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Samba Financial Group

2007 DIRECTORS’ REPORT

1. PRINCIPAL ACTIVITIES Samba Financial Group (Samba) is a Saudi Joint Stock Company, provides a full range of commercial banking services through its branches and subsidiaries. In compliance with the regulatory mandate of the Capital Market Authority (CMA) that requires banks to separate their banking and commercial services from securities related business operations, Sambacapital was incorporated and licensed by CMA. Sambacapital will commence operations in 19 January 2008.

Samba provides a full range of conventional banking services such as loans, trade finance, asset management, consumer financing, credit cards, and treasury products to all client segments including retail and corporate clients and government institutions. Samba provides also a broad arrange of Shariah compliant banking products approved by samba’s Shariah Board, which is managed independently. The Bank is organized into the following main business segments:

Consumer – comprises of individual customer time deposits, current, call and savings accounts, as well as credit cards, retail investment products and consumer loans. It also includes management of fiduciary funds, international and local shares brokerage services.

Corporate – comprises of corporate time deposits, current and call accounts, overdrafts, loans and other credit facilities as well the Bank’s investment, trading and derivative portfolios and its corporate finance advisory services.

Treasury – principally manages money market, foreign exchange, commission rate trading and derivatives for corporate and institutional customers as well as for the Bank’s own account. It is also responsible for funding the Bank’s operations, maintaining liquidity and managing the Bank’s investment portfolio and balance sheet. (Explanation of the Bank’s business segments is included in Note 27 of the financial statements).

Samba’s head office is in Riyadh, with 65 branches kingdom wide and 37 Speed Cash Centers. In addition to UK Branch, Samba Financial Group acquired in 2007 a majority stake of 68.4% in Crescent Commercial Bank in Pakistan, which has 28 branches in the main Pakistani cities and its is listed in Pakistan Bourse.

Sambacapital, a Samba wholly-owned subsidiary, with SR500 million as Capital, is s full provider of leading world-class investment solutions for all investment Client segments. It also provides a bundle of conventional and Shariah-compliant products including award-winning GCC and international mutual funds, such as bond funds and other investment opportunities. Sambacapital leveraged Samba’s innovative technical solutions to provide brokerage services for local, regional and international Share trading markets and provides effective management services to the clients’ portfolios through different delivery channels such as online, phone and mobile. Sambacapital provides IPO services, rights issues, A&M, and financial advisory services to its corporate Clients.

2. REVIEW OF OPERATIONS AND FINANCIAL RESULTS 2007 was full of challenges for the local, regional and global banking industry. Although local and regional bank performed under unprecedented liquid market thanks to the record oil prices, but they experienced retraction in loans growth rates and trading volumes in securities markets. On the international level, the mortgage crisis as well as the liquidity squeeze has materially and adversely affected the results of huge bank, and such impact hit to lesser extent some regional banks.

The growth momentum of Saudi Economy continued in 2007. The nominal GDP grew by 7.1 per cent, whereas the real GDP grew by 3.5 percent in the same period. The private sector share in the national economy hit 46.1% compared with 44.8% in 2006. Non-oil sector continues to record strong growth, with the expansion of steel and petrochemical products as well as the growth of transportation and construction sectors.


We believe that Saudi Economy will continue to prosper in 2008. Should oil prices upward trend continues, special investments and consumption will gain more momentum. Although inflation is a major concern, but the Saudi economy’s continued surpluses in different its accounts, is considered a support to the banking and financial sector.

Samba’s Vision and its management strong control enables realization of satisfactory results to its shareholders. 2007 net income was SR4.8 billion declined from SR5.2 billion in 2006 due to dropping brokerage and asset management income that is adversely affected by deteriorating share trading activities. However, the offset came from the profits of special commissions. All core segments and products have witnessed positive results. Further, the high profit rates, lower basic costs, and the good earnings to expenses ratio, as well as the diversity of earning sources, all provided for the strong profitability of the Bank.

Other financial indicators underline the high performance of the Bank. ROE was 29.1%, ROA 3.5% and the revenues to expenses ratio was 3.7, reflecting our premier position in the banking sector.

Net special commission increased by 15% growth over 2006, thus increasing the operating income to SR 7,2 billion in 2007. Credit costs and the credit cost provisions in 2007 have helped us in our objective of maintaining a loan loss reserve in line with industry norms. The profit per share was SR8.05, which indicates our commitment toward our shareholders.

Total assets at the year-end were SR 154 billion as against SR 124 billion representing a 25% growth over last year. This is mainly attributed to a 20% increase in loans and advances to customers which grew to SR 81 billion at the end of 2007 (2006: SR 67 billion). The bank’s investment portfolio also increased to SR 54 billion (2006: SR 38 billion), customer deposits grew by 22% at 116 billion (2006: SR 95 billion). Our current capital adequacy ratios at 15.2% (Tier 1) and 16.5% (Tier 11) suggests that we are well capitalized and comfortably exceed the local and internationally mandated minimum requirements, which is indicative of our financial strength and sound management practices. The five-year summary financial results of Samba are as follows:

SR’MM 2003 2004 2005 2006 2007

Investments, net 33,876 38,798 36,357 37,682 53,574

Loans and advances, net 34,918 48,178 62,386 67,028 80,553

Total Assets 79,038 94,714 108,306 124,015 154,414

Customer deposits 60,411 67,045 85,240 94,856 115,811

Total Shareholders' Equity 8,878 10,134 12,906 15,300 17,976

Total Operating Income 3,337 3,996 5,828 7,273 7,196

Total Operating Expenses 1,279 1,307 1,511 1,799 1,966

Net Shareholders Income 1,437 2,506 4,018 5,210 4,828

3. GEOGRAPHICAL ANALYSIS OF TURNOVER

Samba’s consolidated turnover is predominantly generated from its activities in Saudi Arabia. Profits of UK Branch and Pakistan subsidiary account for 0.9% and 0.4% respectively from total operating income according to the consolidated financial statements of 2007. 4. FUTURE PLANS

In August 2006 we have received a full commercial banking license from the regulatory authorities of the UAE to open a branch in Dubai which we expect to happen early in 2008. This is part of our growth strategy with medium and longer-term strategic objectives. We realize the region’s potential


and will continue to evaluate any such proposals elsewhere in the region with a view to obtain geographical diversification as well as to enhance our shareholders returns.

Further, Samba announced the launch of Sambacapital to provide investment services in response to the mandate of CMA to have banks separate their banking and commercial services from their security businesses. Sambacapital will incept operation on January 19, 2008.

We are pleased also to announce that the Bank has finalized by January 1, 2008 the full implementation of Basel II capital adequacy standards according to SAMA requirements.

In its normal course of business, the Bank faces different risks including credit, market and liquidity risks. Samba follows a top-down risk management approach to mitigate risks based on polices within a consistent and continuous strategic framework of all business segments. Notes 28, 30, 31 of the Auditors report detail the major risks and management strategy.

Rating Mood’s raised its long term credit rating of Samba 2007 from A- to Al with positive outlook, after it was stable, which reflects the strong financial conditions of the Bank, as well as its continuous growth and credit management efficiency to meet its financial obligations. Samba maintained sound ratings from other agencies such as Capital Intelligence that gave Samba Al with stable outlook, which reflects the prudent senior management vision, strong capital structure and high profitability.

Samba excellence was reflected in several accolades given to it in 2007 from several independent and specialized evaluation agencies. Among such accolades were “Best Bank in Saudi Arabia” from Euromoney and Global Finance, and “Bank of the Year” from Emerging Markets. Those three accolades have never been granted to one single bank in one year. Other accolades include “Best Investment Bank in Middle East and Africa” from Euromoney and Global Finance, “Best Equity House in Saudi Arabia” from Euromoney, “Deal of the Year in Saudi Arabia” from the Banker, “Best Deal in the Middle East” from Euromoney Project Finance, “Best Consumer Internet Bank” and “Best Corp/Institutional Internet Bank” in Saudi Arabia, Middle East and Africa, “Best Foreign Exchange Bank in Saudi Arabia”, and “Best Corporate Trade Finance Services in the Middle East & Africa” from Global Finance, “Best Employment” Award, granted from the Institute of Public Administration. Furthermore, the Managing Director & Chief Executive Officer of Samba has bee named “The 2007 Middle East’s CEO of the Year in Banking and Financial Industry” by the Middle East Excellence Awards Institute 5. BOARD OF DIRECTORS

Samba Board of Directors is formed of 10 members, 5 of them are independent, 3 are non-executives, and 2 executives according to the requirement of Article 2 of the Corporate Governance Regulations issued by the Capital Market Authority (CMA).

In accordance with the Articles of Association of the Bank, the Board of Directors is elected by the Bank’s shareholders for a period of three years. The term of the current directors started on January 1, 2007 and expires on December 31, 2009. There were three Board of Directors meetings held during the year. The attendance record of the meetings was as follows:

Meetings Directors Attended

First Meeting Saud A. Al-Gosaibi, Eisa M. Al-Eisa, Mohammed A. R. Abunayan, Ali Hussein Alireza, Mousa A. Al-Rubaian, Mohammad Al Ghofaili, Dr. Fahd Al Hussain, Ahmad Al Omran, Dr. Ibraheem Nazher, Zaki A. Al Mousa

Second Meeting Saud A. Al-Gosaibi, Eisa M. Al-Eisa, Mohammed A. R. Abunayan, Ali Hussein Alireza, Mousa A. Al-Rubaian, Mohammad Al Ghofaili, Dr. Fahd Al Hussain, Ahmad Al Omran, Dr. Ibraheem Nazher, Zaki A. Al Mousa

Third Meeting Saud A. Al-Gosaibi, Eisa M. Al-Eisa, Mousa A. Al-Rubaian, Mohammad Al Ghofaili, Dr. Fahd Al Hussain, Ahmad Al Omran, Dr. Ibraheem Nazher, Zaki


A. Al Mousa

The Joint stock companies where the directors hold the office of director other than Samba Financial Group, are as follows:

The significant committees set up by the Board of Directors, their role and their current members are as follows:

Executive Committee – is appointed by the Board and comprises of four directors. The Executive Committee held 9 meetings this year. It assists the MD/CEO within the powers determined for it by the Board and deals with matters referred to it by him or by the Board. The current members of the Executive Committee include Messrs Eisa Al-Eisa (Chairman), Mohammed A. R. Abunayan, Ali Hussein Alireza, and Zaki A. Al Mousa.

Audit Committee – Currently comprising of three members including one director, the Audit Committee is appointed by the Board of Directors to assist the board in meeting its responsibilities of monitoring the financial reporting and internal control systems, control the work of the external and internal auditors and review compliance with regulations. The current members of the Audit Committee are Messrs Mousa Al-Rubaian (Chairman), Mohammad Al Ghofaili and Dr. Abdullah Al-Abdulqadir. There were 3 meetings of the Audit Committee held during the current year.

Nomination and remuneration Committee: comprises of 4 directors, Saud A. Al-Gosaibi, Eisa M. Al-Eisa, Mohammed A. R. Abunayan, Mousa A. Al-Rubaian. It is responsible for identifying the skills required in Board members, description of the capabilities and qualifications of Board members, and setting up Samba’s approach with regard to remunerations, incentives and retention of staff.

Directors’ remuneration for 2007 totaled SR 3,600,000. Attendance fees for Board, Executive and Audit Committee meetings were SR 84,000, SR 90,000 and SR 58,000 respectively. Expenses including traveling, boarding and lodging incurred by Directors for attending meetings of the Board, Executive and Audit Committees amounted to SR 276,008.48.

Director Joint Stock Companies

1. Saud Al-Gosaibi Arabian Industrial Investment Company (Nama’a)

2. Eisa Al-Eisa Saudi Electric Company

3. Mohammed Abunayan - NADEC, - National Company for Agriculture & Marketing (Thimar), - Saudi Group for Research & Marketing

4. Mousa Al-Rubaian Saudi Paper Group

5. Dr. Fahd Al Hussain Riyadh Development Company


6. CORPORATE GOVERNANCE

Samba Financial Group is generally in compliance with the Corporate Governance Regulations issued by the Capital Market Authority, except the following:

Article No. Article Requirements Reason of Non-Compliance

Article 6 Voting Rights

(b) In voting in the General Assembly for the nomination to the board members, the accumulative voting method shall be applied.

Samba By-Laws include ordinary voting right

(d) Investors who are judicial persons and who act on behalf of others - e.g. investment funds- shall disclose in their annual reports their voting policies, actual voting, and ways of dealing with any material conflict of interests that may affect the practice of the fundamental rights in relation to their investments.

Samba has no legal capacity to oblige investors who are Judicial persons acting on behalf of others such as investment funds to disclose their voting polices.

7. ACCOUNTING STANDARDS

The bank follows the Accounting Standards for Financial Institutions promulgated by the Saudi Arabian Monetary Agency (SAMA) and the International Financial Reporting Standards. The Bank also prepares its consolidated financial statements to comply with Banking Control law and the Regulations for Companies in the Kingdom of Saudi Arabia.

Adoption of IFRS 7 The Bank has adopted IFRS 7 in 2007, which introduces new disclosures of qualitative and quantitative information about the significance of and the nature and extent of risks arising from financial instruments. 8. SUBSIDIARIES

Sambacapital: a wholly owned subsidiary, incorporated in the Kingdom of Saudi Arabia and licensed by CMA to provide trading, arrangements, advisory and custody services. It will commence operation on 19 January 2008. Crescent Commercial Bank Limited (CCBL)

A 68.4% owned subsidiary incorporated as a banking company in Pakistan and engaged in commercial banking and related services. CCBL is listed on all stock exchanges in Pakistan.

Samba Real Estate Company: A wholly owned subsidiary incorporated in Saudi Arabia under commercial registration no. 1010234757 issued in Riyadh dated 9 Jumada II, 1428H (June 24, 2007). The company has been formed as limited liability company with the approval of SAMA and is engaged in managing real estate projects on behalf of Samba Real Estate Fund

Samba Fund Management (Guernsey) Limited: The Bank operates a wholly owned subsidiary Samba Fund Management (Guernsey) Limited, incorporated and registered according to Guernsey laws on 10 March 2000. It is engaged in management of mutual funds outside the Kingdom. Its authorized and fully paid capital comprises 16.000 ordinary shares at USD 1 per share. Pursuant on the provisions of the Management Agreement dated 10 April 2000, the Company was appointed as the Manager of SAIF. The Company’s management fees cover its expenses.

9. DIVIDENDS

Samba Dividend’s Policy complies with the Banking Control Law of the Kingdom of Saudi Arabia and the Articles of Association of the Bank. Dividends are computed as follows:


1. Zakat payable by the Saudi shareholders and taxes payable by non-Saudi shareholders are computed according to the Saudi laws and regulations. Such amounts are paid to the competent authority and deducted from net profits of Shareholders.

2. 25% minimum from the remaining profits (net of tax and Zakat) are transferred to statutory reserve until this reserve equals the paid up capital of the Bank.

3. From the remaining part of profits net of Zakat, Tax and statutory reserve, an amount that at least equals 5% of the paid up Capital, shall be provisioned for distribution to shareholders as dividends. Dividends shall be distributed proportionally with the shares held by the shareholders according to the Board’s recommendations and decided by the General Assembly, which shall not decide to distribute dividends more than recommended by the Board.

4. The shareholding percentage of Saudi and non-Saudi shareholders shall be maintained upon computing the statutory and other reserves from the net profits after deduction of Zakat and tax.

