annual report2012burgan.com/uploads/burga_annual_review_english_2012.pdfachieved the “best bank in...

Annual Report 2012

driven by you

The Dar al-Athar al-Islamiyyah is one of Kuwait’s leading cultural organisations and home to the al-Sabah Islamic art collection – acknowledged as one of the world’s finest collections of Islamic art. The collection consists of over 30,000 priceless objects, including manuscripts, scientific instruments, carpets, fabrics, jewellery, ceramics, ivory, metalwork and glass dating from the seventh century CE from countries such as Spain, India, China and Iran.

This year, the annual reports of KIPCO Group companies each feature a different key glassware artifact from the al-Sabah collection. The images used within the reports reflect KIPCO’s commitment to protecting and promoting Kuwait’s heritage, while helping to build the nation’s future.

The item pictured here is a Mamluk glass vase made in the Syrian or Egyptian region during the early fourteenth century CE. The piece is an unusual shape and size for its type and is therefore rare. The image is reproduced with the kind permission of the Dar al-Athar al-Islamiyyah.

The KIPCO Group is one of the biggest holding companies in the Middle East and North Africa, with consolidated assets of US$ 26 billion as at 31 December, 2012. The Group has significant ownership interests in over 60 companies operating across 24 countries. The group’s main business sectors are financial services, media, real estate and manufacturing. Through its core companies, subsidiaries and affiliates, KIPCO also has interests in the education and medical sectors.

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Contents

Executive summary 4

Financial highlights 6

Chairman’s statement 8

CEO’s statement 10

Burgan Bank Kuwait operations 12

Corporate Governance 14

Corporate social responsibility report 16

Executive management 22

Jordan Kuwait Bank 24

Gulf Bank Algeria 26

Bank of Baghdad 28

Tunisia International Bank 30

Burgan Bank S.A.KP.O. Box 5389 Safat 12170State of KuwaitTelephone: +965 22988000Fax: +965 22988419www.burgan.com

Established in 1977, Burgan Bank is the youngest commercial Bank and third largest by assets in Kuwait, with a significant focus on the corporate and financial institutions sectors, as well as having a growing retail and private bank customer base.

Burgan Bank has five majority owned subsidiaries, which include Gulf Bank Algeria - AGB (Algeria), Bank of Baghdad - BOB (Iraq & Lebanon), Jordan Kuwait Bank - JKB (Jordan, Palestine and Cyprus), Tunis International Bank - TIB (Tunisia), and the recently acquired Burgan Bank - Turkey, (collectively known as the “Burgan Bank Group”).

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

H.H. Sheikh NawafAl-Ahmad Al-Jaber Al-SabahCrown Prince of the Stateof Kuwait

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Welcome to our Annual Review for the year 2012

Welcome to our Annual Review for the year 2012,

a year that witnessed substantial achievements,

with a solid performance across all activities for

Burgan Bank Group.

Throughout the year, the group was able to maintain

its position as one of the leading financial institution

in the Middle East and North Africa (MENA) region

as well as strengthened its leading position in the

Kuwaiti banking sector through the introduction

of new and innovative products and services and

strong financial delivery and profitability levels.

2012 was the year that witnessed an extensive

number of achievements coupled with substantial

growth across all of Burgan Bank Group’s business

functions and activities.

Financially, the group announced a 10% increase

year on year in its net profits that amounted to

KD 55.6 million. The Group’s solid performance

demonstrates its strong commitment to its

shareholders as well as customers.

During 2012, Burgan Bank Group was recognised

through an impressive array of international

awards from prestigious regional and international

organisations. Burgan Bank achieved the “Best Bank

in Kuwait” award by EMEA finance, Bank of Baghdad

achieved the “Best Bank in Iraq” award by EMEA

finance, Jordan Kuwait Bank achieved the “Best Bank

in Jordan” award by Global Banking and Finance

Review, Tunis International Bank achieved the “Bank

of the Year” by Intercontinental Finance Magazine.

In recognition of its delivery of sound results across

its operations in the region, Burgan Bank Group

also achieved the “Best Banking Group in MENA”

by Global Banking & Finance Review.

Burgan Bank Group is committed to growth through

excellence, relying on its sound corporate strategy,

synergies amongst group members; strong eye for

business opportunities, along with a team of highly

qualified and well experienced banking professionals.

Burgan Bank Group

Members of the Burgan Bank Group

driven by you

Executive summary

The business environment in Kuwait and throughout

the region has undergone a number of challenges

over the course of the year 2012. However, for

Burgan Bank Group, 2012 was a year that proved

the resilience of our business model as the Group

continued to deliver strong growth as well as

solid performance.

It was an eventful year for Burgan Bank Group

on many fronts. Its objectives were met, tangible

results were achieved and returns were maximised

to the group’s wide stakeholders, to ultimately

create a distinct position for the group’s local,

regional and international operations. Markets were

volatile throughout the year, but despite that, the

group managed to increase its position within the

markets it operates from, enhance its profitability,

further improve its asset quality and maintain its

capitalisation and liquidity levels through a set of

successful strategic initiatives.

Key financial indicators for Burgan Bank Group

continued their upward swing, where revenues and

core earnings grew stronger and remained stable.

The overall balance sheet for the group remains

healthy with ideal capitalisation levels and liquidity;

capital adequacy ratio stands at 18.5%. Operating

profit margins have recorded 62.6%, and loans to

deposit ratio is at 86%. Sustainable growth and

diversification of revenue streams are the main

characteristics that describe the Group’s performance

and direction in the upcoming period.

Burgan Bank Group will continue to adopt

international best practices to accommodate

its growth plans. The major focus for the group

throughout the new year will revolve around

further developing its regional and international

operations, increasing market share, as well as

enhancing private and retail banking offerings.

The 2012 Annual Review provides shareholders

with an overview of the Group’s financial and

business performance highlights. Please refer

to the accompanying Financial Review for more

detailed information.

A copy of the annual report can be obtained from

www.burgan.com, or also, if you would prefer to

receive a printed copy of the annual report, please

contact us on +965 2298 8000.

Burgan Bank 2012 ratings

Rating agency Rating highlights

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

Moody’s Bank Deposit Rating A3 / P-2Bank Financial Strength Rating D+

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

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Return on Tangible Equity

+ 20%

Return on Equity

+12%+Operating Profit Growth

17%

About Burgan Bank Group

Established in 1977, Burgan Bank is the youngest

commercial Bank and third largest by assets in Kuwait,

with a significant focus on the corporate and financial

institutions sectors, as well as having a growing retail

and private bank customer base.

Burgan Bank has five majority owned subsidiaries,

which include Gulf Bank Algeria - AGB (Algeria),

Bank of Baghdad - BOB (Iraq & Lebanon), Jordan

Kuwait Bank - JKB (Jordan, Palestine and Cyprus),

Tunis International Bank - TIB (Tunisia), and the

recently acquired Burgan Bank - Turkey, (collectively

known as the “Burgan Bank Group”).

Key highlights in 2012

Solid business performance which led to growth

across key financial indicators

Improved credit quality with drops in NPL ratio

along with an improved overall coverage ratio

Fortified balance sheet leading to strong liquidity

ratios and a solid capital base – with a capital

adequacy ratio of 18.5%

Crystallised inorganic growth plans and

diversification strategy – acquisition in

Turkey completed, along with receiving approval

from Kuwait regulator to acquire 25% stake

in FIMBank, Malta

All leading indicators are in place to sustain

solid operating performance

Financial Highlights

In 2012, Burgan Bank Group continued achieving

sustainable and consistent financial performance.

For the year ending 31st December, 2012, the group

reported a consolidated net profit of KD 55.6 million,

an increase of 10% from KD 50.6 million, which was

reported in 2011. Earnings per share (EPS) grew to

reach 37.8 fils, a 12% growth in comparison with

33.7 fils in 2011.

Moreover, operating income continued its growth

path to reach KD 190 million, reflecting a 16% jump

from the same period of last year. Operating profits,

before provisions, came at KD 119 million, a 17%

increase. With an internal mandate to manage by

returns, Burgan Bank’s returns of equity came at

12.4%, while return on tangible equity was reported

at 20.2%. This is a significant achievement for

Burgan Bank Group, where its returns have been

characterised as the highest amongst its domestic

counterparts.

The group’s key financial indicators continue their

upward path, recording significant improvements.

Overall revenue composition in 2012 and core

earnings grew stronger and remain stable. Loans

and advances reached KD 3.4 billion, signalling an

increase of 50%, and customers’ deposits totalled

to KD 3.9 billion reflecting an increase of 39%, while

operating profit margins and loans to deposit ratio

stood at 62.6% and 86% respectively.

Non-Performing Loans (NPLs) are significantly

improving in their descending trend, in which the

NPL ratio (net of collateral) to gross loans currently

stands at 1.9%, while the loan loss coverage ratio

improved to 171%.

With its significant achievements over the course

of 2012, Burgan Bank Group is well positioned to

achieve higher levels of sustainable growth. The

group will further build on its initial corporate

objectives, moving into the new year, which will

focus on diversifying its regional and international

capabilities, along with enhancing its business units,

namely the retail and private banking operations.

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2009 2010 2011 2012Consolidated balance sheet KD 000’s

Cash and cash equivalents 602,088 624,939 567,352 787,468Treasury bills and bonds with CBK and others 417,049 466,969 419,079 483,588Investment securities 140,952 132,578 148,585 311,021Total assets 4,101,771 4,147,461 4,551,772 5,976,684Total liabilities 3,665,710 3,608,837 3,986,063 5,356,791Shareholders’ Equity 325,475 420,427 447,288 490,760

Consolidated Income Statement

Net interest income 101,829 106,849 104,577 118,940Net fee and commission income 29,966 32,623 38,114 38,143Operating income 154,709 164,873 163,381 190,116Operating profit before provision 111,173 99,614 101,962 118,934Net profit 6,211 4,655 50,562 55,600

Earnings per share (in fils) 5.7 3.4 33.7 37.8

Net

pro

fit

- KD

mill

ion

s

08

637 5

09 10

51

11

56

12

Shar

eho

lder

s’ e

qu

ity

- KD

mill

ion

s 310

08

325

09

420

10

447

11

491

12

Tota

l rev

enu

es -

KD

mill

ion

s

121

08

155

09

165

10

163

11

190

12

Ass

ets

- KD

bill

ion

s

3.9

08

4.1

09

4.1

10

4.6

11

6

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Net profit (KD millions)

55.6+

Earnings per share (fils)

37.8+

Dear shareholder,

I am proud to present to you Burgan Bank Group’s 35th annual report for the year ending December 31st, 2012. The year 2012 proved to be a challenging one, yet rewarding on many levels for the Burgan Bank Group, in which we achieved a solid performance despite geopolitical and economic difficulties.

Chairman’s statement

Together with our strong adherence to a solid

corporate governance framework as well as the

commitment by the Executive Management team

and staff, the group reaped the fruitful results of

our corporate strategy.

With the onset of 2012, Burgan Bank Group has

been delivering a consistent growth story. It has

been a challenging year, namely in terms of the slow

performance of the economy, and limited investment

levels. In spite of that, Burgan Bank Group sought

out to maintain its growth of market share and

continued to build on its inorganic growth strategy.

The consequences of the low economic growth

globally, regionally and locally impacted businesses

in general with low credit demands. At the same

time, the political turmoil in the Arab world has had

negative effect on the region as a whole, presenting

many barriers for economic growth.

However, Burgan Bank Group’s performance proved

to be resilient thanks to the excellent execution of

our business model, intelligent risk management

and strong financial position. During 2012, the

bank gained market share with profitability, grew

both sides of the balance sheet and continued to

build on its expansion strategy by completing the

acquisition of Eurobank Tekfen (Currently operating

under the name of Burgan Bank - Turkey) – a strategic

move toward a more diversified bank and further

sustainable growth.

Burgan Bank Group is on the right trajectory and

I am confident that we will maintain our growth

mode during 2013 and beyond.

Corporate Social Responsibility

Burgan Bank’s Corporate Social Responsibility

promotes and coordinates socially responsible

activities on behalf of the Bank and its employees

across Kuwait. Our support to the wider community

is of paramount importance in our daily work. As

one of the leading local as well as regional financial

institutions, we cater for different segments in the

society to be able to tell their unheard stories and

showcase their creative talents. Our aim is not only

to highlight our financial success, but to document

the legacy we have created across the community.

Every year, Burgan Bank has restated its commitment

towards the Kuwaiti social fabric, and continues

to build on its signature program that is solely

dedicated towards highlighting the roles of special

needs across the country. The bank hosted, for the

11th consecutive year, its annual Al Mass Awards, in

which it honoured the outstanding achievements

of participating special needs patients as well as

organisations that have demonstrated exceptional

commitment in providing the necessary support for

special needs.

Burgan Bank strongly believes that any successful

organisation must enjoy an effective corporate

social responsibility program that is directly linked

to its corporate governance structure. During the

year 2012, Burgan Bank launched an extensive

range of unique social initiatives that demonstrate

its continuous efforts towards providing effective

corporate citizenship practice within the society.

The bank’s activities served as a platform to add

more value to both the bank’s community

development drive as well as catering to the

society’s needs throughout a variety of sectors.

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I am proud of the bank’s social responsibility

efforts, which have evolved significantly and well

recognised by external stakeholders in Kuwait.

The ultimate aim is to build elements of sustainable

development as well as credibility and trust in our

society. More detailed information on the bank’s

social responsibility achievements is provided in

the 2012 Corporate Social Responsibility Report

in the following pages.

The way forward in 2013

We have entered 2013 on solid foundations and we

will continue to manage our position in accordance to

our overall corporate strategy approach. Burgan Bank

Group will further build on the impressive success it

has achieved over the course of 2012 to help promote

more business opportunities amongst our group

members, grow our international presence and

introduce a set of products and services that serve

to add more value to our growing customer base in

Kuwait and across the markets that we operate from.

In 2013, we look forward to another profitable year

and a continuation of our growth story. On behalf

of the Board of Directors, I take this opportunity to

thank the executive management team and staff

under the leadership of Mr. Eduardo Eguren, Chief

Executive Officer, for their continuous hard work and

delivery of strong results. I also take this opportunity

to express our gratitude towards our customers and

shareholders for their continued confidence in our

capabilities.

Majed Essa Al-Ajeel

Chairman

Board of Directors

Majed Essa Al-AjeelChairman

Mohammed Abdul Rahman Al-BisherVice Chairman

Abdul Salam Mohammed Al BaharBoard Member

Ahmed Saud Al-SumaitBoard Member

Faisal Al Radwan Board Member

H.E. Abdul Karim KabaritiBoard Member

Pinak Maitra Board Member

Saudoun Abdullah AliBoard Member

Samer Subhi KhanachetBoard Member

Dear shareholder,

2012 was a year of mixed fortunes for markets around the globe and our region. However, despite the challenging operating business climates locally as well as around the region, the year of 2012 for Burgan Bank Group was a year of solid growth and performance.

CEO’s statement

The year was characterised with consistency in delivering solid results across all metrics of our business & financial scorecard. The group managed to significantly improve profitability, asset quality, capitalisation, liquidity and market position while maintaining its prudent approach toward striking the right “risk & reward” balance.

Throughout the year, we have met our corporate strategy objectives through delivering tangible results, distancing ourselves from the competition and creating a niche for our operations. Our team executional capabilities enabled the group to reap the benefits of the right “formula” adapted – which has proven to be resilient to the adverse economic scene prevailed during 2012 and expected to continue in 2013.

Leading indicators for the group are pointing to the right direction; Burgan Bank group is well positioned to continue building on its strategic initiatives to achieve new heights of its organic and inorganic growth plans aiming at maximising returns to shareholders, customers and staff.

2012 solid growth and performance

Burgan Bank Group reported a consolidated net profit of KD 55.6 million for the year ending 31st December, 2012, reflecting a 10% increase from the same period of 2011 which was reported at KD 50.6 million. Earnings per share (EPS) grew 12% to reach 37.8 fils in comparison with 33.7 fils in 2011. The group’s operating income surged by 16% to reach KD 190 million, while operating profit before provisions soared by 17% to ultimately reach KD 119 million. Returns of Equity reported at 12.4% while Return on tangible equity reported at 20.2%; the highest returns among domestic peers.

Our revenue composition in 2012 has been stable, and core earnings continue to grow stronger. We are continuously increasing our market share with profitability. The group’s loans and advances grew by 50% to reach KD 3.4 billion, whereas customers’ deposits totalled to KD 3.9 billion reflecting an increase of 39%. The group’s operating profit margins stood at 62.6%. The Group’s loans to deposit ratio stands at 86%, as I stated earlier, our leading indicators are pointing north and toward sustainable

growth and stronger revenues diversity. During 2012, Asset quality improved as Non-Performing Loans (NPLs) continued their downward trend. The NPL ratio (net of collateral) to gross loans stood at 1.9% while loan loss coverage ratio improved to 171%.

Our balance sheet remains healthy with optimal capitalisation levels and liquidity; our capital adequacy ratio stands at 18.5%. In 2012, Burgan Bank Group successfully completed an issuance of KD 100 million Lower Tier II Subordinated debt, the first bond issuance of its kind in Kuwait in terms of currency, tenor and size. The initiative was in line with our strategy of raising funds from debt capital markets to strengthen our capital base post acquisition, diversify our investors base and to help in the creation of a yield curve in Kuwait. Burgan Bank Group maintained a robust Liquidity level that is higher than all domestic peers with a liquidity ratio of 31.5%.

