down 25 BB Consolidates Up 25 Up 50 Up 100

Net Int. Inc. Forecast 61,669 64,403 67,131 67,772 70,570 70,844 75,442

Earnings at Risk (6,103) (3,369) (641) – 2,798 3,072 7,670

Earnings at Risk % -9% -5% -1% 0% 4% 5% 11%

The Bank Management will continue to review the policies and procedures on an ongoing basis periodically for necessary and appropriate enhancements, and present them for approval by Board Committees and/or the Board itself as required by the Bank’s Governance structure and, where applicable, CBK guidance.

After the acquisition of JKB & AGB, the Bank is in the process of implementing a Post Acquisition Integration plan by aligning certain identified areas/functions of the three banks, with the assistance of an internationally reputed firm of consultants. Pending the completion of this process, the practices, organizations, functioning of the three banks have different approaches as may be observed from the above. It is the intention of the Bank to align these practices to the best practices as found suitable for application in the three banks and as adopted for implementation.

15

How to obtain our 2009 Financial Statement:

n Shareholders attending our General Assembly meeting will be provided with a copy of the Financial Statement for their approval.

n Shareholders can request a copy of the Financial Statement to be sent to them by courier. Please call +965 2298 8000 to arrange this.

n Shareholders can request a copy of the Financial Statement to be sent to them by email. Please send an email request to [email protected] to arrange this.

n Shareholders can download a PDF copy of the Financial Statement from our website – www.burgan.com

For further information on our 2009 Financial Statement, please telephone +965 2298 8000.

driven by youA member of the KIPCO Group

We have audited the accompanying consolidated financial statements of Burgan Bank S.A.K. (“the Bank”) and its subsidiaries (collectively “the Group”), which comprise the consolidated statement of financial position as at 31 December 2009 and the related consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Management’s Responsibility for the Consolidated Financial Statements

The Bank’s management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards adopted for use by the State of Kuwait. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgement, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate for the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Bank’s management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Ernst & Young Al Aiban, Al Osaimi & PartnersP.O. Box 74, Safat 13001, KuwaitBaitak Tower, 18-21st FloorSafat Square, Ahmed Al-Jaber StreetTelephone (965) 2245 2880 / 2295 5000Facsimile (965) 2245 6419e-mail: [email protected]

Bader & Co. PricewaterhouseCoopersP.O. Box 20174, Safat 13062Dar Al-Awadi Complex, 7th FloorAhmed Al-Jaber Street, Sharq – KuwaitTelephone (965) 22408844Facsimile (965) 22408855e-mail: [email protected]

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of 31 December 2009, and the results of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted for use by the State of Kuwait.

Report on Other Legal and Regulatory Requirements

Furthermore, in our opinion proper books of account have been kept by the Bank and the consolidated financial statements, together with the contents of the report of the Bank’s Board of Directors relating to these consolidated financial statements, are in accordance therewith. We further report that we obtained all the information and explanations that we required for the purpose of our audit and that the consolidated financial statements incorporate all information that is required by the Capital Adequacy Regulations issued by the Central Bank of Kuwait as stipulated in CBK Circular number 2/BS/184/2005 dated 21 December 2005, as amended, Commercial Companies Law of 1960, as amended, and by the Bank›s Articles of Association, that an inventory was duly carried out and that, to the best of our knowledge and belief, no violations of Capital Adequacy Regulations issued by the Central Bank of Kuwait as stipulated in CBK Circular number 2/BS/184/2005 dated 21 December 2005, as amended, Commercial Companies Law of 1960, as amended, nor of the Articles of Association have occurred during the year ended 31 December 2009 that might have had a material effect on the business of the Group or on its financial position.

We further report that, during the course of our audit, we have not become aware of any material violations of the provisions of Law No. 32 of 1968, as amended, concerning currency, the Central Bank of Kuwait and the organisation of banking business, and its related regulations during the year ended 31 December 2009.

Waleed A. Al Osaimi Bader A. Al-WazzanLicence No. 68 A Licence No. 62 AOf Ernst & Young Of PricewaterhouseCoopers

21 January 2010Kuwait

INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF BURGAN BANK S.A.K.

16

BURGAN BANK GROUP

The attached notes 1 to 25 form an integral part of these consolidated financial statements. 3

Consolidated Statement of Financial Position At 31 December 2009

2009 2008Notes KD 000’s KD 000’s

(Restated)ASSETSCash and cash equivalents 3 602,088 550,955Treasury bills and bonds with CBK and others 417,049 387,378Due from banks and other financial institutions 4 407,427 532,412Loans and advances to customers 5 2,246,949 2,132,990Investment securities 6 140,952 107,404Investment in an associate 7 15,434 -Other assets 8 79,523 75,945Property and equipment 9 36,664 30,607Intangible assets 9&10 147,898 125,308

───────── ───────── TOTAL ASSETS 4,093,984 3,942,999 ═════════ ═════════

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIESDue to banks 276,438 192,262Due to other financial institutions 701,366 603,224Deposits from customers 2,424,981 2,416,101Other borrowed funds 11 123,022 197,943Other liabilities 12 139,903 147,668 ───────── ───────── TOTAL LIABILITIES 3,665,710 3,557,198 ───────── ───────── SHAREHOLDERS’ EQUITYShare capital 13 104,133 94,666Share premium 13 64,759 64,759Treasury shares 13 (18,290) (16,589)Statutory reserve 13 39,872 39,216Voluntary reserve 13 40,250 39,594Treasury shares reserve 13 37,296 37,286Investment revaluation reserve 12,447 7,481Share based compensation reserve 538 484Foreign currency translation reserve 10,675 5,026Retained earnings 33,795 38,363 ───────── ───────── Equity attributable to the equity holders of the Bank 325,475 310,286Non controlling interests 102,799 75,515 ───────── ───────── TOTAL SHAREHOLDERS’ EQUITY 428,274 385,801 ───────── ───────── TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 4,093,984 3,942,999 ═════════ ═════════

___________________________ Tariq Mohammed Abdul Salam Chairman

17


Consolidated Income Statement For the year ended 31 December 2009

2009 2008Notes KD 000’s KD 000’s

(Restated)

Interest income 201,996 208,744Interest expense (100,167) (140,727) ───────── ───────── Net interest income 101,829 68,017

Fee and commission income 14 31,844 24,600Fee and commission expense (1,878) (2,184) ───────── ───────── Net fee and comission income 29,966 22,416

Net gain (loss) from foreign currencies 4,499 (237)Net (loss) gain from financial assets at fair value through profit or loss 6 (438) 3,150Net gains from financial assets available for sale 4,431 21,028Share of result from an associate 786 -Dividend income 1,084 2,257Other income 10 12,552 4,474 ───────── ───────── Operating income 154,709 121,105Staff expenses (20,994) (17,985)Other expenses (22,542) (15,501) ───────── ───────── Operating profit before provision 111,173 87,619Provision for impairment of loans and advances 5 (79,389) (36,396)Impairment of investment securities (3,448) (10,158) ───────── ───────── Profit before taxation and board of directors' renumeration 28,336 41,065 Taxation 15 (7,662) (5,261)Board of directors' remuneration (70) (70) ───────── ───────── Profit for the year 20,604 35,734 ═════════ ═════════ Attributable to:Equity holders of the Bank 6,211 37,065Non controlling interests 14,393 (1,331)

───────── ───────── 20,604 35,734

═════════ ═════════ Fils Fils

Basic and diluted earnings per share -attributable to the equity holders of the Bank 16 6.1 35.8 ═════════ ═════════



2009 2008Notes KD 000’s KD 000’s

(Restated)




───────── ───────── 20,604 35,734

═════════ ═════════ Fils Fils


18

BURGAN BANK GROUP



2009 2008Notes KD 000’s KD 000’s


───────── ───────── TOTAL ASSETS 4,093,984 3,942,999 ═════════ ═════════





Consolidated Statement of Comprehensive Income For the year ended 31 December 2009

2009 2008KD 000’s KD 000’s

(Restated)

Profit for the year 20,604 35,734───────── ─────────

Other comprehensive incomeFinancial assets available for sale: Net fair value gain (loss) 5,688 (6,851)Net transfer to income statement 350 (7,694)Foreign currency translation adjustment 9,192 7,675

───────── ───────── Other comprehensive income (expense) for the year 15,230 (6,870)

───────── ───────── Total comprehensive income for the year 35,834 28,864

═════════ ═════════Attributable to:Equity holders of the Bank 16,826 27,916Non controlling interests 19,008 948 ───────── ─────────

35,834 28,864═════════ ═════════


Consolidated Statement of Comprehensive Income For the year ended 31 December 2009

2009 2008KD 000’s KD 000’s

(Restated)

Profit for the year 20,604 35,734───────── ─────────

Other comprehensive incomeFinancial assets available for sale: Net fair value gain (loss) 5,688 (6,851)Net transfer to income statement 350 (7,694)Foreign currency translation adjustment 9,192 7,675

───────── ───────── Other comprehensive income (expense) for the year 15,230 (6,870)

───────── ───────── Total comprehensive income for the year 35,834 28,864

═════════ ═════════Attributable to:Equity holders of the Bank 16,826 27,916Non controlling interests 19,008 948 ───────── ─────────

35,834 28,864═════════ ═════════

19The attached notes 1 to 25 form an integral part of these consolidated financial statements.

4


2009 2008Notes KD 000’s KD 000’s

(Restated)




───────── ───────── 20,604 35,734

═════════ ═════════ Fils Fils




2009 2008Notes KD 000’s KD 000’s

(Restated)




───────── ───────── 20,604 35,734

═════════ ═════════ Fils Fils


BURGAN BANK GROUP



2009 2008Notes KD 000’s KD 000’s


───────── ───────── TOTAL ASSETS 4,093,984 3,942,999 ═════════ ═════════




BURGAN BANK GROUP



2009 2008Notes KD 000’s KD 000’s


───────── ───────── TOTAL ASSETS 4,093,984 3,942,999 ═════════ ═════════




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21

BURGAN BANK GROUPNotes to the Consolidated Financial Statements At 31 December 2009

9

1. INCORPORATION AND PRINCIPAL ACTIVITIES

Burgan Bank S.A.K. ("the Bank”) is a public shareholding company incorporated in the State of Kuwait by Amiri Decree dated 27 December 1975 listed on the Kuwait Stock Exchange and is registered as a Bank with the Central Bank of Kuwait. The Bank‟s registered address is P.O. Box 5389, Safat 12170, State of Kuwait.

The consolidated financial statements of the Bank and its subsidiaries (collectively “the Group”) for the year ended 31 December 2009 were authorised for issue in accordance with a resolution of the Board of Directors on 21 January, 2010 and are issued subject to the approval of the Ordinary General Assembly of the shareholders‟ of the Bank.The Ordinary General Assembly of the Shareholders has the power to amend these consolidated financial statements after issuance.

The principal activities of the Group are explained in note 17.

The Bank is a subsidiary of Kuwait Projects Company Holding K.S.C. ("the Parent Company”).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of preparation The consolidated financial statements are prepared under the historical cost basis, except for the financial assets at fair value through profit or loss, financial assets available for sale and derivative financial instruments that are measured at fair value.

The consolidated financial statements are presented in Kuwaiti Dinars (KD), which is the Bank's functional currency rounded to the nearest thousand except when otherwise stated.

The comparative information on consolidated statement of financial position as at 31 December 2008, consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in shareholders‟ equity and consolidated statement of cash flows for the year then ended have been restated in accordance with IFRS 3: „Business Combination – Revised‟ due to the completion of the purchase price allocation of JKB, which requires retrospective adjustment of provisional amounts recognised at the acquisition date (note 9).

Statement of compliance The consolidated financial statements of the Group have been prepared in accordance with the regulations of the State of Kuwait for financial services institutions regulated by the Central Bank of Kuwait (“CBK”). These regulations require adoption of all International Financial Reporting Standards (“IFRS”) as issued by International Accounting Standard Board (“IASB”) except for International Accounting Standards (“IAS”) 39: Financial instruments: recognition and measurement requirement for collective provision, which has been replaced by the CBK‟s requirement for a minimum general provision as described under the accounting policies for impairment of financial assets and note 5.

Changes in accounting policies and disclosures The accounting policies used in the preparation of these consolidated financial statements are consistent with those used in previous year, except for the adoption of new accounting policies on „Intangible assets‟ and „Investment in an associate‟ and the following issued, revised and amended IASB Standards during the year:

IAS 1: Presentation of Financial Statements (Revised)IFRS 2: Share-based Payment: Vesting conditions and cancellationIFRS 7: Financial Instruments: Disclosures (Amended)IFRS 8: Operating Segments (new)IAS 16: Property, plant and equipment (Amended)IAS 19: Employee benefits (Amended)IAS 28: Investment in associates (Amended)IAS 32: Financial instruments: Presentation (Amended)IAS 36: Impairment of assets (Amended)IAS 38: Intangible assets (Amended)IAS 39: Financial instruments: recognition and measurement (Amended)

BURGAN BANK GROUP


Consolidated Statement of Cash Flows Year ended 31 December 2009

2009 2008Notes KD 000’s KD 000’s

(Restated)Operating activitiesProfit before taxation and board of directors' remuneration 28,336 41,065Adjustments:

Net loss (gain) from financial assets at fair value through profit or loss 438 (3,150)Net gain on sale of financial assets available for sale (4,431) (21,028)Share of result from an associate (786) -Provision for impairment of loans and advances 79,389 36,396Impairment of investment securities 3,448 10,158Dividend income (1,084) (2,257)Depreciation and amortisation 5,966 3,857Provision for share based compensation 54 308

───────── ─────────

Operating profit before changes in operating assets and liabilities 111,330 65,349Changes in operating assets and liabilities:

Treasury bills and bonds with CBK and others (29,671) 86,148Due from banks and other financial institutions 102,520 (104,876)Loans and advances to customers (79,456) (279,679)Other assets 11,678 (2,768)Due to banks 69,257 (277,356)Due to other financial institutions 97,016 244,626Deposits from customers (65,609) 246,989Other liabilities (56,053) (23,148)Taxation paid (1,704) (2,655)

───────── ─────────

Net cash from (used in) operating activities 159,308 (47,370) ───────── ─────────

Investing activitiesPurchase of investment securities (240,880) (654,661)Proceeds from sale of investment securities 211,483 705,004Investment in an associate 7 (14,648) -Purchase of property and equipment (net of disposals) (5,156) (5,220)Dividends received 1,084 2,257Acquisition of a subsidiary, net of cash acquired 10 11,128 36,374 ───────── ─────────

Net cash (used in) from investing activities (36,989) 83,754 ───────── ─────────

Financing activitiesOther borrowed funds (74,921) 149,282Purchase of treasury shares (1,758) (18,819)Sale of treasury shares 67 1,324Cash dividend paid - (51,583)Cash dividend paid to non controlling interests (3,333) - ───────── ─────────

Net cash (used in) from financing activities (79,945) 80,204 ───────── ─────────

Effect of foreign currency translation 3,599 3,212Net movement in non controlling interests 5,160 (35) ───────── ─────────

Net increase in cash and cash equivalents 51,133 119,765Cash and cash equivalents at 1 January 550,955 431,190 ───────── ─────────

Cash and cash equivalents at 31 December 3 602,088 550,955 ═════════ ═════════

22


9

1. INCORPORATION AND PRINCIPAL ACTIVITIES

Burgan Bank S.A.K. ("the Bank”) is a public shareholding company incorporated in the State of Kuwait by Amiri Decree dated 27 December 1975 listed on the Kuwait Stock Exchange and is registered as a Bank with the Central Bank of Kuwait. The Bank‟s registered address is P.O. Box 5389, Safat 12170, State of Kuwait.