In view of the performance during the year, the Board of Directors is pleased to recommend the distribution of net dividend for the second half of 2007 of SR1.0 per share. The total dividend for this half of the year is SR 1,743 million. This will yield a net total dividend to Saudi shareholders for the year of SR 2.70 per share.

Dividends shall be available for distribution immediately after approval by the shareholders at the Annual General Meeting.

10. NOTIFICATION OF SIGNIFICANT SHAREHOLDING AND INTEREST IN SHARES OR DEBT INSTRUMENTS

The Bank has received notifications from some major shareholders and stakeholders notifying the Bank of changing their percentage of shareholding as required under article 30 of the CMA Listing Rules. The number of shares held by the directors & senior executives of the Bank and their wives and dependants are shown in the following table:

No. of Shares held beginning

of the year

Percentage of shareholding -beginning of

the year

Net Change in held Shares

during the year

Change % during the

year

No. of Shares held end of

the year

Percentage of shareholding -end of the

year Major Shareholders 43,595,326 7,33% 19,198,122+ 43.67% 63,157,448 10.53% Board Members and Senior Executives 1,197,195 0.20% 266,916 22.30% 1,464,111 0.24%

11. BORROWINGS & DEBT INSTRUMENTS

In the ordinary course of its business, the Bank borrows and lends money in the inter bank market and with SAMA. These transactions, which are usually of short term nature and carry a commission rate prevailing in the market, are appropriately reflected in the Bank’s consolidated financial statements.

During 2006, the Bank, with the approval of SAMA and the Capital Markets Authority, issued USD 500 million senior unsecured five-year floating rate notes under its USD 1.6 billion Euro Medium Term Notes (EMTN) program to be used for general corporate purposes. The Bank also issued a second tranche of CHF 50 million.

The Bank has settled all such amounts totaling to USD 600 in the quarter ended 31 March 2007.

12. MATERIAL CONTRACTS

Other than the information contained in note 33 in the auditors audit report of the financial statements, no material contracts were executed by the Bank during the year where any of its Directors, the Chief Executive Officer or the Chief Financial Officer or any associate had any interest.

13. WAIVER OF INTEREST BY A DIRECTOR, SENIOR EXECUTIVE OR SHAREHOLDER OF THE BANK

We are not aware of any arrangement or agreement where a director or a senior executive or a shareholder of the Bank has waived any interest or rights to the dividends.

14. STATUTORY PAYMENTS


Zakat and income taxes accrued during the current year are as follows:

SR’MM

Zakat accrued in respect of Saudi shareholders 119

Income tax accrued in respect of foreign shareholders 35

15. EMPLOYEE BENEFITS

The Bank provides for the staff indemnity provision based on the independent actuarial valuation under the Saudi Arabian Labor and Workmen Law and in accordance with the local statutory requirements of the foreign branches and subsidiaries. The amount of such reserve at December 31, 2007 is SR 295,000 thousands.

In addition, the Bank operates three equity-settled share-based plans that entitle certain eligible employees to purchase the underlying shares of the Bank at a pre-determined strike price which approximates the market price of the shares at the date of the grant.

16. BOOKS OF ACCOUNTS, SYSTEM OF INTERNAL CONTROL AND FINANCIAL STATEMENTS

We confirm that: • Proper books of account have been maintained by the bank; • The system of internal control is sound in design and has been effectively implemented; • There are no significant doubts concerning the bank’s ability to continue as a going concern; and • The joint auditors of the bank have rendered an unqualified audit report on the Bank’s consolidated

financial statements for the current year.

17. DONATIONS

During the financial year 2007, Samba allocated SR 30 million towards donations to various educational and other social causes.

18. ENALTIES AND DISCIPLINARY ACTIONS

The Bank has not been subjected to any material penalties or Disciplinary action during 2007. 19. APPROPRIATION OF INCOME

The Board of Directors recommends that net income for the year be appropriated/ distributed as follows:

SR ‘000

Net income for the year 4,828,270

Appropriation:

Interim Dividend (1,083,750)

Final Dividend (659,255)

Total Dividend (1,743,005)

Transfer to Statutory Reserve (442,844)

Transfer to General Reserve -

Transfer to Retained Earnings 2,642,421

20. AUDITORS

At the Annual Ordinary General Meeting of the Bank’s shareholders, held during March 2007, Messrs. Ernst & Young and Al-Juraid & Company were appointed as joint auditors for the fiscal year ending December 31, 2007. The forthcoming Annual Ordinary General Meeting of shareholders shall re-appoint the existing


auditors or appoint other auditors and determine their remuneration for the audit of the Bank for the year ending December 31, 2008.


SAMBA FINANCIAL GROUP

CONSOLIDATED FINANCIAL STATEMENTS AND AUDITORS’ REPORT FOR THE YEAR ENDED DECEMBER 31, 2007


CONSOLIDATED BALANCE SHEETS As at December 31, 2007 and 2006

Notes

2007 SAR’000

2006 SAR’000

ASSETS Cash and balances with Central Bank 3 11,097,630 10,256,525 Due from banks and other financial institutions 4 2,312,434 5,144,826 Investments, net 5 53,573,880 37,682,499 Investment in associate 5 10,545 - Loans and advances, net 6, 33 80,553,307 67,027,647 Property and equipment, net 7 832,987 713,385 Other assets 8 6,033,191 3,189,931

Total Assets 154,413,974 124,014,813

LIABILITIES AND EQUITY LIABILITIES Due to banks and other financial institutions 10 11,424,999 5,785,310 Customer deposits 11, 33 115,811,279 94,855,852 Other liabilities 12 7,163,175 3,798,873 Term loan 13 - 2,250,000 Debt securities issued 14 2,038,958 2,025,160

Total Liabilities 136,438,411 108,715,195 EQUITY Equity attributable to equity holders of the Bank

Share capital 15 6,000,000 6,000,000 Statutory reserve 16 6,000,000 5,557,156 General reserve 16 130,000 130,000 Other reserves (282,192) (113,382) Retained earnings 5,625,461 2,993,846 Proposed dividend 25 659,255 1,101,873 Employee stock option shares (287,576) (369,875) Total equity attributable to equity holders of the

Bank 17,844,948 15,299,618

Minority interest 130,615 -

Total Equity 17,975,563 15,299,618

Total Liabilities and Equity 154,413,974 124,014,813

The accompanying notes 1 to 40 form an integral part of these consolidated financial statements

AbdulHaleem Sheikh Zaki Al-Mousa Eisa M. Al-Eisa Chief Financial Officer (Acting) Director Managing Director & CEO

1


CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 2007 and 2006

Notes

2007 SAR’000

2006 SAR’000

Special commission income 19, 33 8,386,264 6,990,974

Special commission expense 19, 33 3,441,872 2,690,012

Special commission income, net 4,944,392 4,300,962 Fees from banking services, net 20, 33 1,618,145 2,419,986

Exchange income, net 431,371 275,553

Income from investments held at FVIS, net 55,178 177,883

Trading income, net 21 143,738 83,692

(Loss) / gains on non-trading investments, net 22 (31,751) 2,932

Other operating income 23 34,965 11,714

Total operating income 7,196,038 7,272,722 Salaries and employee related expenses 1,288,619 1,185,572

Rent and premises related expenses 181,423 139,464

Depreciation 7 122,686 110,783

Other general and administrative expenses 373,097 362,857 Operating expenses before provision for

credit losses and impairment charge 1,965,825 1,798,676

Provision for credit losses, net of recoveries 6 311,503 263,676

Impairment charge on investments 111,078 -

Total operating expenses 2,388,406 2,062,352

Net Income 4,807,632 5,210,370

Attributable to: Equity holders of the Bank 4,828,270 5,210,370 Minority interest (20,638) -

4,807,632 5,210,370

Basic and fully diluted earnings per share for the year (SAR) 24 8.05 8.68



2


3

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY For the years ended December 31, 2007 and 2006 Other reserves

2007 Notes

Share capital

Statutory reserve

General reserve

Fair value reserve

Exchange translation

reserve Retained earnings

Proposed dividends

Employee stock option

shares Total Minority

interest Total

Equity

SAR’000 SAR’000 SAR’000 SAR’000 SAR’000 SAR’000 SAR’000 SAR’000 SAR’000 SAR’000 SAR’000 Balance at the beginning of the year 6,000,000 5,557,156 130,000 (113,382) - 2,993,846 1,101,873 (369,875) 15,299,618 - 15,299,618

Minority interest arising due to acquisition - - - - - - 153,062 153,062 Changes in equity for the year Net changes in fair value of cash flow hedges 48,565 - - - - 48,565 - 48,565 Net changes in fair value of AFS investments (426,095) - 5,585 - - (420,510) 784 (419,726) Net changes in employee stock option shares - - (16,391) - 82,299 65,908 - 65,908 Transfer to consolidated statement of income- AFS investments 123,821 - - - - 123,821 - 123,821 Transfer to consolidated statement of income - cash flow hedges 91,205 - - - - 91,205 - 91,205 Exchange differences on translation of foreign operations - (6,306) - - - (6,306) (2,593) (8,899) Net income recognized directly into equity (162,504) (6,306) (10,806) - 82,299 (97,317) 151,253 53,936 Net income for the year - - 4,828,270 - - 4,828,270 (20,638) 4,807,632 Total recognized income and expense for the year (162,504) (6,306) 4,817,464 - 82,299 4,730,953 130,615 4,861,568 Transfer to statutory reserve 16 - 442,844 - - - (442,844) - - - - - Dividends paid for 2007 (interim) & 2006 (final) 25 - - - - - (1,083,750) (1,101,873) - (2,185,623) - (2,185,623) 2007 proposed dividend (final) 25 - - - - - (659,255) 659,255 - - - - Balance at end of the year 6,000,000 6,000,000 130,000 (275,886) (6,306) 5,625,461 659,255 (287,576) 17,844,948 130,615 17,975,563

2006 Balance at the beginning of the year 6,000,000 4,254,563 130,000 (144,456) - 1,221,472 1,782,660 (338,073) 12,906,166 - 12,906,166 Changes in equity for the year Net changes in fair value of cash flow hedges 56,247 - - - - 56,247 - 56,247 Net changes in fair value of AFS investments (30,072) - 9,442 - - (20,630) - (20,630) Net changes in employee stock option shares - - 26,356 - (31,802) (5,446) - (5,446) Transfer to consolidated statement of income- AFS investments (43,952) - - - - (43,952) - (43,952) Transfer to consolidated statement of income- cash flow hedges 48,851 - - - - 48,851 - 48,851 Net income recognized directly into equity 31,074 - 35,798 - (31,802) 35,070 - 35,070 Net income for the year - - 5,210,370 - - 5,210,370 - 5,210,370 Total recognized income and expense for the year 31,074 - 5,246,168 - (31,802) 5,245,440 - 5,245,440 Transfer to statutory reserve 16 - 1,302,593 - - - (1,302,593) - - - - - Dividends paid for 2006 (interim) & 2005 (final) 25 - - - - - (1,069,328) (1,782,660) - (2,851,988) - (2,851,988) 2006 proposed dividend (final) 25 - - - - - (1,101,873) 1,101,873 - - - - Balance at end of the year 6,000,000 5,557,156 130,000 (113,382) - 2,993,846 1,101,873 (369,875) 15,299,618 - 15,299,618

The accompanying notes 1 to 40 form an integral part of these consolidated financial statements.


4

CONSOLIDATED STATEMENTS OF CASH FLOW For the years ended December 31, 2007 and 2006

Notes

2007 SAR’000

2006 SAR’000

OPERATING ACTIVITIES Net Income 4,807,632 5,210,370 Adjustments to reconcile net income to net cash from operating activities: Accretion of discount and amortization of premium on non-trading Investments, net 40,282 31,427 Accretion of discount on debt securities issued 838 488 Gain on non-trading investments, net 31,751 (2,932) Depreciation 122,686 110,783 Loss on disposal of property and equipment, net 1,346 1,123 Provision for credit losses, net of recoveries 311,503 263,676 Impairment charge on investments 111,078 - Net (increase) decrease in operating assets: Statutory deposit with Central Banks 3 (1,855,838) (127,760) Due from banks and other financial institutions maturing after ninety days (1,395) (1,642,500) Investments held for trading (274,936) 170,261 Loans and advances (13,707,557) (4,905,736) Other assets (2,595,339) (1,125,112) Net increase (decrease) in operating liabilities: Due to banks and other financial institutions 5,622,541 1,386,360 Customer deposits 20,570,394 9,615,620 Other liabilities 3,307,643 240,025 Net cash from operating activities 16,492,629 9,226,093 INVESTING ACTIVITIES Proceeds from sale of and matured non-trading investments 22,120,937 9,157,913 Purchase of non-trading investments (38,076,248) (10,747,582)Purchase of property and equipment, net (150,870) (152,619) Proceeds from sale of property and equipment 553 1,236 Acquisition of subsidiary, net of cash & cash equivalent acquired 17 (43,344) - Net cash used in investing activities (16,148,972) (1,741,052) FINANCING ACTIVITIES Repayment of term loan / Debt securities issued (2,250,000) 2,024,672 Employee stock option shares, net 65,908 (5,446) Dividends paid (2,150,427) (2,803,525) Net cash used in financing activities (4,334,519) (784,299) (Decrease) / increase in cash and cash equivalents (3,990,862) 6,700,742 Cash and cash equivalents at the beginning of the year 10,755,993 4,055,251 Cash and cash equivalents at the end of the year 26 6,765,131 10,755,993 Special commission received during the year Special commission paid during the year 8,316,213

3,219,312 7,004,432

2,501,839 Supplemental non-cash information: Net changes in fair value and transfers to Consolidated Statements of Income (156,135) 40,516




5

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2007 AND 2006 1. General

Samba Financial Group (the Bank), a Joint Stock Company incorporated in Kingdom of Saudi Arabia, is formed pursuant to Royal Decree No. M/3 dated 26 Rabie Al-Awal 1400H (February 12, 1980). The Bank commenced business on 29 Shaa’ban 1400H (July 12, 1980) when it took over the operations of Citibank in the Kingdom of Saudi Arabia. The Bank operates under commercial registration no. 1010035319 dated 6 Safar 1401H (December 13, 1980) through its 65 branches (2006: 63 branches) in the Kingdom of Saudi Arabia and one overseas branch. The Bank employed 3,127 full time direct staff at the year end (2006: 2,938). The Bank is listed on Saudi Arabian stock exchange and its Head Office is located at King Abdul Aziz Road, P.O.Box. 833, Riyadh 11421, Kingdom of Saudi Arabia.

The objective of the Bank is to provide a full range of banking and related services. The Bank also provides to its customers non-interest based banking products that are approved and supervised by an independent Shariah Board established by the Bank.