Kuwait operations

Our operations in Kuwait have focused on the wide expansion of the product portfolio, aggressive marketing strategies and enhancing our customers’ experience. The delivery of new products has significantly enhanced our competitive position while also providing customers more added value & personalised banking solutions and services. The aggressive marketing strategies have resulted a wider reach and capture of a selective customer base. In 2012, Kuwait’s operations increased its Loans Market share to 12.7%. Our operations excellence in the back, middle and front offices have enabled us to offer a seamless customer experience in all the areas of the bank.

During 2012, Burgan Bank - Kuwait solid financial and operation performance was well recognised by external stakeholders. Burgan Bank reaped a wide array of awards that are the results of “Peers & customers” voting process by renowned publications. From the “Best Corporate Bank”, “Best Private Bank” to the “Best Bank in Kuwait”, Burgan Bank Brand was also recognised by “Best Bank Branding in MENA” and the brand is one of only five brands in MENA that has shown improvement in brand value according to the annual survey by Brand Finance.

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Regional operations

Our regional operations, excluding the subsidiary in Turkey (which was acquired in December 2012), have contributed 51% of the total revenues in 2012. All subsidiaries have demonstrated a consistent and solid revenue performance and continue their operations on strong growth modes.

The group’s subsidiaries are all profitable and growing despite being in what has been seen as risky environments due to the Arab Spring. All of our franchises are in the top quartile, enjoy strong balance sheets and are benefiting from the synergistic business relationship within the group.

As part of the regionalisation strategy and to complement the consistent growth plans, Burgan Bank completed its acquisition process in Turkey to acquire a 99.26% stake of Eurobank Tekfen. Eurobank Tekfen and its subsidiaries (EFG Istanbul Equities & EFG Leasing) became majority owned subsidiaries of Burgan Bank group as of December 21, 2012 and have been renamed to Burgan Bank –Turkey, Burgan Securities and Burgan Leasing as of January 28, 2013.

The Turkish economy and banking sector have continued to demonstrate solid performance and offer opportunities for continued long term expansion. Burgan Bank will benefit from the attractive Turkish banking market through an established franchise led by seasoned management team and offering broad banking services to Corporate, SME, private and Retail clients. Burgan Bank - Turkey is backed by a clear-cut strategy that focuses on the upside geo-economic growth potential Turkey provides, along with the benefits of the bank’s wider group synergies across Jordan, Iraq, Tunisia, Lebanon and Algeria.

Burgan Bank Regionalisation strategy aimed at building and acquiring scale, capabilities and footprint and diversifying our revenues streams has placed Burgan Bank as the most diversified bank in Kuwait.

Moving forward

Burgan Bank Group has a solid foundation to continue building on its growth plans. Our solid performance during 2012 demonstrates that we are well positioned for more success and poised for further sustainable growth. We plan to continue gaining market share with profitability, continue to focus on growing our international operations, continue on our plans to grow our Retail & Private banking franchises and continue building scale, capabilities and footprint through strategic acquisitions.

We are committed to maximising our shareholders’ returns, providing our customers with world-class banking experience, product innovation and competitive value as well as building the best team in the industry.

We are looking forward with confidence to opening a new chapter in the growth and progress of Burgan Bank Group, as we embrace creative and innovative strategies that will transform the nature and status of our operations. I can assure all of our supporters that their trust in the bank is well placed and that there is a renewed commitment by Burgan Bank Group to become a leader in Kuwait and across the region – A profitable regional financial powerhouse.

Eduardo Eguren Chief Executive Officer

Review of the year – Kuwait Operations

Financial performance

During 2012, Kuwait’s operation achieved 12.5% in revenue growth reaching KD 94.2 million and a Return on Equity of 18.3%. Operating profit before provisions grew 16% to reach KD 62.8 million. Asset quality improved significantly – Non-Performing Loans (NPLs) dropped from KD 203.8 million at end of 2011 to KD 157.1 million at the end of 2012. NPLs to Gross loans ratio (net of collateral) dropped to 0.4%.

Operational performance

2012 was the year that Burgan Bank had witnessed an impressive result streak. The bank won an extensive range of awards that demonstrate its leadership and superiority on both the local as well as the regional front. In 2012, Burgan Bank won the coveted “Best Bank in Kuwait” by EMEA Finance. Moreover, the bank also won the “Best Deal of the Year” award from Acquisition international for its acquisition of Eurobank Tekfen. Furthermore, Global Banking and Finance Review online magazine recognised Burgan Bank on two important fronts, the “Best Banking Group in MENA” as well as the “Best Corporate Bank in Kuwait”.

Burgan Bank’s streak of accolades also included the “Best Bank Branding in MENA” award by the Banker Middle East. World Finance, one of the world’s most influential and leading financial magazines has also awarded Burgan Bank with the prestigious “Best Banking Group in Kuwait”. For the second consecutive year in 2012, Burgan Bank won World Finance’s “Best Private Bank” award along with the “Best Private Bank in Kuwait 2012” award from Capital Finance International.

Additionally, for the eleventh consecutive year, Burgan Bank was awarded the JP Morgan Quality Recognition Award, while also receiving the COMMERZBANK award for maintaining high standards of quality, efficiency and reliability while processing Euro currency transactions. In addition, the bank is the only one in Kuwait and one of the very few across the GCC to be certified with ISO: 9001:2008 throughout its banking business.

In 2012, Burgan Bank Kuwait further focused on gaining market share with profitability through expanding its product portfolio and introducing an array of products and services that complement its overall offerings. The delivery of new products has significantly enhanced the bank’s competitive position while also providing customers more added value and personalised banking solutions and services.

Strategic performance and achievements

The bank, over the course of the year, continued building on its strategic initiatives to achieve new heights of its organic growth plans aiming at gaining market share in the core market with profitability.

During 2012, Corporate Banking increased its portfolio by 18% from KD 905 million to KD 1.1 billion. A total of 47 new clients were added to the corporate banking wide & strong customer base. In 2011, Corporate banking launched its new and Kuwait’s first Online Cash Management solution. During the course of the year 2012, 17 new clients subscribed to the new solutions with many others in the pipeline.

Retail Banking has acquired over 3000 new clients during 2012, and continued to launch new innovative products such as “Youth account” and “X-change prepaid card”. Additionally, the Retail bank further expanded the joint promotional activities with a wide array of retailers in Kuwait to provide added-value services to its clientele. During 2012, Retail Banking has re-vamped and introduced it is new Premier Banking offerings targeting the affluent segment with more added-value & personalised services.

2012 marked a year of solid performance and reflected a constant growth trend across the bank’s operations in Kuwait. Through the implementation of prudent risk management and strategic growth initiatives, Burgan Bank - Kuwait maintained its steady growth path, gained market share and significantly enhanced market position.

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During 2012, Financial Institutions Division continued the focus on enhancing the bank’s business development and capabilities. Financial Institutions successfully expanded its portfolio to include counterparties from Qatar, India, Sri Lanka, China and Turkey as well as aiding Burgan Bank Group subsidiaries in Iraq, Algeria and Turkey with Trade issuance & international guarantees. Financial Institutions also managed to successfully expand its trade services to the oil sector.

Treasury completed in 2012 the issuance process of a KD 100 million Lower Tier II Subordinated Bonds, which is considered the first of its kind in Kuwait in terms of currency, tenor and size. The initiative complements the bank’s strategy of raising funds from debt capital markets, and further aims to strengthen its capital base post the acquisition in Turkey and diversify its investor base.

During 2012, Private Banking enjoyed new growth in portfolio and customer base as well as expanded its products & services offerings. The new Ladder Time deposits in Kuwaiti Dinars and US Dollar were successfully introduced and well received by the market. At the beginning of 2012, a new Private Banking Head was appointed with vast international & regional experience in wealth management and private banking.

During the 2012 and following the acquisition of Eurobank Tekfen, Burgan Bank has expanded its regional brand platform across the Turkish market. The bank now is fully operating its newest subsidiary under the name of Burgan Bank – Turkey. The Burgan Bank brand is an award winning one, and extending it is only a natural part of the bank’s expansion strategy which aims at building and acquiring scale, capabilities and footprint. Eurobank Tekfen’s subsidiaries (EFG Istanbul Equities and EFG Leasing) have also been re-branded as Burgan Securities and Burgan Leasing respectively. Burgan Bank Brand is one of only five brands in the MENA region and the only brand in Kuwait that has witnessed an absolute rise in its brand value according to the annual brand valuation conducted by Brand Finance.

Outlook for 2013

In 2013, Kuwait is expected to maintain its elevated levels of investment and social spending, which ultimately will support overall confidence in the market and drive a positive sentiment.

Burgan Bank is confident on building on its consistent growth pace within its operations in Kuwait and will move forward to build on its key strategic objectives:

Continue to increase market share with profitability,

Continue growing the bank’s retail and private banking franchises.

Corporate Governance

Corporate Governance

Since its establishment in 1977 as a public company, Burgan Bank is considered as one of the youngest, yet top performing commercial banks operating in Kuwait. The bank has been shaped to operate successfully on a set of key objectives, which are:

Transparency and operating with good faith and integrity across all of its work with shareholders, customers and regulatory bodies.

An ideal employer. An organisation that factors in a strong

commitment towards social responsibility; bearing in mind the interests of the communities it operates from by encouraging a wide range of interests when able to do so.

Such core objectives reinforce the bank’s varied activities. Burgan Bank’s board has a constant responsibility to safeguard and continue to develop the value of the bank across the interests of both the bank and shareholders alike. The board is considered the overall and final designated body for the decision making process within the bank.

Governance framework

A strong corporate governance framework is what governs Burgan Bank’s board. This process sets out all expectations that include reporting, accountability as well as complete financial governance expectations. Committees working with the bank’s board, every year, review the bank’s internal delegations, policies along with overall procedures with an aim to ensure full compliance with all legislative and regulatory requirements, and ultimately adherence to best industry practice.

Such obligations are looked at very seriously at Burgan Bank, and accordingly, the bank continuously seeks innovative means to enhance its standards of compliance. Employees at Burgan Bank are responsible for carrying the bank’s daily business needs in accordance to all applicable legal as well as regulatory requirements, minimising costs of legal risk while also maximising viable business opportunities.

Code of conduct

Employees at Burgan Bank are expected to operate within high ethical standards. The bank’s code of conduct establishes a strong structure for employees to abide by, which includes elements of behaviour and decision making, to meet Burgan Bank’s different business objectives and legislative obligations.

Corporate Social Responsibility

Corporate Social Responsibility is one of Burgan Bank’s major focuses. The bank has developed an extensive approach towards operating as a good corporate citizen, including its social, environmental and financial responsibilities. An annual Corporate Social Responsibility report appears in this document on page 16.

Internal audit

One of the most important and crucial elements in laying out principles for internal controls is internal auditing. At Burgan Bank, internal auditing establishes a cohesive system for accounting policies, and the nature, scope, objectives and functions of external and internal audits. Moreover, risk internal auditing is a function that is responsible for informing the management of all business risk and compliance with all legal, legislative, industry and bank-wide policy requirements.

To maximise overall output of audit functions and to ensure its independence, the Chief Internal Auditor includes a direct reporting line to the Board Audit Committee, a step that helps internal audit functions to freely determine the scope of internal auditing, and to perform work as well as communicate audit results independently and in a timely and efficient manner.

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Board committees

Board Executive Committee (BEXCO)

Responsibilities: Drive the Strategy Planning, Risk, Asset & Liability allocation, Investment, Operations Policy & Incident reporting

Board Risk Management & Corporate Governance Committee (BRMCGC)

Responsibilities: Ensure corporate governance practices are applied

Board Credit Committee (BCC)

Responsibilities: Determine provisioning policy, credit procedures approval, monitor reports on the exercise of delegation

Board Audit Committee (BAC)

Responsibilities: Review integrity of key financial statements, supervise & review work of external & internal auditors, review & follow up any actions required to ensure compliance with CBK and other regulatory obligations, review systems of internal control

Board Recovery Committee (BRC)

Responsibilities: Review loan recovery policy, follow up on recovery actions in certain cases as requested by BCC

Board Appointments and Remuneration Committee (BARC)

Responsibilities: Recommend to Board and Annual General Meetings candidates to fill any vacancies on the board, to recommend to the board the appointment or dismissal of the CEO, review & approve remuneration disclosure in the Annual report to shareholders

Management Credit Committee (MCC)

Chairman CEO

Board Link BCC

Responsibilities Review credit proposals that are in the CEO delegation band

Management Investment Committee (MIC)

Chairman CEO

Board Link BEXCO

Responsibilities Supervise the investment activities of the Bank, take decisions within its delegated authority and implement BEXCO decisions outside its authority

Management Human Resources Committee (MHRC)

Chairman CEO

Board Link BARC

Responsibilities Review Performance appraisal, bonuses, promotions, new policies, staff satisfaction, scorecard development

Management Audit Committee (MAC)

Chairman CEO

Board Link BAC

Responsibilities Consider internal audit reports and provide response; resolve outstanding issues on time allocate management responsibility and determine time frames for implementing corrective actions

Management Risk Monitoring Committee (MRMC)

Chairman CEO

Board Link BAC

Responsibilities Review the Bank’s policies in line with changing market environment & regulations. Instruct concerned groups propose revisions, modifications to concerned policy for decision of the BAC

Assets Management and Liability Committee (ALCO)

Chairman CEO

Board Link BEXCO

Responsibilities Reviews all aspects of Bank’s Asset-Liability Management including pricing of customer assets & liabilities, gaps and mismatches in interest rates and maturities, liquidity positions, market movements and forecasts of interest and exchange rate durations of assets and liabilities

Management Executive Committee (MEXCO)

Chairman CEO

Board Link BEXCO

Responsibilities Reviews at executive management level the recommendations of the Board Committee

Management committees

Corporate Social Responsibility – 2012 Report

Business performance

Burgan Bank’s consistent positive performance in Kuwait and across the markets in which it operates from is backed by a strong and excellent execution of its strategy and a business model that has proven to be resilient to a less favourable economic and business climate.

Investor Relations – Shafafiya

Burgan Bank held its annual Al Shafafiya Investor’s forum following the bank’s annual general assembly meetings, in which members of the board presented Burgan Bank’s financial earnings report for the year ended December 31, 2011.

The Shafafiya Forum is an annual event that is held amongst Kuwait Projects Company’s (KIPCO) subsidiaries, and reflects a strong corporate governance practice, which promotes corporate fairness, transparency and accountability. The forum provides an ideal gate to discuss financial reports and outlook as well as market predictions openly with shareholders.

Investor Relations – Quarterly Earnings Calls

For the past two years, Burgan Bank holds quarterly earnings conference calls by which investors & analysts dial in to go through a senior management presentation on the bank’s performance. The call aims at granting investors access to management and create a dialogue between the bank and the investment community based on transparency.

Governance

Burgan Bank is strongly committed to the maintenance of a solid Corporate Governance structure practice and framework.

The bank’s Board has a responsibility to protect and enhance the value of the Group in the interests of both shareholders and the group. The Board is the overall and final body for all decision-making within the company. The governance practice at Burgan Bank has been designed to ensure that the bank is effectively managed and that financial industry standards and the Kuwait Stock Exchange, Central Bank and Capital Market Authorities (CMA) statutory obligations are met.

The governance framework, which is underpinned by the Corporate Governance Manual and policies, clearly delineates the separate roles of the Board and bank management. The Board’s Audit Committee monitors developments in the governance area and updates its governance practices to ensure that Burgan Bank continues to maintain the most appropriate standards of governance.

Since 2007, Burgan Bank has been recognised by the Hawkamah Institute for Corporate Governance as one of the leading banks in the MENA region for the implementation of best practice corporate governance methodologies.

Burgan Bank’s overall approach to Corporate Social Responsibility (CSR) begins with a key element; that, as a Kuwaiti company, its brand name, values and work ethics should be on par with the necessities of the Kuwaiti society and with those of the people who rely on the bank.

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Performance culture

Burgan Bank strives to create a culture that is customer focused, collaborative and growth oriented. This culture is an integral part of daily work and a key component in recruitment, selection, learning and development and the performance evaluation of employees and contractors.

Burgan Bank aims to build a competitive advantage by enabling leaders to realise their potential and that of their teams. The bank offers a range of initiatives to develop employees and strengthen its workforce capability.

Personal performance and contribution are promoted at Burgan Bank. Every employee has personal performance objectives that align to the bank’s strategic direction and reflect the culture of respecting customers and caring for our community.

Kuwaitisation percentage increasing to 67%

Burgan Bank, in 2012, has achieved a Kuwaitisation percentage level of 67% across its workforce. This is a significant accomplishment for the bank, in which it has consistently worked towards achieving its long-term strategic objectives of nurturing the best local talent, while also investing in community initiatives that aim at encouraging young people to join the banking sector.

The bank continues to align itself with the developmental goals of the country, especially within this initiative by investing in the Kuwaiti youth. Over the years, the rise in caliber of local talent has continued to improve and impress different segments of our organisation, thus, by joining the Burgan Bank workforce, those potential candidates will receive the required expertise to become future leaders across the banking sector.

Consumer affairs

Burgan Bank’s support to the wider community is of paramount importance across its daily work. As one of the leading local as well as regional financial institutions, the bank caters for different segments in the society to be able to tell their unheard stories and showcase their creative talents.

Ministry of Social Affairs and Labor

In 2012, Burgan Bank was honoured by the Ministry of Social Affairs and Labour for its support and continuous contributions towards the special needs individuals, elderly and orphans. The bank received a token of appreciation, which was awarded by Dr. Abdullah AL Quraini - Director of Public Activities and Media at Ministry of Social Affairs and Labour.

Burgan Bank’s commitment to the people of Kuwait has always been one of the core priorities engraved into the bank’s overall principles. The bank constantly seeks new avenues to fulfil the needs of the less fortunate and bring about a productive change that would revolutionise the meaning of corporate social responsibility within Kuwait.