The consolidated financial statements of the Bank and its subsidiaries (collectively “the Group”) for the year ended 31 December 2009 were authorised for issue in accordance with a resolution of the Board of Directors on 21 January, 2010 and are issued subject to the approval of the Ordinary General Assembly of the shareholders‟ of the Bank.The Ordinary General Assembly of the Shareholders has the power to amend these consolidated financial statements after issuance.

The principal activities of the Group are explained in note 17.

The Bank is a subsidiary of Kuwait Projects Company Holding K.S.C. ("the Parent Company”).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of preparation The consolidated financial statements are prepared under the historical cost basis, except for the financial assets at fair value through profit or loss, financial assets available for sale and derivative financial instruments that are measured at fair value.

The consolidated financial statements are presented in Kuwaiti Dinars (KD), which is the Bank's functional currency rounded to the nearest thousand except when otherwise stated.

The comparative information on consolidated statement of financial position as at 31 December 2008, consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in shareholders‟ equity and consolidated statement of cash flows for the year then ended have been restated in accordance with IFRS 3: „Business Combination – Revised‟ due to the completion of the purchase price allocation of JKB, which requires retrospective adjustment of provisional amounts recognised at the acquisition date (note 9).

Statement of compliance The consolidated financial statements of the Group have been prepared in accordance with the regulations of the State of Kuwait for financial services institutions regulated by the Central Bank of Kuwait (“CBK”). These regulations require adoption of all International Financial Reporting Standards (“IFRS”) as issued by International Accounting Standard Board (“IASB”) except for International Accounting Standards (“IAS”) 39: Financial instruments: recognition and measurement requirement for collective provision, which has been replaced by the CBK‟s requirement for a minimum general provision as described under the accounting policies for impairment of financial assets and note 5.

Changes in accounting policies and disclosures The accounting policies used in the preparation of these consolidated financial statements are consistent with those used in previous year, except for the adoption of new accounting policies on „Intangible assets‟ and „Investment in an associate‟ and the following issued, revised and amended IASB Standards during the year:

IAS 1: Presentation of Financial Statements (Revised)IFRS 2: Share-based Payment: Vesting conditions and cancellationIFRS 7: Financial Instruments: Disclosures (Amended)IFRS 8: Operating Segments (new)IAS 16: Property, plant and equipment (Amended)IAS 19: Employee benefits (Amended)IAS 28: Investment in associates (Amended)IAS 32: Financial instruments: Presentation (Amended)IAS 36: Impairment of assets (Amended)IAS 38: Intangible assets (Amended)IAS 39: Financial instruments: recognition and measurement (Amended)

23

BURGAN BANK GROUP


Consolidated Statement of Cash Flows Year ended 31 December 2009

2009 2008Notes KD 000’s KD 000’s

(Restated)Operating activitiesProfit before taxation and board of directors' remuneration 28,336 41,065Adjustments:

Net loss (gain) from financial assets at fair value through profit or loss 438 (3,150)Net gain on sale of financial assets available for sale (4,431) (21,028)Share of result from an associate (786) -Provision for impairment of loans and advances 79,389 36,396Impairment of investment securities 3,448 10,158Dividend income (1,084) (2,257)Depreciation and amortisation 5,966 3,857Provision for share based compensation 54 308

───────── ─────────

Operating profit before changes in operating assets and liabilities 111,330 65,349Changes in operating assets and liabilities:

Treasury bills and bonds with CBK and others (29,671) 86,148Due from banks and other financial institutions 102,520 (104,876)Loans and advances to customers (79,456) (279,679)Other assets 11,678 (2,768)Due to banks 69,257 (277,356)Due to other financial institutions 97,016 244,626Deposits from customers (65,609) 246,989Other liabilities (56,053) (23,148)Taxation paid (1,704) (2,655)

───────── ─────────

Net cash from (used in) operating activities 159,308 (47,370) ───────── ─────────

Investing activitiesPurchase of investment securities (240,880) (654,661)Proceeds from sale of investment securities 211,483 705,004Investment in an associate 7 (14,648) -Purchase of property and equipment (net of disposals) (5,156) (5,220)Dividends received 1,084 2,257Acquisition of a subsidiary, net of cash acquired 10 11,128 36,374 ───────── ─────────

Net cash (used in) from investing activities (36,989) 83,754 ───────── ─────────

Financing activitiesOther borrowed funds (74,921) 149,282Purchase of treasury shares (1,758) (18,819)Sale of treasury shares 67 1,324Cash dividend paid - (51,583)Cash dividend paid to non controlling interests (3,333) - ───────── ─────────

Net cash (used in) from financing activities (79,945) 80,204 ───────── ─────────

Effect of foreign currency translation 3,599 3,212Net movement in non controlling interests 5,160 (35) ───────── ─────────

Net increase in cash and cash equivalents 51,133 119,765Cash and cash equivalents at 1 January 550,955 431,190 ───────── ─────────

Cash and cash equivalents at 31 December 3 602,088 550,955 ═════════ ═════════


11

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Basis of consolidation (continued) The results of the subsidiaries acquired or disposed off during the period are included in the consolidated income statement from the date of acquisition or up to the date of disposal, as appropriate.

Non-controlling interests represents the equity in the subsidiaries not attributable directly, or indirectly, to the equity holders of the Bank. Equity and net income attributable to non-controlling interests are shown separately in the consolidated statement of financial position, consolidated income statement, consolidated statement of comprehensive income and consolidated statement of changes in Shareholders‟ equity.

When the controlling interest in the subsidiaries is disposed off, the difference between the selling price and the net asset value plus cumulative translation difference and goodwill is recognised in the consolidated income statement.

The subsidiaries of the Group are as follows:

Name of companyCountry of

incorporation

Effective interest as at31 December

2009


2008

Jordan Kuwait Bank P.S.C. (“JKB”) Jordan 51.1% 51.1%Algeria Gulf Bank S.P.A. (“AGB”) Algeria 65.11% -Burgan International Holding S.A. (“BIH”) Luxembourg 100% 100%

Held through JKBUnited Financial Investments Company Jordan 50.46% 50.46%Arab Orient Insurance Company (note 10) Jordan - 65.69%

Financial instruments

Classification of financial instruments The Group classifies financial instruments as "at fair value through profit or loss", "loans and receivables", "available for sale", "held to maturity" and "financial liabilities other than at fair value through profit or loss". Management determines the appropriate classification of each instrument at the time of acquisition.

Recognition/de-recognitionA financial asset or a financial liability is recognised when the Group becomes a party to the contractual provisions of the instrument. All regular way purchase and sale of financial assets are recognised using settlement date accounting. Changes in fair value between the trade date and settlement date are recognised in the consolidated income statement or in other comprehensive income in accordance with the policy applicable to the related instrument. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulations or conventions in the market place.

A financial asset (in whole or in part) is derecognised either when: the contractual rights to receive the cash flows from the asset have expired; the Group has transferred its right to receive cash flows from the assets or has assumed an obligation to pay them in full without material delay to a third party under a „pass through‟ arrangement; or the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the Group has transferred its right to receive cash flows from an asset 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.

A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or expired.


10


Changes in accounting policies and disclosures (continued) The major changes in the new and amended Standards are as follows:

IAS 1: Presentation of Financial Statements – (Revised) The revised Standard separates owner and non-owner changes in shareholders‟ equity. The statement of changes in shareholders‟ equity includes only details of transactions with owners, with non-owner changes in shareholders‟ equity presented as a single line. In addition, the Standard introduces the statement of comprehensive income: it presents all items of recognised income and expense, either in one single statement, or in two linked statements. The Group has elected to present two statements.

IFRS 7: Financial Instruments: Disclosure (amended) The amended Standard requires additional disclosures about fair value measurement and liquidity risk. Measurements related to items at fair value are to be disclosed by source of inputs using a three level fair value hierarchy, by class, for all financial instruments. The amended Standard also requires disclosing a reconciliation between the beginning and ending balance for level 3 fair value measurements, as well as significant transfers between levels in the fair value hierarchy.

IFRS 8: Operating segments The new Standard requires disclosure of information about the Group‟s operating segments and replaces the requirement to determine primary (business) and secondary (geographical) reporting segments of the Group. Adoption of this Standard did not have any effect on the financial position or performance of the Group. The Group determined that the operating segments were the same as the business segments previously identified under IAS 14 „Segment reporting‟.

The application of other IASB Standards did not have material impact on the consolidated financial statements of the Group.

The following IASB Standards and IFRIC Interpretations have been issued/amended but not yet mandatory, and have not been adopted by the Group:

IFRS 2: Share-based Payment: Group cash-settlement share-based payment transactions (effective 1 January 2010)IFRS 5: Non current assets held for sale and discontinued operations (Amended) (effective 1 January 2010)IFRS 9: Financial Instruments: Classification and Measurement (effective 2013) IFRIC Interpretation 9: Reassessment of embedded derivatives (effective 1 July 2009)IFRIC Interpretation 16: Hedges of a net investment in a foreign operation (effective 1 October 2009)IFRIC Interpretation 17: Distributions of non-cash assets to owners (effective 1 July 2009)IFRIC Interpretation 18: Transfers of assets from customers (effective 1 July 2009)

The IFRS 9 will replace IAS 32 and IAS 39 upon its effective date. The application of IFRS 9 will result in amendments to the classification and measurement of financial assets and liabilities of the consolidated financial statements of the Group.

Adoption of other IASB Standards and IFRIC Interpretations will not have material effect on the financial position or financial performance of the consolidated financial statements of the Group. Additional disclosures will be made in the consolidated financial statements when these Standards and Interpretations become effective.

Basis of consolidation The consolidated financial statements comprise the financial statements of the Bank and its subsidiaries. The financial statements of the subsidiaries are prepared for the same reporting year as the Bank, using consistent accounting policies. All material inter-group balances and transactions, including inter-group profits and unrealised profits and losses are eliminated on consolidation.

Subsidiaries are fully consolidated from the date on which control is transferred to the Group. Control is achieved where the Bank has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The results of the subsidiaries acquired or disposed off during the year are included in the consolidated income statement from the date of acquisition or up to the date of disposal, as appropriate.

24


11


Basis of consolidation (continued) The results of the subsidiaries acquired or disposed off during the period are included in the consolidated income statement from the date of acquisition or up to the date of disposal, as appropriate.

Non-controlling interests represents the equity in the subsidiaries not attributable directly, or indirectly, to the equity holders of the Bank. Equity and net income attributable to non-controlling interests are shown separately in the consolidated statement of financial position, consolidated income statement, consolidated statement of comprehensive income and consolidated statement of changes in Shareholders‟ equity.

When the controlling interest in the subsidiaries is disposed off, the difference between the selling price and the net asset value plus cumulative translation difference and goodwill is recognised in the consolidated income statement.

The subsidiaries of the Group are as follows:

Name of companyCountry of

incorporation


2009


2008

Jordan Kuwait Bank P.S.C. (“JKB”) Jordan 51.1% 51.1%Algeria Gulf Bank S.P.A. (“AGB”) Algeria 65.11% -Burgan International Holding S.A. (“BIH”) Luxembourg 100% 100%

Held through JKBUnited Financial Investments Company Jordan 50.46% 50.46%Arab Orient Insurance Company (note 10) Jordan - 65.69%

Financial instruments

Classification of financial instruments The Group classifies financial instruments as "at fair value through profit or loss", "loans and receivables", "available for sale", "held to maturity" and "financial liabilities other than at fair value through profit or loss". Management determines the appropriate classification of each instrument at the time of acquisition.

Recognition/de-recognitionA financial asset or a financial liability is recognised when the Group becomes a party to the contractual provisions of the instrument. All regular way purchase and sale of financial assets are recognised using settlement date accounting. Changes in fair value between the trade date and settlement date are recognised in the consolidated income statement or in other comprehensive income in accordance with the policy applicable to the related instrument. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulations or conventions in the market place.

A financial asset (in whole or in part) is derecognised either when: the contractual rights to receive the cash flows from the asset have expired; the Group has transferred its right to receive cash flows from the assets or has assumed an obligation to pay them in full without material delay to a third party under a „pass through‟ arrangement; or the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the Group has transferred its right to receive cash flows from an asset 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.

A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or expired.

25


13


Financial instruments (continued)Derivative financial instruments (continued) Where derivative contracts are entered into by specifically designating such contracts as a fair value hedge or a cash flow hedge of recognised asset or liability, the Group accounts for them using hedge accounting principles, provided certain criteria are met.

Fair value hedgeIn relation to fair value hedges which meet the conditions for hedge accounting, any gain or loss from re-measuring the hedging instrument is recognised immediately in the consolidated income statement. The hedged items are adjusted for fair value changes relating to the risk being hedged and are also recognised in the consolidated income statement.

Where the adjustment relates to a hedged interest-bearing financial instrument, the adjustment is amortised to the consolidated income statement on a systematic basis such that it is fully amortised by maturity.

Cash flow hedgeIn relation to cash flow hedges which meet the conditions for hedge accounting, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised initially in equity and any ineffective portion is recognised in the consolidated income statement. The gains or losses on cash flow hedges recognised initially in equity are transferred to the consolidated income statement in the period in which the hedged transaction impacts the consolidated income statement. Where the hedged transaction results in the recognition of an asset or liability, the associated gains or losses that had initially been recognised in equity are included in the initial measurement of the cost of the related asset or liability.

For hedges that do not qualify for hedge accounting, any gains or losses arising from changes in fair value of the hedging instrument are taken directly to the consolidated income statement.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, no longer qualifies for hedge accounting or is revoked by the Group. For cash flow hedges, any cumulative gain or loss on the hedging instrument recognised in equity remains in equity until the forecasted transaction occurs. Where the hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the consolidated income statement.

If such derivative transactions, while providing effective economic hedges under the Group‟s risk management policies do not qualify for hedge accounting under IAS 39, they are treated as derivatives held for trading. Derivatives with positive fair values (unrealised gains) are included in other assets and derivatives with negative fair values (unrealised losses) are included in other liabilities. The resultant gains and losses are included in the consolidated income statement.

Certain derivatives embedded in other financial instruments are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not carried at fair value through the profit or loss. These embedded derivatives are measured at fair value with the changes in fair value recognised 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 at fair value, being the premium received. The premium received is amortised in the consolidated income statement in 'fee and commission income' on a straight line basis over the life of the guarantee. The guarantee liability is subsequently carried at initial measurement less amortisation. When a payment under the guarantee is likely to become payable, the present value of the expected payments less the unamortised premium, is charged to the consolidated income statement.

Fair values The fair value of financial assets and liabilities traded in recognised financial markets is their quoted market price, based on the current bid price. For all other financial assets or liabilities where there is no quoted market price, a reasonable estimate of fair value is determined by reference to the current fair value of another instrument that is substantially the same; recent arm‟s length market transactions; discounted cash flow analysis; or other valuation techniques commonly used by market participants.