In accordance with the Securities Business regulations issued by the Capital Market Authority (CMA), the banks in Saudi Arabia are required to transfer their dealing, arranging, managing, advising and custody businesses into a separate legal entity licensed with CMA. In order to comply with the above regulations, the Bank has formed a wholly owned subsidiary, Samba Capital and Investment Management Company formed as limited liability company under Commercial Registration number 1010237159 issued in Riyadh dated 6 Shabaan 1428H (August 19, 2007). The Company has been licensed by the CMA and will commence its business from January 19, 2008. The consolidated financial statements include financial statements of the Bank and its following subsidiaries up to December 31, 2007: Samba Fund Management (Guernsey) Limited A wholly owned subsidiary incorporated in Guernsey and specializing in management of mutual funds. Crescent Commercial Bank Limited (CCBL) A 68.4% owned subsidiary incorporated as a banking company in Pakistan and engaged in commercial banking and related services. CCBL is listed on all stock exchanges in Pakistan. Samba Real Estate Company A wholly owned subsidiary incorporated in Saudi Arabia under commercial registration no. 1010234757 issued in Riyadh dated 9 Jumada II, 1428H (June 24, 2007). The company has been formed as limited liability company with the approval of SAMA and is engaged in managing real estate projects on behalf of Samba Real Estate Fund.

2. Summary of significant accounting policies

The significant accounting policies adopted in the preparation of these consolidated financial statements are set out below. a) Basis of preparation

The Bank follows the Accounting Standards for Financial Institutions promulgated by the Saudi Arabian Monetary Agency (SAMA) and International Financial Reporting Standards (IFRS). The Bank also prepares its consolidated financial statements to comply with the Banking Control Law and the Regulations for Companies in the Kingdom of Saudi Arabia.

The consolidated financial statements are prepared under the historical cost convention except for the

measurement at fair value of derivatives, available for sale and FVIS financial assets and liabilities. In addition, as explained fully in the related notes, financial assets and liabilities that are hedged under a fair value hedging relationship are carried at fair value to the extent of risk being hedged.


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The Bank has adopted IFRS 7, financial instruments: disclosures and amendments to IAS 1 Presentation of Financial Statements – Capital disclosures effective January 1, 2007 with retrospective effect, wherever

applicable. IFRS 7 introduces new disclosures of qualitative and quantitative information about the significance of and the nature and extent of risks arising from financial instruments. The amendment to IAS 1 introduces disclosures about the level of capital and how the Bank manages capital.

Under article 37 of the Bank’s Articles of Association, the Gregorian calendar is observed for reporting the

consolidated financial statements.

These consolidated financial statements are expressed in Saudi Arabian Riyals (SAR) and are rounded off to the nearest thousands.

b) Consolidation

These consolidated financial statements include the financial position and results of Samba Financial Group and its subsidiary companies. The financial statements of subsidiaries are prepared for the same reporting period as that of the Bank, using consistent accounting policies. Significant inter-group balances and transactions are eliminated upon consolidation.

Subsidiaries are all entities over which the Bank has the power to govern the financial and operating policies, so as to obtain benefits from its activities, generally accompanying a shareholding of more than one half of the voting rights. Subsidiaries are consolidated from the date on which control is transferred to the Bank and cease to be consolidated from the date on which the control is transferred from the Bank. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statements of income from the date of the acquisition or up to the date of disposal, as appropriate. Minority interests represent the portion of net income or loss and net assets not owned, directly or indirectly, by the Bank in subsidiaries and are presented in the consolidated statements of income and within equity in the consolidated balance sheets, separately from the equity holders of the Bank.

The purchase method of accounting is used to account for the acquisition of subsidiary by the Bank. The cost of acquisition is measured at the fair value of the consideration given at the date of exchange, together with costs directly attributable to the acquisition, if material. The acquired identifiable assets, liabilities and contingent liabilities are measured at their fair value at the date of acquisition. The excess of the cost of acquisition over the fair value of the Bank’s share of identifiable net assets acquired is recorded as intangible asset – goodwill.

c) Critical accounting judgments and estimates

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates and assumptions that affect the reported amounts of assets and liabilities. It also requires management to exercise its judgement in the process of applying the Bank’s accounting policies. Such estimates, assumptions and judgements are continually evaluated and are based on historical experience and other factors, including obtaining professional advice and expectations of future events that are believed to be reasonable under the circumstances. Significant areas where management has used estimates, assumptions or exercised judgements are as follows:

(i) Impairment losses on loans, advances and investments The Bank reviews its loan portfolios to assess impairment on a quarterly basis. In determining whether an impairment loss should be recognized, the Bank makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows. This evidence may include observable data indicating that there has been an adverse change in the payment of borrowers in a group. Management uses estimates based on historical loss experience for loans with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when estimating its cash flows. The methodology and assumptions used for estimating both the amount and the timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.


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(ii) Fair value of unquoted financial instruments

The fair values of financial instruments that are not quoted in active markets are determined by

using valuation techniques. Where valuation techniques including models are used to determine fair values, they are validated and periodically reviewed by qualified personnel independent of the area that created them. All models are calibrated to ensure that outputs reflect actual data and comparative market prices. To the extent practical, models use only observable data, however areas such as credit risk (both own and counter party), volatilities and correlations require management to make estimates. Changes in assumptions about these factors could affect the reported fair value of financial instruments.

(iii) Impairment of available for-sale equity investments

The Bank exercises judgement to consider impairment on its available-for-sale equity investments. This includes determination of a significant or prolonged decline in the fair value below its cost. In making this judgement, the Bank evaluates among other factors, the normal volatility in share price. In addition, the Bank considers impairment to be appropriate when there is evidence of deterioration in the financial position of the investee, industry and sector performance, changes in technology, and operational and financing cash flows.

d) Settlement date accounting

All regular way purchases and sales of financial instruments are recognized and derecognized on the settlement date. Regular way purchases or sales are purchases or sales of financial instruments that require delivery of assets within the time frame generally established by regulation or convention in the market place. For financial instruments held at fair value, the Bank accounts for any change in fair values between the trade date and the reporting date.

e) Derivative financial instruments and hedge accounting

Derivative financial instruments are measured at fair value and their fair values are included in other assets, if positive, or in other liabilities, if negative. Fair values are generally obtained by reference to quoted market prices, discounted cash flow models and other pricing models, as appropriate. Derivative financial instruments are designated as held for trading unless they are part of an effective hedging relationship. Any changes in the fair values of derivatives that are held for trading purposes are taken directly to the consolidated statement of income.

Hedge accounting

Hedges are classified into two categories: (a) fair value hedges which hedge the exposure to changes in the fair value of a recognized asset or liability; and (b) cash flow hedges which hedge exposure to variability in cash flows that is attributable to a particular risk associated with a recognized asset or liability.

In order to qualify for hedge accounting, the hedge is required to be highly effective at inception i.e. the changes in the fair value or the cash flows of the hedging instrument should effectively offset corresponding changes in the hedged instrument, and should be reliably measurable. At the inception of the hedge, the risk management objective and strategy is documented including the identification of the hedging instrument, the related hedged item, the nature of the risk being hedged, and how the Bank will assess the effectiveness of the hedging relationship. Subsequently, the hedge is required to be assessed and determined to be an effective hedge on an ongoing basis. Hedge accounting is discontinued when the designation is revoked, the hedging instrument is expired or sold, terminated or exercised, or no longer qualifies for hedge accounting.


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In relation to fair value hedges that meet the criteria for hedge accounting, any gain or loss from re-measuring the hedging instruments to fair value is recognized immediately in the consolidated statement of income. The corresponding fair value of the hedged item is adjusted against the carrying amount and is recognized in the consolidated statement of income. Where the fair value hedge of a special commission bearing financial instrument ceases to meet the criteria for hedge accounting, the adjustment to the carrying value resulting from fair value changes is amortized to the consolidated statement of income over the remaining life of the hedged instrument. In relation to cash flow hedges that meet the criteria for hedge accounting, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognized initially in other reserves under equity and the ineffective portion, if any, being the difference in the fair value of hedging instrument and the hedged item, is recognized in the consolidated statement of income. Gains or losses recognized initially in other reserves are transferred to the consolidated statement of income in the period in which the hedged item impacts the consolidated statement of income.

f) Foreign currencies

The consolidated financial statements are denominated and presented in Saudi Arabian Riyals, which is also the functional currency of the Bank. Transactions in foreign currencies are translated into Saudi Riyals at exchange rates prevailing at transaction dates. Monetary assets and liabilities denominated in foreign currencies at the year end are translated into Saudi Arabian Riyals at the exchange rates prevailing at the balance sheet date. The monetary assets and liabilities of overseas branch and subsidiaries are translated at the rate of exchange prevailing at the balance sheet date. The statements of income of overseas branch and subsidiaries are translated at the average exchange rates for the year. On consolidation, exchange differences arising from the translation of the net investment in foreign entities are taken to equity.

Realized and unrealized gains or losses on exchange are credited or charged to the consolidated statement of income.

g) Offsetting

Financial assets and liabilities are offset and reported net in the consolidated balance sheet when there is a legally enforceable right to offset the recognized amounts and the Bank intends to settle on a net basis, or to realize the asset and settle the liability simultaneously.

h) Revenue recognition

Special commission income and expense including the fees which are considered an integral part of the effective yield of a financial instrument, are recognized in the consolidated statement of income using the effective yield method, and include premiums amortized and discounts accreted during the year. Fee from banking services are recognized on an accrual basis when the service has been provided. Commitment fees for loans that are likely to be drawn down are deferred and, together with the related direct cost, are recognized as an adjustment to the effective yield on the loan when it is drawn down. Portfolio and other management advisory and service fees are recognized based on the applicable service contracts, usually on a time-proportionate basis. Fee received on asset management, wealth management, financial planning, custody services and other similar services that are provided over an extended period of time, are recognized rateably over the period when the service is being provided. Dividend income is recognized when declared and right to receive is ascertained.

The calculation of the effective commission rate includes all fees and points paid or received, transaction costs, and discounts or premiums that are an integral part of the effective commission rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of financial asset or liability.

Exchange income is recognized as and when it arises. For presentation purposes, “Exchange income, net”


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includes exchange related gains and losses from derivative financial instruments and translated foreign currency assets and liabilities.

i) Sale and repurchase agreements

Securities sold with commitment to repurchase at a specified future date (repos), continue to be recognized in the consolidated balance sheet and are measured in accordance with related accounting policies for trading, FVIS, available for sale and other investments at amortized cost. The counterparty liability for amounts received under these agreements is included in due to banks and other financial institutions or customer deposits, as appropriate. The difference between the sale and the repurchase price is treated as special commission expense and is recognized over the life of the repo agreement on an effective yield basis. Assets purchased with a corresponding commitment to resell at a specified future date (reverse repos), are not recognized in the consolidated balance sheet, as the Bank does not obtain control over the assets. Amounts paid under these agreements are included in cash and balances with Central Banks, due from banks and other financial institutions or loans and advances, as appropriate. The difference between the purchase and the resale price is treated as special commission income and is recognized over the life of the reverse repo agreement.

j) Investments

All investment securities are initially recognized at fair value and except for investments held at FVIS, include the acquisition costs associated with the investment. Transaction cost, if any, are not added to fair value measurement at initial recognition of investments held at FVIS. Premiums are amortized and discounts are accreted using the effective yield method and are taken to special commission income. For securities that are traded in organized financial markets, fair value is determined by reference to the prevailing quoted market bid prices at the close of business on the balance sheet date. Fair value of managed assets and investments in mutual funds are determined by reference to declared net asset values. For securities where there is no quoted market price, a reasonable estimate of the fair value is determined by reference to the current market value of another instrument which is substantially the same, or is based on the expected future cash flows or the underlying net asset base of the security. Following the initial recognition of investment securities, subsequent transfers between the various classes of investment are not ordinarily permissible. The period end reporting values for each class of investments are determined as follows: i) Held at fair value through income statement (FVIS) Investments in this category are classified as either held for trading or those designated as FVIS.

Investments classified as trading are acquired principally for the purpose of selling or repurchasing in short term. An investment may be designated as FVIS by the management if it satisfies the criteria laid down by IAS 39. After initial recognition, investments are measured at fair value and gains and losses arising from any change in the fair value are recognized in the consolidated statement of income for the period in which it arises.

ii) Available for sale

Investments that are classified as available for sale are subsequently measured at fair value. For available for sale investments where fair value has not been hedged, any gain or loss arising from a change in the fair value is recognized directly in other reserves under equity until the investment is derecognized or considered permanently impaired, at which time the cumulative gain or loss previously recognized in equity is included in the consolidated statement of income for the period. Any gain or loss arising from a change in the fair value of available for sale investments that are part of an effective hedging relationship is recognized directly in the consolidated statement of income to the extent of the changes in fair value being hedged.


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iii) Held to maturity Investments having fixed or determinable payments and fixed maturity that the Bank has the positive

intent and ability to hold to maturity other than those that meet the definition of FVIS, available for sale and other investments held at amortised cost are classified as held to maturity. Held to maturity investments are subsequently measured at amortised cost, less provision for impairment in value. Amortised cost is calculated by taking into account any discount or premium on acquisition on an effective yield method.

Any gain or loss on such investments is recognized in the consolidated statement of income when the

investment is derecognized or impaired. Investments classified as held to maturity cannot ordinarily be sold or reclassified without impacting the Bank’s ability to use this classification and cannot be designated as a hedged item with respect to special commission rate or prepayment risk, reflecting the longer-term nature of these investments.

iv) Other Investments held at amortized cost

Investments with fixed or determinable payments that are not quoted in an active market, other than those purchased with the intent to be sold immediately or in the short term and are not classified as available for sale, are classified as other investments held at amortized cost. Such investments where fair value has not been hedged are stated at amortized cost, less provision for any permanent impairment. Any gain or loss is recognized in the consolidated statement of income when the investment is derecognized or impaired.

k) Loans and advances

Loans and advances are non-derivative financial assets originated or acquired by the Bank with fixed or determinable payments. All loans and advances are initially measured at fair value including acquisition charges associated with the loans and advances, if any. Following the initial recognition, subsequent transfers between the various classes of loans and advances is not ordinarily permissible. The subsequent period-end reporting values for various classes of loans and advances are determined on the basis as set in the following paragraphs: (i) Loans and advances held at amortized cost

Loans and advances originated or acquired by the Bank that are not quoted in an active market and for which fair value has not been hedged are stated at amortized cost less any amount written off and provisions for impairment.

For loans and advances which are hedged, the related portion of the hedged fair value is adjusted against the carrying amount.

(ii) Available for sale

Loans and advances classified as available for sale upon initial recognition are subsequently measured at fair value. Any changes in fair value, other than those relating to hedged risks, are recognized directly in “other reserves” under “ equity” until these are derecognized or impaired at which time the cumulative gain or loss previously recognized in equity is included in the consolidated statement of income for the period.

For presentation purposes, provision for credit losses is netted from loans and advances.


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l) Impairment of financial assets

An assessment is made at each balance sheet date to determine whether there is an objective evidence that a financial asset or group of financial assets may be impaired. Objective evidence of impairment may include indications that the borrower is experiencing significant financial difficulty, default or delinquency in special commission or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. If such evidence exists, the estimated recoverable amount of that asset is determined and any impairment loss, based on the net present value of future anticipated cash flows, is recognized for changes in its carrying amounts. Financial assets are written off only in circumstances where effectively all possible means of recovery have been exhausted. Once a financial asset has been written down to its estimated recoverable amount, special commission income is thereafter recognized based on the rate of special commission that was used to discount the future cash flows for the purpose of measuring the recoverable amount.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognized in the income statement in impairment charge for credit losses.

Renegotiation activity is designed to manage customer relationships, maximise collection opportunities and, if possible, avoid foreclosure or repossession. Such activity may involve extending the payment arrangements and/or the agreement of new loan conditions. Once the terms have been renegotiated, the loan is no longer considered past due. Management continuously reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur.