National Celebrations

Reflecting its deep sense of belonging to the Kuwaiti community, Burgan Bank celebrated Kuwait’s signature national days by taking part in a number of activities to mark the State of Kuwait’s national spirit. Event attendees were provided with gifts to mark the national celebration.

Ministry of Social Affairs and Labor

Microsoft Imagine Cup competition

Burgan Bank sponsored for the second time Microsoft’s annual Imagine Cup, an international premier student technology competition that is aimed at encouraging students to use their creativity and passion to present solutions for many of the world’s toughest challenges.

The bank believes in nurturing young talents and enabling them to discover their potential in an effort to create a sound world. Keeping in line with its social initiatives, Imagine Cup is an innovative concept that paves the way for top talents to hone their skills as software experts on a common, competitive and productive platform.

Indian Doctors Forum

Burgan Bank was honoured by the Indian Doctors Forum for its endorsement to launching the 2012 Health Guide. Burgan Bank’s support is in line with its efforts to spread more health education and other community related medical issues. The year’s health guide has been published with a fundamental theme of “Cancer Awareness”.

Burgan Bank is fully committed to organisations and associations such as the Indian Doctors Forum, which reflects its role as a socially responsible Kuwaiti leading financial institution. The bank continues to open more chapters in its dedication towards the social fabric of Kuwait.

Bloom Expo

Burgan Bank sponsored its first children’s exhibition ‘Bloom Expo’ through its Kids account “Buba”. The children’s event held a series of competitions, seminars, national songs, stories, puppet shows. The bank’s famous “BuBa” Account character entertained the attendees and their families at the exhibition.

Ahmadi Music Group

Burgan Bank sponsored ‘The Desert Song’ organised by The Ahmadi Music Group and directed by Richard Bushman, which featured an ensemble of theatre artists and a full symphony orchestra that performed to Siegmund Romberg and Oscar Hammerstein’s opera.

The opera is a great platform for highlighting and showcasing the culturally rich traditions of the Arab world. Burgan Bank is a keen supporter of promoting events that highlight and raise public awareness on local and regional cultures. The Desert Song is one of very few operas in existence set in the Arab world. It tells the story of the efforts of the French in Morocco, in about 1910, to suppress rebellion by a band of desert outlaws, the Riffs.

KIPCO media dinner

As part of its Media Relations activities and by its belief in the importance of the Media role in society, KIPCO hosted a media gathering and dinner in 2012 on behalf of its operating companies to thank the media and acknowledge their efforts, support and role in the society.

The media event was attended by the local media. Burgan Bank as a subsidiary of KIPCO was represented by its corporate communications team and maintains an on-going dialogue with both local and regional media.

Community relations

Burgan Bank’s overall approach to social responsibility begins with a key element; that, as a Kuwaiti company, its brand name, values, and work ethics should be on par with the necessities of the Kuwaiti society and with those of the people who rely on the bank.

Bloom Expo

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11th Al Mass Awards

Burgan Bank restated its commitment towards its annual corporate social responsibility initiative by successfully hosting the 11th Annual Al Mass Awards. The event honoured the outstanding achievements of participating special needs patients as well as organisations that have demonstrated exceptional commitment in providing the necessary support for special needs.

Nine outstanding individuals were presented awards in three categories – the Blue diamond award for those with a cognitive or mental disability; the Yellow diamond award for those with physical disabilities; and the White diamond award, for those with a sensory disability. Furthermore, three organisations were also commended for their work in supporting special needs throughout their daily activities.

The Al Mass Awards, which began as a simple idea to reward special needs individuals as well as organisations that support children and people with special needs eleven years ago, has gained increasing popularity and national admiration over the years.

Supporting the Kuwait Association for the Care of Children in Hospital’s activities

Burgan Bank reiterated its commitment to the community by rendering its support to the Kuwait Association for Care of Children in Hospitals (KACCH). This is an ongoing commitment which is now in its 11th year. Supporting healthcare initiatives has been an integral part of Burgan Bank’s Corporate Social Responsibility framework and Corporate Citizenship program, Burgan Bank is proud to be a benefactor towards such leading medical projects, and KAACH’s humane initiatives.

Over the past 10 years, Burgan Bank’s continual contributions have helped support the development of healthcare and paediatric facilities in several hospitals which are part of the KACCH, often helping children and their families fund treatment and recovery from fatal and terminal illnesses, as well as providing entertainment.

Tisaheel Small & Medium Enterprises

Burgan Bank sponsored Tisaheel Center for Small Business Development’s workshop on enhancing the role of small & medium enterprises (SMEs). The event shed light on various opportunities small businesses can capitalise on, along with the impact that this sector has on the overall development of the economy. A number of workshops focused on key essentials of a successful business start-up.

Burgan Bank is committed to supporting the growth of SMEs in Kuwait. The bank believes that developing a group of diverse and competitive small businesses is an important factor towards achieving sustainable growth, while also contributing substantially to the economy and providing a strong platform for the growth of new industries as well as strengthening existing ones.

Proud to be Kuwaiti (P2BK)

The Proud 2 Be Kuwait (P2BK) forum was established in 2008, under the patronage of His Excellence Sheikh Nasser Mohammed Al Ahmad Al Sabah, Prime Minister of Kuwait. The forum provides a platform to showcase the achievements of Kuwaiti youth in business, sporting, cultural and social pursuits.

Burgan Bank is proud to be a corporate sponsor of P2BK, supporting the development and achievements of Kuwaiti youth.

11th Al Mass Awards

Re-opening the virtual dealing room at Kuwait University

Burgan Bank and KIPCO Asset Management Company (KAMCO) sponsored the re-opening of the virtual dealing room at Kuwait University. The new virtual dealing room, which includes state-of-the-art technology and the latest software used for financial trading and office furniture, all combined in a dynamic and vibrant ambience that provides a flexible and interesting educational environment for students.

The dealing room offers students a working virtual platform to explore all of the intricacies of trading, such as foreign exchange, derivatives, interest rate futures, fixed income instruments and equities. The initiative marks the transfer of knowledge between Burgan Bank and KAMCO, where their technical and financial analysts will serve as instructors for specific modules at the dealing room.

Gulf University of Science and Technology’s Youth Conference

Burgan Bank sponsored the First Youth Banking Conference organised by the Gulf University of Science & Technology in Kuwait. Chairman of the Bank, Mr. Majed Essa Al-Ajeel presided over the event and explained how a large sector of the Kuwaiti economy has been built on banking.

When thinking of banking, it is not only about the unlimited opportunities for personal career growth that should come to mind, but also how Kuwait can have one of the top economies through innovation and dedication to the banking sector. The event provided a chance to gain a deeper understanding of what a career in banking is about, and the different paths that can be followed.

Gulf Traffic Week 2012

Burgan Bank took part in the GCC’s Gulf Traffic Week initiative, which was held to highlight the importance of safety driving, and promoted methods of reducing traffic accidents. The bank collaborated with the Ministry of Interior’s Traffic Department, to deliver a wide range of tactical programs that aimed at involving both citizens as well as residents.

The campaign, part of the GCC’s Traffic Departments’ road safety initiative, helped increase levels of awareness on the dangers of traffic accidents. It served as a means for exchanging data and traffic expertise among the participating delegations along with raising a diverse array of topics related to traffic in Kuwait. The initiative was held under the theme of “together to reducing traffic accidents” reflecting the need to consider safe traffic measures to minimise accidents.

Ramadan and Gergean Festival

Every year Burgan Bank hosts community events during the holy month of Ramadan. During Ramadan 2012 the bank focused on hosting a range of Gergean themed events for Kuwaiti children and their families a number of venues.

The bank also hosted Gergean celebrations with the Special Care Complex at the Ministry of Social Affairs and Labour, the Disabled Sports Club and the Kuwaiti Society for Guardians of the Disabled.

Healthy day at Burgan Bank

Burgan Bank held a two day internal health awareness program at its Head Office, in collaboration with Flex Resorts and Blue Passion Company. The campaign took place at the bank’s head office and aimed at introducing a variety of beneficial offerings that aimed at promoting a healthy lifestyle.

Such initiatives are part of Burgan Bank’s overall internal communications framework which aims at promoting a strong internal corporate culture.

Summer Training ProgramRamadan and Gergean Festival

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Breast cancer awareness

Burgan Bank held a breast cancer awareness day for its female employees as well as Kuwait Project Company’s (KIPCO) female employees in collaboration with Taiba Clinic. The bank set up a booth at its head office, which aimed at allowing the attendees to benefit from free checkups. The bank also provided educational leaflets that contained the most updated information on breast cancer from the World Health Organisation to female employees, as well as consultations on their general health in an effort to raise more awareness on various health issues.

The breast cancer early detection awareness initiative is part of the continued development of the Burgan Bank’s successful contributions to raise awareness on the disease, and to encourage women to conduct preventive checkups.

Beat diabetes walk

In celebration of World Diabetes Day, Burgan Bank participated in the annual “Beat Diabetes Walk” which was organised by Landmark Group. The event included a large group of participants who commenced their walk from the Yacht Club all the way to the Green Islands. Throughout the walk, a number of testing centers were available to provide free diabetes check-ups.

World Diabetes Day is a global celebration that occurs in more than 200 diabetic member associations, in over 160 different countries. The cause unites medical professionals, associations and individuals all over the world to celebrate World Diabetes Day.

Summer training program

In 2012, Burgan Bank launched its annual summer training program for talented young students. The program has been tailored to provide students with a head start in meeting the challenges that lie ahead in their fledgling careers in the world of finance. Along with gaining invaluable, hands-on experience through assisting various seasoned finance professionals at both the Head Office and branches, the bank is also offered classroom training programs to increasing students’ knowledge and practical experience.

High school visits

Burgan Bank hosted a group of elementary students from Al Juwaireya Bint AlHareth School at the bank’s headquarters. Students were taken around the different departments of the bank and met with a number of the staff as they got to learn about how banks operate. The bank also visited Bayan High School for Girls to provide a brief induction on the banking sector and its overall operations.

Burgan Bank is keen on creating excitement amongst students at different education levels across the world of banking. During such visits, the bank’s teams focus their efforts on the importance of saving.

Beat Diabetes WalkBreast Cancer Awareness

1. Adrian Gostuski Group Chief Operations Officer Adrian joined Burgan Bank in 2011. As the Group Chief

Operating Officer, Adrian is responsible for leading the bank’s operational areas of finance, legal, operations and technology.

Prior to joining Burgan Bank, Adrian was the CFO of Operations and Technology for Barclays Bank – Retail. From 2003 to 2008, Adrian held the role of CFO of Latin America and Banamex for Citigroup – Corporate. Whilst at Citigroup, Adrian also held the role of CFO – Consumer Banking in Singapore and was part of the management of Citigroup’s equity investments in Argentina and debt and equity investment in Latin America, Eastern Europe and Asia Pacific. Adrian has also worked as an auditor at PWC.

2. Amr El-Kasaby Group Chief Internal Auditor Amr joined Burgan Bank in 2007. As the Group Chief Internal

Auditor, Amr is responsible for leading the internal audit functions for Burgan Bank and its five subsidiaries.

Amr has 24 years’ experience in auditing and accounting, and has led audit engagements across a broad section of industries including banking, trading, investment management, manufacturing, industrial, automotive and oil and gas while in Ernst & Young. Prior to joining Burgan Bank, Amr was the Acting Chief Internal Auditor for the Kuwait Finance House.

3. Bashir Jaber Head of Corporate Communications Bashir joined Burgan Bank in 2006. As the Head of Corporate

Communications, Bashir is responsible for managing Burgan Bank’s corporate & public affairs, which includes corporate marketing, investor relations, brand management, relationship management, external communications and corporate social responsibility.

Bashir has over 10 years’ experience and prior to joining Burgan Bank, Bashir held various positions at Ogilvy & Mather – an international branding, marketing, advertising, and public relations group.

4. Eduardo Eguren Chief Executive Officer Eduardo was appointed as the Chief Executive Officer of

Burgan Bank in September 2010. Eduardo has over 26 years’ experience in global corporate,

retail and commercial banking. He has held senior leadership roles across Latin America, Europe, Asia, North America and Africa, responsible for driving development and implementation of local and regional strategies.

Before joining Burgan Bank, Eduardo was the CEO of Global Commercial Banking for Barclays Bank. Prior to this Eduardo held senior leadership roles with Citibank and Citigroup.

5. Halah El-Sherbini Chief Human Resources and Development Officer Halah joined Burgan Bank in 2011. As the Chief Human

Resources and Development Officer, Halah is responsible for leading the development of strategies to further build the capabilities and skills of Burgan Bank’s staff, so that the bank can deliver its business objectives and aspirations.

Prior to joining Burgan Bank, Halah held various roles in human resources at Ahli United Bank, Citibank Kuwait, Gulf Bank and National Bank of Kuwait.

6. Huda Al-Shemmari Head of Strategic Business Development and Chief of Staff Huda joined Burgan Bank in 2003. As the Head of Strategic

Development and Chief of Staff for the CEO, Huda is responsible for the identification and assessment of organic and in-organic business growth opportunities.

Huda has over 14 years’ experience in trading, investment management and treasury analysis. Huda has utilised this experience as a guest lecturer in banking studies for the Kuwait Institute of Banking Studies.

Prior to joining Burgan Bank, Huda held various treasury, investment and international client management roles at the Commercial Bank of Kuwait.

Named in alphabetical order (first name basis)

1 2 5

10

6

11

7

12

8

13

9

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Management Team

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7. Ivan Jensen Chief Information Technology Officer Ivan joined Burgan Bank in 2007. As the Chief Information

Technology Officer, he is responsible for establishing IT governance and ensuring that IT supports and enables the bank’s strategy.

Prior to joining Burgan Bank, Ivan held technology leadership roles within NBK, The Commercial Bank of Qatar and IBM.

8. Khalid Fahad Al Zouman Chief Financial Officer (Acting Chief Risk Officer) Khalid joined Burgan Bank in 2000 as the Head of Risk

Management, before moving into the role of Chief Financial Officer. Khalid has over 21 years’ experience working in Kuwait and international markets in financial management – with a particular emphasis on accounting and auditing.

Prior to joining Burgan Bank, Khalid held senior financial management roles with Ernst & Young in Kuwait and the United States.

9. Mahmoud Ezzat Chief Legal Counsel Mahmoud joined Burgan Bank in 2000 as a Legal Advisor.

In 2009, Mahmoud was appointed as Chief Legal Counsel. As Chief Legal Counsel, Mahmoud’s team is responsible

for providing and managing the bank’s legal services. Mahmoud has over 20 years’ experience as a lawyer, having held in-house roles within financial institutions and in law firms.

10. Mones Bazzy Head of Private Banking Mones joined Burgan Bank in 2012. He has over 30 years of

experience in managing private banking as well as wealth management activities across a number of leading financial institutions around the region.

Prior to joining Burgan Bank, Mones held various senior roles in private banking functions across a number of prominent institutions that included Mashreq Bank as well as Merrill Lynch.

11. Raed Al Haqhaq Chief Banking Officer Raed joined Burgan Bank in 2000. Raed has over 17

years’ local and international experience in corporate and investment banking. Raed began his career at the Kuwait Investment Authority and then moved to the International Investment Group where his last role was Assistant Vice President.

12. Steven Lee Reece Group Chief Risk Officer Steven joined Burgan Bank in 2012 as Group Chief Risk

Officer. Steven has over 30 years’ of transnational risk experience. His remit at Burgan Bank includes being responsible for all risk activities related to the group’s operations. Steven held risk management roles at a number of prominent financial institutions that include Al Khalij Commercial Bank in Qatar, National Commercial Bank in Saudi Arabia, along with various senior roles at Citibank around the world.

13. Venkatakrishnan Menon Chief Operations Officer Venkat joined Burgan Bank in 2005. As the Chief Operations

Officer, Venkat is a member of the Management Executive Committee and is responsible for leading the bank’s enterprise project office, general services and administration department along with the operations’ group. Prior to joining Burgan Bank, Venkat held senior management roles at BNP Paribas, Standard Chartered Bank and HDFC Bank.

14. Vinit Chandra (resigned in January 2013) Group Head of International Banking & Treasury (IBT),

Private & Retail Banking Vinit joined Burgan Bank in 2012. In his role, Vinit was

responsible for enhancing Burgan Bank Group’s IBT, Private and Retail Banking services. His responsibilities revolved around placing the strategic plans as well as developing the leadership function of these important business groups, while also assisting the management in realising profitable growth opportunities by applying an overall effective and efficient process across their respective areas. Prior to joining Burgan Bank, Vinit assumed the role of CEO Emerging Markets - Global Retail and Commercial Bank at Barclays, in which his expertise led to the bank’s rapid organic and inorganic expansion.

Review of the year

Jordan Kuwait Bank (JKB) was established in 1976 as a joint venture by Jordanian, Kuwaiti and other Arab investors. Burgan Bank acquired a 51.1% stake in JKB in 2008.

Jordan Kuwait Bank is Burgan Bank’s largest subsidiary providing 15% of the consolidated balance sheet total assets.

Financial performance review

2012 was a difficult period for the Jordanian economy with escalation in political tensions in the region and waves of refugees pouring into the country straining its limited resources. This affected tourism and foreign investments in Jordan, weighing on the nation’s annual growth.

Despite the difficult operating environment, revenue climbed 7% to reach KD 46.2 million, and operating profit grew by 5.7% reaching KD 31.9 million. Net profit grew by 10.8% reporting KD 15.3 million. Loans & advances grew by 14.5% while deposits grew 1.5%, Prudent management of operating expenses and adherence to credit control procedures were key factors for steady and resilient performance.