12


Financial instruments (continued)Measurement All financial assets or financial liabilities are initially measured at fair value. Transaction costs are added only for those financial instruments not measured at fair value through profit or loss. Transaction costs on financial assets classified as investments at fair value through profit or loss are recognised in the consolidated income statement.

Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss includes financial assets held for trading and financial assets designated upon initial recognition as at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term.

Financial assets are designated as at fair value through profit or loss, if they are managed and their performance is evaluated on reliable fair value basis in accordance with documented investment strategy. Interest earned or incurred is accrued as interest income/expense according to the terms of the contract, while dividend income is recorded in „Dividend income‟ when the right to receive the payment has been established.

After initial recognition financial assets at fair value through profit or loss are remeasured at fair value with all changes in fair value recognised in the consolidated income statement.

Derivative instruments are categorised as held for trading unless they are designated as hedging instruments.

Financial assets held to maturity Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as held to maturity when the Group has the positive intention and ability to hold to maturity.

After initial recognition, held to maturity financial assets are carried at amortised cost using the effective interest rate method, less impairment losses, if any. The calculation takes into account any premium or discount on acquisition and includes transaction costs and fees that are an integral part of the effective interest rate.

Loans and receivables These are non-derivative financial assets having fixed or determinable payments that are not quoted in an active market. These are subsequently measured at amortised cost using the effective yield method adjusted for impairment losses, if any. The amortisation is included in “Interest income” in the consolidated income statement. Losses arising from impairment are recognised in the consolidated income statement.

Treasury bills and bonds with CBK and others, due from banks and other financial institutions (“OFIs”), and loans and advances to customers are classified as “loans and receivables”.

Financial assets available for sale These are non-derivative financial assets principally acquired to be held for an indefinite period of time that may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices.

These are subsequently measured at fair value with gains and losses being recognised as other comprehensive income in the equity as "investment revaluation reserve" until the financial assets are derecognised or until the financial asset are determined to be impaired at which time the cumulative gains and losses previously reported as other comprehensive income in equity are transferred to the consolidated income statement. Financial assets whose fair value cannot be reliably measured are carried at cost less impairment losses, if any.

Financial liabilities other than at fair value through profit or loss These are subsequently measured at amortised cost using the effective yield method. Due to banks, Due to other financial institutions, Deposit from customers, Other borrowed funds, and Other liabilities are classified as “financial liabilities other than at fair value through profit or loss”.

Derivative financial instruments A derivative financial instrument is a financial contract between two parties where payments are dependent upon movements in price of one or more underlying financial instruments, reference rate or index. The Group makes use of derivative instruments to manage exposures to interest rate, foreign currency and credit risks including exposures arising from forecast transactions.

26


13


Financial instruments (continued)Derivative financial instruments (continued) Where derivative contracts are entered into by specifically designating such contracts as a fair value hedge or a cash flow hedge of recognised asset or liability, the Group accounts for them using hedge accounting principles, provided certain criteria are met.

Fair value hedgeIn relation to fair value hedges which meet the conditions for hedge accounting, any gain or loss from re-measuring the hedging instrument is recognised immediately in the consolidated income statement. The hedged items are adjusted for fair value changes relating to the risk being hedged and are also recognised in the consolidated income statement.

Where the adjustment relates to a hedged interest-bearing financial instrument, the adjustment is amortised to the consolidated income statement on a systematic basis such that it is fully amortised by maturity.

Cash flow hedgeIn relation to cash flow hedges which meet the conditions for hedge accounting, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised initially in equity and any ineffective portion is recognised in the consolidated income statement. The gains or losses on cash flow hedges recognised initially in equity are transferred to the consolidated income statement in the period in which the hedged transaction impacts the consolidated income statement. Where the hedged transaction results in the recognition of an asset or liability, the associated gains or losses that had initially been recognised in equity are included in the initial measurement of the cost of the related asset or liability.

For hedges that do not qualify for hedge accounting, any gains or losses arising from changes in fair value of the hedging instrument are taken directly to the consolidated income statement.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, no longer qualifies for hedge accounting or is revoked by the Group. For cash flow hedges, any cumulative gain or loss on the hedging instrument recognised in equity remains in equity until the forecasted transaction occurs. Where the hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the consolidated income statement.

If such derivative transactions, while providing effective economic hedges under the Group‟s risk management policies do not qualify for hedge accounting under IAS 39, they are treated as derivatives held for trading. Derivatives with positive fair values (unrealised gains) are included in other assets and derivatives with negative fair values (unrealised losses) are included in other liabilities. The resultant gains and losses are included in the consolidated income statement.

Certain derivatives embedded in other financial instruments are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not carried at fair value through the profit or loss. These embedded derivatives are measured at fair value with the changes in fair value recognised 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 at fair value, being the premium received. The premium received is amortised in the consolidated income statement in 'fee and commission income' on a straight line basis over the life of the guarantee. The guarantee liability is subsequently carried at initial measurement less amortisation. When a payment under the guarantee is likely to become payable, the present value of the expected payments less the unamortised premium, is charged to the consolidated income statement.

Fair values The fair value of financial assets and liabilities traded in recognised financial markets is their quoted market price, based on the current bid price. For all other financial assets or liabilities where there is no quoted market price, a reasonable estimate of fair value is determined by reference to the current fair value of another instrument that is substantially the same; recent arm‟s length market transactions; discounted cash flow analysis; or other valuation techniques commonly used by market participants.

27


15


Financial instruments (continued)Renegotiated loans In the event of a default, the Group seeks to restructure loans rather than take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. When the terms and conditions of these loans are renegotiated, the terms and conditions of the new contractual arrangement apply in determining whether these loans remain past due. Management continually reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loan continues to be subject to an individual or collective impairment assessment calculated using the loan‟s original effective interest rate.

Repurchase and resale agreements Assets sold with a simultaneous commitment to repurchase at a specified future date at an agreed price (repos) are not derecognised in the consolidated statement of financial position. Amounts received under these agreements are treated as interest bearing liabilities and the difference between the sale and repurchase price treated as interest expense using the effective interest rate method.

Assets purchased with a corresponding commitment to resell at a specified future date at an agreed price (reverse repos) are not recognised in the consolidated statement of financial position. Amounts paid under these agreements are treated as interest earning assets and the difference between the purchase and resale price treated as interest income using the effective interest rate method.

Cash and cash equivalents Cash and cash equivalents comprise cash in hand and on current account with banks and OFIs and balances with CBK and due from banks and OFIs with maturities not exceeding thirty days from original maturity.

Investment in an associate The Group's investment in its associate is accounted for using the equity method of accounting. An associate is an entity in which the Group has significant influence and which is neither a subsidiary nor a joint venture.

Under the equity method, the investment in an associate is carried in the consolidated statement of financial position at cost plus post acquisition changes in the Group's share of net assets of an associate. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortised nor separately tested for impairment. The consolidated income statement reflects the share of the results of operations of an associate. Where there has been a change recognised directly in the equity of an associate, the Group recognises its share of any changes and discloses this, when applicable, in the consolidated statement of comprehensive income. Unrealised gains and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in an associate.

The consolidated financial statements of the associate are prepared for the same reporting period as the Group. Where 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 additional impairment loss on the Group's investment in its associate. The Group determines at each reporting date whether there is any objective evidence that the investment in an associate is impaired. If this is the case the Group calculates the amount of impairment as the difference between the recoverable amount of an associate and its carrying value and recognises the amount in the consolidated income statement.

Property and equipment Property and equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation is provided on all premises and equipment, other than freehold land, at rates calculated to write off the cost of each asset on a straight line basis over its estimated useful life. Freehold land is stated at cost less impairment losses.

The estimated useful lives of the assets for the calculation of depreciation are as follows:

Buildings 20 to 35 yearsFurniture and equipment 4 to 11 yearsMotor vehicles 3 to 7 yearsComputers 5 years

When assets are sold or retired, their cost and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is recognised in the consolidated income statement.


14


Financial instruments (continued)Fair values (continued)The fair value of derivative is the equivalent of the unrealised gain or loss from marking to market the derivative using prevaling market rates or internal pricing models. An analysis of fair values of financial instruements and further details as to how they are measured are provided in note 22.

Amortised cost This is computed using the effective interest method less any allowance for impairment. The calculation takes into account any premium or discount on acquisition and includes transaction costs and fees that are an integral part of the effective interest rate.

Offsetting Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position, when the Bank has a legally enforceable right to offset and intends to settle either on a net basis or to realise the asset and settle the liability simultaneously.

Impairment of financial assets An assessment is made at each reporting date to determine whether there is an objective evidence that a specific financial asset may be impaired. A financial asset or a group of financial assets is deemed to be impaired, if and only if, there is an objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset and that loss event has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

The Group assess whether objective evidence of impairment exists on an individual basis for each individual significant assets and collectively for others. The main criteria that the Group uses to determine that there is objective evidence of an impairment consideration include whether any payment of principal or interest are overdue by more than 90 days or there are any known difficulties in the cash flows including the sustainability of the counterparty‟s business plan, credit rating downgrades, breach of original terms of the contract, its ability to improve performance once a financial difficulty has arisen, deterioration in the value of collateral etc. If such evidence or indication exists, any impairment loss is recognised in the consolidated income statement. The impairment losses are evaluated at each reporting date, unless unforeseen circumstances require more careful attention.

The impairment loss for financial assets carried at amortised cost is measured as the difference between the asset‟s carrying amount and the present value of estimated future cash flows including amounts recoverable from collateral and guarantees, discounted at the financial asset‟s original effective interest rate. If a financial asset such as loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. 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.

In the case of equity investments classified as „available for sale‟, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any evidence of impairment exists in the case of „available for sale‟ financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the consolidated income statement, is removed from equity and recognised in the consolidated income statement. Subsequent increases in fair value of equity instruments are not reversed through consolidated income statement.

For non equity financial assets, 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. 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.

In addition, in accordance with Central Bank of Kuwait instructions, a minimum general provision is made on all applicable credit facilities (net of certain categories of collateral) that are not provided for specifically.

28


15


Financial instruments (continued)Renegotiated loans In the event of a default, the Group seeks to restructure loans rather than take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. When the terms and conditions of these loans are renegotiated, the terms and conditions of the new contractual arrangement apply in determining whether these loans remain past due. Management continually reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loan continues to be subject to an individual or collective impairment assessment calculated using the loan‟s original effective interest rate.

Repurchase and resale agreements Assets sold with a simultaneous commitment to repurchase at a specified future date at an agreed price (repos) are not derecognised in the consolidated statement of financial position. Amounts received under these agreements are treated as interest bearing liabilities and the difference between the sale and repurchase price treated as interest expense using the effective interest rate method.

Assets purchased with a corresponding commitment to resell at a specified future date at an agreed price (reverse repos) are not recognised in the consolidated statement of financial position. Amounts paid under these agreements are treated as interest earning assets and the difference between the purchase and resale price treated as interest income using the effective interest rate method.

Cash and cash equivalents Cash and cash equivalents comprise cash in hand and on current account with banks and OFIs and balances with CBK and due from banks and OFIs with maturities not exceeding thirty days from original maturity.

Investment in an associate The Group's investment in its associate is accounted for using the equity method of accounting. An associate is an entity in which the Group has significant influence and which is neither a subsidiary nor a joint venture.

Under the equity method, the investment in an associate is carried in the consolidated statement of financial position at cost plus post acquisition changes in the Group's share of net assets of an associate. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortised nor separately tested for impairment. The consolidated income statement reflects the share of the results of operations of an associate. Where there has been a change recognised directly in the equity of an associate, the Group recognises its share of any changes and discloses this, when applicable, in the consolidated statement of comprehensive income. Unrealised gains and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in an associate.

The consolidated financial statements of the associate are prepared for the same reporting period as the Group. Where 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 additional impairment loss on the Group's investment in its associate. The Group determines at each reporting date whether there is any objective evidence that the investment in an associate is impaired. If this is the case the Group calculates the amount of impairment as the difference between the recoverable amount of an associate and its carrying value and recognises the amount in the consolidated income statement.

Property and equipment Property and equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation is provided on all premises and equipment, other than freehold land, at rates calculated to write off the cost of each asset on a straight line basis over its estimated useful life. Freehold land is stated at cost less impairment losses.

The estimated useful lives of the assets for the calculation of depreciation are as follows:

Buildings 20 to 35 yearsFurniture and equipment 4 to 11 yearsMotor vehicles 3 to 7 yearsComputers 5 years

When assets are sold or retired, their cost and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is recognised in the consolidated income statement.

29


17


Financial instruments (continued)Business combinations and goodwill (continued)Goodwill is allocated to each of the Group‟s cash-generating units or groups of cash generating units and is tested annually for impairment. Goodwill impairment is determined by assessing the recoverable amount of cash-generating unit to which goodwill relates. The recoverable value is the value in use of the cash-generating unit, which is the net present value of estimated future cash flows expected from such cash-generating unit. If the recoverable amount of cash generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit prorated on the basis of the carrying amount of each asset in the unit. Any impairment loss recognised for goodwill is not reversed in the subsequent period. Where goodwill forms part of a cash-generating unit (group of cash generating units) and part of the operations within that unit is disposed off, the goodwill associated with the operation disposed off is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation.

End of service indemnity Provision is made for amounts payable to employees under the Kuwaiti Labour Law, employee contracts and applicable labour laws in the countries where the subsidiaries operate. This liability, which is unfunded, represents the amount payable to each employee as a result of involuntary termination on the statement of financial position date.

Treasury shares The Bank‟s holding in its own shares is stated at acquisition cost and is recognised in shareholders‟ equity. The treasury shares are accounted for using the cost method. Under this method, the weighted average cost of the shares reacquired is charged to a contra account in the equity. When the treasury shares are reissued, gains are credited to a separate account in equity, “treasury shares reserve”, which is not distributable. Any realised losses are charged to the same account to the extent of the credit balance on that account. Any excess losses are charged to retained earnings then to the voluntary reserve and statutory reserve. Gains realised subsequently on the sale of treasury shares are first used to offset any previously recorded losses in the order of reserves, retained earnings and the treasury shares reserve account. These shares are not entitled to any cash dividend that the Bank may propose. The issue of bonus shares increases the number of shares proportionately and reduces the average cost per share without affecting the total cost of treasury shares.

Share based payment transactions The cost of share based payment transactions with employees is measured by reference to the fair value at the date on which they are granted. The fair value of the employee stock options is determined using the Black-Scholes option pricing model. Measurement inputs include share price on measurement date, exercise price, volatility, risk free interest rate and expected dividend yield. The fair value of these options is recognised as an expense over the vesting period with corresponding effect to shareholders‟ equity.

Revenue recognition Interest income and expense are recognised in the consolidated income statement for all interest bearing instruments using effective interest method. The effective interest rate is the rate that exactly discounts estimated future cash flows through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, all fees and points paid or received between parties to the contract, transaction costs and all other premiums or discounts are considered, but not future credit losses.

Once a financial instrument is impaired, interest is thereafter recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

When the Group enters into an interest rate swap to change interest from fixed to floating (or vice versa) the amount of interest income or expense is adjusted by the net interest on the swap. Credit origination fee are treated as an integral part of the effective interest rate of financial instruments and are recognised over their lives, except when the underlying risk is sold to a third party, at which time it is recognised immediately.

Fee and commission earned for the provision of services over a period of time are accrued over that period. These fee include credit related fee and other management fees. Loan commitment fee and originating fee that are an integral part of the effective interest rate of a loan are recognised (together with any incremental cost) as an adjustment to the effective interest rate on loan.