(i) Impairment of financial assets held at amortized cost

A financial asset is classified as impaired when there is an objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event(s) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

A specific provision for credit losses due to impairment of a loan or any other financial asset held at amortized cost is established if there is objective evidence that the Bank will not be able to collect all amounts due. The amount of the specific provision is the difference between the carrying amount and the estimated recoverable amount. The estimated recoverable amount is the present value of expected future cash flows, including amounts estimated to be recoverable from guarantees and collateral, discounted based on the original effective commission rate.

In addition to specific provision for credit losses, provision for collective impairment is made on a portfolio basis for credit losses where there is an objective evidence that unidentified losses exist at the reporting date. This provision is estimated based on various factors including credit ratings allocated to a borrower or group of borrowers, the current economic conditions, the experience the Bank has had in dealing with a borrower or group of borrowers and available historical default information. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions.

For financial assets at amortised cost, the carrying amount of the asset is adjusted either directly or

through the use of an allowance account and the amount of the adjustment is included in the consolidated statement of income.

(ii) Impairment of financial assets held as available for sale For financial assets held as available for sales at fair value, where a loss has been recognised directly


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under equity, the cumulative net loss recognised in equity is transferred to the consolidated statement of

income when the asset is considered to be impaired.

For equity investments held as available for sale, a significant or prolonged decline in fair value below its cost represents objective evidence of impairment. The impairment loss cannot be reversed through consolidated statement of income as long as the asset continues to be recognised i.e. any increase in fair value after impairment can only be recognised in equity. On derecognition, any cumulative gain or loss previously recognised in equity is included in the statement of income for the period.

m) Other real estate owned

The Bank, in the ordinary course of business, acquires certain real estate against settlement of loans and advances. Such real estate are considered as assets held for sale and are initially recorded at the lower of the net realizable value of related loans and advances or the current fair value of the related real estate, less any cost to sell. Subsequent to the initial recognition, these other real estate owned are periodically revalued and are carried at lower of their carrying values or the related net realizable value. Rental income, realized gains or losses on disposal and unrealized losses on revaluation are credited or charged to the consolidated statement of income.

n) Property and equipment

Property and equipment are stated at historical cost net of accumulated depreciation. Freehold land is not depreciated. The cost of other property and equipment is depreciated using the straight-line method over the estimated useful lives of the assets as follows:

Buildings 33 years Leasehold premises Period of lease Leasehold improvements Over lease period or 10 years, whichever is the shorter

Furniture, equipment and vehicles Up to 7 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Gains and losses on disposals of property and equipment are included in the consolidated statement of income.

o) Intangible assets - goodwill

Goodwill represents the excess of the cost of acquisition over the fair value of the Bank’s share of identifiable assets, liabilities and contingent liabilities of the acquired subsidiary at the date of acquisition. Goodwill is stated at cost less any accumulated impairment losses, which are charged to the consolidated statement of income. An impairment test for goodwill is carried out annually or more frequently if events or changes in the circumstances indicate that the carrying value may be impaired.

p) Financial liabilities

All financial liabilities including customer and money market deposits, term loan and debt securities issued are initially recognized at fair value less transaction costs except for financial liabilities measured at FVIS where transactions cost, if any, are not deducted from the fair value measurement at initial recognition, and are included in consolidated statement of income. Subsequently, all the special commission bearing financial liabilities other than those held at FVIS are measured at amortized cost. Amortized cost is calculated by taking into account any discount or premium on settlement. Commission bearing deposits for which there is an associated fair value hedging relationship are adjusted for fair value to the extent hedged. Financial liabilities held at FVIS comprise market linked financial liabilities which are customer deposits where the rate of return is benchmarked to the performance of underlying instruments such as currencies, equities or


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commodities. At maturity, the repayment of principal amount to the customers is in accordance with the contractual terms. After initial recognition these deposits are measured at fair value and any gains or losses arising from the change in fair value are included in the consolidated statement of income for the period.

q) Financial guarantees

In ordinary course of business, the Bank extends credit related commitments consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognized in the consolidated financial statements at fair value in other liabilities, being the value of the premium received. Subsequent to the initial recognition, the Bank’s liability under each guarantee is measured at the higher of the amortised premium and the best estimate of expenditure required settling any financial obligation arising as a result of guarantees. The premium received is recognized in the consolidated income statement over the life of the guarantee.

r) Provisions Provisions are recognized when a reliable estimate can be made for a present legal or constructive obligation as a result of past events and it is more likely than not that an outflow of resources will be required to settle the obligation. s) Cash and cash equivalents

For the purpose of the consolidated statements of cash flows, cash and cash equivalents comprise cash, balances with Central Banks and reverse repos, excluding statutory deposit, and due from banks and other financial institutions having an original maturity of ninety days or less.

t) Derecognition of financial instruments

A financial asset is derecognized, when the contractual rights to the cash flows from the financial asset expires. In instances where the Bank is assessed to have transferred a financial asset, the asset is derecognized if the Bank has transferred substantially all the risks and rewards of ownership. Where the Bank has neither transferred nor retained substantially all the risks and rewards of ownership, the financial asset is derecognized only if the Bank has not retained control of the financial asset. The Bank recognizes separately as assets or liabilities any rights and obligations created or retained in the process. A financial liability is derecognized only when it is extinguished, that is when the obligation specified in the contract is either discharged, cancelled or expired.

u) Share-based payments

The Bank offers its eligible employees three types of equity-settled share-based payment plans (the “Plans”) as approved by SAMA. The following is a brief description of these plans:

i) Capital accumulation plan

Under the terms of the Capital Accumulation Plan (CAP), eligible employees of the Bank are offered stock options at a predetermined strike price to be withheld out of their annual bonus payments, should the employee decides and accepts to participate in the plan.

ii) Employee share participation plan

Under the terms of the Employee Share Participation Plan (ESPP), eligible employees of the Bank are offered stock options at a predetermined strike price if the employee accepts and agrees to contribute the value of stock options in equal monthly installment for a 25-month period.


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iii) Long term bonus plan

Under the terms of the Long Term Bonus Plan (LTBP), eligible employees of the Bank are offered stock options at a predetermined strike price for a fixed period of time. At maturity of the plans, the Bank delivers the underlying allotted shares if the employees’ exercise the options as per the terms and conditions of the plans. However, in case of CAP and ESPP, should the employees decide not to exercise their options, they are entitled to receive their contributions. Additionally, in case of ESPP, the employees will also receive a predetermined rate of return on their contributions.

The cost of these plans is measured by reference to the fair value at the date on which the options are granted. The fair value of the options is determined by the use of the Black-Scholes pricing model. The cost of the plans is recognised over the period in which the service condition is fulfilled, ending on the date on which the relevant employees become fully entitled to the stock option (‘the vesting date’). The cumulative expense recognised for these plans at each reporting date until the vesting date, reflects the extent to which the vesting period has expired and the Bank’s best estimate of the number of equity instruments that will ultimately vest. The charge or credit to the consolidated statement of income for a period represents the movement in cumulative expense recognised as at the beginning and end of that period. The Bank uses the Black-Scholes model in order to risk-manage its options exposure under the plans. The Bank, with the approval from SAMA, has entered into an agreement with an independent third-party to acquire a beneficial interest in the underlying shares solely to manage the price risks associated with the above schemes.

Under the provisions of such agreement, the Bank, at no point, becomes the legal owner of the underlying

shares. However, such employee stock option shares are recorded by the Bank at cost and presented as a deduction from the equity as adjusted for any transaction costs, dividends and gains or losses on sales of such shares.

v) Staff indemnity provision

The staff indemnity provision is made based on an actuarial valuation of the Bank’s liability under the Saudi Arabian Labor and Workmen Law and in accordance with the local statutory requirements of the foreign branch and subsidiaries.

w) Zakat and income taxes

Under Saudi Arabian Zakat and Income tax laws, zakat and income taxes are the liabilities of Saudi and foreign shareholders, respectively. Zakat is computed on the Saudi shareholders’ share of equity or net income using the basis defined under the Zakat regulations. Income taxes are computed on the foreign shareholders share of net income for the year. Zakat and income taxes are not charged to the Bank’s consolidated statement of income as they are deducted from the dividends paid to the shareholders. Overseas branch and subsidiaries are subject to income tax as per rules and regulations of country in which they reside. x) Investment management services

The Bank offers investment management and advisory services to its customers. These services include portfolio management on discretionary and non-discretionary bases and management of investment funds in consultation with professional investment advisors. The Bank’s investment in these funds is included in the FVIS or available for sale investments and fees earned are disclosed under related party transactions.


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Assets held at trust or in a fiduciary capacity are not treated as assets of the Bank and accordingly are not included in the Bank’s consolidated financial statements.

y) Non-interest based banking products

In addition to conventional banking, the Bank offers its customers certain Shariah compliant banking products, which are approved by its Shariah Board.

All Shariah compliant banking products are accounted for using IFRS and are in conformity with the accounting policies described in these consolidated financial statements. 3. Cash and balances with Central Banks

2007 SAR ‘000

2006 SAR ‘000

Cash in hand 861,883 970,087 Statutory deposit 4,893,559 3,002,858 Current account 704,188 303,580 Money market placements 4,638,000 5,980,000

Total 11,097,630 10,256,525

In accordance with the Banking Control Law and regulations issued by Central Bank, the Bank is required to maintain a statutory deposit with Central Banks at stipulated percentages of its demand, savings, time and other deposits, as calculated at the end of each month. Money market placements represent securities purchased under an agreement to re-sell (reverse repos) with SAMA.

4. Due from banks and other financial institutions

2007 SAR ‘000

2006 SAR ‘000

Current accounts 598,592 534,476 Money market placements 1,713,842 4,610,350

Total 2,312,434 5,144,826 5. Investments, net a) Investment securities are classified as follows:

i) Held at fair value through income statement (FVIS)

Domestic International Total

2007 SAR ‘000

2006 SAR ‘000

2007 SAR ‘000

2006 SAR ‘000

2007 SAR ‘000

2006 SAR ‘000

Fixed rate securities 338,876 62,536 201,650 76,643 540,526 139,179 Floating rate notes - - 249,932 830,070 249,932 830,070 Externally managed portfolios - - 3,356,250 1,881,244 3,356,250 1,881,244

Others 55,273 56,677 - - 55,273 56,677

Total Held at FVIS 394,149 119,213 3,807,832 2,787,957 4,201,981 2,907,170


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FVIS investments above include investments held for trading of SAR 394.1 million (2006: SAR 119.2 million). The designated FVIS investments included above are so designated when the financial instruments include one or more embedded derivatives or are being evaluated on a fair value basis and are in accordance with the documented risk management strategy of the Bank. ii) Available for sale


2007 SAR ‘000

2006 SAR ‘000

2007 SAR ‘000

2006 SAR ‘000

2007 SAR ‘000

2006 SAR ‘000

Fixed rate securities 1,643,682 3,020,907 14,321,615 7,924,572 15,965,297 10,945,479

Floating rate notes 1,259,641 - 7,428,418 2,114,206 8,688,059 2,114,206

Equities and others 8,484 8,553 570,591 240,536 579,075 249,089

Total available for sale 2,911,807 3,029,460 22,320,624 10,279,314 25,232,431 13,308,774

iii) Held to maturity International Total

2007 SAR ‘000

2006 SAR ‘000

2007 SAR ‘000

2006 SAR ‘000

Fixed rate securities 16,674 - 16,674 -

Floating rate notes 13,890 - 13,890 -

Held to maturity 30,564 - 30,564 -

iv) Other investments held at amortized cost, net


2007 SAR ‘000

2006 SAR ‘000

2007 SAR ‘000

2006 SAR ‘000

2007 SAR ‘000

2006 SAR ‘000

Fixed rate securities 4,043,383 4,595,411 - - 4,043,383 4,595,411

Floating rate notes 12,743,454 12,701,993 4,457,137 3,109,113 17,200,591 15,811,106

Mudaraba Investments 2,864,930 1,060,038 - - 2,864,930 1,060,038

Total held at amortized cost, net 19,651,767 18,357,442 4,457,137 3,109,113 24,108,904 21,466,555

Grand total 22,957,723 21,506,115 30,616,157 16,176,384 53,573,880 37,682,499


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b) The composition of investments is as follows:

2007 SAR ‘000 2006

SAR ‘000 Quoted Unquoted Total Quoted Unquoted Total

Fixed rate securities 14,302,653 6,263,227 20,565,880 7,924,572 7,755,497 15,680,069

Floating rate notes 10,645,466 15,507,006 26,152,472 4,069,188 14,686,194 18,755,382

Equities 363,227 215,848 579,075 143,158 105,931 249,089 Mudaraba

investments - 2,864,930 2,864,930 - 1,060,038 1,060,038

Other - 3,411,523 3,411,523 - 1,937,921 1,937,921

Total 25,311,346 28,262,534 53,573,880 12,136,918 25,,545,581 37,682,499

Unquoted securities principally comprise Saudi Government Development Bonds and Saudi Floating Rate Notes.

In view of the nature of the market for such securities, carrying values are determined by using an appropriate pricing model. Included in fixed rate securities above are securities pledged under repurchase agreements with other banks and customers whose carrying value at December 31, 2007 was SAR 10,475 million (2006: SR 4,139 million).

c) The analysis of unrecognized gains and losses and fair values of other investments held at amortized cost, are as follows:

2007 SAR ’000

2006 SAR ’000

Carrying

value

Gross unrecogni

zed gain

Gross unrecogniz

ed losses Fair

value Carrying

value

Gross unrecogni

zed gain

Gross unrecogni

zed losses

Fair value

Fixed rate securities 4,043,383 19,771 (20,446) 4,042,708 4,595,411 208 (93,675) 4,501,944

Floating rate notes 17,200,591 18,742 (356,318) 16,863,015 15,811,106 99,264 (12,843) 15,897,527

Mudaraba investments 2,864,930 - - 2,864,930 1,060,038 - - 1,060,038

Total 24,108,904 38,513 (376,764) 23,770,653 21,466,555 99,472 (106,518) 21,459,509

Mudaraba is an arrangement approved by the Shariah Board under which the Bank provides funds to customers for a specified business activity. The returns under such arrangements are shared between the Bank and customer on a predetermined basis. Mudaraba investments are included under ‘Other investments held at amortized cost’. The fair value of these Mudaraba investments are not expected to be significantly different from their carrying values.

d) Credit quality of investments

The credit quality of investment portfolio is as follows: 2007

SAR ‘000 2006

SAR ‘000 Saudi government bonds 18,682,355 20,172,024 Investment grade 26,125,320 12,256,059 Non-investment grade 1,599,220 1,049,809 Unrated 7,166,985 4,204,607 Total 53,573,880 37,682,499


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The unrated investments mainly comprise of private equities, hedge funds and equity tranches of collateralized loan and debt obligations. The Bank uses its internal ratings to rate the credit quality of the investment portfolio. Investments classified under Investment grade above comprise of credit exposures equivalent to Aaa to Baa3 ratings under Moody’s ratings methodology.

e) The investments by counter-party are as follows:

2007 SAR ‘000

2006 SAR ‘000

Government and quasi government 33,557,623 27,986,774 Corporate 4,298,954 2,256,548

Banks and other financial institutions 11,748,185 4,803,154 Other 3,969,118 2,636,023 Total 53,573,880 37,682,499

f) During the year SAR 79.6 million (2006: Nil) and SAR 31.4 million (2006: Nil) has been recorded for the impairment charge on available for sale investments and other investments held at amortized cost respectively.

g) Investment in associated company represents Bank’s share of investment in entities where the Bank has significant influence but not the control through its overseas subsidiary. These investments are accounted for using the equity method of accounting.