In 2012, JKB was honoured with three awards by the Global Banking & Finance Review (GBAF): Best Bank in Jordan, Best Private Bank in Jordan and the Best Co-branded Credit Card in Jordan. The bank achieved phenomenal growth in retail credit portfolio coming up with innovative products.

A key milestone in 2012 was achieved when the bank led, arranged and participated in a syndicated loan to Al Maabar Abdoun Real Estate Development Company. This is estimated to be the largest syndicated loan in Jordan.

Moreover, JKB co-arranged and participated in the syndicated AsSamra Wastewater Treatment Project, in addition to unilaterally granting the National Electric Power Company (NEPCO) a long-term facility of JOD 50 million.

JKB’s International Department opened new communication channels with CitiBank and Deutsche Bank to expand its network and establish an international presence. An agreement with Signature Net was also accomplished to manage correspondent banks’ signatures electronically.


During 2012, Jordan Kuwait Bank conducted some strategic restructuring exercises to enhance operational efficiency in the marketing & sales and branches administration departments. Aimed at improving up-time and reliability of the banking system, JKB signed an agreement with ICSFS for a new Core Banking System, simultaneously providing 171 training courses to 1,861 employees for overall improvement in skills and capabilities.

Outlook for 2013

JKB continues to have a positive outlook despite the political and economic troubles gripping the region at large. The bank is rearing to advance forward on all fronts: a new data centre to meet higher standards, a new Payment Switch for a leap in functions like cash recycling, electronic cheque clearing and instant issuing, and implementing a new system called BANKS to greatly improve a variety of operations.

The bank has plans to launch an array of MasterCard offerings to clients including credit, debit and prepaid options. These new initiatives will be fundamentally geared towards achieving growth, constantly exploring finance and investment opportunities in emerging business sectors.

Jordan Kuwait Bank

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Jordan

Palestine

Cyprus

The item pictured here is a glass ewer made in the Iranian region in either the twelfth or thirteenth century CE. The piece is pear-shaped with a funnel neck. The decoration is formed by trails of contrasting

blue glass in a zigzag pattern. The image is reproduced with the kind permission of the Dar al-Athar al-Islamiyyah.

Contribution to group’s revenues

24%

Contributionto group’s total assets

15%+

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The item pictured here is a glass ewer made in the Iranian region in The item pictured here is a glass ewer made in the Iranian region in

Review of the year

Gulf Bank Algeria commercial bank was established in 2003. The bank is focused on contributing to the economic and financial development of Algeria by offering a wide businesses as well as individuals a comprehensive range of financial products and services.

Gulf Bank Algeria (AGB) is one of the country’s most dynamic and successful financial institutions. The bank prides itself in concurrently launching and successfully establishing robust Islamic financing and conventional banking facilities through an extensive network of 33 branches operating around the country.

Gulf Bank Algeria is a Burgan Bank subsidiary contributing 6.1% to the consolidated balance sheet total assets.


In 2012, the bank announced a turnaround in its results, reflecting a consistent streak of growth factors across all key indicators. For the period ending 31st December, 2012, AGB announced a net profit (after tax, and attributable to shareholders) of KD 13.7 million, marking an impressive 42.7% increase over KD 9.6 million which was reported in 2011.

Moreover, the bank’s revenues also witnessed an increase of 52% to record KD 35 million. Customers’ loan came at KD 230 million, reflecting an overall increase of 54% reported in the same period of the previous year, and assets continue their upward swing to post a KD 389.7 million, a 51% rise from last year.

By the end of 2012, AGB’s total shareholder equity had reached KD 55.7 million.


During 2012, AGB focused on delivering a superior and integrated customer service. The bank has been certified as an acquirer of all VISA transactions, as well as a Platinum Card and MasterCard issuer. Furthermore, AGB became the first exclusive bank across the country that offers VISA Platinum cards to its customers. The bank also established a Mini Switch to allow the integration of a number of leading card brands.

In addition, the bank’s product development team received the necessary approvals and authorisations to launch related products and services that include Leasing as well as Shipping Insurance. Moreover, the bank prepared for the launches of dematerialised savings accounts along with the “Academy of AGB Partners” a dedicated unit that serves the bank’s SMEs client base.

Over the course of the year, AGB inaugurated three new branches and developed one self-banking branch. It also developed a new mobile transaction service (MTS) which enables the availability of money ordered ATM to be withdrawn on to other ATMs and is based on serial codes received from mobile devices.


AGB embarked on a range of strategic initiatives that aimed at enhancing its product and service offerings. The bank applied a WorkFlow Credit system that is solely aimed at credit applications, and goes through from the initiation process to the implementation phase of the decision making and effective recovery procedures. In addition, the bank, in collaboration with FileNet (IBM) launched an electronic document management system to specifically manage its accounting records in conjunction with initiating WorkFlow Project Documentary Credit practice that processes the bank’s operations from the opening all the way through the settlement stage.

In 2012, AGB acquired two mobile ATMs, a service that is exclusive in Algeria. Each ATM is intended to be installed across major country-wide events with an ultimate objective of demonstrating the bank’s leadership in product and service innovation.

Outlook for 2013

Gulf Bank Algeria is optimistic about the outlook of the New Year, and has placed a set of strategic objectives that will guide its overall operations and performance.

In 2013, the bank will continue its ongoing expansion of its branch network, along with officially and exclusively launching the MasterCard in the Algerian market. It will also develop and invest in its staff who is involved in credit system workflow transactions along with all sales teams in an aim to expand its growing customer base.

Gulf Bank Algeria

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Algeria

The item pictured here is a glass decanter made in either Egypt or Syria during the mid-fourteenth century CE. The piece features

blue and red enamel and gilt. The decoration consists of medallions with images of lions attacking gazelles. The object is intact and the

enamel work is in good condition. The image is reproduced with the kind permission of the Dar al-Athar al-Islamiyyah.


18%


6.1%+

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Review of the year

Bank of Baghdad was established as an Iraqi private stock company in 1992. In 1998 the Central Bank of Iraq amended Bank of Baghdad articles of association, to allow the bank to expand its service offering to include personal and international banking.

In 2010 the Bank of Baghdad received approval from the Central Bank of Lebanon and the Central Bank of Iraq to expand its operations into Lebanon. The bank’s expanded footprint has allowed international business in Lebanon and Middle East to forge stronger commercial links with Iraq.

Bank of Baghdad is one of the largest private commercial banks in Iraq. The bank currently has 40 branches as of 31/12/2012, and 43 ATMs spread across the country.

Bank of Baghdad is a Burgan Bank subsidiary contributing 4.5% to the consolidated balance sheet total assets.


Bank of Baghdad enjoyed solid growth in 2012, attributed to continued improvement to the bank’s retail and wholesale banking operations. The bank reported a net profit tax after tax of KD 5.3 million. In 2012 the bank’s total shareholder equity reached KD 49.6 million), reflecting an increase of 48% from 2011.


During the past year the bank has continued to implement its plan to improvement its retail and wholesale banking services and has introduced a number of new technology initiatives to enhance the performance and productivity of its wide branch network. In 2011 Bank of Baghdad was the first bank in Iraq to introduce magnetic cheque processing and inter-branch communication and data processing.

In February 2012, Bank of Baghdad was recognised as the “Best Local Bank” at the Middle East Banking Awards. The award recognises the bank’s excellent track record in the provision of retail banking, assets management and brokerage activities.


In 2012 Bank of Baghdad continued toward building on its primary strategy of attracting corporate business. This resulted in steady gains across the bank’s assets and liability portfolio. The bank also continued its drive to offer international and local corporate clients bundled services. This initiative led to steady growth in commission-based income stream.

Bank of Baghdad is committed to invest in its human capital to ensure its customers receive the highest quality services delivered by skilled knowledgeable staff, to support this strategic objective, the bank opened two new staff training and development centres during the year.

Outlook for 2013

Despite the challenges that Iraq continues to face, Bank of Baghdad is optimistic about the credit growth possibilities for 2013.

The bank is well positioned for growth in 2013, which is underpinned by its continued focus on expansion of the branch network footprint and the provision of quality service to clients.

Bank of Baghdad

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Iraq

The item pictured here is a glass ewer made in either the Iranian or Mesopotamian (modern Iraq) region in either the

ninth or tenth century CE. The piece is made from translucent green glass and has a long flared neck. Opposite the spout

there is an L-shaped handle. The image is reproduced with the kind permission of the Dar al-Athar al-Islamiyyah.


6.5%


4.5%+

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Review of the year

Tunis International Bank (TIB) was established in 1982 as the first fully licensed banking corporation under Tunisian law. TIB operates under the supervision of the Central Bank of Tunisia and is a member of the Tunisia Clearing House Association.

Tunis International Bank provides a comprehensive range of international financial services for corporations, financial institutions, individuals and governments in Tunisia and abroad.

Tunis International Bank is a Burgan Bank subsidiary contributing 2.5% of the consolidated balance sheet total assets.


Despite the tight economic conditions and declining interest rate, Tunis International Bank maintained a strong balance sheet and registered a growth of 6.7% in customer deposits and 5.7% in assets.


In 2012, Tunis International Bank was awarded The Annual Golden International Award of Europe for Quality and Technology by the International Congress of Business Initiative Directions (BID).

The bank’s continuous efforts to improve customer service led the bank get recognised by InterContinental Finance Magazine for excellence in customer service.


True to the TIB’s continuous search for improvement, a new IT management team was put in place to provide better customer service and MIS that helped in key strategic decisions. The new e-banking initiatives gave an impetus to banking transaction as customers used online facilities.

Outlook for 2013

The 2013 outlook for Tunisia is one of hope despite the persistence of political and economic instability. The country is waiting for the adoption of a new constitution and the formation of a democratically elected government to make good use of the multilateral support from IMF, Europe, Japan, USA and others.

Tunis International Bank is looking to take advantage of the group’s international network to enter regional markets.

The bank will also seek to bolster its lending activities by identifying prominent and promising sectors: the aviation industry.

Growing its ambitions in Islamic finance, TIB may participate in the Sukuk transaction of Tunisair to finance the acquisition of four airplanes. The bank aims to co-lead and co-manage the transaction with Burgan Bank.

Tunis International Bank

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Tunisia

The item pictured here is a glass bottle made in the Iranian region in either the twelfth or thirteenth century CE. The piece

is made from translucent green glass with applied purple glass. The bottle has an almost globular shape that becomes

conical at the bottom. The image is reproduced with the kind permission of the Dar al-Athar al-Islamiyyah.


1.7%


2.5%+

+

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How to obtain our 2012 Financial Statements:

Shareholders attending our General Assembly meeting will be provided with a draft printed copy of the Financial Statements for their approval.

Shareholders can request a printed copy of the Financial Statements to be sent to them by courier seven days before the advertised date of the General Assembly; please call Burgan Bank’s Corporate Communications Department on +965 2298 8000 to arrange this.

Shareholders can request a copy of the Financial Statements to be sent to them by email seven days before the advertised date of the General Assembly; please contact [email protected] to arrange this.

Shareholders can download a PDF copy of the Financial Statements seven days before the advertised date of the General Assembly from our company website – www.burgan.com

كيفـية الحصول على نسخة من بياناتنا المالية لعام 2012

العمومية الجمعية الذين يحضرون سيتم تزويد المساهمين للشركة بمسودة نسخة مطبوعة من البيانات المالية للموافقة عليها. بإمكان المساهمين طلب تزويدهم بنسخة مطبوعة أيام اليد، وذلك قبل سبعة المالية ببريد تسليم البيانات من من تاريخ اجتماع الجمعية العمومية المعلن عنه. ولهذا الغرض، يرجى االتصال بإدارة االتصاالت التسويقية فـي بنك برقان على

الهاتف رقم 8000 2298 965+ لترتيب ذلك.

بإمكان المساهمين طلب إرسال نسخة من البيانـات الماليــة إليهم أيام من تاريــخ اجتماع الجمعية بالبريد اإللكتروني قبل سبعة العمومية المعلن عنه. ولهذا الغرض، يرجى مراسلتنا على عنوان

البريد اإللكتروني التالـي: [email protected] لترتيب ذلك.

بإمكان المساهمين الحصول على نسخة من البيانات المالية فـي صيغة ملف PDF قبل سبعة أيام من التاريخ المعلن عنه الجتماع الجمعية العمومية، وذلك من موقع الشركة على شبكة اإلنترنت

www.burgan.com

Members of the Burgan Bank Group

For further information on our 2012 Financial Statements or for extra copies of this review, please telephone +965 2298 8000

P.O. Box 5389, Safat 12170, Kuwait, Tel: +965 2298 8000 Fax: +965 2298 8419www.burgan.com

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Annual Financials 2012

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The Dar al-Athar al-Islamiyyah is one of Kuwait’s leading cultural organisations and home to the al-Sabah Islamic art collection – acknowledged as one of the world’s finest collections of Islamic art. The collection consists of over 30,000 priceless objects, including manuscripts, scientific instruments, carpets, fabrics, jewellery, ceramics, ivory, metalwork and glass dating from the seventh century CE from countries such as Spain, India, China and Iran.

This year, the annual reports of KIPCO Group companies each feature a different key glassware artifact from the al-Sabah collection. The images used within the reports reflect KIPCO’s commitment to protecting and promoting Kuwait’s heritage, while helping to build the nation’s future.

The item pictured here is a Mamluk glass vase made in the Syrian or Egyptian region during the early fourteenth century CE. The piece is an unusual shape and size for its type and is therefore rare. The image is reproduced with the kind permission of the Dar al-Athar al-Islamiyyah.

The KIPCO Group is one of the biggest holding companies in the Middle East and North Africa, with consolidated assets of US$ 26 billion as at 31 December, 2012. The Group has significant ownership interests in over 60 companies operating across 24 countries. The group’s main business sectors are financial services, media, real estate and manufacturing. Through its core companies, subsidiaries and affiliates, KIPCO also has interests in the education and medical sectors.

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1. Introduction

These instructions including subsequent amendments thereto cover comprehensively the calculation of the Capital to Risk Assets Ratio (CRAR) under Pillar 1 of RCAS, the supervisory oversight under Pillar 2 and the disclosure of information under Pillar 3. Given below are the necessary disclosures pertaining to the Bank’s Capital Structure, Risk Management objectives and policies, information relating to the Credit Exposure, Credit Risk Mitigation, Market Risk and Operational Risk as required under the CBK regulations. In arriving at the CRAR, in accordance with the regulations, the Standardised Approach has been used for the computation of the Risk Weighted Assets (RWA).

2. Subsidiaries And Significant Investments

i The CBK regulations apply to:

Burgan Bank S.A.K

ii Basis of Consolidation

The Bank has five subsidiaries as on 31st December 2012. These are the following commercial banking entities acquired during the years 2008 – 2012 whose financials are consolidated in the Bank’s financial statements.

Pillar 3 disclosures for the full 2012 year

Comments have been made, where appropriate, in regard to the approach and process in these subsidiaries. The practices in all the group entities are not uniform due to banking practices and regulatory requirements in the respective countries of operation. However, a level of harmonization has already been put in place for the purpose of meaningful consolidation of the financial position & performance and reporting in accordance with Basel II. Also, under an ongoing process of post-acquisition integration, international best practices as are applicable and practical in the region have been identified and are being implemented in all the entities.

iii. Restriction/Impediments on Fund Transfers

Transfer of funds or regulatory capital within the group entities is subject to the applicable rules and regulations in the respective jurisdictions. While some of the countries of incorporation of the subsidiaries have liberalized foreign exchange regimes others have exchange control regulations governing cross-border transfer of funds. Any transfer of regulatory capital among the group entities is subject to the applicable laws and regulations and the receipt of necessary approvals from the respective authorities.

3. Capital Structure

i. Main features of Capital Instruments

The Bank’s paid up capital entirely consists of ordinary shares which have proportionate voting rights. These are listed in the Kuwait Stock Exchange and are actively traded thereon.

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

Burgan Bank Subsidiaries

Name Country of incorporation

Paid-up Capital

Effective holding %

Date of becoming a subsidiary

Jordan Kuwait Bank (JKB)

Jordan Jordanian Dinars 100 million

51.19% 10 Jul 2008

Gulf Bank Algeria (AGB)

Algeria Algerian Dinars 10 billion

91.13% 30 Apr 2009

Bank of Baghdad (BOB)

Iraq Iraqi Dinars 175 billion

51.79% 10 Jan 2010

Tunis International Bank (TIB)

Tunisia United States Dollars 50 million

86.70% 27 Jun 2010

Burgan Bank - Turkey

Turkey Turkish Lira 570 million

99.26% 21 Dec 2012

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

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

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Name of the insurance company Kuwait Reinsurance Company K.S.C.C

Country of incorporation Kuwait

Ownership % 0.075

* Had the amount been deducted from the capital, the CRAR would have been 18.528%, instead of 18.529% as shown.

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As at 31 December 2012, the share capital comprised of 1,544,967,180 issued and fully paid equity shares of KD 100 fils each and the bank’s capital structure was as follows:.

4. Capital Adequacy

i. Bank’s Approach to Capital Adequacy Assessment

The Bank has in place a system under which the capital adequacy of the Bank as well as the CRAR are being calculated at regular intervals, based on the CBK circular instructions dated 12/12/2005 and subsequent amendments. Based on this system, the CRAR of the Bank has been above the required threshold of 12% during the year 2012.