16


Financial instruments (continued)

Property and equipment (continued)The carrying amounts of property and equipment are reviewed at each statement of financial position date to determine whether there is any indication of impairment. If any such indication exists, the assets are written down to their recoverable amounts and the impairment loss is recognised in the consolidated income statement.

Intangible assets Intangible assets (other than goodwill) acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets, excluding capitalised development costs, are not capitalised and expenditure is reflected in the consolidated income statement in the period in which the expenditure is incurred.

The useful lives of intangible assets are assessed as either finite or indefinite.

Intangible assets with finite lives are amortised over the useful economic life, as mentioned below, and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful economic life is reviewed at least at each financial position date. Changes in the expected useful economic life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the consolidated income statement in the “other expenses” consistent with the function of the intangible asset.

Amortisation is calculated using the straight-line method to write down the cost of intangible assets to their residual values over their estimated useful economic lives as follows:

Banking licence – 30 years Customer relationships and core deposits – 10 years

Gains or losses arising from derecognition 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 consolidated income statement when the asset is derecognised. Business combinations and goodwill A business combination is the bringing together of separate entities or businesses into one reporting entity as a result one entity, the acquirer, obtaining control of one or more other businesses. The acquisition method of accounting is used to account for business combinations. Under this method, the acquirer recognises, separately from goodwill, identifiable assets acquired, liabilities assumed and any non-controlling interests in the acquiree at the acquisition date.

The identifiable assets acquired and the liabilities assumed at the acquisition date are measured at fair values. Any non-controlling interests in the acquiree is measured at the non-controlling interest‟s proportionate share of the acquiree‟s identifiable net assets.

Goodwill arising in a business combination is recognised as of the acquisition date as the excess of :

(a) the aggregate of the consideration transferred, the fair value of any non-controlling interests in the acquiree measured at the non controlling interest‟s proportionate share of the acquiree‟s identifiable net assets and the acquisition-date fair value of the acquirer‟s previously held equity interest in the acquiree; over

(b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured at their fair values.

30


17


Financial instruments (continued)Business combinations and goodwill (continued)Goodwill is allocated to each of the Group‟s cash-generating units or groups of cash generating units and is tested annually for impairment. Goodwill impairment is determined by assessing the recoverable amount of cash-generating unit to which goodwill relates. The recoverable value is the value in use of the cash-generating unit, which is the net present value of estimated future cash flows expected from such cash-generating unit. If the recoverable amount of cash generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit prorated on the basis of the carrying amount of each asset in the unit. Any impairment loss recognised for goodwill is not reversed in the subsequent period. Where goodwill forms part of a cash-generating unit (group of cash generating units) and part of the operations within that unit is disposed off, the goodwill associated with the operation disposed off is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation.

End of service indemnity Provision is made for amounts payable to employees under the Kuwaiti Labour Law, employee contracts and applicable labour laws in the countries where the subsidiaries operate. This liability, which is unfunded, represents the amount payable to each employee as a result of involuntary termination on the statement of financial position date.

Treasury shares The Bank‟s holding in its own shares is stated at acquisition cost and is recognised in shareholders‟ equity. The treasury shares are accounted for using the cost method. Under this method, the weighted average cost of the shares reacquired is charged to a contra account in the equity. When the treasury shares are reissued, gains are credited to a separate account in equity, “treasury shares reserve”, which is not distributable. Any realised losses are charged to the same account to the extent of the credit balance on that account. Any excess losses are charged to retained earnings then to the voluntary reserve and statutory reserve. Gains realised subsequently on the sale of treasury shares are first used to offset any previously recorded losses in the order of reserves, retained earnings and the treasury shares reserve account. These shares are not entitled to any cash dividend that the Bank may propose. The issue of bonus shares increases the number of shares proportionately and reduces the average cost per share without affecting the total cost of treasury shares.

Share based payment transactions The cost of share based payment transactions with employees is measured by reference to the fair value at the date on which they are granted. The fair value of the employee stock options is determined using the Black-Scholes option pricing model. Measurement inputs include share price on measurement date, exercise price, volatility, risk free interest rate and expected dividend yield. The fair value of these options is recognised as an expense over the vesting period with corresponding effect to shareholders‟ equity.

Revenue recognition Interest income and expense are recognised in the consolidated income statement for all interest bearing instruments using effective interest method. The effective interest rate is the rate that exactly discounts estimated future cash flows through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, all fees and points paid or received between parties to the contract, transaction costs and all other premiums or discounts are considered, but not future credit losses.

Once a financial instrument is impaired, interest is thereafter recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

When the Group enters into an interest rate swap to change interest from fixed to floating (or vice versa) the amount of interest income or expense is adjusted by the net interest on the swap. Credit origination fee are treated as an integral part of the effective interest rate of financial instruments and are recognised over their lives, except when the underlying risk is sold to a third party, at which time it is recognised immediately.

Fee and commission earned for the provision of services over a period of time are accrued over that period. These fee include credit related fee and other management fees. Loan commitment fee and originating fee that are an integral part of the effective interest rate of a loan are recognised (together with any incremental cost) as an adjustment to the effective interest rate on loan.

31


19


Financial instruments (continued)Fiduciary assets Assets and related deposits held in trust or in a fiduciary capacity are not treated as assets or liabilities of the Group and accordingly are not included in the consolidated statement of financial position.

Significant accounting judgments, estimates and assumptions Judgements In the process of applying the Group‟s accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect on the amounts recognised in the consolidated financial statements:

Impairment of financial assets available for sale The Group treats available for sale equity investments as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires considerable judgement.

Fair values of assets and liabilities including intangibles Considerable judgement by management is required in the estimation of the fair value of the assets including intangibles with definite and indefinite useful life, liabilities and contingent liabilities acquired as a result of business combination.

Estimation uncertainty and assumptions The key assumptions concerning the future and other key sources of estimation uncertainty at the consolidated statement of financial position 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 discussed below:

Impairment of goodwill The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows.

Impairment losses on loans and advances The Group reviews its loans and advances on a quarterly basis to assess whether a provision for impairment should be recorded in the consolidated income statement. In particular, considerable judgement by management is required in the estimation of the amount and timing of future cash flows when determining the level of provisions required. Such estimates are necessarily based on assumptions about several factors involving varying degrees of judgment and uncertainty, and actual results may differ resulting in future changes to such provisions.

Valuation of unquoted equity investments and derivatives Fair valuation of unquoted equity investments and derivatives is normally based on one of the following:

recent arm‟s length market transactions; current fair value of another instrument that is substantially the same; the expected cash flows discounted at current rates applicable for items with similar terms and risk

characteristics and other valuation models.

The determination of the cash flows and discount factors for unquoted equity financial assets requires significant estimation.

3. CASH AND CASH EQUIVALENTS 2009

KD 000’s2008

KD 000’s

Cash in hand and on current account with banks and OFIs 212,716 86,705Balances with the CBK 555 361Due from banks and OFIs maturing within thirty days 388,817 463,889 ───────── ─────────

602,088 550,955 ═════════ ═════════


18


Financial instruments (continued)Revenue recognition (continued) Dividend income is recognised when the right to receive such income is established.

Foreign currency Foreign currency transactions are recorded in KD at the rates of exchange prevailing on the date of the transaction. Monetary assets and liabilities in foreign currencies are converted into KD at the rates of exchange prevailing onthe consolidated statement of financial position date. The resulting exchange gains and losses are taken to the consolidated income statement.

Non-monetary assets and liabilities in foreign currencies that are stated at fair value are translated to KD at the foreign exchange rates ruling on the dates that the values were determined. In case of non-monetary assets whose change in fair values are recognised directly in equity, foreign exchange differences are recognised directly in equity and for non-monetary assets whose change in fair value are recognised directly in the consolidated income statement are recognised in the consolidated income statement.

As at the reporting date, the assets and liabilities of subsidiaries are translated into the Bank‟s presentation currency KD at the rate of exchange ruling on the consolidated statement of financial position date, and their income statements are translated at the 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 or fair value adjustments to the carrying amounts of assets and liabilities arising on acquisition are treated as assets and liabilities of the respective subsidiaries and translated at the closing date.

Taxation National Labour Support Tax (NLST) The Bank calculates the NLST in accordance with Law No. 19 of 2000 and the Ministry of Finance Resolutions No. 24 of 2006 at 2.5% of taxable profit for the year. As per law, cash dividends from listed companies which are subjected to NLST have been deducted from the profit for the year.

Kuwait Foundation for the Advancement of Sciences (KFAS)The Bank calculates the contribution to KFAS at 1% of profit for the year, in accordance with the modified calculation based on the Foundation‟s Board of Directors resolution, which states that the Board of Directors‟ remuneration and transfer to statutory reserve should be excluded from profit for the year when determining the contribution.

ZakatContribution to Zakat is calculated at 1% of the profit of the Bank in accordance with Law No. 46 of 2006 and the Ministry of Finance resolution No. 58/2007 effective from 10 December 2007.

Taxation on overseas subsidiaries Taxation on overseas subsidiaries is calculated on the basis of the tax rates applicable and prescribed according to the prevailing laws, regulations and instructions of the countries where these subsidiaries operate.

Segment information A segment is a distinguishable component of the Group that engages in business activities from which it earns revenue and incurs costs. The operating segments are used by the management of the Bank to allocate resources and assess performance. Operating segments exhibiting similar economic characteristics, product and services, class of customers where appropriate are aggregated and reported as reportable segments.

Contingencies Contingent assets are not recognised in the consolidated financial statements, but are disclosed when an inflow of economic benefit is probable.

Contingent liabilities are not recognised in the consolidated financial statements, but are disclosed unless the possibility of an outflow of resources embodying economic benefit is remote.

32


19


Financial instruments (continued)Fiduciary assets Assets and related deposits held in trust or in a fiduciary capacity are not treated as assets or liabilities of the Group and accordingly are not included in the consolidated statement of financial position.

Significant accounting judgments, estimates and assumptions Judgements In the process of applying the Group‟s accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect on the amounts recognised in the consolidated financial statements:

Impairment of financial assets available for sale The Group treats available for sale equity investments as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires considerable judgement.

Fair values of assets and liabilities including intangibles Considerable judgement by management is required in the estimation of the fair value of the assets including intangibles with definite and indefinite useful life, liabilities and contingent liabilities acquired as a result of business combination.

Estimation uncertainty and assumptions The key assumptions concerning the future and other key sources of estimation uncertainty at the consolidated statement of financial position 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 discussed below:

Impairment of goodwill The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows.

Impairment losses on loans and advances The Group reviews its loans and advances on a quarterly basis to assess whether a provision for impairment should be recorded in the consolidated income statement. In particular, considerable judgement by management is required in the estimation of the amount and timing of future cash flows when determining the level of provisions required. Such estimates are necessarily based on assumptions about several factors involving varying degrees of judgment and uncertainty, and actual results may differ resulting in future changes to such provisions.

Valuation of unquoted equity investments and derivatives Fair valuation of unquoted equity investments and derivatives is normally based on one of the following:

recent arm‟s length market transactions; current fair value of another instrument that is substantially the same; the expected cash flows discounted at current rates applicable for items with similar terms and risk

characteristics and other valuation models.

The determination of the cash flows and discount factors for unquoted equity financial assets requires significant estimation.

3. CASH AND CASH EQUIVALENTS 2009

KD 000’s2008

KD 000’s

Cash in hand and on current account with banks and OFIs 212,716 86,705Balances with the CBK 555 361Due from banks and OFIs maturing within thirty days 388,817 463,889 ───────── ─────────

602,088 550,955 ═════════ ═════════

33


21

5. LOANS AND ADVANCES TO CUSTOMERS (continued)

The impairment provision for credit facilities complies in all material respects with the specific provision requirements of the CBK and IFRS. In March 2007, the CBK issued a circular amending the basis of making minimum general provisions on facilities changing the rate from 2% to 1% for cash facilities and 0.5% for non cash facilities. The revised rates are applied effective from 1 January 2007 on the net increase in facilities, net of certain restricted categories of collateral during the reporting period. The general provision as of 31 December 2006 in excess of the present 1% for cash facilities and 0.5% for non cash facilities amounts to KD 16,154 thousand and is retained as a general provision until further directive from the CBK.

The analysis of the provision for impairment based on specific and general provision is as follows:

c) Non-performing loans Non-performing loans and advances, which either do not accrue interest or where interest is suspended, are as follows:

Loans and advancesKD 000’s

ProvisionsKD 000’s

Collateral heldagainst non-performing

loansKD 000’s

At 31 December 2009Granted prior to the invasion of Kuwait in 1990 5,050 5,050 -Granted after liberation of Kuwait in 1991 231,645 70,136 102,291 ───────── ───────── ─────────

236,695 75,186 102,291 ═════════ ═════════ ═════════

At 31 December 2008 Granted prior to the invasion of Kuwait in 1990 4,952 4,952 -Granted after liberation of Kuwait in 1991 26,050 16,989 4,613 ───────── ───────── ─────────

31,002 21,941 4,613 ═════════ ═════════ ═════════

2009KD 000’s

2008KD 000’s

Specific provision 98,354 27,191General provision 80,774 72,384

───────── ───────── 179,128 99,575

═════════ ═════════


20

4. DUE FROM BANKS AND OTHER FINANCIAL INSTITUTIONS

2009KD 000’s

2008KD 000’s

Banks 229,886 301,488OFIs 228,399 258,292 ────────── ────────── Less: 458,285 559,780Provision for impairment (note 5) (50,858) (27,368)

────────── ──────────407,427 532,412

══════════ ══════════

5. LOANS AND ADVANCES TO CUSTOMERS

a) Balances

b) Provision for impairment

* Loans and advances include those financial assets acquired at fair value, net of provisions (note 10).

Provision for impairment includes KD 11,197 thousand (31 December 2008: KD 10,512 thousand) being provision for non-cash facilities reported under other liabilities (note 12).

2009KD 000’s

2008KD 000’s

Corporate 1,941,636 1,861,620Retail 422,386 333,065

───────── ─────────Less: 2,364,022 2,194,685Provision for impairment (117,073) (61,695) ───────── ─────────

2,246,949 2,132,990═════════ ═════════

Banksand OFIs Corporate Retail TotalKD 000's KD 000's KD 000's KD 000's

At 1 January 2009 27,740 49,403 22,432 99,575On acquisition of a subsidiary * 12 2,088 189 2,289Exchange adjustment - 322 254 576Ceded to the CBK - - (1) (1)Amounts written off - (2,389) (311) (2,700)Charge to income statement 23,324 52,168 3,897 79,389

───────── ───────── ───────── ─────────At 31 December 2009 51,076 101,592 26,460 179,128 ═════════ ═════════ ═════════ ═════════

Banksand OFIs Corporate Retail TotalKD 000's KD 000's KD 000's KD 000's

At 1 January 2008 6,075 33,376 17,141 56,592On acquisition of a subsidiary - 6,311 307 6,618Ceded to the CBK - - (5) (5)Amounts written off - - (26) (26)Charge to income statement 21,665 9,716 5,015 36,396

───────── ───────── ───────── ─────────At 31 December 2008 27,740 49,403 22,432 99,575 ═════════ ═════════ ═════════ ═════════

34


21

5. LOANS AND ADVANCES TO CUSTOMERS (continued)

The impairment provision for credit facilities complies in all material respects with the specific provision requirements of the CBK and IFRS. In March 2007, the CBK issued a circular amending the basis of making minimum general provisions on facilities changing the rate from 2% to 1% for cash facilities and 0.5% for non cash facilities. The revised rates are applied effective from 1 January 2007 on the net increase in facilities, net of certain restricted categories of collateral during the reporting period. The general provision as of 31 December 2006 in excess of the present 1% for cash facilities and 0.5% for non cash facilities amounts to KD 16,154 thousand and is retained as a general provision until further directive from the CBK.