6. Loans and advances, net

a) Loans and advances are classified as follows:

Total Others Commercial

loans & advances

Consumer loans Credit cards

2007 (SAR ‘000)

Held at amortised cost

81,611,092 603,611 66,043,363 13,270,138 1,693,980 Performing loans and advances, gross

1,879,52331,8931,845,595 2,035- Non performing loans and advances, net

83,490,615635,50467,888,958 13,272,1731,693,980Total held at amortised cost

62,118 - 62,118 - - Available for sale

83,552,733 635,504 67,951,076 13,272,173 1,693,980 Total loans and advances

(2,999,426)(51,273)(2,767,918) (145,155)(35,080)Provision for credit losses

80,553,307584,23165,183,158 13,127,0181,658,900Loans & advances, net


19


loans & advances

Consumer loans

Credit cards 2006 (SAR’000)

Held at amortised cost

68,224,998 339,718 52,391,253 14,015,464 1,478,563 Performing loans and advances, gross

1,526,721- 1,526,721 - - Non performing loans and advances, net

69,751,719339,71853,917,974 14,015,4641,478,563Total held at amortised cost

60,869 - 60,869 - - Available for sale

69,812,588 339,718 53,978,843 14,015,464 1,478,563 Total loans and advances

(2,784,941)(16,367)(2,600,574) (140,600)(27,400)Provision for credit losses

67,027,647323,35151,378,269 13,874,8641,451,163Loans & advances, net

Loans and advances net includes Shariah approved non-interest based banking products in respect of Murabaha, Ijara and Tawarrog finance, which are stated at cost less provision for credit losses amounting to SAR 25,786 million (2006: SAR 22,130 million). The carrying amount of renegotiated loans as at December 31, 2007 is SAR 133 million (2006: SAR 567 million).

b) Movement in provision for credit losses are as follows:


loans & advances


2007 (SAR’000)

2,784,941 16,367 2,600,574 140,600 27,400 Balance at beginning of the year

101,950 25,503 76,386 61 - Acquisition of subsidiary during the year

141,2699,958119,137 4,4947,680Provided during the year

(9,796)-(9,796) --Bad debts written off

(18,938)(555)(18,383) --Recoveries of amounts previously provided

2,999,42651,2732,767,918 145,15535,080Balance at the end of the year


loans & advances


2006 (SAR’000)

2,754,72731,3312,583,896 131,4008,100Balance at beginning of the year

83,742(14,964)70,206 9,20019,300Provided during the year

(26,828)-(26,828) --Bad debts written off

(26,700)-(26,700) --Recoveries of amounts previously provided

2,784,94116,3672,600,574 140,60027,400Balance at the end of the year

During the year, the Bank has charged an amount of SAR 311.5 million to the consolidated statement of income on account of provision for credit losses which is net of recoveries of amounts previously provided and net direct write- offs (2006: SAR 263.7 million).


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c) Credit quality of loans and advances

i) Loans neither past due nor impaired


loans & advances


2007 (SAR’000)

75,840,888603,61161,256,811 12,554,5261,425,940Standard

3,973,594- 3,296,744 519,015157,835Special mention

79,814,482603,61164,553,555 13,073,5411,583,775Total


loans & advances


2006 (SAR’000)

62,276,800339,71847,167,928 13,430,7851,338,369Standard

4,749,124- 4,237,629 431,18680,309Special mention

67,025,924339,71851,405,557 13,861,9711,418,678Total

For presentation purposes, the Bank has categorized its portfolio of loans and advances that are neither past due nor impaired into two sub categories i.e. standard and special mention, as required by SAMA.

Loans and advances under the standard category are performing, have sound fundamental characteristics and include those that exhibit neither actual nor potential weaknesses. The special mention category includes loans and advances that are also performing, current and up to date in terms of principal and special commission payments. However, they require close management attention as they may have potential weaknesses both financial and non financial that may, at some future date, result in the deterioration of the repayment prospects or either the principal or the special commission payments. The special mention loans and advances would not expose the Bank to sufficient risk to warrant a worse classification.

ii) Economic sector risk concentration for the loans and advances and the related credit loss provision is as follows:

2007 Performing

SAR ‘000

Non-performing, net

SAR ‘000

Credit loss provision SAR ‘000

Loans & advances, net

SAR ‘000 Government and quasi government 718,980 - 1,264 717,716 Banks and other financial institutions 1,635,796 1,480 134,399 1,502,877 Agriculture and fishing 2,995,115 79,124 89,656 2,984,583 Manufacturing 10,736,022 109,675 193,335 10,652,362 Mining and quarrying 640,058 48,589 67,988 620,659 Electricity, water, gas and health services 1,192,020 73,550 104,160 1,161,410 Building and construction 9,842,657 383,312 461,567 9,764,402 Commerce 15,893,310 244,601 356,031 15,781,880 Transportation and communication 4,365,434 89,018 188,174 4,266,278 Services 4,843,159 125,462 195,252 4,773,369 Consumer loans and credit cards 14,964,118 2,035 180,235 14,785,918 Other 13,846,541 722,677 1,027,365 13,541,853

Total 81,673,210 1,879,523 2,999,426 80,553,307


21

2006 Performing

SAR ‘000

Non-performing, net

SAR ‘000

Credit loss provision SAR ‘000

Loans & advances, net

SAR ‘000 Government and quasi government 1,710,225 - 954 1,709,271 Banks and other financial institutions 1,779,742 4,033 24,925 1,758,850 Agriculture and fishing 2,516,456 80,111 90,256 2,506,311 Manufacturing 9,488,307 61,852 197,063 9,353,096 Mining and quarrying 587,973 50,955 70,270 568,658 Electricity, water, gas and health services 973,617 35,604 112,832 896,389 Building and construction 6,244,090 111,655 331,846 6,023,899 Commerce 14,874,525 240,233 431,671 14,683,087 Transportation and communication 1,329,320 92,221 86,406 1,335,135

Services 3,201,486 208,473 210,480 3,199,479 Consumer loans and credit cards 15,494,027 - 168,000 15,326,027 Other 10,086,099 641,584 1,060,238 9,667,445

Total 68,285,867 1,526,721 2,784,941 67,027,647

iii) Ageing of loans and advances past due but not impaired

Total Commercial

loans & advances


2007 (SAR’000)

1,239,3071,078,200 110,734 50,373Less than 90 days 619,421473,726 85,863 59,83290 days and more

1,858,7281,551,926 196,597 110,205Total

Total Commercial

loans & advances


2006 (SAR’000)

860,045736,407 85,567 38,071Less than 90 days 399,898310,158 67,926 21,81490 days and more

1,259,9431,046,565 153,493 59,885Total d) Collateral

Fair value of collateral held by Bank against loans and advances by each category are as follows:

2007 SAR ‘000

2006 SAR ‘000

Neither past due nor impaired 36,383,914 17,410,654 Past due but not impaired 6,743,575 12,292,519

Impaired 11,454 16,745

Total 43,138,943 29,719,918 The collateral consists of deposits, financial guarantees, marketable securities and real estate. Those collaterals which are not readily convertible into cash (i.e. real estate) are acquired by the Bank with intent to dispose off in case of default by the customer.


22

7. Property and equipment, net

Land and buildings SAR ‘000

Leasehold improvements

SAR ‘000

Furniture, equipment & vehicles

SAR ‘000

2007 Total

SAR ‘000

2006 Total

SAR ‘000 Cost

Balance at the beginning of the year 872,060 296,397 665,370 1,833,827 1,684,977 Acquisition of subsidiary during the year 82,896 168 26,670 109,734 -

Additions - 49,845 101,025 150,870 152,619

Disposals and adjustments - (250) (2,091) (2,341) (3,769)

Balance at the end of the year 954,956 346,160 790,974 2,092,090 1,833,827

Accumulated depreciation

Balance at the beginning of the year 402,489 169,908 548,045 1,120,442 1,011,069 Acquisition of subsidiary during the year 4,653 - 11,692 16,345 -

Charge for the year 36,571 11,305 74,810 122,686 110,783

Disposals and adjustments - - (370) (370) (1,410)

Balance at the end of the year 443,713 181,213 634,177 1,259,103 1,120,442

Net book value as at December 31, 2007 511,243 164,947 156,797 832,987

Net book value as at December 31, 2006 469,571 126,489 117,325 713,385

Property and equipment at December 31, 2007 include work in progress amounting to SAR 50.1 million (2006: SAR 32 million). 8. Other Assets

2007 SAR ‘000

2006 SAR ‘000

Accrued special commission receivable: - Banks and other financial institutions 36,590 57,628 - Investments 441,120 387,302 - Loans and advances 381,337 351,346 - Other 80,434 70,352

Total accrued special commission receivable 939,481 866,628 Accounts receivable 601,427 386,321 Positive fair value of derivatives (note 9) 4,025,420 1,316,951 Other real estate, net 18,492 18,492 Goodwill (note 17) 38,952 - Other 409,419 601,539

Total 6,033,191 3,189,931


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9. Derivatives

In the ordinary course of business, the Bank utilizes the following derivative financial instruments for both trading and hedging purposes: Swaps are contractual agreements to exchange one set of cash flows for another. For commission rate swaps, counterparties generally exchange fixed and floating rate commission payments in a single currency without exchanging principal. For currency swaps, fixed commission payments and principal are exchanged in different currencies. For cross currency commission rate swaps, principal, fixed and floating commission payments are exchanged in different currencies. Forwards and futures are contractual agreements to either buy or sell a specified currency, commodity or financial instrument at a specified price and date in the future. Forwards are customized contracts transacted in the over the counter market. Foreign currency and commission rate futures are transacted in standardized amounts on regulated exchanges. Forward commission rate agreements are individually negotiated commission rate futures that call for a cash settlement for the difference between a contracted commission rate and the market rate on a specified future date, based on a notional principal for an agreed period of time.

Options are contractual agreements under which the seller (writer) grants the purchaser (holder) the right, but not the obligation, to either buy or sell at a fixed future date or at any time during a stipulated period, a specified amount of a currency, commodity, equity or financial instrument at a pre-determined price.

Derivatives held for trading purposes Most of the Bank’s derivative trading activities relate to sales, positioning and arbitrage. Sales activities involve offering products to customers in order to, inter alia, enable them to transfer, modify or reduce current and future risks. Positioning involves managing market risk positions with the expectation of profiting from favorable movements in prices, rates or indices. Arbitrage involves identifying, with the expectation of profiting from, price differentials between markets or products. Derivatives held for hedging purposes As part of its asset and liability management, the Bank uses derivatives for hedging purposes in order to adjust its own exposure to currency and commission rate risks. This is generally achieved by hedging specific transactions as well as by strategic hedging against overall balance sheet exposures. Strategic hedging does not qualify for special hedge accounting and the related derivatives are accounted for as held for trading. The Bank uses forward foreign exchange contracts and currency swaps to hedge against specifically identified currency risks. In addition, the Bank uses commission rate swaps and commission rate futures to hedge against the commission rate risk arising from specifically identified fixed commission rate exposures. The Bank also uses commission rate swaps to hedge against the cash flow risk arising on certain floating rate exposures. In all such cases, the hedging relationship and objective, including the details of the hedged items and hedging instrument are formally documented and the transactions are accounted for as fair value or cash flow hedges. The table below shows the positive and negative fair values of derivative financial instruments, together with the notional amounts analyzed by the term to maturity and the monthly average. The notional amounts, which provide an indication of the volumes of the transactions outstanding at the year-end, do not necessarily reflect the amounts of future cash flows involved. These notional amounts, therefore, are neither indicative of the Bank’s exposure to credit risk, which is generally limited to the positive fair value of the derivatives, nor to market risk.

The analysis of derivative financial instruments and the related fair values together with the notional amounts classified by the term to maturity is as follows:


24

Notional amounts by term to maturity

2007 Positive Fair value

SR ‘000

Negative Fair value

SR ‘000

Notional amount

Total SR ‘000

Within 3 Months SR‘000

3-12 Months SR‘000

1-5 Years

SR‘000

Over 5 Years

SR’000

Monthly Average SR ‘000

Held for trading

Commission rate swaps 2,398,472 1,909,505 104,435,151 808,691 4,966,831 78,237,844 20,421,785 71,657,904

Commission rate futures, options and guarantees 106,033 103,892 20,043,444 451,704 4,984,428 12,202,069 2,405,243 14,555,565

Forward foreign exchange contracts 310,747 394,805 74,264,738 53,363,429 20,433,304 468,005 - 48,683,436

Currency options 437,086 57,661 1,563,582 1,219,322 344,260 - - 2,147,243

Swaptions - 19 397,500 - - 397,500 - 231,875

Equity & commodity options 690,952 1,066,756 6,022,129 1,034,095 1,962,374 3,025,660 - 3,367,221

Other 6,258 - 95,641 - - 95,641 - 100,939

Held as fair value hedges

Commission rate futures 14,681 1,048 3,681,300 3,681,300 - - - 1,543,626

Commission rate Swaps - 2,264 46,875 - - - 46,875 3,906

Held as cash flow hedges

Commission rate swaps 61,191 2,405 4,087,000 75,000 2,222,500 1,227,000 562,500 10,527,169

Total 4,025,420 3,538,355 214,637,360 60,633,541 34,913,697 95,653,719 23,436,403

Notional amounts by term to maturity

2006 Positive Fair value

SR ‘000

Negative Fair value

SR ‘000

Notional amount

Total SR ‘000

Within 3 Months SR‘000

3-12 Months SR‘000

1-5 Years

SR‘000

Over 5 Years

SR’000

Monthly Average SR ‘000

Held for trading

Commission rate swaps 503,960 455,192 48,376,967 1,105,200 6,071,978 26,587,915 14,611,874 37,120,528

Commission rate futures, options and guarantees

126,284 128,362 10,737,837 1,290,606 2,490,265 6,956,966 - 12,094,738

Forward foreign exchange contracts

136,924 152,367 38,300,093 22,964,148 15,279,285 56,660 - 27,217,599

Currency options 74,022 69,403 1,568,340 553,643 862,090 152,607 - 3,179,498

Swaptions 352 587 900,000 - - 900,000 - 900,000

Equity & commodity options 253,579 252,684 1,825,901 166,578 300,906 1,358,417 - 1,257,166

Other 24,462 31,024 37,500 - - 37,500 - 34,375

Held as fair value hedges

Commission rate futures - - - - - - - 640,671

Held as cash flow hedges

Commission rate swaps 197,368 29,990 10,911,063 750,000 541,313 9,052,250 567,500 8,270,537

Total 1,316,951 1,119,609 112,657,701 26,830,175 25,545,837 45,102,315 15,179,374


25

The tables below show a summary of hedged items, the nature of the risk being hedged, the hedging instrument and their fair values:

Description of hedged items

Fair

value

Nature of

Hedge

Hedging

Instrument

Positive fair

value

Negative fair

value

2007 (SR ‘000)

Fixed rate notes 3,240,504 Fair value Commission rate futures 14,681 1,048

Fixed rate notes 53,086 Fair value Commission rate swaps - 2,264

Floating rate notes 5,788,839 Cash flow Commission rate swaps 61,191 2,405

2006 (SR ‘000)

Floating rate notes 10,983,243 Cash flow Commission rate swaps 197,368 29,990

Approximately 56% (2006: 62%) of the positive fair value of the Bank’s derivatives are entered into with financial institutions and less than 25% (2006: 23%) of the positive fair value contracts are with any single counter-party at the balance sheet date. 10. Due to banks and other financial institutions

2007 SAR ‘000

2006 SAR ‘000

Current accounts 662,016 2,204,490

Money Market deposits 10,762,983 3,580,820

Total 11,424,999

5,785,310

Money market deposits include deposits against the sale of fixed rate securities of SAR 9,038 million (2006: SAR 778 million) with an agreement to repurchase the same at fixed future dates.