The Bank also has in place a policy for Internal Capital Adequacy Assessment Process (ICAAP) that is compliant with the CBK instructions in regard to Pillar 2 of Basel II and has been duly approved by its Board of Directors during the year. The ICAAP policy covers additional risks apart from the three risks, viz. Credit, Market and Operational risks covered under Pillar 1 and assesses additional capital requirements for these additional risks over and above the minimum level stipulated by the CBK. A copy of this policy document has also been sent to CBK for their information and records. Additionally, the Bank also conducts a stress test which calculates the effect on its profits and CRAR in cases of stress, based on certain scenarios.

The Bank takes into account the CRAR calculations in respect of all its future business plans so as to ensure that, at all times, the level of its eligible capital is sufficient to meet the expected increase in business and particularly the level of RWAs. The Bank takes into consideration developments locally and in the region, the expected changes in the banking environment and the fact that the CRAR prescribed by the regulators is considerably above the international norm of 8% as recommended by the Basel Committee while examining the level of capital that it would like to maintain. The Board also takes into consideration other relevant factors such as the Bank’s future business plans, the new areas of business

under examination and the nature of the attendant risks etc. The Bank has in place a well documented Internal Capital Adequacy Assessment Process (ICAAP) Policy which takes into consideration additional risks beyond the three risks covered under Pillar 1 of the RCAS. This policy has been developed to fully comply with the CBK regulations on Pillar 2 of RCAS. The internal assessment process for capital requirements is carried out periodically by the bank taking into account not only its position for the time being but also the future business plans.

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

As regards the subsidiaries, the respective banking regulations in regard to capital adequacy are different in each of the jurisdictions. While the authorities in - Jordan and Turkey have mandated the application of the Basel II recommendations as adapted to suit the respective local requirements, others, viz. Algeria, Iraq and Tunisia are yet to finalise the regulations in this regard. Where Basel II rules have been applied in any of the subsidiaries, this has been done using the Standardised Approach.

The relevant CBK regulations on Basel II have however been applied for the consolidated financial position of the Bank and its subsidiaries.

Table II – Capital Structure Of The BankKD’000s

Paid up share capital 154,497

Reserves 347,149

Less: Treasury shares (36,688)

Less: Goodwill (85,733)

Less: Investments in unconsolidated subsidiary and significant minority investment

(121)

Minority interest 100,882

T I E R 1 Capital 479,986

45% of fair valuation reserves 4,991

General provision subject to 1.25% of the credit Risk Weighted Assets (RWA’s)

47,390

Subordinated debt 209,634

Less: Investments in consolidated subsidiaries and significant minority investment

(121)

T I E R 2 Capital 261,894

T I E R 3 Capital –

Total Eligible Capital after deductions 741,880

Table III – Capital Requirement For Each Standard PortfolioKD’000s

Claims on sovereigns 4,244

Claims on public sector entities 12,967

Claims on banks 38,135

Claims on corporates 228,620

Regulatory retail exposures 62,391

RHL Eligible for 35% RW 270

Past due exposures 14,320

Other exposures 93,994

Total 454,941

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

(10,002)

Total Credit risk weighted exposure 444,939

Market risk exposure under Standardised approach

3,974

Operational risk exposure 31,538

Grand Total 480,451

Total Capital Ratio (%) 18.5%

T I E R 1 Capital Ratio (%) 12.0%

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5. Risk Management

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

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

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

iii. Operational Risk which includes risks due to operational failures

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

Majority of the subsidiaries, have an independent risk management function reporting directly to the respective CEOs, organized into, among others, three sections responsible for the three families of risks stated above. Among the subsidiaries, JKB has already put in place an independent Risk Management function and has developed an ICAAP policy with the due approval of its Board of Directors, taking into account the applicable rules of Central Bank of Jordan (CBJ). Since the regulations in other jurisdictions do not mandate this as yet, the Bank will, in due course, assist the subsidiaries to develop their own ICAAP policies, suited to their requirements. In the meanwhile, the ICAAP is applied by the Bank at the consolidated as well at the subsidiary wise level of assets and liabilities.

A. Credit risk

i. Strategies and Processes

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

at the Executive Committee of the Bank and approved by the Board Executive Committee. The Policy also defines the types of products that the various business groups can market to their clients and counterparties. Any new product is required to undergo a specific validation process before its launch.

The Bank’s subsidiaries also have their respective credit policies that govern the grant of credit facilities to clients segmented suitably, based on the market in their respective business areas. Subject to the respective local business environments and the specific requirements applicable in each jurisdiction, the policies of the subsidiaries have a similar coverage.

ii. Structure and Organisation

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

The subsidiaries are in the process of setting up similar structures and organizations, subject of course to their respective local conditions and business environments. While JKB, TIB and ET already have similar organizations in place, as regards the other two subsidiaries, in view of their business environment with less number of large corporate exposures and higher exposures to retail and small & medium business entities, the organization is being made to adapt to the local requirements.

iii. Scope and Nature of Reporting Systems

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

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

The subsidiaries will also have similar set up for the credit process after credit approval.

iv. Hedges and Mitigants

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

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

As regards shares, bonds etc., the Bank fulfills the stipulated regulatory requirements for their periodic valuation, application of haircuts etc. In regard to real estate assets, the Bank has employed independent, professional and govt. recognized valuers who are required to assess the value of the collateral before they are accepted as security. Where considered necessary, the Bank also seeks a second valuation. The periodicity of the valuation is again in line with the regulatory requirements.

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

The respective credit policies of the subsidiaries also define the collaterals acceptable for their respective credit facilities with the ratios for coverage, top-up and liquidation. However, unlike the laws of Kuwait, the laws in the jurisdictions of the subsidiaries permit hypothecation of immoveable properties of clients in favor of a bank and where this is permitted, such collateral is also obtained, subject to the conditions stipulated in the respective legal provisions. Based on their respective local regulatory requirements and banking practices, the collaterals are valued by independent sources.

B. Market Risk

i. Strategies and Processes

The operations of the Bank’s Treasury and Investment Banking Group give rise to the market risks assumed by the Bank. The Bank has a well-defined and CBK compliant Treasury Policy that outlines its risk appetite in regard to undertaking transactions that result in exposures to market risk. Being a specialized area that requires particular knowledge of the market and various products and players therein, the policy document is prepared by the Treasury Group with inputs/concurrence from the Risk Management, under the guidance and approval of the Board. The Policy covers rules concerning the positions that the Bank assumes in the course of its trading in foreign exchange, equities and fixed-income securities as also the interest rate risk positions of its banking book in terms of mismatches in maturity and/or re-pricing periods. The strategies that the Treasury Group plans to adopt during the coming year are decided on the basis of market forecasts that are made at the time of preparation of the annual budget. These are, on an ongoing basis, discussed at the Asset Liability Committee (ALCO) meetings and corrective actions, if any, are decided at these meetings. These meetings are chaired by the Chief Executive Officer and are convened by the Market Risk Controller in the Risk Management Group. The ALCO discusses and deliberates on all aspects of market and liquidity risks.

The subsidiaries have their respective well defined ALCO policies with a similar content of topics, but suited to their respective business environments. These ALCO policies have been framed with due consideration for the respective local regulations that have an effect on the market risks assumed by each of them.

ii. Structure and Organisation

The Treasury group, in consultation with the Risk Management, lays down the various limits and rules under which the members of the Treasury Dealing Room are allowed to take up positions. These limits are approved by the Board Executive Committee and where so required under the regulations, also by CBK. These limits relate to intra-day and overnight positions as well as positions under different maturity buckets, counterparty exposure limits, stop-loss levels etc. While the adherence of these limits is monitored

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by the Head- IBT, Private and Retail Banking, they are also independently monitored by the Market Risk Controller whose office is located in the dealing room but reports to the Chief Risk Officer. The Market Risk Controller reports relevant information on the treasury activities of the Bank including the various positions taken by the Treasury to the Chief Risk Officer on a daily basis or more frequently if necessary.

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

As regards the subsidiaries, as stated above, the operations in the area of foreign exchange trading are governed by the applicable local regulations for each of them. These banks also have various regulatory limits on their dealing activities and open positions. These banks however have their back office/middle office functions with reporting lines outside the front office. The Market Risk section under the Risk Management monitors the market risks arising from all treasury activities including investments.

a. Scope and Nature of Reporting Systems

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

b. Hedges and Mitigants

A major part of the banking and trading books of the Bank is in Kuwaiti Dinars (KD’s), the other important currencies being the internationally actively traded currencies. Due to the limited scope for hedging interest rate positions in KD’s arising from a limited range of hedging products, the Bank enters into, where reasonably possible, variable interest rate transactions structured to enable it to minimize maturity/re-pricing mismatches. As regards the other currencies, the open positions taken by the Bank are within pre-set limits and tenors for the respective currency. The Bank also makes use of interest rate and currency swaps to hedge its interest rate and currency positions in foreign currencies. The Bank normally makes use of derivatives for hedging purposes and also meets the requests of its clients for derivative products on a fully matched basis. However, the Bank only deals in or offers to its clients, simple derivatives such as forward foreign exchange contracts and does not handle the more sophisticated derivatives including structured derivatives.

As regards the subsidiaries, with the exception of ET other entities do not actively take proprietary trading positions The range of products offered by them to their clients is also limited, due to the market environment and where applicable, exchange control regulations.

ET deals in FX derivatives and interest rate derivatives to cover client needs on a back to back basis as well as for proprietary activities. All derivatives activities are regulated through limits approved by the BOD and monitored through bank systems.

C. Operational Risk

a. Strategies and Processes

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

For the purpose of separation of the functions of IT development/operations from IT Security, the Operational Risk Controller is also responsible to independently ensure the adequacy and effectiveness of IT security systems and procedures. These include both internal and external IT security measures. While a similar organization is available in some of the subsidiaries, others are in the process of setting up such an organization. However, the IT Security function is separate from the IT development/operations.

The Bank has a robust and well defined Business Continuity Program, which comprises of policies and procedures with clearly defined roles, responsibilities and ownership for Crisis Management, Emergency Response, Business Recovery and IT Disaster Recovery Planning. The Bank’s BCP steering committee, represented by the senior executive Management of the Bank, approves and oversees the annual BCP strategy and road map. Burgan Bank’s Business Continuity Management Program is designed to ensure the continuity of bank’s critical businesses at a minimum loss, in case of a disaster and a emergency that may impact the bank or a national event and may shutdown the whole country or part of it in case of any eventuality. Burgan Bank has a dedicated Disaster Recovery & Business Continuity Recovery site within Kuwait, which would be active in case some parts and specific areas in Kuwait are impacted. To respond to a country wide shutdown a fully operational data back-up site and a Crisis Command Centre outside Kuwait is functional. Should any

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contingency arises, the key pre-identified bank staff would relocate locally or internationally to render crucial services to the esteemed clients and partners during a crisis/disaster. Regular drills and tests are conducted to cover all aspects of the Business Continuity Plan. Some of the subsidiaries have documented their business continuity and recovery plans, others are in the process of formulating ad implementing the same.

b. Structure and Organisation

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

Such an organization with an independent head of operations reporting to the respective chief executive officers is in place in the subsidiaries also.

c. Scope and Nature of Reporting Systems

As regards the scope and nature of risk reporting in this area, the Bank has laid down a Risk and Control Self assessment program as well as Internal Control Charts (ICCs) that are required to be submitted by the various functionaries with differing periodicities. These are required to be submitted to specified supervisors who conduct the necessary follow up in regard to exceptions and ensure corrective action. The ICCs cover all the branches and operating departments in the head office.

The subsidiaries are in the process of introducing ICCs with suitable modifications to suit their respective local needs. Also, some of the subsidiaries have in place a Risk and Control Self assessment covering several functions.

a. Hedges and Mitigants

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

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

These tools, viz. the Risk Dashboards and IMS are also in the process of being implemented in the subsidiaries.

6. Credit Exposures

i. Definition of Past Due and Impaired Assets

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

The subsidiaries also apply such prudent policies which are in line with the relevant regulations in their respective jurisdictions. Additionally, the subsidiaries also follow the rules laid down by their respective regulatory authorities.

ii. Approaches for Specific and General Provisions

As required under the CBK regulations, the Bank maintains two types of loan loss reserves. On the Bank’s exposure to non-bank clients and counterparties which are not covered by collateral in the form of cash or demand/term deposits with the Bank, the Bank was required to maintain a general provision of 2% of the outstanding exposure, both on and off-balance sheet. If the exposure to a third party is covered by the guarantee of a bank that is rated below ‘A’, in such cases also, the Bank was required to maintain a general provision of 2% of the outstanding exposure. However, with effect from 12.03.07, the CBK amended these rules and banks in Kuwait are, after that date, required to maintain only 1% (instead of 2%) general reserve in respect of cash exposures and 0.5% for non-cash exposures. The past level of general provisions as of 31.12.2006 however cannot be reversed unless, under special circumstances, CBK approval is obtained for the same. The Bank has not reversed any past provision in this regard. Out of the general provision so maintained, a sum equal to 1.25% of the RWA in the case of on-balance sheet exposures and after the application of Credit Conversion Factors and Risk Weights for off-balance sheet exposures is considered to be part of the

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Tier 2 capital of the Bank and the remaining amount is given the same treatment for the purpose of CRAR as if it was a specific provision, i.e., it is reduced from the RWA of the Bank.

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

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

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

The subsidiaries follow their respective applicable regulations in regard to impaired assets and provisioning requirements. However, at the time of consolidation of the accounts, The Bank applies the CBK rules in regard to provisioning on the consolidated basis. Any shortfall arising on account of the difference between the respective regulatory requirements of a subsidiary and the CBK regulatory requirements are covered by the Bank at the consolidated level.

iii. Credit Risk Management Policy

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

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

iv. ECAIs and Mapping Process

An exercise to map these ratings to the exposure of the Bank where applicable is carried out. Where a general issuer rating is available, the same is used for the relevant exposure of the rated client/counterparty. Where only an issue rating is available, if the rated issue has comparable characteristics to the Bank’s exposure both in terms of the tenor and other features such as availability of credit enhancement etc. such rating is considered. CBK at present considers Moody’s, Standard and Poor’s and Fitch as the Approved ECAIs and only those clients/counterparties who have a solicited rating from one or more of these ECAIs, are considered to be rated. Based on the rating systems as declared by the ECAIs, the ratings are classified into Investment Grade and Non-Investment Grade ratings. Those who are not rated by any of these three ECAIs are considered to be unrated. In order to ensure that the ratings are not considered selectively, if a current rating from one of these ECAIs available in respect of any client/counterparty, it is always taken into account and in such cases, the client/counterparty is not considered as unrated.

Table IV – Credit Risk Exposure KD’000s

Gross credit exposure

Gross average credit exposure*

Funded Unfunded Funded Unfunded

Claims on sovereigns

988,184 18,257 869,277 6,509

Claims on public sector entities

114,103 13,798 93,060 23,249

Claims on banks 890,405 208,064 899,266 149,772

Claims on corporates

1,894,475 1,281,516 1,607,216 1,004,248

Cash items 78,722 – 95,847 –

Regulatory retail exposures

555,647 88,010 541,734 85,478

RHL Eligible for 35% RW

12,446 – 11,922 –

Past due exposures

195,324 929 216,191 812

Other exposures (Note 1)

1,275,837 61,049 1,147,442 50,325

Total 6,005,143 1,671,623 5,481,955 1,320,393

* Average exposure represents daily average outstanding except in the case of past due exposures, which show quarterly averages since the classification of past due exposures is done quarterly.

Note 1: Other exposures includes Loans to Real Estate Activity and Share financing; These attracts a risk weight of 150% based on Central Bank of Kuwait Circular (2/RB/220/2008) dated 12 May 2008.

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

Kuwait Other Middle

East

Europe USA Rest of the

world

Total


372,759 427,614 109,503 – 96,565 1,006,441


– 127,895 6 – – 127,901

Claims on banks

294,896 331,779 268,467 24,191 179,136 1,098,469


1,590,541 519,564 624,514 938 440,434 3,175,991

Cash items 27,240 28,778 3,842 114 18,748 78,722


360,370 54,729 195,018 – 33,540 643,657


– 12,446 – – – 12,446

Past due exposures

147,394 33,112 12,319 – 3,428 196,253


930,391 132,991 172,454 707 100,343 1,336,886

Total 3,723,591 1,668,908 1,386,123 25,950 872,194 7,676,766


Table VI – Gross Credit Risk Exposures By Residual Contractual Maturity KD’000s

Up to 3 months

3 to 6 months

6 to 12 months

Over 12 months

Total


481,661 124,834 88,725 311,221 1,006,441


– – – 127,901 127,901

Claims on banks 823,228 116,058 114,573 44,610 1,098,469


853,228 457,095 438,859 1,426,809 3,175,991

Cash items 78,722 – – – 78,722


86,653 56,160 48,758 452,086 643,657


– – – 12,446 12,446

Past due exposures

196,253 – – – 196,253


299,672 158,419 84,251 794,544 1,336,886

Total 2,819,417 912,566 775,166 3,169,617 7,676,766


Table VII – Impaired Loans And Provisions By Standard Portfolio KD’000s

Impaired loans (net of suspended

interest and collateral)

Total provision

Specific provision charge / charge off

Claims on banks 1,828 1,301 3,513


55,977 164,186 11,956


6,498 16,931 273


4,503 11,951 2,077

Total 68,806 194,369 17,819


Table VIII – Geographical Distribution Of Impaired Loans (net)KD’000s

Kuwait Other Middle East

Europe USA Rest of the

world

Total

Claims on banks

– 1,828 – – – 1,828


– 29,605 19,526 – 6,846 55,977


3,833 1,395 695 – 575 6,498


4,503 – – – – 4,503

Total 8,336 32,828 20,221 – 7,421 68,806


Table IX – Reconciliation Of Changes In Provisions KD’000s

Funded Unfunded Total

Provisions as on 1 January 2012

157,561 18,791 176,352

On acquisition of a subsidiary

22,131 3,044 25,175

Exchange adjustment 102 (45) 57

Amounts written off (43,308) – (43,308)

Charge to statement of income

35,487 606 36,093

Provisions as on 31 December 2012

171,973 22,396 194,369

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7. Credit Risk Mitigation (CRM)

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

i. On and Off-Balance Sheet Netting

The generic legal documents that the Bank obtains from its clients normally include a clause that permits the Bank to offset the client’s dues to the Bank against the Bank’s dues to the client. Thus, if the same legal entity that has obtained credit facilities from the Bank also maintains credit balances in its accounts, the Bank would normally have the legal right to set off the credit balances against its dues. In respect of some counterparty banks, there are specific agreements that provide for netting on and/or off-balance sheet exposures. Additionally, in specific cases, the Bank approves credit facilities to a client against pledge/block of his deposits to cover the whole or part of his dues.