The analysis of the provision for impairment based on specific and general provision is as follows:

c) Non-performing loans Non-performing loans and advances, which either do not accrue interest or where interest is suspended, are as follows:

Loans and advancesKD 000’s

ProvisionsKD 000’s

Collateral heldagainst non-performing

loansKD 000’s

At 31 December 2009Granted prior to the invasion of Kuwait in 1990 5,050 5,050 -Granted after liberation of Kuwait in 1991 231,645 70,136 102,291 ───────── ───────── ─────────

236,695 75,186 102,291 ═════════ ═════════ ═════════

At 31 December 2008 Granted prior to the invasion of Kuwait in 1990 4,952 4,952 -Granted after liberation of Kuwait in 1991 26,050 16,989 4,613 ───────── ───────── ─────────

31,002 21,941 4,613 ═════════ ═════════ ═════════

2009KD 000’s

2008KD 000’s

Specific provision 98,354 27,191General provision 80,774 72,384

───────── ───────── 179,128 99,575

═════════ ═════════

35


23

8. OTHER ASSETS 2009

KD 000’s2008

KD 000’s

Accrued interest receivable 30,340 31,359Others 49,183 44,586 ────────── ──────────

79,523 75,945 ══════════ ══════════

9. INTANGIBLE ASSETS

Intangible assets represent goodwill and other intangible assets.

On 10 July 2008, the Bank acquired 51.1% equity interest in JKB and determined provisional goodwill after assigning provisional fair values to the identifiable assets and liabilities acquired pending finalisation of the Purchase Price Allocation (PPA) exercise.

During the year, the Bank completed the PPA exercise for JKB and allocated a portion of the provisional goodwill to various identifiable tangible and intangible assets and accounted the residual value as goodwill. Goodwill represents the future economic benefits arising from other assets acquired in the business combination that are not individually identified and separately recognised. The 2008 comparative information has been restated to reflect this adjustment.

Other intangible assets represent the value of banking license KD 43,251 thousand, customer relationship KD 10,439 thousand, core customer deposits KD 2,388 thousand and others KD 96 thousand.

The fair valuation of tangible assets include revaluation of the land and building amounting to KD 5,210 thousand. The fair value of other assets and liabilities (including contingent liabilities) acquired, do not materially differ from their provisionally determined fair values.

GoodwillKD 000’s

Other intangible

assetsKD 000’s

TotalKD 000’s

CostAt 31 December 2008 (As orginally stated) 97,416 - 97,416Reclassified to Property plant and equipment (2,662) - (2,662)Transfer to other intangible assets (28,705) 28,705 -Non controlling interests' share of intangibles - 27,469 27,469Exchange adjustment 2,412 2,051 4,463

────── ────── ──────At 31 December 2008 (Restated) 68,461 58,225 126,686

────── ────── ──────Additions (note 10) 19,754 - 19,754Exchange adjustment 3,172 2,421 5,593

────── ────── ──────At 31 December 2009 91,387 60,646 152,033

════════ ════════ ════════Accumulated amortisationAt 31 December 2008 (As orginally stated) - - -Charge for the period - 1,378 1,378

────── ────── ──────At 31 December 2008 (Restated) - 1,378 1,378Charge for the period - 2,757 2,757

────── ────── ──────At 31 December 2009 - 4,135 4,135

════════ ════════ ════════Net book valueAt 31 December 2008 (As orginally stated) 97,416 - -

════════ ════════ ════════At 31 December 2008 (Restated) 68,461 56,847 125,308

════════ ════════ ════════At 31 December 2009 91,387 56,511 147,898

════════ ════════ ════════


22

6. INVESTMENT SECURITIES 2009

KD 000’s2008

KD 000’sFinancial assets at fair value through profit or lossQuoted equity securities – held for trading 1,346 1,248

────────── ──────────

Financial assets available for saleDebt securities- Quoted 18,462 7,326- Unquoted 29,300 23,752

────────── ──────────47,762 31,078

────────── ──────────Equity securities- Quoted 12,284 14,082- Unquoted 70,616 53,892

────────── ──────────82,900 67,974

────────── ──────────Total financial assets available for sale 130,662 99,052

────────── ──────────Financial assets held to maturityDebt securities- Quoted - 2,732- Unquoted 8,944 4,372

────────── ──────────Total financial assets held to maturity 8,944 7,104

────────── ──────────Total investment securities 140,952 107,404 ══════════ ══════════

For debt instruments carried at amortised cost the management believes there is no indication of impairment in value.

During the year ended 31 December 2008, the Group adopted the amendments to IAS 39 issued by IASB on 13October 2008 and reclassified certain trading investments with a carrying value of KD 11,155 thousand (31 December 2008: KD 15,086 thousand) from the 'fair value through profit or loss' (financial assets held for trading) category to 'available for sale' category with effect from 1 July 2008.

The Group has recorded an unrealised loss of KD 139 thousand (31 December 2008: KD 1,231 thousand) in respect of the reclassified financial assets in „Cumulative changes in fair values‟ within consolidated statement of comprehensive income. Had the Group not implemented these amendments, unrealised gain of KD 1,092 thousand (31 December 2008: unrealised loss of KD 1,231 thousand) would have been recorded in the consolidated income statement.

7. INVESTMENT IN AN ASSOCIATE

During the year, the Group acquired 45.31% equity interest in Bank of Baghdad P.J.S.C. (“BoB”), incorporated in the State of Iraq having commercial banking as its‟ principal activity and listed on Iraq Stock Exchange for a purchase consideration of KD 14,648 thousand. As a result of this acquisition, BoB has become an associate of the Bank.

Subsequent to the year end, the Group has acquired additional equity interest of 5.3% in BoB resulting in an increase in the effective holding to 50.6%. This has resulted in BoB subsequently becoming a subsidiary of the Group and will be consolidated from the date of exercise of control.

36


23

8. OTHER ASSETS 2009

KD 000’s2008

KD 000’s

Accrued interest receivable 30,340 31,359Others 49,183 44,586 ────────── ──────────

79,523 75,945 ══════════ ══════════

9. INTANGIBLE ASSETS

Intangible assets represent goodwill and other intangible assets.

On 10 July 2008, the Bank acquired 51.1% equity interest in JKB and determined provisional goodwill after assigning provisional fair values to the identifiable assets and liabilities acquired pending finalisation of the Purchase Price Allocation (PPA) exercise.

During the year, the Bank completed the PPA exercise for JKB and allocated a portion of the provisional goodwill to various identifiable tangible and intangible assets and accounted the residual value as goodwill. Goodwill represents the future economic benefits arising from other assets acquired in the business combination that are not individually identified and separately recognised. The 2008 comparative information has been restated to reflect this adjustment.

Other intangible assets represent the value of banking license KD 43,251 thousand, customer relationship KD 10,439 thousand, core customer deposits KD 2,388 thousand and others KD 96 thousand.

The fair valuation of tangible assets include revaluation of the land and building amounting to KD 5,210 thousand. The fair value of other assets and liabilities (including contingent liabilities) acquired, do not materially differ from their provisionally determined fair values.

GoodwillKD 000’s

Other intangible

assetsKD 000’s

TotalKD 000’s

CostAt 31 December 2008 (As orginally stated) 97,416 - 97,416Reclassified to Property plant and equipment (2,662) - (2,662)Transfer to other intangible assets (28,705) 28,705 -Non controlling interests' share of intangibles - 27,469 27,469Exchange adjustment 2,412 2,051 4,463

────── ────── ──────At 31 December 2008 (Restated) 68,461 58,225 126,686

────── ────── ──────Additions (note 10) 19,754 - 19,754Exchange adjustment 3,172 2,421 5,593

────── ────── ──────At 31 December 2009 91,387 60,646 152,033

════════ ════════ ════════Accumulated amortisationAt 31 December 2008 (As orginally stated) - - -Charge for the period - 1,378 1,378

────── ────── ──────At 31 December 2008 (Restated) - 1,378 1,378Charge for the period - 2,757 2,757

────── ────── ──────At 31 December 2009 - 4,135 4,135

════════ ════════ ════════Net book valueAt 31 December 2008 (As orginally stated) 97,416 - -

════════ ════════ ════════At 31 December 2008 (Restated) 68,461 56,847 125,308

════════ ════════ ════════At 31 December 2009 91,387 56,511 147,898

════════ ════════ ════════

37


25

10. BUSINESS COMBINATION (continued)

The consideration paid and the provisional values of the assets acquired and liabilities assumed recognised at the acquisition date, as well as the non-controlling interest‟s proportionate share of the acquiree‟s identifiable net assets in AGB, are summarised as follows:

KD 000’sAssetsCash and cash equivalents 40,423Due from banks and other financial institutions 1,025Loans and advances to customers 90,402Investment securities 63Other assets 15,256Property and equipment 4,110 ───────

151,279 ───────LiabilitiesDue to banks 14,919Due to other financial institutions 1,126Deposits from customers 74,489Other liabilities 42,260

───────132,794

───────Net assets acquired 18,485

═══════

Consideration transferred 29,295Non-controlling interest in the acquiree 6,449Fair value of acquirer's previously held equity interest 2,495

───────38,239

Net assets acquired (18,485)───────

Provisional goodwill (note 9) 19,754═══════

Consideration settled in cash (29,295)Cash and cash equivalents in subsidiary acquired 40,423

───────Cash inflow on acquisition 11,128 ═══════

The gross amounts due under loans and advances is KD 91,935 thousand, of which KD 1,533 thousand is expected to be uncollectible.


24

9. INTANGIBLE ASSETS (continued)

The carrying value of goodwill and intangible assets with indefinite useful life are tested for impairment on an annual basis (or more frequently if evidence exists that goodwill or intangible assets might be impaired) by estimating the recoverable amount of the cash generating unit ("CGU") to which these items are allocated using value-in-use calculations. The carrying amount of intangible assets allocated to each CGU is disclosed under note 17. These calculations use pre-tax cash flow projections based on financial budgets approved by management over a five years period and a terminal growth rate of 6%. These cash flows were then discounted using a discount rate of 11.2% to derive a net present value which is compared to the carrying value of goodwill. The discount rate used is pre-tax and reflects specific risks relating to the relevant CGU. The Group has also performed a sensitivity analysis by varying these input factors by a reasonable possible margin. Based on such analysis, there are no indications that goodwill or intangible assets are impaired.

10. BUSINESS COMBINATION

During 2008, the Bank and United Gulf Bank B.S.C ("UGB") (subsidiary of the Parent Company) entered into a „Memorandum of Understanding‟ (MOU) to acquire UGB‟s holding in four commercial banks by the Bank for KD 194 million. This „Memorandum of Understanding‟ has certain clauses, including regulatory approvals, to be fulfilled by UGB and the Bank before the transaction can be completed.

The four commercial banks referred above are: JKB BoB AGB Tunis International Bank S.A.

Accordingly, during 2008, the Bank acquired 51.1% equity interest in JKB and has been consolidated from the date of exercise of control.

During the year, the Bank acquired 60% equity interest in AGB, an unlisted commercial bank engaged in banking and related financial operations in the State of Algeria. Prior to the acquisition, the Bank held 5.11% effective interest in AGB through JKB which hold 10% equity interest in AGB. Accordingly, from 30 April 2009 (the date of exercise of control), the Bank‟s effective equity interest in AGB has increased from 5.11% to 65.11% and the Group holdings from 10% to 70%. Therefore, AGB has become a subsidiary of the Group and has been consolidated from the date of exercise of control.

The business combination was achieved in stages. The Bank remeasured its previously held equity interest in the acquiree at the acquisition-date fair value and recognised the resulting gain or loss in the consolidated income statement. Accordingly, KD 3,988 thousand pertaining to the previously held interest in AGB and KD 904thousand acquisition related expenses have been recognised in the consolidated income statement as part of “Net gains on financial assets available for sale”.

The acquisition of AGB has been accounted based on the provisional values assigned to the identifiable assets, liabilities and contingent liabilities of AGB as on the acquisition date and the management is in the process of determining the fair values of assets, liabilities and contingent liabilities acquired.

38


25


The consideration paid and the provisional values of the assets acquired and liabilities assumed recognised at the acquisition date, as well as the non-controlling interest‟s proportionate share of the acquiree‟s identifiable net assets in AGB, are summarised as follows:

KD 000’sAssetsCash and cash equivalents 40,423Due from banks and other financial institutions 1,025Loans and advances to customers 90,402Investment securities 63Other assets 15,256Property and equipment 4,110 ───────

151,279 ───────LiabilitiesDue to banks 14,919Due to other financial institutions 1,126Deposits from customers 74,489Other liabilities 42,260

───────132,794

───────Net assets acquired 18,485

═══════

Consideration transferred 29,295Non-controlling interest in the acquiree 6,449Fair value of acquirer's previously held equity interest 2,495

───────38,239

Net assets acquired (18,485)───────

Provisional goodwill (note 9) 19,754═══════

Consideration settled in cash (29,295)Cash and cash equivalents in subsidiary acquired 40,423

───────Cash inflow on acquisition 11,128 ═══════

The gross amounts due under loans and advances is KD 91,935 thousand, of which KD 1,533 thousand is expected to be uncollectible.

39


27

13. EQUITY AND RESERVES

a) The authorised, issued and fully paid up share capital of the Bank comprises 1,041,330,766 shares (31 December 2008: 946,664,333 shares) of 100 fils each.

b) The share premium and treasury shares reserve are not available for distribution.

c) The Commercial Companies Law and the Bank‟s articles of association require that 10% of the profit for the year before Board of Directors remuneration, NLST, KFAS and Zakat be transferred annually to statutory reserve. The Bank may resolve to discontinue such annual transfers when the reserve equals 50% of paid up share capital. Distribution of statutory reserve is limited to the amount required to enable the payment of dividend of 5% of share capital in years when accumulated profits are not sufficient for the payment of a dividend of that amount.

d) The articles of association of the Bank requires an amount of not less than 10% of the profit for the year before Board of Directors remuneration, NLST, KFAS and Zakat be transferred annually to the voluntary reserve. There is no restriction on distribution of this reserve.

e) Treasury shares 2009 2008

Number of shares held 29,570,769 23,027,545 ══════════ ══════════ Percentage of shares held 2.84% 2.43% ══════════ ══════════ Market value KD 000‟s 9,906 15,889 ══════════ ══════════

Reserves equivalent to the cost of the treasury shares held are not available for distribution.

f) Proposed dividends The Board of Directors have recommended not to distrubute any divdend for the year 2009 (2008: bonus shares 10%), which is subject to approval at the annual general meeting of the shareholders. Dividend for the year 2008 was approved and issued at the annual general meeting of the shareholders held on 31 March 2009. This resulted in an increase in the number of authorised and issued shares by 94,666,433 shares and share capital by KD 9,467 thousand.

g) Capital increase The ordinary and extraordinary general meeting of shareholders held on 11 January 2010 approved the increase of the Bank‟s share capital through the issuance of 360 million ordinary shares at 100 fils par value and share premium of 180 fils per share. The execution of this capital increase is subject to finalisation of the respective regulatory approvals.