11. Customer deposits

a) Customer deposits comprise the following:

2007 SAR ‘000

2006 SAR ‘000

Demand 41,792,125 33,789,800

Savings 2,077,663 1,655,209

Time 64,267,140 50,995,479

Other 7,674,351 8,415,364

Total 115,811,279 94,855,852

Time deposits include deposits accepted under Shariah approved non-interest based banking product contracts, of SAR 14,790 million (2006: SAR 12,478 million).


26

Time deposits include deposits against sale of fixed rate securities of SAR 1,505 million (2006: SAR 3,446 million) with agreements to repurchase the same at fixed future dates. Other customer deposits include SAR 1,335 million (2006: SAR 1,018 million) of margins held against facilities extended to customers. Included in time deposits are market linked customer deposits amounting to SAR1,504 million (2006: SAR 1,151 million), which are designated FVIS liabilities. The deposits are so designated when they include one or more embedded derivatives or are being evaluated on a fair value basis in accordance with the documented risk management strategy of the Bank. b) The above include foreign currency deposits as follows: 2007

SAR ‘000 2006

SAR ‘000 Demand 4,769,496 3,207,244

Savings 68,148 92,752

Time 15,752,714 17,130,550

Other 1,211,032 931,864

Total 21,801,390 21,362,410

12. Other liabilities

2007 SAR ‘000

2006 SAR ‘000

Accrued special commission payable:

- Banks and other financial institutions 7,409 11,634

- Customer deposits 854,013 623,572

- Term loan and debt securities issued 9,175 10,640

- Other 4,978 565

Total accrued special commission payable 875,575 646,411

Accounts payable 810,190 653,592

Negative fair value of derivatives (note 9) 3,538,355 1,119,609

Customer initial public offering deposits 88,627 5,409

Other 1,850,428 1,373,852

Total 7,163,175 3,798,873

13. Term Loan

On December 20, 2004, the Bank entered into a five-year syndicate unsecured term loan facility agreement for an amount of US$ 600 million for general corporate purposes. The facility was fully utilized and was originally repayable in 2009 as per the terms & conditions of the syndicate agreement. This facility carried a special commission rate of LIBOR plus 37.5 bps and was listed on the London Stock Exchange. The Bank has fully repaid this term loan during the year.


27

14. Debt securities issued

During the second quarter of 2006, the Bank, with the approval of SAMA and the Capital Market Authority (CMA), issued USD 500 million senior unsecured five-year floating rate notes under its USD 1.6 billion Euro Medium Term Notes (EMTN) program to be used for general corporate purposes. These notes carry a special commission rate of LIBOR plus 30bps and are listed on the London Stock Exchange. During the third quarter of 2006, the Bank issued the second tranche of CHF 50 million two-year unlisted senior unsecured floating rate notes. These notes carry a special commission rate of LIBOR plus 9bps. The Bank accounts for such notes at amortized cost which is calculated by taking into account the discount allowed, if any, at the time of the issue.

15. Share capital

The authorized, issued and fully paid share capital of the Bank consists of 600 million shares of SAR 10 each. The ownership of the Bank’s share capital is as follows:

2007 2006 Saudi shareholders 96.44% 96.44% Foreign shareholders - Banque du Caire 2.34% 2.34% - Bank Melli Iran 1.22% 1.22% 100.00% 100.00%

At a Board of Directors’ meeting held on February 5, 2008, the Directors recommended an increase in the Bank’s share capital from SAR 6 billion to SAR 9 billion through a one for two bonus share dividend subject to the final approval of the shareholders at their extra ordinary general assembly meeting.

16. Statutory and general reserves

In accordance with the Banking Control Law of the Kingdom of Saudi Arabia and the Articles of Association of the Bank, a minimum of 25% of the net income for the year is required to be transferred to a statutory reserve until this reserve equals the paid up capital of the Bank. Accordingly, SAR 442.8 million has been transferred from 2007 net income (2006: SAR 1,302.5 million) to the statutory reserve. The statutory reserve is not currently available for distribution. In addition, as and when considerate appropriate, the Bank makes an appropriation to general reserve for general banking risks.

17. Business Combination

On March 30, 2007 (the acquisition date), the Bank has acquired a majority shareholding of 68.4% in Crescent Commercial Bank Limited (CCBL), Pakistan through a fresh issue of 600 million shares at Pak Rupees (PKR) 10 each by CCBL to the Bank for a cash consideration of SAR 370.5 million. CCBL is a banking company engaged in commercial banking and related services and is listed on all the stock exchanges in Pakistan. It operates 28 branches at the end of the year, all located within Pakistan.

Goodwill of SAR 38.9 million arose on this business combination. Goodwill is attributable to the significant synergies expected to arise from the development of CCBL within Samba Financial Group, and those intangibles such as strategically located branch network covering cities in Pakistan and workforce in place with local knowledge and experience, which are not recognized separately. Goodwill arising on business combination has been recorded in other assets.

The fair value and carrying value of assets, liabilities and contingent liabilities of CCBL and goodwill at the

acquisition date were as follows:


28

(SAR’000) Fair value

recognized on acquisition

Carrying amount

Assets: Cash and balances with treasury banks 46,840 46,840 Due from banks and other financial institutions 430,450 430,450 Investments, net 151,330 154,673 Loans and advances, net 134,252 134,252 Property and equipment, net 95,118 51,905 Other assets 79,170 80,553

Total Assets 937,160 898,673

Liabilities: Due to banks and other financial institutions 18,151 18,151 Customer deposits 396,976 396,976 Other liabilities 37,368 37,368 Total liabilities 452,495 452,495 Minority interest 153,063 140,908 Net assets acquired 331,602 305,270 Goodwill (note 8) 38,952 Cost of acquisition 370,554 Cash outflow on acquisition: Cash consideration paid 370,554 Cash and cash equivalents in subsidiary acquired (327,210) 43,344

Had the combination taken place at the beginning of the year, the consolidated operating income of the Bank would have been lower by SAR 0.6 million and the consolidated net income of the Bank would have been lower by SAR 15.6 million.

18. Commitments and contingencies

a) Legal proceedings No provision has been made in relation to legal proceedings existing as at December 31, 2007 and 2006 as no material costs are expected to be incurred.

b) Capital commitments

The Bank’s capital commitments as at December 31, 2007 and 2006 in respect of building and equipment purchases are not material to the financial position of the Bank.

c) Credit related commitments and contingencies Credit related commitments and contingencies mainly comprise letters of credit, guarantees, acceptances and

irrevocable commitments to extend credit. The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit, which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans and advances. Documentary letters of credit which are written undertakings by the Bank on behalf of a customer authorizing a third party to draw drafts on the Bank up to


29

a stipulated amount under specific terms and conditions, are generally collateralized by the underlying

shipments of goods to which they relate, and therefore have less risk. Acceptances comprise undertakings by the Bank to pay bills of exchange drawn on customers. The Bank expects most acceptances to be presented before being reimbursed by the customers. Cash requirements under these instruments are considerably less than the amount of the related commitment because the Bank generally expects the customers to fulfill their primary obligation.

Commitments to extend credit represent the unused portion of approved facilities to extend credit, principally in

the form of loans and advances, guarantees and letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to a loss in an amount equal to the total unused commitments. However, the likely amount of loss, which cannot readily be quantified, is expected to be less than the total unused commitment as most commitments to extend credit are contingent upon customers maintaining specific credit standards. The total outstanding commitments to extend credit do not necessarily represent future cash requirements as many of these commitments may expire or terminate without being funded.

i) The contractual maturity structure for the Bank’s credit related commitments and contingencies are as follows:

2007 (SAR ‘000) Within 3 Months

3-12 Months

1-5 Years

Over 5 Years

Total

Letters of credit 4,760,806 3,010,500 1,704,146 - 9,475,452

Letters of guarantee 4,383,701 12,285,914 7,957,570 17,936 24,645,121

Acceptances 1,428,827 611,481 57,860 - 2,098,168

Irrevocable commitments to extend credit 114,286 454,134 1,156,397 643,928 2,368,745

Other 2,969,180 - - - 2,969,180

Total 13,656,800 16,362,029 10,875,973 661,864 41,556,666

2006 (SAR ‘000) Within 3

Months 3-12

Months 1-5

Years Over 5 Years

Total

Letters of credit 3,722,267 2,043,480 1,650,834 - 7,416,581

Letters of guarantee 4,478,552 5,604,207 5,934,610 175,792 16,193,161

Acceptances 1,280,265 708,242 56,748 - 2,045,255

Irrevocable commitments to extend credit 5,048,682 3,588,046 584,030 701,836 9,922,594

Other 3,774,924 - - - 3,774,924

Total 18,304,690 11,943,975 8,226,222 877,628 39,352,515

The unused portion of commitments outstanding as at December 31, 2007 which can be revoked unilaterally at any time by the Bank amounts to SAR 73,350 million (2006: SAR 53,174 million).


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ii) The analysis of credit related commitments and contingencies by counter-party is as follows:

2007

SAR ‘000 2006

SAR ‘000 Corporate 32,112,438 35,571,940

Banks and other financial institutions 9,325,732 3,776,746

Other 118,496 3,829

Total 41,556,666 39,352,515

d) Assets pledged Assets pledged as collateral with other financial institutions as security for borrowings are as follows:

2007 (SAR’000)

2006 (SAR’000)

Assets Related

liabilities Assets Related

liabilities Available for sale investments 7,707,980 7,751,220 2,706,300 2,798,010

Other investments held at amortized cost 2,766,740 2,792,250 1,433,020 1,426,090

Total 10,474,720 10,543,470 4,139,320 4,224,100

e) Operating lease commitments

The future minimum lease payments under non-cancelable operating leases where the Bank is the lessee are not material to the financial position of the Bank.

19. Special commission income and expense

2007 SAR ‘000

2006 SAR ‘000

Special commission income Investments:

- Available for sale 712,823 466,816 - Other investments held at amortized cost 1,234,103 1,092,102 1,946,926 1,558,918 Due from banks and other financial institutions 759,582 312,166 Loans and advances 5,679,756 5,119,890

Total 8,386,264 6,990,974

Special commission expense Due to banks and other financial institutions 240,634 209,327 Customer deposits 3,056,883 2,288,906 Term loan and debt securities issued 144,355 191,779

Total 3,441,872 2,690,012


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20. Fee from banking services, net

2007 SAR ‘000

2006 SAR ‘000

Fee income: - Share trading and fund management 903,834 1,869,938 - Trade finance 184,974 174,023 - Corporate finance and advisory 116,639 46,830 - Other banking services 503,226 421,001

Total fee income 1,708,673 2,511,792

Fee expense:

- Cards (12,726) (10,578)

- Other banking services (77,802) (81,228)

Total fee expense (90,528) (91,806)

Fee from banking services, net 1,618,145 2,419,986

21. Trading income, net

2007 SAR ‘000

2006 SAR ‘000

Debt securities 94,176 7,649 Derivatives 80,573 54,803 Equities and others (31,011) 21,240

Total 143,738 83,692

22. Gains / (loss) on non-trading investments, net

2007 SAR ‘000

2006 SAR ‘000

Available for sale (68,633) 667 Other investments held at amortized cost 36,882 2,265

Total (31,751) 2,932

23. Other operating income

2007 SAR ‘000

2006 SAR ‘000

Loss on disposal of property and equipment (1,346) (1,123) Gain on disposal of other real estate 1,125 1,310 Dividend 12,214 5,452 Other 22,972 6,075

Total 34,965 11,714


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24. Basic and fully diluted earnings per share Basic and fully diluted earnings per share is calculated by dividing the net income for the years 2007 and 2006 by

600 million shares. 25. Dividend, Zakat and income tax

The Board of Directors’ have proposed a final dividend of SAR 659 million for 2007 (2006: SAR 1,102 million). The proposed dividends are not shown as a liability and are included within the equity until approved by the shareholders’ annual general assembly. Zakat attributable to Saudi shareholders for the year is estimated at SAR 119 million (2006: SAR 127 million) which will be deducted from their share of dividend. The net dividend for the year to Saudi shareholders is SAR 2.70 per share (2006: SAR 3.40 per share) of which SAR 1.70 (2006: SAR 1.70) was paid as interim dividend.

Income tax liability to the foreign shareholders on their current year’s share of income is estimated at SAR 35 million (2006: SAR 37 million). Any such unpaid income tax liability for 2007 will be deducted from their share of dividend for the year. The net dividend to foreign shareholders is SAR 27 million (2006: SAR 40 million).

26. Cash and cash equivalents

Cash and cash equivalents for the purpose of the consolidated statements of cash flows comprise the following:

2007 SAR ‘000

2006 SAR ‘000

Cash and balances with Central Banks excluding statutory deposit

(note 3) 6,204,071 7,253,667

Due from banks and other financial institutions maturing within ninety days 561,060

3,502,326

Total 6,765,131 10,755,993 27. Business segments

The Bank is organized into the following main business segments:

Consumer – comprises of individual customer time deposits, current, call and savings accounts, as well as credit cards, retail investment products and consumer loans. It also includes management of fiduciary funds, international and local shares brokerage services.

Corporate – comprises of corporate time deposits, current and call accounts, overdrafts, loans and other credit facilities as well the Bank’s investment, trading and derivative portfolios and its corporate finance advisory services.

Treasury – principally manages money market, foreign exchange, commission rate trading and derivatives for corporate and institutional customers as well as for the Bank’s own account. It is also responsible for funding the Bank’s operations, maintaining liquidity and managing the Bank’s investment portfolio and balance sheet.

The Bank’s primary business is conducted in Kingdom of Saudi Arabia with one overseas branch and an overseas subsidiary. However, the results of operations of the overseas operations are not material to the Bank’s overall consolidated financial statements. Transactions between the business segments are on normal commercial terms. Funds are ordinarily reallocated between segments, resulting in funding cost transfers. Special commission charged for these funds is based on inter-bank rates. There are no other material items of income or expense between the business segments.