For the purposes of computation of CRAR (also for calculation of general provisions), as a prudential measure, the Bank does not take into account the general lien available to it under the generic documentation but only considers cases where specific pledge/block of deposits is in place.

ii. Collateral Policy

It is the Bank’s endeavour to obtain acceptable collateral cover for its exposures as far as commercially practicable. The collateral normally consists of real estate properties, shares listed in Kuwait and other leading stock exchanges, other traded and untraded securities such as bonds, mutual funds etc. In some cases, in order to ensure the promoter’s commitment, the Bank also obtains other forms of collateral such as unlisted shares/securities etc. but these securities of course are not considered for CRM purposes. While the Bank will be willing to accept other eligible collaterals as defined by the CBK such as gold, eligible debt instruments etc. these are not generally offered by clients/counterparties to the Bank. Accordingly, the eligible collateral predominantly consists of shares listed and traded on the recognised stock exchanges which form part of their respective main indices and eligible real estates as per CBK rules.

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

However, as regards the subsidiaries, the respective local laws do not pose any constraints on enforcement of the mortgage on the primary residence and hence these constraints do not apply in their cases.

iii. Main Types of Collateral

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

iv. Collateral Valuation and Management

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

v. Guarantees for Credit Enhancement

As stated earlier, there are very few cases where guarantee of a better-rated entity is obtained for the exposure to a lower rated entity. In these cases, where the rating is given by an approved ECAI, the guarantor’s rating is substituted in place of the rating of the borrower, for the purpose of computation of RWAs. Where the guarantor and/or the borrower are/is not rated by an approved ECAI, the Bank uses its internal assessment to determine the acceptability of the guarantee but for the purpose of computation of RWA, this has no effect.

vi. Concentration

The Bank makes an endeavor to avoid concentration of collateral as far as possible. To this intent, when collateral in the form of listed shares is accepted, the year-to-date daily traded volumes of the concerned share and the average number of trades are examined and these are, among other

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points, taken into consideration in making a decision to accept the collateral and stipulating the concerned threshold ratios stated above, viz. coverage ratio, top-up ratio and liquidation ratio. The Bank classifies listed shares into various categories based on the liquidity and volatility of the concerned share, derived from the data available with the Kuwait Stock Exchange. The ratios stated above would vary depending on the classification of the shares.

8. Market Risk For Trading Portfolio, Foreign Exchange And Commodities Exposures

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

9. Operational Risk

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

The subsidiaries which are under Basel II apply the Basic Indicator Approach for computing operational risk under their respective local regulations. However, during the consolidation process, the operational risks are considered under the Standardised Approach where the activities of the subsidiaries are considered under the various business lines as stipulated under the CBK regulations on Basel II calculations.

10. Equity Position In The Banking Book

i. Classification of Investments

The Bank consolidates the assets and liabilities of its five subsidiaries, viz. Bank of Baghdad, Gulf Algeria Bank, Jordan Kuwait Bank,Tunis International Bank and EuroBank Tekfen. The Bank’s investments are classified as either ‘Available for Sale’, ‘Held to Maturity’, ‘At fair value through income statement’ or ‘Held for Trading’. Investments in equities that are acquired principally for the purpose of selling in the short term or, if they are managed and their performance is

Table X – Net Credit Exposure After Risk Mitigation And Credit Conversion Factor

KD’000s

Before CRM CRM Net Exposure

Claims on sovereigns 990,506 57 990,449


116,890 416 116,474

Claims on banks – Rated 653,170 – 653,170

Claims on banks – Unrated 261,541 – 261,541

Claims on corporates 2,336,475 429,447 1,907,028

Cash items 78,722 – 78,722

Regulatory retail exposures 578,931 27,087 551,844

RHL Eligible for 35% RW 12,446 6,025 6,421

Past due exposures 195,789 69,640 126,149


1,298,747 593,405 705,342

Total 6,523,217 1,126,077 5,397,140


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

Covered by:

Exposure after CCF, net of Suspended

Interest

Financial collateral after application of

haircuts as stipulated by CBK

Claims on sovereigns 990,506 57


116,890 416

Claims on banks 914,711 –

Claims on corporates 2,336,475 429,447

Cash items 78,722 –


578,931 27,087

RHL Eligible for 35% RW 12,446 6,025

Past due exposures 195,789 69,640

Other exposures (Note 1) 1,298,747 593,405

Total 6,523,217 1,126,077


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

Equity position risk 518

Foreign exchange risk 1,250

Interest rate position risk 1,226

Options 981

Total 3,975

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evaluated on reliable fair value basis in accordance with the documented investment strategy, are classified as at fair value through income statement and all other investments are classified as available for sale. The Bank has an Investment Policy that outlines the type of investments, the accounting requirements, the risk appetite for investments etc.

ii. Accounting Policy and Valuation Methodology

The accounting policies concerning investments and their valuation methodologies are described in detail under the “Summary of Significant Accounting Policies” elsewhere in this Annual Report. During the year 2012, there has been no significant change in these policies and methodologies.

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

As regards the subsidiaries, they also have their respective investment policies on the above lines, which of course, are in line with their applicable regulatory requirements.

11. Interest Rate Risk In The Banking Book (IRRBB)

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

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

For an even 25/50/100 basis point shock along the yield curve, net interest income for one year (from Jan. to Dec. 2013) including derivatives is affected as shown below:

The mid-year interest rate sensitivity analysis conducted by the Bank indicated that for an even increase in interest rates by 100 basis points (1%) the annual interest income of the Bank would have gone up by 18% whereas an even reduction in interest rates by the same level would have resulted in a reduction of net interest income by 17%. Since the banking book is predominantly in KD’s, this exercise is conducted on the consolidated book. This analysis is now being conducted at monthly intervals.

JKB conducts its interest rate sensitivity taking an interest rate movement of 100 basis points. Currently, the other subsidiaries do not conduct such an exercise.

Table XIII – Investments KD’000s

Publicly traded Privately heldEquities 28,929 52,002 Fixed income instruments 143,468 22,300 Any other investments – 64,322

Total 172,397 138,624

Capital requirement by equity groupingsKD’000s

Investments available for sale 26,303 Investments held to maturity 1,657 Investments designated through profit & loss 7,311Investments held for trading 2,736

Total 38,007

Realised gains/(losses) recorded in the income statement

1,661

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

11,091

45% of the above included in Tier 2 Capital 4,991

40,000

45,000

50,000

35,000

30,000

20,000

25,000

15,000

10,000

5,000

(5,000)

(10,000)

(15,000)

–

50%

55%

45%

40%

30%

25%

35%

20%

15%

KD

000

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

28,963 32,243 33,824 35,361 37,344 39,329 43,316

(6,398) (3,118) (1,537) – 1,983 3,968 7,955

-18% -9% -4% 0% 6% 11% 22%

Net Int. Inc. Forecast Earnings at Risk Earnings at Risk %

10%

0%

-5%

5%

-10%

-15%

Impact of interest rate change on earnings

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12. Overview And Conclusion

It is considered by the Board and Management of the Bank that, as at the end of 2012, the institution has in place a management, control and evaluation system that is:

• Responsive to present business environment, the bank’sgrowth plans and the attendant risks,

• Compliantbothwithhistoricregulatoryinstructionsandinconformity with the enhanced Basel II driven requirements detailed by CBK in their December 2005 instruction document and further enhancements to the same issued from time to time including the detailed additions on Pillar 2 matters, and

• Meetsgenerally accepted international riskmanagementstandards for a financial institution of the size and complexity of the Bank.

The Bank also appoints an independent audit firm other than its external auditors, to examine the internal control systems in the Bank and its subsidiaries and to point out any deficiencies that may give rise to risks. This is being done in fulfillment of the CBK regulations and a copy of these reports along with the steps taken to correct any deficiencies is presented to the Board Audit Committee and also to CBK. This provides additional comfort regarding the checks and balances in place in the Bank and its subsidiaries.

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

• Detailed operating procedures are in place in respect ofall major functions and the concerned staff members may refer to them as and when necessary so as to ensure their compliance

• Internal Control Charts of different periodicities are inplace in all its major functions that enable the respective supervisory employees to follow and exercise control over the aspects covered by these charts

• The Bank’s IT security and control structure has beeneffectively functioning and is certified under an international information security certification.

• Anindependentinternalauditfunctionhasregularboardapproved audit plans to audit the various areas of the bank and present their findings and the responses of the audited departments including the steps taken to address audit observations.

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

How to obtain our 2012 Financial Statements:

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

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

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

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

For further information on our 2012 Financial Statement, please telephone +965 2298 8000.

driven by youA member of the KIPCO Group

Report on the Consolidated Financial StatementsWe have audited the accompanying consolidated financial statements of Burgan Bank S.A.K. (“the Bank”) and its subsidiaries (collectively “the Group”), which comprise the consolidated statement of financial position as at 31 December 2012 and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Consolidated Financial StatementsManagement is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as adopted for use by the State of Kuwait, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

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

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

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

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

OpinionIn our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as at 31 December 2012, and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted for use by the State of Kuwait.

Report on Other Legal and Regulatory RequirementsFurthermore, in our opinion proper books of account have been kept by the Bank and the consolidated financial statements, together with the contents of the report of the Bank’s Board of Directors relating to these consolidated financial statements, are in accordance therewith. We further report that we obtained all the information and explanations that we required for the purpose of our audit and that the consolidated financial statements incorporate all information that is required by the Capital Adequacy Regulations issued by Central Bank of Kuwait (“CBK”) as stipulated in CBK Circular number 2/BS/184/2005 dated 21 December 2005, as amended, the Companies Law No 25 of 2012, and by the Bank’s Articles of Association, that an inventory was duly carried out and that, to the best of our knowledge and belief, no violations of Capital Adequacy Regulations issued by the CBK as stipulated in the CBK Circular number 2/BS/184/2005 dated 21 December 2005, as amended, the Companies Law No 25 of 2012, nor of the Articles of Association have occurred during the year ended 31 December 2012 that might have had a material effect on the business of the Group or on its financial position.

We further report that, during the course of our audit, we have not become aware of any material violations of the provisions of Law No. 32 of 1968, as amended, concerning currency, the CBK and the organisation of banking business, and its related regulations during the year ended 31 December 2012.

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

Deloitte & Touche, Al-Fahad, Al Wazzan & CoAhmed Al-Jaber Street, SharqDar Al-Awadi Complex, Floors 7 & 9P.O. Box 20174, Safat 13062 orP.O. Box 23049, Safat 13091 KuwaitTelephone (965) 2240 8844, 2243 8060Facsimile (965) 2240 8855, 2245 2080www.deloitte.com

Waleed A. Al Osaimi Bader A. Al WazzanLicence No. 68 A Licence No. 62 AErnst & Young Deloitte & Touche(AlAiban, AlOsaimi & Partners) (AlFahad, AlWazzan & Co)

27 January 2013Kuwait

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19

BURGAN BANK GROUP

The attached notes 1 to 24 form an integral part of these consolidated financial statements. 3

Consolidated Statement of Financial Position As at 31 December 2012 2012 2011 Notes KD 000’s KD 000’s ASSETS Cash and cash equivalents 3 787,468 567,352 Treasury bills and bonds with CBK and others 483,588 419,079 Due from banks and other financial institutions 4 610,780 843,176 Loans and advances to customers 5 3,384,406 2,252,348 Investment securities 6 311,021 148,585 Other assets 7 154,056 99,536 Property and equipment 68,399 49,175 Intangible assets 8 176,966 172,521

TOTAL ASSETS 5,976,684 4,551,772

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES Due to banks 311,634 291,604 Due to other financial institutions 713,253 650,533 Deposits from customers 3,895,116 2,795,779 Other borrowed funds 10 230,985 107,864 Other liabilities 11 205,803 140,283

TOTAL LIABILITIES 5,356,791 3,986,063

SHAREHOLDERS’ EQUITY Share capital 12 154,497 147,140 Share premium 12 129,559 129,559 Treasury shares 12 (36,688) (33,139) Statutory reserve 12 51,414 45,625 Voluntary reserve 12 51,792 46,003 Treasury shares reserve 12 36,554 36,552 Investment revaluation reserve 11,091 5,846 Share based compensation reserve 564 561 Foreign currency translation reserve (1,718) (1,912) Other reserves 554 554 Retained earnings 93,141 70,499

Equity attributable to the equity holders of the Bank 490,760 447,288 Non controlling interests 129,133 118,421

TOTAL SHAREHOLDERS’ EQUITY 619,893 565,709

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 5,976,684 4,551,772

___________________________ ________________________ Khalid Al Zouman Eduardo Eguren Linsen Chief Financial Officer Chief Executive Officer ___________________________ Majed Essa Al Ajeel Chairman

BURGAN BANK GROUP



TOTAL ASSETS 5,976,684 4,551,772









20

BURGAN BANK GROUP


Consolidated Income Statement For the year ended 31 December 2012

2012 2011 Notes KD 000’s KD 000’s Interest income 190,903 166,601 Interest expense (71,963) (62,024)

Net interest income 118,940 104,577

Fee and commission income 13 41,046 40,872 Fee and commission expense (2,903) (2,758)

Net fee and comission income 38,143 38,114

Net gain from foreign currencies 17,554 7,754 Net investment income 14 2,017 6,239 Dividend income 2,211 1,636 Other income 11,251 5,061

Operating income 190,116 163,381 Staff expenses (32,379) (28,036) Other expenses (38,803) (33,383)

Operating profit before provision 118,934 101,962 Provision for impairment of loans and advances 5 (36,093) (29,122) Provision for impairment of investment securities (4,021) (4,525)

Profit before taxation and board of directors' renumeration 78,820 68,315

Taxation 15 (15,984) (10,649) Board of directors' remuneration (90) (90)

Profit for the year 62,746 57,576

Attributable to: Equity holders of the Bank 55,600 50,562 Non controlling interests 7,146 7,014

62,746 57,576 Fils Fils

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

37.8

33.7

BURGAN BANK GROUP



TOTAL ASSETS 5,976,684 4,551,772









21

BURGAN BANK GROUP


Consolidated Statement of Comprehensive Income For the year ended 31 December 2012

2012 2011 KD 000’s KD 000’s Profit for the year 62,746 57,576

Other comprehensive income (loss) Financial assets available for sale: Net change in fair value 3,308 (2,961) Net transfer to consolidated income statement 2,975 (721) Foreign currency translation adjustment 1,102 (5,831)

Other comprehensive income (loss) for the year 7,385 (9,513)

Total comprehensive income for the year 70,131 48,063

Attributable to: Equity holders of the Bank 61,039 43,581 Non controlling interests 9,092 4,482

70,131 48,063

BURGAN BANK GROUP



TOTAL ASSETS 5,976,684 4,551,772









22

BU

RG

AN

BA

NK

GR

OU

P

The

atta

ched

not

es 1

to 2

4 fo

rm a

n in

tegr

al p

art o

f the

se c

onso

lidat

ed fi

nanc

ial s

tate

men

ts.