14. FEE AND COMMISSION INCOME

Fee and commission income includes KD 1,629 thousand (31 December 2008: KD 2,244 thousand) being fee income related to fiduciary activities.


26


As a result of AGB becoming a subsidiary of the Group, the consolidated income statement of the Group includes the following income and expenses of AGB from the date of control.

KD 000’s

Operating income 12,998Staff expenses (826)Other expenses (2,707)

───────Operating profit before provisions 9,465

Provision for impairment of loans and advances (3,909) ───────Profit before taxation 5,556

Taxation (1,575) ─────── Profit for the period 3,981

═══════

Attributable to:Equity holders of the Bank 2,592Non controlling interest 1,389 ───────

3,981═══════

Had the acquisition of AGB taken place at the beginning of the year, the operating income of the Group for the period would have been higher by KD 4,505 thousand amounting to a total of KD 17,503 thousand and the profit attributable to the equity holders of the Bank would have been higher by KD 1,299 thousand amounting to a total of KD 3,891 thousand.

During the year, one of the Bank‟s subsidiary sold 53.92% of its equity interest in one of its subsidiary for a net gain of KD 4,197 thousand which is included under „Other income‟. The non-controlling interests of the net gain has been included as part of the net movement in non-controlling interests. The retained equity interest of 11.76% has been reclassified as financial asset available for sale at fair value. The assets and liabilities of the subsidiary being disposed off is not material to the Group‟s consolidated financial statements.

11. OTHER BORROWED FUNDS Effective

interest rate2009

KD 000’s2008

KD 000’s

Long term subordinated borrowing CBKDR + 1% 96,233 96,233Medium term USD borrowing due 2009 LIBOR + 0.375% - 43,462Medium term USD borrowing due 2009 LIBOR + 0.300% - 13,798Medium term EURO borrowing due 2009 LIBOR + 0.525% - 19,290Medium term EURO borrowing due 2010 1.683% 20,675 19,290Other borrowing –subsidiaries 8.2% - 8.6% 6,114 5,870 ────────── ──────────

123,022 197,943 ══════════ ══════════

12. OTHER LIABILITIES 2009

KD 000’s2008

KD 000’s

Accrued interest payable 30,383 44,157Staff benefits 4,606 6,768Provision for non-cash credit facilities (note 5) 11,197 10,512Sundry creditors – subsidiary 38,726 30,671Other balances 54,991 55,560 ────────── ──────────

139,903 147,668 ══════════ ══════════

40


27

13. EQUITY AND RESERVES

a) The authorised, issued and fully paid up share capital of the Bank comprises 1,041,330,766 shares (31 December 2008: 946,664,333 shares) of 100 fils each.

b) The share premium and treasury shares reserve are not available for distribution.

c) The Commercial Companies Law and the Bank‟s articles of association require that 10% of the profit for the year before Board of Directors remuneration, NLST, KFAS and Zakat be transferred annually to statutory reserve. The Bank may resolve to discontinue such annual transfers when the reserve equals 50% of paid up share capital. Distribution of statutory reserve is limited to the amount required to enable the payment of dividend of 5% of share capital in years when accumulated profits are not sufficient for the payment of a dividend of that amount.

d) The articles of association of the Bank requires an amount of not less than 10% of the profit for the year before Board of Directors remuneration, NLST, KFAS and Zakat be transferred annually to the voluntary reserve. There is no restriction on distribution of this reserve.

e) Treasury shares 2009 2008

Number of shares held 29,570,769 23,027,545 ══════════ ══════════ Percentage of shares held 2.84% 2.43% ══════════ ══════════ Market value KD 000‟s 9,906 15,889 ══════════ ══════════

Reserves equivalent to the cost of the treasury shares held are not available for distribution.

f) Proposed dividends The Board of Directors have recommended not to distrubute any divdend for the year 2009 (2008: bonus shares 10%), which is subject to approval at the annual general meeting of the shareholders. Dividend for the year 2008 was approved and issued at the annual general meeting of the shareholders held on 31 March 2009. This resulted in an increase in the number of authorised and issued shares by 94,666,433 shares and share capital by KD 9,467 thousand.

g) Capital increase The ordinary and extraordinary general meeting of shareholders held on 11 January 2010 approved the increase of the Bank‟s share capital through the issuance of 360 million ordinary shares at 100 fils par value and share premium of 180 fils per share. The execution of this capital increase is subject to finalisation of the respective regulatory approvals.

14. FEE AND COMMISSION INCOME

Fee and commission income includes KD 1,629 thousand (31 December 2008: KD 2,244 thousand) being fee income related to fiduciary activities.

41


29

17. SEGMENTAL INFORMATION (continued)

Segment results include revenue and expenses directly attributable to each particular segment as the Group does not have any inter-segment charges.

BankingKD 000’s

Treasury and investment

bankingKD 000’s

InternationalKD 000’s

TotalKD 000’s

31 December 2009Net interest income 58,021 6,745 37,063 101,829

───────── ───────── ───────── ─────────

Segment operating income 74,735 13,308 66,666 154,709 ───────── ───────── ───────── ───────── Segment result before provision 63,023 11,253 46,460 120,736Provision for impairment of loans and advances (46,036) (23,335) (10,018) (79,389)Impairment of investment securities - (2,043) (1,405) (3,448)

───────── ───────── ───────── ───────── Segment result after provisions 16,987 (14,125) 35,037 37,899

───────── ───────── ───────── ───────── Unallocated expenses (9,563) ─────────Profit for the year before taxation and board of

directors' remuneration 28,336 ═════════ Segment assets 1,785,658 1,177,261 1,131,065 4,093,984

═════════ ═════════ ═════════ ═════════

Segment liabilities 1,176,895 1,669,375 819,440 3,665,710═════════ ═════════ ═════════ ═════════

Intangible assets - - 147,898 147,898

BankingKD 000’s


bankingKD 000’s


TotalKD 000’s

(Restated)31 December 2008Net interest income 51,516 1,746 14,755 68,017

───────── ───────── ───────── ─────────

Segment operating income 70,001 31,928 19,176 121,105 ───────── ───────── ───────── ─────────

Segment result before provision 58,825 29,962 11,580 100,367Provision for impairment of loans and advances (6,711) (22,355) (7,330) (36,396)Impairment of investment securities - (6,600) (3,558) (10,158)

───────── ───────── ───────── ─────────Segment result after provisions 52,114 1,007 692 53,813

───────── ───────── ───────── ─────────Unallocated expenses (12,748)

─────────Profit for the year before taxation and board of directors' remuneration 41,065

═════════ ═════════ ═════════ ═════════Segment assets 1,739,163 1,282,206 921,630 3,942,999

═════════ ═════════ ═════════ ═════════Segment liabilities 1,114,937 1,796,482 645,779 3,557,198

═════════ ═════════ ═════════ ═════════Intangible assets - - 125,308 125,308


28

15. TAXATION

2009 2008KD 000’s KD 000’s

NLST 158 981KFAS 59 363Zakat 63 392Taxation arising outside Kuwait 7,382 3,525

────────── ──────────7,662 5,261

══════════ ══════════

16. EARNINGS PER SHARE

Basic earnings per share is computed by dividing the profit for the year attributable to the equity holders of the Bank by the weighted average number of shares outstanding during the year less treasury shares. Diluted earnings per share is computed by dividing the profit for the year attributable to the equity holders by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.

The computation of basic and diluted earnings per share is as follows: 2009 2008

KD'000 KD'000(Restated)

Profit for the year attribuitable to equity holders of the Bank 6,211 37,065 ═══════════ ═══════════

Shares Shares

Number of shares outstanding:Weighted average number of paid up shares 1,041,330,766 1,041,330,766Weighted average number of treasury shares (29,405,639) (5,173,019) ──────── ────────Weighted average number of outstanding shares 1,011,925,127 1,036,157,747Effect of share based payments - 1,275,856 ──────── ────────Weighted average number of outstanding shares adjusted for effect of dilution 1,011,925,127 1,037,433,603 ──────── ────────Basic and diluted earnings per share (fils) 6.1 35.8 ═══════════ ═══════════

Basic and diluted earnings per share for the comparative period presented have been restated to reflect the increase in bonus shares issued on 31 March 2009 (note 13).

17. SEGMENTAL INFORMATION

The Group is organised into three main business segments: Banking: incorporating private customer current account, business current and savings accounts, deposits,

investment products, credit and debit cards, consumer and housing loans, overdrafts, commercial loans and other credit facilities

Treasury and investment banking: incorporating money market, foreign exchange, Treasury bills and bonds and Central bank bonds, investments and fund management.

International: incorporating operations arising outside the state of Kuwait.

Management monitors the result of its operating segments separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit and loss which in certain respects is measured differently from operating profit or loss in the consolidated financial statements.

42


29

17. SEGMENTAL INFORMATION (continued)

Segment results include revenue and expenses directly attributable to each particular segment as the Group does not have any inter-segment charges.

BankingKD 000’s


bankingKD 000’s


TotalKD 000’s

31 December 2009Net interest income 58,021 6,745 37,063 101,829

───────── ───────── ───────── ─────────

Segment operating income 74,735 13,308 66,666 154,709 ───────── ───────── ───────── ───────── Segment result before provision 63,023 11,253 46,460 120,736Provision for impairment of loans and advances (46,036) (23,335) (10,018) (79,389)Impairment of investment securities - (2,043) (1,405) (3,448)

───────── ───────── ───────── ───────── Segment result after provisions 16,987 (14,125) 35,037 37,899

───────── ───────── ───────── ───────── Unallocated expenses (9,563) ─────────Profit for the year before taxation and board of

directors' remuneration 28,336 ═════════ Segment assets 1,785,658 1,177,261 1,131,065 4,093,984

═════════ ═════════ ═════════ ═════════

Segment liabilities 1,176,895 1,669,375 819,440 3,665,710═════════ ═════════ ═════════ ═════════

Intangible assets - - 147,898 147,898

BankingKD 000’s


bankingKD 000’s


TotalKD 000’s

(Restated)31 December 2008Net interest income 51,516 1,746 14,755 68,017

───────── ───────── ───────── ─────────

Segment operating income 70,001 31,928 19,176 121,105 ───────── ───────── ───────── ─────────

Segment result before provision 58,825 29,962 11,580 100,367Provision for impairment of loans and advances (6,711) (22,355) (7,330) (36,396)Impairment of investment securities - (6,600) (3,558) (10,158)

───────── ───────── ───────── ─────────Segment result after provisions 52,114 1,007 692 53,813

───────── ───────── ───────── ─────────Unallocated expenses (12,748)

─────────Profit for the year before taxation and board of directors' remuneration 41,065

═════════ ═════════ ═════════ ═════════Segment assets 1,739,163 1,282,206 921,630 3,942,999

═════════ ═════════ ═════════ ═════════Segment liabilities 1,114,937 1,796,482 645,779 3,557,198

═════════ ═════════ ═════════ ═════════Intangible assets - - 125,308 125,308

43


31

18. TRANSACTIONS WITH RELATED PARTIES (continued)

No. of Board members or

executive staff2009

KD 000’s2008

KD 000’sBoard membersLoans and advances 2 989 388Deposits from customers 5 1,455 2,743

Executive staffLoans and advances 19 492 188Deposits 23 951 128Commitments and contingencies 3 3 4

Key management compensation Remuneration paid or accrued in relation to “key management” (deemed for this purpose to comprise Directors in relation to their committee service, the Chief Executive Officer and other Senior Officers) was as follows:

2009 2008KD 000’s KD 000’s

Short term employee benefits – including salary and bonus 2,095 1,450Accrual for end of service indemnity 267 201Accrual for cost of long term incentive rights - 115 ───────── ───────── 2,362 1,766 ═════════ ═════════

19. SHARE BASED COMPENSATION

The Bank operates two share based compensation plans for its employees, namely a Discounted Share Purchase Plan (DSPP) and an Employee Share Option Scheme (ESOP).

The DSPP scheme is available for all bank employees who have completed a minimum of one year employment with the Bank and is subject to meeting a certain performance condition. Eligible employees under the DSPP can purchase bank shares at a predetermined discount with a lock-in period of 5 years.

The ESOP scheme is available only for employees who hold certain specified posts within the Bank. Eligible employees are granted the option to purchase a predetermined number of the Bank‟s shares at a specified exercise price; the exercise of the option is subject to meeting certain performance conditions; and the option is valid for 5 years from the date of its grant.

The fair value of the options is estimated using a Black-Scholes option pricing model, taking into account the terms and conditions upon which the options were granted.

The number of shares allowed to be granted per issue under both schemes is not to exceed 5,000,000 shares in total and not to exceed 10% of total share capital.

20. COMMITMENTS AND CONTINGENT LIABILITIES 2009

KD 000’s2008

KD 000’s

Acceptances 22,191 196,498Letters of credit 173,895 105,677Letters of guarantee 462,861 489,819Undrawn commitments to extend credit 141,694 198,805

────────── ──────────800,641 990,799

══════════ ══════════


30

18. TRANSACTIONS WITH RELATED PARTIES

The Group has entered into transactions with certain related parties (Parent company, directors and key management personnel of the Group and entities controlled, jointly controlled or significantly influenced by such parties) who were customers of the Group during the year. The terms of these transactions are approved by the Group‟s management. The balances and transactions are as follows:

ParentcompanyKD 000's

AssociateKD 000's

OthersKD 000's

2009KD 000s

2008KD 000s

Due from banks and other financial institutions - 7,502 171,997 179,499 141,740

Loans and advances - - 35,800 35,800 2,962Investment securities 705 - 18,984 19,689 7,069Investment securities managed by a

related party - - 652 652 1,108Due to banks - 30 15,186 15,216 5,403Due to other financial institutions - - 7,146 7,146 8,849Deposits from customers 99,499 - 2,004 101,503 85,704Other borrowed funds - - 96,233 96,233 96,233

Contingent liabilities and commitments

Acceptances - - - - 10Letters of credit - - - - 5Letters of guarantee - - 2,707 2,707 3,516

TransactionsInterest income - - 9,135 9,135 5,834Interest expense 1,536 - 4,484 6,020 6,898Fee and commission income 142 1 193 336 372Fee and commission expense - - 956 956 351Dividend income 200 - 51 251 626

44


31

18. TRANSACTIONS WITH RELATED PARTIES (continued)

No. of Board members or

executive staff2009

KD 000’s2008

KD 000’sBoard membersLoans and advances 2 989 388Deposits from customers 5 1,455 2,743

Executive staffLoans and advances 19 492 188Deposits 23 951 128Commitments and contingencies 3 3 4

Key management compensation Remuneration paid or accrued in relation to “key management” (deemed for this purpose to comprise Directors in relation to their committee service, the Chief Executive Officer and other Senior Officers) was as follows:

2009 2008KD 000’s KD 000’s

Short term employee benefits – including salary and bonus 2,095 1,450Accrual for end of service indemnity 267 201Accrual for cost of long term incentive rights - 115 ───────── ───────── 2,362 1,766 ═════════ ═════════

19. SHARE BASED COMPENSATION

The Bank operates two share based compensation plans for its employees, namely a Discounted Share Purchase Plan (DSPP) and an Employee Share Option Scheme (ESOP).