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a) The Bank’s total assets and liabilities as at December 31, 2007 and 2006, its total operating income, total

operating expenses, net income, capital expenditure and depreciation expense for the years then ended, by business segment, are as follows:

2007 (SAR’000) Consumer Corporate Treasury Total

Total assets 27,545,990 62,791,341 64,076,643 154,413,974

Total liabilities 56,646,426 65,883,223 13,908,762 136,438,411

Total operating income 4,038,963 2,516,021 641,054 7,196,038

Total operating expenses 1,465,983 704,436 217,987 2,388,406

Net income 2,572,980 1,811,585 423,067 4,807,632

Capital expenditure 95,315 47,384 8,171 150,870

Depreciation 55,042 62,464 5,180 122,686


Total assets 25,942,126 47,541,896 50,530,791 124,014,813

Total liabilities 47,723,440 50,690,458 10,301,297 108,715,195

Total operating income 4,547,487 2,156,156 569,079 7,272,722

Total operating expenses 1,302,272 656,699 103,381 2,062,352

Net income 3,245,215 1,499,457 465,698 5,210,370

Capital expenditure 106,870 42,350 3,399 152,619

Depreciation 47,679 56,560 6,544 110,783 b) The Bank’s credit exposure by business segment is as follows:


Balance sheet risk assets 22,693,489 49,861,321 63,895,356 136,450,166

Commitments and contingencies 605,119 21,045,390 - 21,650,509

Derivatives 31,086 3,398,305 10,685,652 14,115,043


Balance sheet risk assets 22,389,095 36,970,756 50,495,121 109,854,972

Commitments and contingencies 603,530 24,650,470 - 25,254,000

Derivatives 28,315 1,370,601 5,295,378 6,694,294

Balance sheet risk assets comprise of the carrying value of balance sheet assets, excluding cash and balances with Central Banks, property and equipment and other assets. Credit exposures relating to commitments, contingencies and derivatives are stated at their credit equivalent amounts as prescribed by Central Banks.


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28. Credit Risk

Credit risk is the risk that a customer of the Bank will fail to discharge its financial obligation to the Bank and will cause the Bank to incur a financial loss. The Bank seeks to manage its credit risk exposure by ensuring that its customers meet the minimum credit standards defined by the Bank’s management and through diversification of lending activities to ensure that there is no undue concentration of risks with individuals, or within groups of customers in specific locations or businesses. The Bank continually assesses and monitors credit exposures to ensure timely identification of potential problem credits. In addition to monitoring credit limits, the Bank manages the credit exposure relating to its trading activities by entering into master netting agreements and collateral arrangements with counterparties in appropriate circumstances, and by limiting the duration of exposure. In certain cases the Bank may also close out transactions and settle on a net present value basis. Concentrations of credit risk arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations of credit risk indicate the relative sensitivity of the Bank’s performance to developments affecting a particular industry or geographical location. The Bank limits the impact of concentration risk in exposure by setting progressively lower limits for longer tenors and taking security, where considered appropriate, to mitigate such risks. Debt instruments included in the Bank’s investment portfolio are mainly sovereign risk instruments. Analysis of investments by counterparty and the composition of loans and advances is provided in notes 5 and 6 to the consolidated financial statements, respectively. The nature and extent of credit risk relating to derivative instruments and commitments and contingencies is provided in notes 9 and 17, respectively. The Bank classifies its exposure into ten risk categories that are compatible with internationally recognized ratings. Of these, eight categories are for performing and two for non-performing. Each individual borrower is rated based on an internally developed debt rating model that evaluates risk based on financial as well as qualitative inputs. The risk rating categories drive the due diligence and approval process, and these ratings are reviewed at least annually, or sooner if any adverse signs are visible. These categories also form the basis for managing credit concentrations and identifying problem credits. Exposures falling below a certain classification threshold are considered to be impaired, and appropriate specific provisions are made against these loans by comparing the present value of expected future cash flows for each such exposure with its carrying amount on the basis of criteria prescribed by IAS 39. Impairment and uncollectibility are also measured and recognized on a portfolio basis for a group of similar credits that are not individually identified as impaired.

28.1 Maximum exposure to credit risk without taking into account any collateral and other credit enhancements is

as follows: 2007

SAR’000 2006

SAR’000 ASSETS Due from banks and other financial institutions 2,312,434 5,144,826 Investments & investment in associates 53,584,425 37,682,499 Loans and advances, net 80,553,307 67,027,647

Total Assets 136,450,166 109,854,972 Contingent liabilities and commitments 21,650,509 25,254,000

Derivatives 14,115,043 6,694,294 Total 172,215,718 141,803,266


35

29. Geographical concentration a) The distribution by geographical region for major categories of assets, liabilities, commitments and

contingencies and credit exposure are as follows:

2007 (SAR’000) Kingdom of

Saudi Arabia

GCC & Middle

east Europe North

America South East Asia

Other countries TOTAL

Assets Cash & balances with

Central Banks 11,035,032 - 1,774 - 60,824 - 11,097,630

Due from banks and other financial institutions 347,770 127,496 642,551 517,408 651,173 26,036 2,312,434

Investments & investment in associates 25,339,495 940,201 8,999,105 16,455,610 313,215 1,536,799 53,584,425

Loans and advances, net 76,144,497 196,895 3,308,806 - 284,431 618,678 80,553,307

Total 112,866,794 1,264,592 12,952,236 16,973,018 1,309,643 2,181,513 147,547,796

Liabilities Due to banks & other

financial institutions 68,915 703,530 6,386,497 2,944,009 66,754 1,255,294 11,424,999

Customer deposits 109,282,515 359,923 5,014,306 164,075 715,020 275,440 115,811,279

Term loan - - - - - - -

Debt securities issued - 505,495 1,196,467 - - 336,996 2,038,958

Total 109,351,430 1,568,948 12,597,270 3,108,084 781,774 1,867,730 129,275,236

Commitments & contingencies 30,087,174 2,223,443 5,682,330 1,055,181 2,200,975 307,563 41,556,666

Credit Exposure

Commitments & contingencies 16,637,972 1,030,539 2,661,468 585,342 641,469 93,719 21,650,509

Derivatives 5,822,836 899,836 5,028,779 1,930,094 - 433,498 14,115,043

Total 22,460,808 1,930,375 7,690,247 2,515,436 641,469 527,217 35,765,552

2006 (SAR’000) Kingdom of

Saudi Arabia

GCC & Middle East

Europe North America

South East Asia

Other countries TOTAL

Assets Cash & balances with

Central Banks 10,185,668 - 70,857 - - - 10,256,525

Due from banks & other financial institutions 1,583,778 314,115 1,892,661 1,207,565 29,448 117,259 5,144,826

Investments, net 22,560,612 673,362 5,512,607 8,149,950 77,062 708,906 37,682,499

Loans and advances, net 65,769,070 136,068 763,574 - - 358,935 67,027,647

Total 100,099,128 1,123,545 8,239,699 9,357,515 106,510 1,185,100 120,111,497


36

Liabilities

Due to banks & other financial institutions 1,921,203 127,330 201,570 3,428,077 2,583 104,547 5,785,310

Customer deposits 90,674,500 377,103 2,045,796 132,178 3,089 1,623,186 94,855,852

Term loan 142,500 748,125 990,000 275,625 - 93,750 2,250,000

Debt securities issued - 505,268 1,183,046 - - 336,846 2,025,160

Total 92,738,203 1,757,826 4,420,412 3,835,880 5,672 2,158,329 104,916,322

Commitments & Contingencies 28,723,496 805,267 5,332,583 986,502 2,849,003 655,664 39,352,515

Credit Exposure

Commitments & contingencies 20,221,142 384,342 2,999,272 320,451 1,079,156 249,637 25,254,000

Derivatives 2,986,701 134,745 2,679,809 719,662 - 173,377 6,694,294

Total 23,207,843 519,087 5,679,081 1,040,113 1,079,156 423,014 31,948,294

Balances shown in due from and due to banks and other financial institutions under Kingdom of Saudi Arabia include money market placements amounting to SAR Nil (2006: SAR Nil) and deposits totaling SAR Nil (2006: SAR Nil) respectively on account of foreign branches of local banks. Credit exposures are stated at their credit equivalent amounts as prescribed by SAMA.

b) The distribution by geographical concentration of non-performing loans and advances and provision for credit losses are as follows:

(SAR ‘000)

Non performing loans, net Provision for

Credit losses 2007 2006 2007 2006

Saudi Arabia 1,732,468 1,522,688 2,852,123 2,780,908

GCC and Middle East 1,102 4,033 1,102 4,033

South East Asia 145,953 - 146,201 -

Total 1,879,523 1,526,721 2,999,426 2,784,941

30. Market Risk

Market Risk is the risk that the fair value or future cash flows of the financial instruments will fluctuate due to changes in market variables such as special commission rates, foreign exchange rates, and equity prices. The Bank classifies exposures to market risk into either trading or non-trading or banking-book. a) Market Risk -Trading Book

The Bank has set limits for the acceptable level of risks in managing the trading book. In order to manage the market risk in trading book, the Bank periodically applies a VAR methodology to assess the market risk positions held and also to estimate the potential economic loss based on a set of assumptions and changes in market conditions.


37

A VAR methodology estimates the potential negative change in market value of a portfolio at a given confidence level and over a specified time horizon. The Bank uses simulation models to assess the possible changes in the market value of the trading book based on historical data. VAR models are usually designed to measure the market risk in a normal market environment and therefore the use of VAR has limitations because it is based on historical correlations and volatilities in market prices and assumes that the future movements will follow a statistical normal distribution. The VAR that the Bank measures is an estimate, using a confidence level of 99% of the potential loss that is not expected to be exceeded if the current market positions were to be held unchanged for one day. The use of 99% confidence level depicts that within a one-day horizon, losses exceeding VAR figure should occur, on average, not more than once every hundred days. The VAR represents the risk of portfolios at the close of a business day, and it does not account for any losses that may occur beyond the defined confidence interval. The actual trading results however, may differ from the VAR calculations and, in particular, the calculation does not provide a meaningful indication of profits and losses in stressed market conditions. To overcome the VAR limitations mentioned above, the bank also carries out stress tests of its portfolio to simulate conditions outside normal confidence intervals. The potential losses occurring under stress test conditions are reported regularly to the Bank’s Asset Liability Committee (ALCO) for their review. The Bank’s VAR related information for the year ended December 31, 2007 and 2006 is as under.

2007 (SR’000)

Foreign exchange

Special commission

rate Equity

Total

VAR as at December 31, 2007 19,830 7,170 2,758 29,758

Average VAR for 2007 2,790 7,960 2,236 12,986

2006 (SR’000)

Foreign exchange

Special commission

rate Equity

Total

VAR as at December 31, 2006 3,510 6,450 2,862 12,822

Average VAR for 2006 3,110 5,360 3,733 12,203

b) Market Risk – Non-Trading or Banking Book

Market risk on non-trading or banking book positions mainly arises from the special commission rate, foreign currency exposures and equity price changes.

i) Special Commission Rate Risk

Special commission rate risk arises from the possibility that the changes in special commission rates will affect either the fair values or the future cash flows of the financial instruments. The Bank has established special commission rate gap limits for stipulated periods. The Bank monitors positions daily and uses hedging strategies to ensure maintenance of positions within the established gap limits. The following table depicts the sensitivity to a reasonable possible change in special commission rates, with other variables held constant, on the Bank’s consolidated statement of income or equity. The sensitivity of the income is the effect of the assumed changes in special commission rates on the net special commission income for one year, based on non-trading financial assets and financial liabilities held as at December 31,


38

2007, including the effect of hedging instruments. The sensitivity of equity is calculated by revaluing the fixed rate available for sale financial assets, including the effect of any associated hedges as at December 31, 2007 for the effect of assumed changes in special commission rates. The sensitivity of equity is analyzed by maturity of the asset or swap. All the banking book exposures are monitored and analyzed in currency concentrations and relevant sensitivities are presented below:

Currency Increase /

decrease in percentage

Sensitivity of special

commission income

Sensitivity of equity Total 2007 (SAR’000)

6 months or less

6 to 12 months

1-5 years

Over 5 years

SAR 1% 4,304 (69) (45) (38) (2) (154)

US Dollar 1% (4,962) (480) (342) (2,467) (2,162) (5,451)

Euro 1% (2,577) (250) (205) (1,461) (420) (2,336)

Currency Increase /

decrease in percentage

Sensitivity of special

commission income

Sensitivity of equity Total 2006 (SAR’000)

6 months or less

6 to 12 months

1-5 years

Over 5 years

SAR 1% (155) (141) (100) (141) (1) (383)

US Dollar 1% (1,592) (45) (19) (111) (80) (255)

Euro 1% (2,519) (192) (188) (1,349) (714) (2,443) The Bank is exposed to various risks associated with the effect of fluctuations in the prevailing levels of market commission rates on its financial position and cash flows. The table below summarizes the Bank’s exposure to commission rate risks. Included in the table are the Bank’s assets and liabilities at carrying amounts, categorized by the earlier of contractual re-pricing or maturity dates. The Bank is exposed to commission rate risk as a result of mismatches or gaps in the amounts of assets and liabilities and off-balance sheet instruments that mature or re-price in a given period. The Bank manages this risk by matching the re-pricing of assets and liabilities through risk management strategies.

2007 (SAR ‘000)

Within 3 Months

3-12 Months

1-5 Years

Over 5 Years

Non- commission

bearing Total

Effective commission

rate Assets

Cash and balances with Central Banks 4,638,602 - - - 6,459,028 11,097,630 4.80%

Due from Banks and other financial institutions 1,796,758 12,121 - - 503,555 2,312,434 4.90%

Investments & investments in associates, net 24,904,863 5,992,938 5,378,479 16,717,732 590,413 53,584,425 4.58%

Loans and advances, net 39,550,627 26,681,254 10,513,130 3,803,911 4,385 80,553,307 6.65%

Property and equipment, net - - - - 832,987 832,987

Other assets - - - - 6,033,191 6,033,191

Total Assets 70,890,850 32,686,313 15,891,609 20,521,643 14,423,559 154,413,974


39

Liabilities and Equity Within 3 Months

3-12 Months

1-5 Years

Over 5 Years

Non- commission

bearing Total


rate Due to banks and other financial

institutions 9,771,562 933,164 225,740 - 494,533 11,424,999 4.64%

Customer deposits 56,171,588 10,894,214 2,805,227 924,654 45,015,596 115,811,279 4.19%

Other liabilities - - - - 7,163,175 7,163,175

Term loan - - - - - -

Debt securities issued 1,942,132 96,826 - - - 2,038,958 5.44%

Total equity - - - - 17,975,563 17,975,563

Total Liabilities and Equity 67,885,282 11,924,204 3,030,967 924,654 70,648,867 154,413,974

On balance sheet gap 3,005,568 20,762,109 12,860,642 19,596,989 (56,225,308) -

Off balance sheet gap 70,448 (2,308,474) (143,920) (945,603) (3,327,549)

Total commission rate sensitivity gap 3,076,016 18,453,635 12,716,722 18,651,386

Cumulative commission rate sensitivity gap 3,076,016 21,529,651 34,246,373 52,897,759

2006 (SAR ‘000)

Within 3 Months

3-12 Months

1-5 Years

Over 5 Years

Non- commission

bearing Total


rate Assets

Cash and balances with Central Bank 5,980,000 - - - 4,276,525 10,256,525 4.70%

Due from Banks and other financial institutions 4,392,825 210,368 - - 541,633 5,144,826 5.29%

Investments, net 21,257,990 5,307,878 5,463,698 5,403,844 249,089 37,682,499 4.80%

Loans and advances, net 28,930,724 20,009,728 9,743,825 8,343,370 - 67,027,647 7.47%


Other assets - - - - 3,189,931 3,189,931

Total Assets 60,561,539 25,527,974 15,207,523 13,747,214 8,970,563 124,014,813


40

Liabilities and Equity Within 3 Months

3-12 Months

1-5 Years

Over 5 Years

Non- commission

bearing Total


rate Due to banks and other financial institutions 4,400,158 1,184,234 35,484 - 165,434 5,785,310 5.20%

Customer deposits 43,444,365 9,984,089 1,678,099 1,193,926 38,555,373 94,855,852 4.46%


Term loan 2,250,000 - - - - 2,250,000 5.50%

Debt securities issued 2,025,160 - - - - 2,025,160 5.96%

Total equity - - - - 15,299,618 15,299,618

Total Liabilities and Equity 52,119,683 11,168,323 1,713,583 1,193,926 57,819,298 124,014,813

On balance sheet gap 8,441,856 14,359,651 13,493,940 12,553,288 (48,848,735) -

Off balance sheet gap 11,068,529 (628,813) (9,150,042) (752,736) - 536,938

Total commission rate sensitivity gap 19,510,385 13,730,838 4,343,898 11,800,552

Cumulative commission rate sensitivity gap 19,510,385 33,241,223 37,585,121 49,385,673

The off balance sheet gap represents the net notional amounts of off-balance sheet financial instruments, which are used to manage the commission rate risk. The effective commission rate (effective yield) of a monetary financial instrument is the rate that, when used in a present value calculation, results in the carrying amount of the instrument. The rate is a historical rate for fixed rate instruments and a current market rate for a floating rate instrument. The effective commission rates disclosed above relate to commission rate sensitive assets and liabilities outstanding at the year-end. ii) Foreign Currency Risk

Currency risk represents the risk of change in the value of financial instruments due to changes in foreign exchange rates.