6

Con

solid

ated

Sta

tem

ent o

f Cha

nges

in S

hare

hold

ers’

Equ

ity

For

the

year

end

ed 3

1 D

ecem

ber

2012

At

trib

utab

le to

equ

ity h

olde

rs o

f the

Ban

k

Shar

e ca

pita

l KD 000

’s

Shar

e pr

emiu

m

KD 000

’s

Trea

sury

sh

ares

KD 000

’s

Stat

utor

y re

serv

e KD 000

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ntar

y re

serv

e KD 000

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Trea

sury

sh

ares

re

serv

e KD 000

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Inve

stm

ent

reva

luat

ion

rese

rve

KD 000

’s

Shar

e ba

sed

com

pens

atio

n re

serv

e KD 000

’s

Fore

ign

curr

ency

tr

ansl

atio

n re

serv

e K

D 000

’s

Oth

er

rese

rves

KD 000

’s

Reta

ined

ea

rnin

gs

KD 000

’s

Tota

l KD 000

’s

Non

co

ntro

lling

in

tere

sts

KD 000

’s

Tota

l equ

ity

KD 000

’s

B

alan

ce a

t 1 Ja

nuar

y 20

12

147

,140

1

29,5

59

(33,

139)

4

5,62

5

46,

003

3

6,55

2

5,8

46

561

(1

,912

) 5

54

70,

499

4

47,2

88

118

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5

65,7

09

Prof

it fo

r the

yea

r -

-

-

-

-

-

-

-

-

-

5

5,60

0

55,

600

7

,146

6

2,74

6

Oth

er c

ompr

ehen

sive

inco

me

-

-

-

-

-

-

5,2

45

-

194

-

-

5

,439

1

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7

,385

Tota

l com

preh

ensi

ve in

com

e -

-

-

-

-

-

5

,245

-

1

94

-

55,

600

6

1,03

9

9,0

92

70,

131

Tr

ansf

er to

rese

rves

-

-

-

5

,789

5

,789

-

-

-

-

-

(1

1,57

8)

-

-

-

Shar

e ca

pita

l inc

reas

e in

a

sub

sidia

ry

-

-

-

-

-

-

-

-

-

-

-

-

4,9

20

4,9

20

Bon

us sh

ares

issu

ed (n

ote

12)

7,3

57

-

-

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-

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(7,3

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-

-

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Cas

h di

vide

nd (n

ote

12)

-

-

-

-

-

-

-

-

-

-

(1

4,02

3)

(14,

023)

-

(1

4,02

3)

Cas

h di

vide

nd p

aid

to n

on

con

trolli

ng in

tere

sts

-

-

-

-

-

-

-

-

-

-

-

-

(4,1

30)

(4,1

30)

Purc

hase

of t

reas

ury

shar

es

-

-

(3,5

53)

-

-

-

-

-

-

-

-

(3,5

53)

-

(3,5

53)

Sale

of t

reas

ury

shar

es

-

-

4

-

-

2

-

-

-

-

-

6

-

6

Acq

uist

ion

of su

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(not

e 9)

-

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8

30

830

Sh

are

base

d co

mpe

nsat

ion

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xpen

se

-

-

-

-

-

-

-

3

-

-

-

3

-

3

Bal

ance

at 3

1 D

ecem

ber

201

2 1

54,4

97

129

,559

(3

6,68

8)

51,

414

5

1,79

2

36,

554

1

1,09

1

564

(1

,718

) 5

54

93,

141

4

90,7

60

129

,133

6

19,8

93

BU

RG

AN

BA

NK

GR

OU

P

The

atta

ched

not

es 1

to 2

4 fo

rm a

n in

tegr

al p

art o

f the

se c

onso

lidat

ed fi

nanc

ial s

tate

men

ts.

3

Con

solid

ated

Sta

tem

ent o

f Fin

anci

al P

ositi

on

A

s at 3

1 D

ecem

ber

2012

20

12

2011

Not

es

KD

000

’s

KD 000

’s

ASS

ET

S

Cas

h an

d ca

sh e

quiv

alen

ts

3 7

87,4

68

567,

352

Tr

easu

ry b

ills a

nd b

onds

with

CB

K a

nd o

ther

s

483

,588

41

9,07

9 D

ue fr

om b

anks

and

oth

er fi

nanc

ial i

nstit

utio

ns

4 6

10,7

80

843,

176

Loan

s and

adv

ance

s to

cust

omer

s 5

3,3

84,4

06

2,25

2,34

8 In

vest

men

t sec

uriti

es

6 3

11,0

21

148,

585

Oth

er a

sset

s 7

154

,056

99

,536

Pr

oper

ty a

nd e

quip

men

t

68,

399

49

,175

In

tang

ible

ass

ets

8 1

76,9

66

172,

521

TO

TA

L A

SSE

TS

5,

976,

684

4,

551,

772

LIA

BIL

ITIE

S A

ND

SH

AR

EH

OL

DE

RS’

EQ

UIT

Y

L

IAB

ILIT

IES

D

ue to

ban

ks

3

11,6

34

291,

604

Due

to o

ther

fina

ncia

l ins

titut

ions

713

,253

65

0,53

3 D

epos

its fr

om c

usto

mer

s

3,89

5,11

6

2,79

5,77

9 O

ther

bor

row

ed fu

nds

10

230

,985

10

7,86

4 O

ther

liab

ilitie

s 11

2

05,8

03

140,

283

TO

TA

L L

IAB

ILIT

IES

5,

356,

791

3,

986,

063

SHA

RE

HO

LD

ER

S’ E

QU

ITY

Shar

e ca

pita

l 12

1

54,4

97

147,

140

Shar

e pr

emiu

m

12

129

,559

12

9,55

9 Tr

easu

ry sh

ares

12

(3

6,68

8)

(33,

139)

St

atut

ory

rese

rve

12

51,

414

45

,625

V

olun

tary

rese

rve

12

51,

792

46

,003

Tr

easu

ry sh

ares

rese

rve

12

36,

554

36

,552

In

vest

men

t rev

alua

tion

rese

rve

11,

091

5,

846

Shar

e ba

sed

com

pens

atio

n re

serv

e

564

56

1 Fo

reig

n cu

rren

cy tr

ansl

atio

n re

serv

e

(1,7

18)

(1,9

12)

Oth

er re

serv

es

5

54

554

Ret

aine

d ea

rnin

gs

9

3,14

1

70,4

99

Equi

ty a

ttrib

utab

le to

the

equi

ty h

olde

rs o

f the

Ban

k

490

,760

44

7,28

8 N

on c

ontro

lling

inte

rest

s

129

,133

11

8,42

1

TO

TA

L S

HA

RE

HO

LD

ER

S’ E

QU

ITY

6

19,8

93

565,

709

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TA

L L

IAB

ILIT

IES

AN

D S

HA

RE

HO

LD

ER

S’ E

QU

ITY

5,97

6,68

4

4,55

1,77

2

____

____

____

____

____

____

___

___

____

____

____

____

____

_

K

halid

Al Z

oum

an

Ed

uard

o Eg

uren

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sen

C

hief

Fin

anci

al O

ffic

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C

hief

Exe

cutiv

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_

____

____

____

____

____

____

__

Maj

ed E

ssa

Al A

jeel

Cha

irman

23

BU

RG

AN

BA

NK

GR

OU

P

The

atta

ched

not

es 1

to 2

4 fo

rm a

n in

tegr

al p

art o

f the

se c

onso

lidat

ed fi

nanc

ial s

tate

men

ts.

7

Con

solid

ated

Sta

tem

ent o

f Cha

nges

in S

hare

hold

ers’

Equ

ity (C

ontin

ued)

Fo

r th

e ye

ar e

nded

31

Dec

embe

r 20

12

Attr

ibut

able

to e

quity

hol

ders

of t

he B

ank

Shar

e ca

pita

l KD 000

’s

Shar

e pr

emiu

m

KD 000

’s

Trea

sury

sh

ares

KD 000

’s

Stat

utor

y re

serv

e KD 000

’s

Volu

ntar

y re

serv

e KD 000

’s

Trea

sury

sh

ares

re

serv

e KD 000

’s

Inve

stm

ent

reva

luat

ion

rese

rve

KD 000

’s

Shar

e ba

sed

com

pens

atio

n re

serv

e KD 000

’s

Fore

ign

curr

ency

tr

ansl

atio

n re

serv

e KD 000

’s

Oth

er

rese

rves

KD 000

’s

Reta

ined

ea

rnin

gs

KD 000

’s

Tota

l KD 000

’s

Non

co

ntro

lling

in

tere

sts

KD 000

’s

Tota

l equ

ity

KD 000

’s

B

alan

ce a

t 1 Ja

nuar

y 20

11

140,

133

129,

559

(16,

401)

40

,365

40

,743

36

,567

8,

732

549

2,18

3 53

3 37

,464

42

0,42

7 11

8,19

7 53

8,62

4 Pr

ofit

for t

he y

ear

-

-

-

-

-

-

-

-

-

-

50,5

62

50,5

62

7,01

4 57

,576

O

ther

com

preh

ensi

ve lo

ss

-

-

-

-

-

-

(2,8

86)

-

(4,0

95)

-

-

(6,9

81)

(2,5

32)

(9,5

13)

Tota

l com

preh

ensi

ve (l

oss)

i

ncom

e -

-

-

-

-

-

(2

,886

) -

(4

,095

) -

50

,562

43

,581

4,

482

48,0

63

Tran

sfer

to re

serv

es

-

-

-

5,26

0 5,

260

-

-

-

-

-

(10,

520)

-

-

-

B

onus

shar

es is

sued

(not

e 12

) 7,

007

-

-

-

-

-

-

-

-

-

(7,0

07)

-

-

-

Cas

h di

vide

nd p

aid

to n

on

con

trolli

ng in

tere

sts

-

-

-

-

-

-

-

-

-

-

-

-

(4,2

18)

(4,2

18)

Purc

hase

of n

on c

ontro

lling

i

nter

ests

-

-

-

-

-

-

-

-

-

21

-

21

(40)

(1

9)

Purc

hase

of t

reas

ury

shar

es

-

-

(16,

783)

-

-

-

-

-

-

-

-

(1

6,78

3)

-

(16,

783)

Sa

le o

f tre

asur

y sh

ares

-

-

45

-

-

(1

5)

-

-

-

-

-

30

-

30

Shar

e ba

sed

com

pens

atio

n

exp

ense

-

-

-

-

-

-

-

12

-

-

-

12

-

12

Bal

ance

at 3

1 D

ecem

ber

201

1 14

7,14

0 12

9,55

9 (3

3,13

9)

45,6

25

46,0

03

36,5

52

5,84

6 56

1 (1

,912

) 55

4 70

,499

44

7,28

8 11

8,42

1 56

5,70

9

BU

RG

AN

BA

NK

GR

OU

P

The

atta

ched

not

es 1

to 2

4 fo

rm a

n in

tegr

al p

art o

f the

se c

onso

lidat

ed fi

nanc

ial s

tate

men

ts.

3

Con

solid

ated

Sta

tem

ent o

f Fin

anci

al P

ositi

on

A

s at 3

1 D

ecem

ber

2012

20

12

2011

Not

es

KD

000

’s

KD 000

’s

ASS

ET

S

Cas

h an

d ca

sh e

quiv

alen

ts

3 7

87,4

68

567,

352

Tr

easu

ry b

ills a

nd b

onds

with

CB

K a

nd o

ther

s

483

,588

41

9,07

9 D

ue fr

om b

anks

and

oth

er fi

nanc

ial i

nstit

utio

ns

4 6

10,7

80

843,

176

Loan

s and

adv

ance

s to

cust

omer

s 5

3,3

84,4

06

2,25

2,34

8 In

vest

men

t sec

uriti

es

6 3

11,0

21

148,

585

Oth

er a

sset

s 7

154

,056

99

,536

Pr

oper

ty a

nd e

quip

men

t

68,

399

49

,175

In

tang

ible

ass

ets

8 1

76,9

66

172,

521

TO

TA

L A

SSE

TS

5,

976,

684

4,

551,

772

LIA

BIL

ITIE

S A

ND

SH

AR

EH

OL

DE

RS’

EQ

UIT

Y

L

IAB

ILIT

IES

D

ue to

ban

ks

3

11,6

34

291,

604

Due

to o

ther

fina

ncia

l ins

titut

ions

713

,253

65

0,53

3 D

epos

its fr

om c

usto

mer

s

3,89

5,11

6

2,79

5,77

9 O

ther

bor

row

ed fu

nds

10

230

,985

10

7,86

4 O

ther

liab

ilitie

s 11

2

05,8

03

140,

283

TO

TA

L L

IAB

ILIT

IES

5,

356,

791

3,

986,

063

SHA

RE

HO

LD

ER

S’ E

QU

ITY

Shar

e ca

pita

l 12

1

54,4

97

147,

140

Shar

e pr

emiu

m

12

129

,559

12

9,55

9 Tr

easu

ry sh

ares

12

(3

6,68

8)

(33,

139)

St

atut

ory

rese

rve

12

51,

414

45

,625

V

olun

tary

rese

rve

12

51,

792

46

,003

Tr

easu

ry sh

ares

rese

rve

12

36,

554

36

,552

In

vest

men

t rev

alua

tion

rese

rve

11,

091

5,

846

Shar

e ba

sed

com

pens

atio

n re

serv

e

564

56

1 Fo

reig

n cu

rren

cy tr

ansl

atio

n re

serv

e

(1,7

18)

(1,9

12)

Oth

er re

serv

es

5

54

554

Ret

aine

d ea

rnin

gs

9

3,14

1

70,4

99

Equi

ty a

ttrib

utab

le to

the

equi

ty h

olde

rs o

f the

Ban

k

490

,760

44

7,28

8 N

on c

ontro

lling

inte

rest

s

129

,133

11

8,42

1

TO

TA

L S

HA

RE

HO

LD

ER

S’ E

QU

ITY

6

19,8

93

565,

709

TO

TA

L L

IAB

ILIT

IES

AN

D S

HA

RE

HO

LD

ER

S’ E

QU

ITY

5,97

6,68

4

4,55

1,77

2

____

____

____

____

____

____

___

___

____

____

____

____

____

_

K

halid

Al Z

oum

an

Ed

uard

o Eg

uren

Lin

sen

C

hief

Fin

anci

al O

ffic

er

C

hief

Exe

cutiv

e O

ffic

er

_

____

____

____

____

____

____

__

Maj

ed E

ssa

Al A

jeel

Cha

irman

24

BURGAN BANK GROUP


Consolidated Statement of Cash Flows Year ended 31 December 2012

2012 2011 Notes KD 000’s KD 000’s Operating activities Profit before taxation and board of directors' remuneration 78,820 68,315 Adjustments: Net investment income 14 (2,017) (6,239) Provision for impairment of loans and advances 36,093 29,122 Provision for impairment of investment securities 4,021 4,525 Dividend income (2,211) (1,636) Depreciation and amortisation 10,952 11,283 Share based compensation expense 3 12

Operating profit before changes in operating assets and liabilities 125,661 105,382 Changes in operating assets and liabilities: Treasury bills and bonds with CBK and others (64,509) 47,890 Due from banks and other financial institutions 236,060 (368,621) Loans and advances to customers (655,230) (134,577) Other assets (29,654) (28,255) Due to banks (11,447) (11,683) Other borrowed funds 26 (674) Due to other financial institutions 62,368 142,328 Deposits from customers 592,865 230,953 Other liabilities 9,490 15,164 Taxation paid (11,934) (9,064)

Net cash from (used in) operating activities 253,696 (11,157)

Investing activities Purchase of investment securities (182,830) (42,853) Proceeds from sale of investment securities 91,122 24,859 Purchase of property and equipment (16,953) (4,950) Dividends received 2,211 1,636 Acquisition of subsidiary, net of cash acquired 9 (10,181) -

Net cash used in investing activities (116,631) (21,308)

Financing activities Proceeds from issuance of long term subordinated bonds 100,000 - Repayment of other borrowed funds - (537) Proceeds from share capital increase 4,920 - Purchase of treasury shares (3,553) (16,783) Sale of treasury shares 6 30 Cash dividend paid to equity holders of the Bank 12 (14,023) - Cash dividend paid to non controlling interests (4,130) (4,218)

Net cash from (used in) financing activities 83,220 (21,508)

Net increase (decrease) in cash and cash equivalents 220,285 (53,973) Effect of foreign currency translation (169) (3,614) Cash and cash equivalents at 1 January 567,352 624,939

Cash and cash equivalents at 31 December 3 787,468 567,352

Additional cash flow information: Interest received 169,561 164,982 Interest paid 58,486 60,124

BURGAN BANK GROUP



TOTAL ASSETS 5,976,684 4,551,772









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BURGAN BANK GROUP

Notes to the Consolidated Financial Statements At 31 December 2012

9

1. INCORPORATION AND PRINCIPAL ACTIVITIES Burgan Bank S.A.K. ("the Bank”) is a public shareholding company incorporated in the State of Kuwait by Amiri Decree dated 27 December 1975 listed on the Kuwait Stock Exchange and is registered as a Bank with the Central Bank of Kuwait (“CBK”). The Bank’s registered address is P.O. Box 5389, Safat 12170, State of Kuwait. The consolidated financial statements of the Bank and its subsidiaries (collectively “the Group”) for the year ended 31 December 2012 were authorised for issue in accordance with a resolution of the Board of Directors on 27 January 2013 and are issued subject to the approval of the Ordinary General Assembly of the shareholders’ of the Bank. The Ordinary General Assembly of the Shareholders has the power to amend these consolidated financial statements after issuance. The principal activities of the Group are explained in note 17. The Bank is a subsidiary of Kuwait Projects Company Holding K.S.C. ("the Parent Company”). "The Companies Law issued on 26 November 2012 by Decree Law no 25 of 2012 (the “Companies Law”), which was published in the Official Gazette on 29 November 2012, cancelled the Commercial Companies Law No 15 of 1960. According to article 2 of the Decree, the Bank has a period of 6 months from 29 November 2012 to regularize its affairs in accordance with the Companies Law." 2. SIGNIFICANT ACCOUNTING POLICIES Basis of preparation The consolidated financial statements are prepared under the historical cost convention, except for financial assets classified as fair value through profit or loss, certain financial assets classified as available for sale and derivative financial instruments that are measured at fair value. The consolidated financial statements are presented in Kuwaiti Dinars (KD), which is the Bank's functional currency rounded to the nearest thousand except when otherwise stated. Statement of compliance The consolidated financial statements of the Group have been prepared in accordance with the regulations of the State of Kuwait for financial services institutions regulated by the CBK. These regulations require adoption of all International Financial Reporting Standards (“IFRS”) as issued by International Accounting Standards Board (“IASB”) except for International Accounting Standards (“IAS”) 39: Financial Instruments: Recognition and Measurement requirement for collective provision, which has been replaced by the CBK’s requirement for a minimum general provision as described under the accounting policies for impairment of financial assets. Changes in accounting policies and disclosures The accounting policies used in the preparation of these consolidated financial statements are consistent with those used in the previous financial year, except for the adoption of the following amendments to IFRS effective as of 1 January 2012:

IFRS 7 Financial Instruments: Disclosures — Enhanced Derecognition Disclosure Requirements (effective 1 July 2011)