The DSPP scheme is available for all bank employees who have completed a minimum of one year employment with the Bank and is subject to meeting a certain performance condition. Eligible employees under the DSPP can purchase bank shares at a predetermined discount with a lock-in period of 5 years.

The ESOP scheme is available only for employees who hold certain specified posts within the Bank. Eligible employees are granted the option to purchase a predetermined number of the Bank‟s shares at a specified exercise price; the exercise of the option is subject to meeting certain performance conditions; and the option is valid for 5 years from the date of its grant.

The fair value of the options is estimated using a Black-Scholes option pricing model, taking into account the terms and conditions upon which the options were granted.

The number of shares allowed to be granted per issue under both schemes is not to exceed 5,000,000 shares in total and not to exceed 10% of total share capital.

20. COMMITMENTS AND CONTINGENT LIABILITIES 2009

KD 000’s2008

KD 000’s

Acceptances 22,191 196,498Letters of credit 173,895 105,677Letters of guarantee 462,861 489,819Undrawn commitments to extend credit 141,694 198,805

────────── ──────────800,641 990,799

══════════ ══════════

45


33

21. DERIVATIVES FINANCIAL INSTRUMENTS (continued)

Forward swaps Forward swaps are contractual agreements between two parties to exchange movement in interest or foreign currency rates based on a specific notional amount. For interest rate swaps, counter parties generally exchange fixed and floating rate interest payments based on a notional value in a single currency.

22. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value of all financial instruments are not materially different from their carrying values except certain financial assets avaliable for sale carried at cost (note 6). For financial assets and financial liabilities that are liquid or having a short-term maturity (less than three months) it is assumed that the carrying amounts approximate to their fair value. This assumption is also applied to demand deposits, savings accounts without a specific maturity and variable rate financial instruments.

The financial instruements amounting to KD 13,630 thousand are determined based on the quoted prices in active market for the same instrument and financial instruements amounting to KD 70,616 thousand are based on the observable market data.

23. FIDUCIARY ASSETS

The Group manages investment funds on behalf of customers with net asset value of KD 148,344 thousand (31 December 2008: KD 288,439 thousand).

24. RISK MANAGEMENT

The Group classifies the risks faced as part of its day to day activities into certain categories of risks and accordingly specific responsibilities have been given to various officers for the identification, measurement, control and reporting of these identified families of risks. The categories of risks are: A. Risks arising from financial instruments:

i. Credit risk which includes default risk of clients and counterparties ii. Market risk which includes interest rate, foreign exchange and equity price risks and iii. Liquidity risk

B. Other risks iv. Operational risk which includes risks due to operational failures

A. CREDIT RISK

Credit risk is the risk that a counterparty will be unable to pay amounts in full when due. The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to geographical and industry segments. Such risks are monitored on a regular basis and are subject to regular review. Limits on the level of credit risk by product, industry sector and by country are approved by the Board.

The exposure to any one borrower, including Banks and OFIs is further restricted by sub limits covering items on statement of financial position and commitments and contingent liabilities exposures and daily delivery risk limits in relation to trading items such as forward foreign exchange contracts. Actual exposures against limits are monitored daily. The Group has a well documented credit policy that complies with CBK regulations and defines the appetite of the Group for assumption of risks in its various business groups.

Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral and corporate and personal guarantees.

Credit risk arising from derivative financial instruments is limited to those with positive fair values, recorded in the consolidated statement of financial position.


32

20. COMMITMENTS AND CONTINGENT LIABILITIES (continued)

The primary purpose of these instruments is to ensure that funds are available to customers as required. Acceptances, standby letters of credit and guarantees, which represent irrevocable assurances that the Group will make payments in the event that the customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are undertaken by the Group on behalf of the customer authorising a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct borrowing.

Commitments to extend credit represent unused portions of authorisations to extend cash credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments since most of these commitments will expire or terminate without being funded.

The Group makes available to its customers guarantees which may require that the Group makes 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.

21. DERIVATIVE FINANCIAL INSTRUMENTS

In the ordinary course of business the Group enters into various types of transactions that involve derivative financial instruments. A derivative financial instrument is a financial contract between two parties where payments are dependent upon movements in price of one or more underlying financial instruments, reference rate or index.

The table below shows the fair value of derivative financial instruments, recorded as assets or liabilities, together with their notional amounts analysed by the terms of maturity. The notional amount, recorded gross, 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 the year end and are indicative of neither the market risk nor the credit risk. The credit risk exposure is managed as part of the overall borrowers lending limits, together with potential exposures from market movements.

Notional amount

31 December 2009Positive fair

valueNegative fair

value Within 1 year TotalKD 000’s KD 000’s KD 000’s KD 000’s

Derivatives held for trading:(non-qualifying hedges)Forward swaps/ foreign exchange contracts - (3) 1,447 1,447

═════════ ═════════ ═════════ ═════════

Notional amount

31 December 2008Positive fair

valueNegative fair

value Within 1 year TotalKD 000’s KD 000’s KD 000’s KD 000’s

Derivatives held for trading:(non-qualifying hedges)Forward swaps/ foreign exchange contracts 1,949 (1,986) 71,787 71,787

═════════ ═════════ ═════════ ═════════

Forward foreign exchange Forward foreign exchange contracts are contractual agreements to either buy or sell a specified currency, at a specific price and date in the future, and are customised contracts transacted in the over-the-counter market.

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21. DERIVATIVES FINANCIAL INSTRUMENTS (continued)

Forward swaps Forward swaps are contractual agreements between two parties to exchange movement in interest or foreign currency rates based on a specific notional amount. For interest rate swaps, counter parties generally exchange fixed and floating rate interest payments based on a notional value in a single currency.

22. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value of all financial instruments are not materially different from their carrying values except certain financial assets avaliable for sale carried at cost (note 6). For financial assets and financial liabilities that are liquid or having a short-term maturity (less than three months) it is assumed that the carrying amounts approximate to their fair value. This assumption is also applied to demand deposits, savings accounts without a specific maturity and variable rate financial instruments.

The financial instruements amounting to KD 13,630 thousand are determined based on the quoted prices in active market for the same instrument and financial instruements amounting to KD 70,616 thousand are based on the observable market data.

23. FIDUCIARY ASSETS

The Group manages investment funds on behalf of customers with net asset value of KD 148,344 thousand (31 December 2008: KD 288,439 thousand).

24. RISK MANAGEMENT

The Group classifies the risks faced as part of its day to day activities into certain categories of risks and accordingly specific responsibilities have been given to various officers for the identification, measurement, control and reporting of these identified families of risks. The categories of risks are: A. Risks arising from financial instruments:

i. Credit risk which includes default risk of clients and counterparties ii. Market risk which includes interest rate, foreign exchange and equity price risks and iii. Liquidity risk

B. Other risks iv. Operational risk which includes risks due to operational failures

A. CREDIT RISK

Credit risk is the risk that a counterparty will be unable to pay amounts in full when due. The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to geographical and industry segments. Such risks are monitored on a regular basis and are subject to regular review. Limits on the level of credit risk by product, industry sector and by country are approved by the Board.

The exposure to any one borrower, including Banks and OFIs is further restricted by sub limits covering items on statement of financial position and commitments and contingent liabilities exposures and daily delivery risk limits in relation to trading items such as forward foreign exchange contracts. Actual exposures against limits are monitored daily. The Group has a well documented credit policy that complies with CBK regulations and defines the appetite of the Group for assumption of risks in its various business groups.

Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral and corporate and personal guarantees.

Credit risk arising from derivative financial instruments is limited to those with positive fair values, recorded in the consolidated statement of financial position.

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24. RISK MANAGEMENT (continued)

A. CREDIT RISK (continued)

Credit risk concentration (continued)The Group‟s financial assets and commitments and contingent liabilities, before taking into account any collateral held or credit enhancements can be analysed by the following industry sectors:

2009KD 000’s

2008KD 000’s

Industry sectorSovereign 479,917 389,197Banking 928,504 819,496Investment 278,311 278,549Trade and commerce 481,189 541,824Real estate 740,793 744,212Personal 514,286 644,762Manufacturing 249,025 269,888Construction 371,408 409,914Others 478,906 511,276

───────── ─────────4,522,339 4,609,118

═════════ ═════════

Credit quality per class of financial assets The credit quality of financial assets are summarised by reference to public ratings given to the clients/counterparties by recognised and approved External Credit Assessment Institutions (ECAIs).

For further details regarding the Group‟s credit risk management policy please refer to Basel II – Pillar 3 Disclosures (Item 6-iii).

a) Financial assets neither past due nor impaired 2009

Rated Unrated TotalInvestment

gradeNon investment

gradeKD 000’s KD 000’s KD 000’s KD 000’s

Sovereigns 574,967 - 62,431 637,398Banks and OFIs 492,785 - 167,649 660,434Corporates - - 1,562,238 1,562,238Retail - - 378,589 378,589Other credit exposures - - 87,046 87,046

─────── ─────── ─────── ───────1,067,752 - 2,257,953 3,325,705═══════ ═══════ ═══════ ═══════

2008Rated Unrated Total

Investmentgrade

Non investment grade

KD 000’s KD 000’s KD 00'0’s KD 000’s

Sovereigns 491,612 - - 491,612Banks and OFIs 576,593 76,262 182,515 835,370Corporates - - 1,669,843 1,669,843Retail - - 296,519 296,519Other credit exposures - 4,273 69,791 74,064

─────── ─────── ─────── ───────1,068,205 80,535 2,218,668 3,367,408═══════ ═══════ ═══════ ═══════

As of 31 December 2009, exposures whose terms have been renegotiated that would be otherwise past due or impaired amounted to KD 283,997 thousand (31 December 2008: KD 397,528 thousand). The fair value of collateral held against these exposures amounts to KD 127,911 thousand (31 December 2008: KD 73,874 thousand).


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Gross maximum exposure to credit risk: The table below shows the gross maximum exposure to credit risk across financial assets before and after taking into consideration the effect of credit risk mitigation.

2009KD 000’s

2008KD 000’s

Cash and cash equivalents 563,227 495,998Treasury bills and bonds with CBK and others 417,049 387,378Due from banks and other financial institutions 407,427 532,412Loans and advances to customers 2,246,949 2,132,990Investments securities 56,706 38,182Other assets 30,340 31,359 ───────── ───────── Total 3,721,698 3,618,319 ───────── ─────────

Commitments and contingent liabilities 800,641 990,799 ───────── ───────── Gross maximum credit risk exposure before consideration of credit risk mitigation 4,522,339 4,609,118 ═════════ ═════════ Gross maximum credit risk exposure after consideration of credit risk mitigation 2,624,286 2,182,597 ═════════ ═════════

The exposures set above, are based on net carrying amounts as reported in the consolidated statement of financial position, except for commitments and contingent liabilities.

Collateral and Credit risk mitigation techniques The main credit risk mitigation techniques applied by the Group are based on eligible collaterals. The collaterals held are valued at regular intervals in line with regulatory guidelines.

For further details regarding the Group‟s use of credit risk mitigation techniques, and collateral policy, refer to Basel II – Pillar 3 Disclosures (Item 7).

Credit risk concentrationIn line with regulatory requirements, the Bank‟s maximum exposure to a single counterparty or a group of related counterparties cannot exceed 15 % of its comprehensive capital. For further details regarding the Bank‟s capital structure please refer to Basel II – Pillar 3 Disclosures (Item 3).

The top 10 largest exposures outstanding as a percentage of gross loans and advances to customers at 31 December 2009 is 16% (31 December 2008: 18%).

The concentration across classes within loans and advances to customers, which form the significant portion of assets subject to credit risk, is given in note 5.

The Group‟s financial assets and commitments and contingent liabilities, before taking into account any collateral held or credit enhancements can be analysed by the following geographic regions:

2009 2008

AssetsKD 000s

Commitments and contingent

liabilitiesKD 000s

TotalKD 000s

Assets KD 000s

Commitmentsand contingent

liabilitiesKD 000s

TotalKD 000s

Kuwait 2,308,791 543,538 2,852,329 2,298,065 829,667 3,127,732Other middle east 1,097,513 158,813 1,256,326 1,098,772 125,404 1,224,176Europe 35,991 462 36,453 196,745 13,225 209,970Rest of world 279,403 97,828 377,231 24,737 22,503 47,240

─────── ─────── ─────── ─────── ─────── ───────3,721,698 800,641 4,522,339 3,618,319 990,799 4,609,118═══════ ═══════ ═══════ ═══════ ═══════ ═══════

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Credit risk concentration (continued)The Group‟s financial assets and commitments and contingent liabilities, before taking into account any collateral held or credit enhancements can be analysed by the following industry sectors:

2009KD 000’s

2008KD 000’s

Industry sectorSovereign 479,917 389,197Banking 928,504 819,496Investment 278,311 278,549Trade and commerce 481,189 541,824Real estate 740,793 744,212Personal 514,286 644,762Manufacturing 249,025 269,888Construction 371,408 409,914Others 478,906 511,276

───────── ─────────4,522,339 4,609,118

═════════ ═════════

Credit quality per class of financial assets The credit quality of financial assets are summarised by reference to public ratings given to the clients/counterparties by recognised and approved External Credit Assessment Institutions (ECAIs).

For further details regarding the Group‟s credit risk management policy please refer to Basel II – Pillar 3 Disclosures (Item 6-iii).

a) Financial assets neither past due nor impaired 2009

Rated Unrated TotalInvestment

gradeNon investment

gradeKD 000’s KD 000’s KD 000’s KD 000’s

Sovereigns 574,967 - 62,431 637,398Banks and OFIs 492,785 - 167,649 660,434Corporates - - 1,562,238 1,562,238Retail - - 378,589 378,589Other credit exposures - - 87,046 87,046

─────── ─────── ─────── ───────1,067,752 - 2,257,953 3,325,705═══════ ═══════ ═══════ ═══════

2008Rated Unrated Total

Investmentgrade

Non investment grade

KD 000’s KD 000’s KD 00'0’s KD 000’s

Sovereigns 491,612 - - 491,612Banks and OFIs 576,593 76,262 182,515 835,370Corporates - - 1,669,843 1,669,843Retail - - 296,519 296,519Other credit exposures - 4,273 69,791 74,064

─────── ─────── ─────── ───────1,068,205 80,535 2,218,668 3,367,408═══════ ═══════ ═══════ ═══════

As of 31 December 2009, exposures whose terms have been renegotiated that would be otherwise past due or impaired amounted to KD 283,997 thousand (31 December 2008: KD 397,528 thousand). The fair value of collateral held against these exposures amounts to KD 127,911 thousand (31 December 2008: KD 73,874 thousand).

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B. MARKET RISK (continued)

The Group is exposed to interest rate risk on its interest bearing assets and liabilities (Treasury bills and bonds with CBK and others, due from banks and other financial institutions, loans and advances to customers, due to banks, due to other financial institutions, deposits from customers and other borrowed funds).

The table below summarises the effect on net interest income as a result of the changes in interest rate:

2009 2008KD 000’s KD 000’s

Increase in interest rate "Basis Points"50 3,419 9,905100 7,651 20,970

Decrease in interest rate “Basis Points”50 (3,716) (9,748)100 (6,104) (18,888)

Currency risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group takes on exposure to effects of fluctuations in the prevailing currency exchange rates on its financial position and cash flows. The Board of Directors sets limits on the level of exposure by currency and in total for both overnight and intra-day positions, which are monitored daily.