The Bank manages exposure to the effects of fluctuations in prevailing foreign currency exchange rates on its

financial position and cash flows. The Management sets limits on the level of exposure by currency and in total for both overnight and intra-day positions and hedging strategies, which are monitored daily. At the end of the year, the Bank had the following significant net currency exposures:

2007 (SAR’000)

Long

2006 (SAR’000)

(Short) United States Dollar 1,167,622 (1,821,311)

Pakistan Rupees 330,165 -

The table below shows the currencies to which the Bank has a significant exposure as at December 31, 2007 and 2006 on its non-trading monetary assets and liabilities and forecasted cash flows. The analysis calculates the


41

effect of reasonable possible movement of the currency rate against SAR, with all other variables held constant, on the consolidated income statement (due to the fair value of the currency sensitive non-trading monetary assets and liabilities) and equity (due to change in fair value of currency swaps and forward foreign exchange contracts used as cash flow hedges). A positive effect shows a potential increase in income statement or equity; whereas a negative effect shows a potential net reduction in income statement or equity

December 31, 2007

Currency exposures

Change in currency rate

Effect on net income (SAR’000) Effect on equity

US Dollar 1% 377 -

Euro 1% (639) -

December 31, 2006

Currency exposures

Change in currency rate

Effect on net income (SAR’000) Effect on equity

US Dollar 1% 38 -

Euro 1% 511 -

iii) Equity Price Risk

Equity price risk refers to the risk of decrease in fair values of equities in the Bank’s non-trading investment portfolio as a result of reasonable possible changes in levels of equity indices and the value of individual stocks. The effect on the Bank’s equity investments held as available for sale due to reasonable possible change in equity indices, with all other variables held constant is as follows:

December 31, 2007 December 31, 2006 Change in equity

price Effect in SAR’000 Change in equity price

Effect in SAR’000

Unquoted 1% 5,498 1% 2,552

31. Liquidity risk

Liquidity risk is the risk that the Bank will be unable to meet its net funding requirements. Liquidity risk can be caused by market disruptions or credit downgrades, which may cause certain sources of funding to be less readily available. To mitigate this risk, management has diversified funding sources and manages its assets with liquidity in mind, maintaining an appropriate balance of cash, cash equivalents and readily marketable securities. In accordance with Banking Control Law and the regulations issued by SAMA, the Bank maintains a statutory deposit with SAMA equal to 9% of total demand deposits and 2% of savings and time deposits (2006: 7% and 2% respectively). In addition to the statutory deposit, the Bank also maintains liquid reserves of no less than 20% of its deposit liabilities, in the form of cash, gold, Saudi Government securities or assets that can be converted into cash within a period not exceeding 30 days. The Bank has the ability to raise additional funds through repo facilities with Central Banks against Saudi Government securities up to 75% of the nominal value of bonds held.


42

i) Maturity profile of Bank’s assets, liabilities and equity The tables below summarize the maturity profile of the Bank’s assets, liabilities and equity. The contractual maturities of assets and liabilities have been determined on the basis of the remaining period at the balance sheet date to the contractual maturity date, and do not take account of the effective maturities as indicated by the Bank’s deposit retention history and the availability of liquid funds. Management monitors the maturity profile to ensure that adequate liquidity is maintained. For presentation purposes demand deposits are included in “No fixed maturity” category.

2007 (SAR ‘000) Within 3 months

3-12 months

1-5 years

Over 5 years

No Fixed maturity Total

Assets

Cash & balances with Central Banks 6,196,596 - - - 4,901,034 11,097,630

Due from banks and other financial institutions 1,796,758 12,120 - - 503,556 2,312,434

Investments & investments in associates, net 2,370,585 4,740,929 19,868,159 26,014,339 590,413 53,584,425

Loans and advances, net 23,288,416 29,234,307 20,837,144 7,193,440 - 80,553,307


Other assets 5,862 973 - - 6,026,356 6,033,191

Total Assets 33,658,217 33,988,329 40,705,303 33,207,779 12,854,346 154,413,974

Liabilities and Equity Within 3 months

3-12 months

1-5 years

Over 5 years

No Fixed maturity Total

Due to banks and other financial institutions 9,804,830 900,832 221,832 1,354 496,151 11,424,999

Customer deposits 53,810,637 9,098,345 2,247,975 1,034,910 49,619,412 115,811,279

Other liabilities 6,125 4,373 398 - 7,152,279 7,163,175

Term loan - - - - - -

Debt securities issued - - 2,038,958 - - 2,038,958

Total equity - - - - 17,975,563 17,975,563



43

2006 (SAR ‘000) Within 3 months

3-12 months

1-5 years

Over 5 years

No fixed maturity Total

Assets

Cash & balances with Central Banks 7,253,667 - - - 3,002,858 10,256,525

Due from banks and other financial institutions 4,419,436 183,758 - - 541,632 5,144,826

Investments, net 4,990,735 2,312,523 17,263,406 12,866,746 249,089 37,682,499

Loans and advances, net 27,713,245 15,244,805 13,676,779 10,276,838 115,980 67,027,647


Other assets - - - - 3,189,931 3,189,931

Total Assets 44,377,083 17,741,086 30,940,185 23,143,584 7,812,875 124,014,813

Liabilities and Equity Within 3 months 3-12 months 1-5

years Over 5 years No fixed maturity Total

Due to banks and other financial institutions 4,461,643 988,067 3,629 - 331,971 5,785,310

Customer deposits 41,154,425 8,199,768 1,446,174 1,193,927 42,861,558 94,855,852


Term loan - - 2,250,000 - - 2,250,000

Debt securities issued - - 2,025,160 - - 2,025,160

Total equity - - - - 15,299,618 15,299,618


ii) Analysis of undiscounted financial liabilities by remaining contractual maturities The table below summarizes the maturity profile of Bank’s financial liabilities at December 31, 2007 and 2006 based

on contractual undiscounted repayment obligations. The totals in this table do not match with the consolidated balance sheet as special commission payments with contractual maturities are included in the table on an undiscounted basis. The contractual maturities of financial liabilities have been determined on the basis of the remaining period at the balance sheet date to the contractual maturity date. The table below does not reflect the expected cash flows indicated by the deposit retention history of the Bank.

SAR ‘000 Within 3 months

3-12 months

1-5 years

Over 5 years

On demand Total

December 31, 2007 64,077,044 10,188,965 5,834,927 2,240,345 54,852,866 137,194,147

December 31, 2006 45,754,538 9,329,041 6,544,865 1,771,692 46,378,858 109,778,994

32. Fair values of financial assets and liabilities Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing

parties in an arm’s length transaction. Consequently, differences can arise between carrying values and fair value estimates.


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The fair values of on balance sheet financial instruments, except for other investments held at amortized cost, are

not significantly different from their carrying values included in the consolidated financial statements. The estimated fair value of other investments held at amortized cost is based on quoted market prices when available or pricing models in the case of certain fixed rate securities, and is disclosed in note 5. The total amount of the change in fair values estimated using valuation techniques that was recognised in consolidated statement of income during the year amounted to SAR 681.9 million (2006: SAR 447.1 million).

33. Related party transactions

In the ordinary course of its activities, the Bank transacts business with related parties. The related party transactions are governed by limits set by the Banking Control Law and regulations issued by Central Banks. The year-end balances resulting from such transactions included in the Bank’s consolidated financial statements are as follows: 2007

SAR ‘000 2006

SAR ‘000

Directors, other major shareholders and their affiliates:

Loans and advances 5,024,129 3,123,981 Customer deposits 18,065,342 7,472,763 Commitments and contingencies 737,116 1,137,821

SAMBA’s mutual funds:

Investment 50,735 56,677

Customers’ deposits 502,248 75,227

Other major shareholders represent shareholdings of more than 5% of the Bank’s issued and paid up share capital. Income and expenses pertaining to transactions with related parties included in the consolidated financial statements are as follows:

2007 SAR ‘000

2006 SAR ‘000

Special commission income 268,455 262,238

Special commission expense 806,516 507,011

Fees from banking services, net 67,675 135,619

Directors’ remuneration 3,820 1,197 The total amount of compensation paid to key management personnel during the year is as follows:

2007 SAR ‘000

2006 SAR ‘000

Short-term employee benefits 89,275 73,190

Post-employment, termination and share-based payments 13,553 16,514 Key management personnel are those persons, including the Managing Director and CEO, having authority and responsibility for planning, directing, and controlling the activities of the Bank, directly or indirectly.

34. Capital Management

The Bank monitors the adequacy of its capital using the methodology and ratios established by SAMA with a view to


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maintain sound capital base to support business development and meet regulatory capital requirement as defined by SAMA. These ratios measure capital adequacy by comparing the Bank’s eligible capital with its balance sheet assets, commitments and contingencies and notional amount of derivatives at a weighted amount to reflect their relative risk. During the year Bank has fully complied with regulatory capital requirement. Bank management on a periodical basis review capital base and level of risk weighted assets to ensure that capital is adequate for risk inherited in business activities. The management also consider Bank’s business plan along with economic conditions which directly and indirectly after business environment. Overseas subsidiary manages its own capital as prescribed by local regulatory requirements.

2007 2006 Capital Ratio % Capital Ratio %

Tier 1 Capital 17,935,836 15.23 15,299,618 16.41

Tier 1 + Tier 2 Capital 19,383,018 16.46 16,464,756 17.66

Tier 1 capital comprises the share capital, statutory, general and other reserves, minority interest and retained earnings less any intangible assets of the Bank as at the year-end. Tier 2 capital comprise of a prescribed amount of eligible provisions.

2007 SAR ‘000

2006 SAR ‘000

Risk weighted assets Carrying Value/

Notional Credit

Equivalent Risk

Weighted Assets

Carrying Value/

Notional Credit

Equivalent Risk

Weighted Assets

Balance sheet assets

0% 44,364,869 - 36,292,536 -

20% 14,312,075 2,862,415 12,148,345 2,429,669

100% 95,737,029 95,736,960 75,573,932 75,573,932

Total 154,413,973 98,599,375 124,014,813 78,003,601

Commitments & Contingencies

0% 1,257,009 470,619 - 3,786,404 2,974,962 -

20% 13,298,254 9,303,396 1,860,679 12,770,706 11,723,628 2,344,726

100% 27,001,403 11,876,494 11,876,494 22,795,405 10,555,410 10,555,410

Total 41,556,666 21,650,509 13,737,173 39,352,515 25,254,000 12,900,136

Derivatives

0% 5,550,778 - - 8,193,842 - -

20% 144,174,436 5,592,360 1,118,472 74,902,210 3,466,016 693,203

50% 64,809,132 8,458,114 4,229,057 29,561,649 3,228,278 1,614,139

100% 103,014 64,569 64,569 - - -

Total 214,637,360 14,115,043 5,412,098 112,657,701 6,694,294 2,307,342

Grand Total 117,748,646 93,211,079


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35. Investment management services

The assets under management outstanding at end of the year including mutual funds and discretionary portfolios amounted to SAR 29,478 million (2006: SAR 23,588 million). This includes funds managed under Shariah approved portfolios amounting to SAR 9,144 million (2006: SAR 8,383 million). Assets held in trust or in a fiduciary capacity are not treated as assets of the Bank and, accordingly, are not included in the Bank’s consolidated financial statements. Effective January 19, 2008 the investment management services will be provided by Samba Capital and Investment Management Company, a 100% owned subsidiary of the Bank.

36. Share-based payments

The Bank has following share-based payment plans outstanding at the end of the year. Significant features of each of these plans are as follows:

Nature of Plan Long-Term Bonus Plan

Capital Accumulation Plan

Number of outstanding plans

5 2

Grant Date Between Mar 2003 and Nov 2006

Between Jan 2006 and Feb 2007

Maturity date

Between Mar 2008 and Nov 2012

Between Jan 2008 and Feb 2009

Number of options granted on the grant date, adjusted for bonus share issue and split

6,587,125

274,282

Strike price per option at grant date, adjusted for bonus share issue and split

Between SAR 47 and SAR 120


Vesting period

Between 3 and 5 years

24 months

Vesting conditions Participating employees to remain in service

Participating employees to remain in service

Method of settlement Equity Equity

Valuation model used

Black-Scholes Black-Scholes

Fair value per option on grant date after bonus and stock split adjustment




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The weighted average price and the movement in number of stock options are as follows:

Weighted average exercise price (SAR)

Number of stock options

2007 2006 2007 2006

Beginning of the year 77.85 66.69 5,125,738 4,527,910

Granted during the year 118.31 116.48 1,788,842 1,285,440

Forfeited (112.93) (155.95) (77,058) (67,408)

Exercised (72.81) (171.88) (602,752) (620,205)

End of the Year 89.51 77.85 6,234,770 5,125,737 The stock options outstanding at December 31, 2007 have an exercise price in the range of SAR 50 to SAR 150 and weighted average contractual life of three years.

The fair value of stock options granted during the year using the Black Scholes model was SAR 66.6 million (2006: SAR 60.3 million). The inputs used to the model were the share price at the grant date, exercise price, life of the option, expected dividends and annual risk free rate of return. The expected volatility of the share price is based on statistical analysis of daily share price movements. The stock options are granted only under a service condition with no market condition associated with them. The total amount of expense recognized in these consolidated financial statements in respect of share-based payment plans for the year 2007 is SAR 21.8 million (2006: SAR 15.7 million).

37. Comparative figures Certain prior year balances have been reclassified to conform with current year presentation. 38. Post balance sheet events Effective January 1, 2008 as required by Central Banks, the Bank has plans to implement revised Basel framework

on capital adequacy, commonly known as Basel II Framework issued by the Basel Committee on banking supervision.

39. Issued IFRS but not yet effective International Accounting Standards Committee has published IFRS 8 - Operating segments and amendment to IAS

1 – Presentation of Financial Statements, which are mandatory for compliance for the Bank’s accounting year beginning January 1, 2009. The Bank has opted not to adopt these earlier than their mandatory compliance date.

40. Board of Directors' approval

The consolidated financial statements were approved by the Board of Directors on 27 Muharram 1429H (February 5, 2008).

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