The Group had the following net exposures in foreign currencies: 2009 2008

KD 000’s KD 000’sLong/(short) Long/(short)

US Dollar (8,935) (13,413)Euro 467 (8)Japenese Yen 18 46Saudi Riyal 426 404UAE Dirham 598 621Others 3,953 7,226

The Group conducts multiple sensitivity analysis scenarios on regular intervals in order to assess the potential impact of any major fluctuation in exchange rates of major currencies against the KD. Based on the results of the analysis conducted there are no material implication over the Group‟s foreign exchange income or equity for a 1% fluctuation in the major currencies exchange rates.

Equity price risk Equity price risk arises from the change in fair values of equity investments. The Group manages this risk through diversification of investments in terms of geographical distribution and industry concentration. The majority of the Group‟s quoted investments are listed on the regional Stock Exchanges.

The Group conducts sensitivity analysis on regular intervals in order to assess the potential impact of any major changes in fair value of equity instruments. Based on the results of the analysis conducted there are no material implication over the Group‟s profit or equity for a 1% fluctuation in major stock exchanges.


36



Credit quality per class of financial assets (continued)

b) Financial assets past due but not impaired For credit risk related exposures, a past due exposure is considered to be one where the client or counterparty has failed to meet his contractual obligation to the Group towards payment of the interest or the principal or a part thereof on the date on which such payment is due.

2009 20081 to 45 days

45 to 90 days Total

1 to 45 days

45 to 90 days Total

KD000's KD 000's KD 000's KD 000's KD 000's KD 000's

Banks and OFIs - 45,260 45,260 53,830 25,720 79,550Corporates 99,441 31,315 130,756 117,958 25,108 143,066Retail 11,316 2,541 13,857 17,033 2,201 19,234

─────── ─────── ─────── ─────── ─────── ───────110,757 79,116 189,873 188,821 53,029 241,850

═══════ ═══════ ═══════ ═══════ ═══════ ═══════Fair value of collateral held 58,359 17,774 76,133 77,984 17,870 95,854

c) Impaired financial assets The Group considers an asset to be impaired if the realisable value of the asset is less than the value at which it is carried in the books of the Group before it considers the necessity of making a specific provision for the same.

2009 2008

Total Provision

Fair value of collateral

held Total Provision

Fair value of collateral

heldKD 000's KD 000's KD 000's KD 000's KD 000's KD 000's

Banks and OFIs 65,733 21,122 - 3,734 3,734 -Corporates 215,114 57,957 100,772 11,048 7,527 3,206Retail 21,581 17,229 1,519 19,954 14,414 1,407

────── ────── ────── ────── ────── ──────302,428 96,308 102,291 34,736 25,675 4,613══════ ══════ ══════ ══════ ══════ ══════

B. MARKET RISK

Market risk is the risk that the value of an asset will fluctuate as a result of changes in market variables such as interest rates, foreign exchange rates, and equity prices, whether those changes are caused by factors specific to the individual investment or its issuer or factors affecting all financial assets traded in the market.

Market risk is managed on the basis of pre-determined asset allocations across various asset categories, diversification of assets in terms of geographical distribution and industry concentration, a continuous appraisal of market conditions and trends and management‟s estimate of long and short term changes in fair value.

Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect the fair value or cash flows of the financial instruments. The Group takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. This arises as a result of mismatches or gaps in the amounts of assets and liabilities and off balance sheet instruments that mature or reprice in a given period. The Group manages this risk by matching the repricing of assets and liabilities through risk management strategies.

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The Group is exposed to interest rate risk on its interest bearing assets and liabilities (Treasury bills and bonds with CBK and others, due from banks and other financial institutions, loans and advances to customers, due to banks, due to other financial institutions, deposits from customers and other borrowed funds).

The table below summarises the effect on net interest income as a result of the changes in interest rate:

2009 2008KD 000’s KD 000’s

Increase in interest rate "Basis Points"50 3,419 9,905100 7,651 20,970

Decrease in interest rate “Basis Points”50 (3,716) (9,748)100 (6,104) (18,888)

Currency risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group takes on exposure to effects of fluctuations in the prevailing currency exchange rates on its financial position and cash flows. The Board of Directors sets limits on the level of exposure by currency and in total for both overnight and intra-day positions, which are monitored daily.

The Group had the following net exposures in foreign currencies: 2009 2008

KD 000’s KD 000’sLong/(short) Long/(short)

US Dollar (8,935) (13,413)Euro 467 (8)Japenese Yen 18 46Saudi Riyal 426 404UAE Dirham 598 621Others 3,953 7,226

The Group conducts multiple sensitivity analysis scenarios on regular intervals in order to assess the potential impact of any major fluctuation in exchange rates of major currencies against the KD. Based on the results of the analysis conducted there are no material implication over the Group‟s foreign exchange income or equity for a 1% fluctuation in the major currencies exchange rates.

Equity price risk Equity price risk arises from the change in fair values of equity investments. The Group manages this risk through diversification of investments in terms of geographical distribution and industry concentration. The majority of the Group‟s quoted investments are listed on the regional Stock Exchanges.

The Group conducts sensitivity analysis on regular intervals in order to assess the potential impact of any major changes in fair value of equity instruments. Based on the results of the analysis conducted there are no material implication over the Group‟s profit or equity for a 1% fluctuation in major stock exchanges.

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C. LIQUIDITY RISK (continued)

Up to 3months

KD 000’s

3 – 6months

KD 000’s

6 – 12months

KD 000’s

More than 12 monthsKD 000’s

TotalKD 000’s

2008

Financial liabilitiesDue to banks 185,798 7,342 - - 193,140Due to other financial institutions 408,921 59,758 141,589 - 610,268Deposits from customers 2,071,966 196,956 167,144 3,072 2,439,138Other borrowed funds 21,236 1,792 60,585 144,315 227,928Other liabilities 113,136 22,147 6,243 6,142 147,668 ───────── ───────── ───────── ───────── ─────────

2,801,057 287,995 375,561 153,529 3,618,142═════════ ═════════ ═════════ ═════════ ═════════

Contingent liabilities and commitments 335,178 289,544 233,767 132,310 990,799

═════════ ═════════ ═════════ ═════════ ═════════

The table below summarises the maturity profile of the Group‟s assets and liabilities. The maturities of assets and liabilities have been determined according to when they are expected to be recovered or settled. The maturity profile for financial assets at fair value through income statement and financial assets available for sale is determined based on management's estimate of liquidation of those financial assets. The actual maturities may differ from the maturities shown above since borrowers may have the right to prepay obligations with or without prepayment penalties.

Up to 3monthsKD 000s

3 – 6monthsKD 000s

6 – 12 monthsKD 000s

More than 12 monthsKD 000s

TotalKD 000s

2009

ASSETSCash and cash equivalents 602,088 - - - 602,088Treasury bills and bonds with CBK and

others 207,098 99,916 67,891 42,144 417,049Due from banks and other financial

institutions 297,237 41,864 27,667 40,659 407,427Loans and advances to customers 790,018 240,400 272,283 944,248 2,246,949Investment securities 7,483 2,024 2,422 129,023 140,952Investment in an associate - - - 15,434 15,434Other assets 58,630 3,191 4,067 13,635 79,523Property and equipment - - - 36,664 36,664Intangible assets - - - 147,898 147,898

──────── ──────── ──────── ──────── ────────Total assets 1,962,554 387,395 374,330 1,369,705 4,093,984

════════ ════════ ════════ ════════ ════════

LIABILITIES AND EQUITYDue to banks 265,814 5,563 5,061 - 276,438Due to other financial institutions 268,773 138,704 292,165 1,724 701,366Deposits from customers 2,134,212 199,508 79,550 11,711 2,424,981Other borrowed funds 20,675 - - 102,347 123,022Other liabilities 102,271 13,285 6,646 17,701 139,903Equity - - - 428,274 428,274

──────── ──────── ──────── ──────── ────────Total liabilities and equity 2,791,745 357,060 383,422 561,757 4,093,984

════════ ════════ ════════ ════════ ════════Net liquidity gap (829,191) 30,335 (9,092) 807,948 -

════════ ════════ ════════ ════════ ════════


38



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 rate fall. The fixed rate assets of the Group are not significant compared to the total assets. Moreover, other market conditions causing prepayment is not significant in the markets in which the Group operates. Therefore the Group considers the effect of prepayment on net interest income is not material after taking in to account the effect of any prepayment penalties.

C. LIQUIDITY RISK

Liquidity risk is the risk that the Group will be unable to meet its liabilities when they fall due. The Group is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, loan draw downs, guarantees. To limit this risk, the Group manages assets with liquidity in mind and monitors liquidity on a daily basis.

The table below shows an analysis of financial liabilities and contingent liabilities and commitments based on the remaining undiscounted contractual maturities:

Up to 3months

KD 000’s

3 – 6months

KD 000’s

6 – 12months

KD 000’s


TotalKD 000’s

2009

Financial liabilities Due to banks 266,765 6,021 5,062 - 277,848Due to other financial institutions 269,260 140,445 297,220 1,728 708,653Deposits from customers 2,140,100 201,329 80,251 11,818 2,433,498Other borrowed funds 21,665 - - 122,147 143,812Other liabilities 102,271 13,285 6,646 17,701 139,903 ───────── ───────── ───────── ───────── ─────────

2,800,061 361,080 389,179 153,394 3,703,714 ═════════ ═════════ ═════════ ═════════ ═════════ Contingent liabilities and

commitments 279,728 271,012 125,270 124,631 800,641 ═════════ ═════════ ═════════ ═════════ ═════════

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Up to 3months

KD 000’s

3 – 6months

KD 000’s

6 – 12months

KD 000’s


TotalKD 000’s

2008

Financial liabilitiesDue to banks 185,798 7,342 - - 193,140Due to other financial institutions 408,921 59,758 141,589 - 610,268Deposits from customers 2,071,966 196,956 167,144 3,072 2,439,138Other borrowed funds 21,236 1,792 60,585 144,315 227,928Other liabilities 113,136 22,147 6,243 6,142 147,668 ───────── ───────── ───────── ───────── ─────────

2,801,057 287,995 375,561 153,529 3,618,142═════════ ═════════ ═════════ ═════════ ═════════

Contingent liabilities and commitments 335,178 289,544 233,767 132,310 990,799

═════════ ═════════ ═════════ ═════════ ═════════

The table below summarises the maturity profile of the Group‟s assets and liabilities. The maturities of assets and liabilities have been determined according to when they are expected to be recovered or settled. The maturity profile for financial assets at fair value through income statement and financial assets available for sale is determined based on management's estimate of liquidation of those financial assets. The actual maturities may differ from the maturities shown above since borrowers may have the right to prepay obligations with or without prepayment penalties.


3 – 6monthsKD 000s

6 – 12 monthsKD 000s


TotalKD 000s

2009

ASSETSCash and cash equivalents 602,088 - - - 602,088Treasury bills and bonds with CBK and


institutions 297,237 41,864 27,667 40,659 407,427Loans and advances to customers 790,018 240,400 272,283 944,248 2,246,949Investment securities 7,483 2,024 2,422 129,023 140,952Investment in an associate - - - 15,434 15,434Other assets 58,630 3,191 4,067 13,635 79,523Property and equipment - - - 36,664 36,664Intangible assets - - - 147,898 147,898

──────── ──────── ──────── ──────── ────────Total assets 1,962,554 387,395 374,330 1,369,705 4,093,984

════════ ════════ ════════ ════════ ════════

LIABILITIES AND EQUITYDue to banks 265,814 5,563 5,061 - 276,438Due to other financial institutions 268,773 138,704 292,165 1,724 701,366Deposits from customers 2,134,212 199,508 79,550 11,711 2,424,981Other borrowed funds 20,675 - - 102,347 123,022Other liabilities 102,271 13,285 6,646 17,701 139,903Equity - - - 428,274 428,274

──────── ──────── ──────── ──────── ────────Total liabilities and equity 2,791,745 357,060 383,422 561,757 4,093,984

════════ ════════ ════════ ════════ ════════Net liquidity gap (829,191) 30,335 (9,092) 807,948 -

════════ ════════ ════════ ════════ ════════

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3 – 6months

KD 000s

6 – 12 months

KD 000s


TotalKD 000s

2008ASSETSCash and cash equivalents 550,955 - - - 550,955Treasury bills and bonds with CBK and


institutions 315,692 56,280 112,700 47,740 532,412Loans and advances to customers 839,066 307,357 268,573 717,994 2,132,990Investment securities 14,139 478 2,353 90,434 107,404Other assets 58,242 4,206 3,949 9,548 75,945Property and equipment - - - 30,607 30,607Intangible assets - - - 125,308 125,308

─────── ─────── ─────── ─────── ───────Total assets 1,926,255 474,033 478,281 1,064,430 3,942,999

═══════ ═══════ ═══════ ═══════ ═══════LIABILITIES AND EQUITYDue to banks 185,162 7,100 - - 192,262Due to other financial institutions 407,207 58,743 137,274 - 603,224Deposits from customers 2,058,660 193,415 160,997 3,029 2,416,101Other borrowed funds 19,290 - 57,260 121,393 197,943Other liabilities 113,136 22,147 6,243 6,142 147,668Equity - - - 385,801 385,801

──────── ──────── ──────── ──────── ──────── Total liabilities and equity 2,783,455 281,405 361,774 516,365 3,942,999

════════ ════════ ════════ ════════ ════════ Net liquidity gap (857,200) 192,628 116,507 548,065 -

════════ ════════ ════════ ════════ ════════

D. OPERATIONAL RISK

Operational risk is the risk of loss caused by failures in operational process, people and system that supports operational processes. The Group has a set of policies and procedures, which are approved by the Board of Directors and are applied to identify, assess and supervise operational risk in addition to other types of risks relating to the banking and financial activities of the Group. Operational risk is managed by Risk management. Risk management ensures compliance with policies and procedures to identify, assess, supervise and monitor operational risk as part of overall Global risk management.

The Operational Risk management function of the Group is in line with the CBK instructions dated 14 November 1996, concerning the general guidelines for internal controls and the instructions dated 13 October 2003, regarding the sound practices for managing and supervising operational risks in banks.

25. CAPITAL MANAGEMENT

The disclosures relating to the Capital Adequacy Regulations issued by Central Bank of Kuwait as stipulated in CBK Circular number 2/BS/184/2005 dated 21 December 2005, are included under the „Capital Management and Allocation‟ section of the annual report.

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Burgan Bank is your financial partner, forming a relationship with you based on integrity and trust, providing innovative banking services that understand and support your different needs at every stage of life.

Our VisionTo be the best of class financial service provider in the Kuwaiti market through sustained execution of best practice, innovation and stakeholder care.

Our GoalsTo maximise value for all our stakeholders, clients, personnel and shareholders by building on Burgan Bank’s three pillars of client delight and care, leveraging its operational and technological capabilities and nurturing our staff. Our stakeholder’s value must be consistent, growth oriented and accomplished in the spirit of the corporate governance framework.

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Documents

Annual Financials · 4 Pillars 3 disclosures for the full 2009 year ... one of the leading commercial banks in Kuwait. 2 3.8 % 09 annual financials Burgan Bank 2009 ratings Rating