IAS 12 Income Taxes – Recovery of Underlying Assets (effective 1 January 2012) The adoption of the standards or interpretations is described below: IFRS 7 Financial Instruments: Disclosures — Enhanced Derecognition Disclosure Requirements (effective 1 July 2011) The amendment requires additional disclosure about financial assets that have been transferred but not derecognised to enable the user of the Group’s financial statements to understand the relationship with those assets that have not been derecognised and their associated liabilities. In addition, the amendment requires disclosures about the entity’s continuing involvement in derecognised assets to enable the users to evaluate the nature of, and risks associated with, such involvement. The amendment is effective for annual periods beginning on or after 1 July 2011. The Group does not have any assets with these characteristics so there has been no effect on the presentation of its consolidated financial statements.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Changes in accounting policies and disclosures (continued) IAS 12 Income Taxes (Amendment) – Deferred Taxes: Recovery of Underlying Assets (effective 1 January 2012) The amendment clarified the determination of deferred tax on investment property measured at fair value and introduces a rebuttable presumption that deferred tax on investment property measured using the fair value model in IAS 40 should be determined on the basis that its carrying amount will be recovered through sale. It includes the requirement that deferred tax on non-depreciable assets that are measured using the revaluation model in IAS 16 should always be measured on a sale basis. The amendment is effective for annual periods beginning on or after 1 January 2012 and has no effect on the Group’s financial position, performance or its disclosures. Standards issued but not yet effective The following IASB Standards have been issued/amended but are not yet mandatory, and have not been adopted by the Group:

IFRS 7 Disclosures — Offsetting Financial Assets and Financial Liabilities — Amendments to IFRS 7 (effective 1 January 2013)

IFRS 9 Financial Instruments: Classification and Measurement (effective 1 January 2015) IFRS 10 Consolidated Financial Statements (effective 1 January 2013) IFRS 11 Joint Arrangements (effective 1 January 2013) IFRS 12 Disclosure of Involvement with Other Entities (effective 1 January 2013) IFRS 13 Fair Value Measurement (effective 1 January 2013) IAS 1 Financial Statement Presentation – Presentation of Items of Other Comprehensive Income

(effective 1 July 2012) IAS 19 Employee Benefits (Revised) (effective 1 January 2013) IAS 27 Separate Financial Statements (as revised in 2011) (effective 1 January 2013) IAS 28 Investments in associates and Joint Ventures (as revised in 2011) (effective 1 January 2013) IAS 32 Offsetting Financial Assets and Financial Liabilities — Amendments to IAS 32 (effective 1

January 2014) IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine (effective 1 January 2013)

The major changes are as follows: IFRS 7 Disclosures — Offsetting Financial Assets and Financial Liabilities — Amendments to IFRS 7 These amendments require an entity to disclose information about rights to set-off and related arrangements (e.g., collateral agreements). The disclosures would provide users with information that is useful in evaluating the effect of netting arrangements on an entity’s financial position. The new disclosures are required for all recognised financial instruments that are set off in accordance with IAS 32 Financial Instruments: Presentation. The disclosures also apply to recognised financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are set off in accordance with IAS 32. These amendments will not impact the Group’s financial position or performance and become effective for annual periods beginning on or after 1 January 2013.

IFRS 9 ‘Financial Instruments’: Classification and Measurement The standard was issued in November 2009 and becomes effective for annual years beginning on or after 1 January 2015. IFRS 9 improves the ability of the users of the financial statement to assess the amount, timing and uncertainty of future cash flows of the entity by replacing many financial instrument classification categories, measurement and associated impairment methods. The application of IFRS 9 will result in amendments and additional disclosures relating to financial instruments and associated risks.

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BURGAN BANK GROUP


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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Standards issued but not yet effective (continued) IFRS 10 Consolidated Financial Statements IFRS 10, which will be effective 1 January 2013, replaces the consolidation guidance in IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation - Special Purpose Entities by introducing a single consolidation model for all entities based on control, irrespective of the nature of the investee (i.e., whether an entity is controlled through voting rights of investors or through other contractual arrangements as is common in special purpose entities). Under IFRS 10, control is based on whether an investor has 1) power over the investee; 2) exposure or rights, to variable returns from its involvement with the investee; and 3) the ability to use its power over the investee to affect the amount of the returns. IFRS 11 Joint Arrangements IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities — Non-monetary Contributions by Venturers. IFRS 11 removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using the equity method. These amendments will not impact the Group’s financial position or performance and become effective for annual periods beginning on or after 1 January 2013. IFRS 12 Disclosure of Interests in Other Entities IFRS 12, which will be effective 1 January 2013, requires enhanced disclosures about both consolidated entities and unconsolidated entities in which an entity has involvement. The objective of IFRS 12 is to require information so that financial statement users may evaluate the basis of control, any restrictions on consolidated assets and liabilities, risk exposures arising from involvements with unconsolidated structured entities and non-controlling interest holders' involvement in the activities of consolidated entities. IFRS 13 Fair Value Measurement IFRS 13, which will be effective 1 January 2013, replaces the guidance on fair value measurement in existing IFRS accounting literature with a single standard. IFRS 13 defines fair value, provides guidance on how to determine fair value and requires disclosures about fair value measurements. However, IFRS 13 does not change the requirements regarding which items should be measured or disclosed at fair value. IAS 1 Financial Statement Presentation: The amendments to IAS 1 change the grouping of items presented in other comprehensive income. Items that could be reclassified (or ‘recycled’) to profit or loss at a future point in time (for example, upon derecognition or settlement) would be presented separately from items that will never be reclassified. The amendment becomes effective for annual periods beginning on or after 1 July 2012. IAS 19 Employee Benefits (Revised) Amended standard is effective for annual periods beginning on or after 1 January 2013, with earlier application permitted. With very few exceptions retrospective application is required. Numerous changes or clarifications are made under the amended standard. Among these numerous amendments, the most important changes are removing the corridor mechanism and making the distinction between short-term and other long-term employee benefits based on expected timing of settlement rather than employee entitlement. These amendments are not expected to impact the Group’s financial position or performance. IAS 28 Investments in Associates and Joint Ventures (as revised in 2011) As a consequence of the new IFRS 11 Joint Arrangements, and IFRS 12 Disclosure of Interests in Other Entities, IAS 28 Investments in Associates, has been renamed IAS 28 Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates. The revised standard becomes effective for annual periods beginning on or after 1 January 2013. IAS 32 Offsetting Financial Assets and Financial Liabilities — Amendments to IAS 32 These amendments clarify the meaning of “currently has a legally enforceable right to set-off”. The amendments also clarify the application of the IAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. These amendments are not expected to impact the Group’s financial position or performance and become effective for annual periods beginning on or after 1 January 2014.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Standards issued but not yet effective (continued) The application of the above standards/amendemnts is not expected to have a material impact on the financial position or performance of the Group as and when they become effective or early adopted, except for IFRS 9 and IFRS 13 which will result in amendments and/or additional disclosures relating to classification, measurement and associated risks of financial instruments. Adoption of other IASB Standards/amendments will not have a material effect on the consolidated financial position or the consolidated financial performance of the Group.

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

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

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

Losses within a subsidiary are attributed to the non controlling interests even if that results in a deficit balance.

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it:

Derecognises the assets (including goodwill) and liabilities of the subsidiary Derecognises the carrying amount of any non controlling interest Derecognises the cumulative translation differences, recorded in equity Recognises the fair value of the consideration received Recognises the fair value of any investment retained Recognises any surplus or deficit in the income statement Reclassifies the Group’s share of components previously recognised in other comprehensive income to

income statement or retained earnings, as appropriate.

The subsidiaries of the Group are as follows:

Name of company Country of

incorporation

Effective interest as at 31 December

2012

Effective interest as at 31 December

2011 Jordan Kuwait Bank P.S.C. (“JKB”) Jordan 51.19% 51.19% Algeria Gulf Bank S.P.A. (“AGB”) Algeria 91.13% 91.13% Bank of Baghdad P.J.S.C. (“BoB”) Iraq 51.79% 51.79% Tunis International Bank S.A (“TIB”) Tunisia 86.70% 86.70% Eurobank Tekfen (“ET”) Turkey 99.26% -

Held through JKB United Financial Investments Company Jordan 25.70% 25.70% Ejara Leasing Company Jordan 51.19% 51.19%

Held through BoB Baghdad Brokerage Company Iraq 51.79% 51.79% Held through ET EFG Finansal Kiralama A.S. Turkey 99.25% - EFG İstanbul Equities Menkul Degerler A.S Turkey 99.25% - Held through EFG İstanbul Equities Menkul Degerler A.S EFG İstanbul Portfoy Yonetimi A.S. Turkey 99.25% -

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments Classification of financial instruments The Group classifies financial instruments as at "fair value through profit or loss", "loans and receivables", "available for sale", "held to maturity" and "financial liabilities other than at fair value through profit or loss". Management determines the appropriate classification of each instrument at initial recognition. Recognition/de-recognition A financial asset or a financial liability is recognised when the Group becomes a party to the contractual provisions of the instrument. All regular way purchase and sale of financial assets are recognised using settlement date accounting. Changes in fair value between the trade date and settlement date are recognised in the consolidated income statement or in other comprehensive income in accordance with the policy applicable to the related instrument. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulations or conventions in the market place. A financial asset (in whole or in part) is derecognised either when: the contractual rights to receive the cash flows from the asset have expired; the Group has transferred its right to receive cash flows from the assets or has assumed an obligation to pay them in full without material delay to a third party under a ‘pass through’ arrangement; or the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the Group has transferred its right to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the consolidated income statement. Measurement All financial assets or financial liabilities are initially measured at fair value. Transaction costs are added only for those financial instruments not measured at fair value through profit or loss. Transaction costs on financial assets at fair value through profit or loss are recognised in the consolidated income statement. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss includes financial assets held for trading and financial assets designated upon initial recognition as at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling or buying in the near term. Changes in fair value are recognised in net investment income. Interest earned is accrued in interest income, using the effective interest rate (EIR), while dividend income is recorded under operating income, in the consolidated income statement, when the right to the payment has been established. Financial assets are designated as at fair value through profit or loss, if they are managed and their performance is evaluated on reliable fair value basis in accordance with documented investment strategy. After initial recognition financial assets at fair value through profit or loss are remeasured at fair value with all changes in fair value recognised in the consolidated income statement. Derivative instruments are categorised as held for trading unless they are designated as hedging instruments. Financial assets held to maturity Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as held to maturity when the Group has the positive intention and ability to hold to maturity. After initial recognition, held to maturity financial assets are carried at amortised cost using the effective interest rate method, less impairment losses, if any. The calculation takes into account any premium or discount on acquisition and includes transaction costs and fees that are an integral part of the effective interest rate.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments (continued) Measurement (continued) Loans and receivables These are non-derivative financial assets having fixed or determinable payments that are not quoted in an active market. These are subsequently measured at amortised cost using the effective yield method adjusted for impairment losses, if any. Treasury bills and bonds with CBK and others, due from banks and other financial institutions (“OFIs”), and loans and advances to customers are classified as “loans and receivables”. Financial assets available for sale Financial assets available for sale include equity and debt securities. Equity investments classified as available for sale are those, which are neither classified as held for trading nor designated at fair value through profit or loss. Debt securities in this category are those which are intended to be held for an indefinite period of time that may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. These are subsequently measured at fair value with gains and losses being recognised as other comprehensive income in the equity as "investment revaluation reserve" until the financial assets are derecognised or until the financial assets are determined to be impaired at which time the cumulative gains and losses previously reported as other comprehensive income in equity are transferred to the consolidated income statement. Financial assets whose fair value cannot be reliably measured are carried at cost less impairment losses, if any. Financial liabilities other than at fair value through profit or loss These are subsequently measured at amortised cost using the effective interest rate. Due to banks, Due to other financial institutions, Deposit from customers, Other borrowed funds, and Other liabilities are classified as “financial liabilities other than at fair value through profit or loss”. Other borrowed funds Financial instruments issued by the Bank that are not designated at fair value through profit or loss, are classified under ‘other borrowed funds’, where the substance of the contractual arrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares. After initial measurement, other borrowings are subsequently measured at amortised cost using the EIR. Financial guarantees In the ordinary course of business, the Group gives financial guarantees, consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognised in the financial statements at fair value, being the premium received. The premium received is amortised in the consolidated income statement in 'fee and commission income' on a straight line basis over the life of the guarantee. The guarantee liability is subsequently measured as a higher of the amount initially recognised less amortisation or the value of any financial obligation that may arise as a result of financial guarantee. Any increase in the liability relating to financial guarantees is recorded in the consolidated income statement. Derivative financial instruments The Group makes use of derivative instruments to manage exposures to interest rate, foreign currency and credit risks including exposures arising from forecast transactions. Where derivative contracts are entered into by specifically designating such contracts as a fair value hedge or a cash flow hedge of a recognised asset or liability, the Group accounts for them using hedge accounting principles, provided certain criteria are met. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. For derivative contracts that do not qualify for hedge accounting, any gains or losses arising from changes in fair value of the derivative contract are taken directly to the consolidated income statement.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Derivative financial instruments (continued) Hedge accounting For the purposes of hedge accounting, hedges are classified into two categories: (a) fair value hedges which hedge the exposure to changes in the fair value of a recognised asset or liability; and (b) cash flow hedges, which hedge exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction. When a financial instrument is designated as a hedge, the Group formally documents the relationship between the hedging instrument and hedged item as well as its risk management objectives and its strategy for undertaking the various hedging transactions. The Group also document its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The Group discontinues hedge accounting when the following criteria are not met:

a) it is determined that the hedging instrument is not, or has ceased to be, highly effective as a hedge; b) the hedging instrument expires, or is sold, terminated, or exercised; c) the hedged item matures or is sold or repaid; or d) a forecast transaction is no longer deemed highly probable.

Fair value hedges The changes in fair value of the hedging instrument that qualify and is designated as fair value hedge is recorded in the consolidated income statement, together with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. If the hedge accounting is discontinued, the fair value adjustment to the hedged item is amortised to the consolidated income statement over the period to maturity of the previously designated hedge relationship using the effective interest method. If the hedged item is derecognised, the unamortised fair value is recognised immediately in the consolidated income statement. Cash flow hedges For qualifying cash flow hedges, the fair value gain or loss associated with the effective portion of the cash flow hedge is recognised initially in other comprehensive income, and transferred to the consolidated income statement in the periods when the hedged transaction affects consolidated income statement. Any ineffective portion of the gain or loss on the hedging instrument is recognised immediately in the consolidated income statement. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in other comprehensive income at that time remains in other comprehensive income and is recognised when the hedged forecast transaction is ulimately recognised in the consolidated income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was recognised in other comprehensive income is immediately transferred to the consolidated income statement. Fair value of financial instruments The fair value of financial instruments traded in active markets is based on their quoted market price (bid price for assets and ask price for liabilities) without any deduction for transaction costs. For financial instruments not traded in active markets, a reasonable estimate of fair value is determined by reference to the current fair value of another instrument that is substantially the same;; recent arm’s length market transactions;; discounted cash flow analysis; or other valuation techniques commonly used by market participants. An analysis of fair values of financial instruments and further details as to how they are measured are provided in note 21. Amortised cost This is computed using the effective interest method less any allowance for impairment. The calculation takes into account any premium or discount on acquisition and includes transaction costs and fees that are an integral part of the effective interest rate.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Offsetting of financial instruments Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position, when the Bank has a legally enforceable right to offset and intends to settle either on a net basis or to realise the asset and settle the liability simultaneously. Assets pending sale The Group occasionally acquires non-monetary assets in settlement of certain financing receivables and loans and advances. Such assets are stated at the lower of the carrying value of the related financing receivables and loans and advances and the current fair value. Gains or losses on disposal, and revaluation losses, are recognised in the consolidated income statement. Impairment of financial assets The Group assesses at each reporting date whether there is objective evidence that a specific financial asset or a group of financial assets are impaired. A financial asset or a group of financial assets is deemed to be impaired, if and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence that a specific financial asset or a group of financial assets classified as loans and receivables are impaired includes whether any payment of principal or interest is overdue by more than 90 days or there are any known difficulties in the cash flows including the sustainability of the counterparty’s business plan, credit rating downgrades, breach of original terms of the contract, its ability to improve performance once a financial difficulty has arisen, deterioration in the value of collateral etc. The Group assess whether objective evidence of impairment exists on an individual basis for each individually significant asset and collectively for others not deemed individually significant. The impairment loss for financial assets classified as loans and receivables is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows including amounts recoverable from collateral and guarantees, discounted at the financial asset’s original effective interest rate. If the financial asset has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the consolidated income statement. For debt instruments classified as available-for-sale, the Group assesses individually whether there is objective evidence of impairment based on the same criteria as financial assets classified as loans and receivables. However, the amount recorded for impairment is the cumulative loss measured as the difference between the amortised cost and the current fair value, less any impairment loss on that investment previously recognised in the consolidated income statement. If, in a subsequent period, the fair value of a debt instrument increases and the increase can be objectively related to a credit event occurring after the impairment loss was recognised in the consolidated income statement, the impairment loss is reversed through the consolidated income statement. In the case of equity instruments classified as ‘available for sale’, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any evidence of impairment exists, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the consolidated income statement, is recognised in the consolidated income statement. Subsequent increases in fair value of such available for sale equity instruments are not reversed through the consolidated income statement. For non equity financial assets, the carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the consolidated income statement. If, in a subsequent period, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. In addition, in accordance with CBK instructions, a minimum general provision is made on all applicable credit facilities (net of certain categories of collateral) that are not provided for specifically. Financial assets are written off when there is no realistic prospect of recovery.

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17

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Renegotiated loans In the event of a default, the Group seeks to restructure loans rather than take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. When the terms and conditions of these loans are renegotiated, the terms and conditions of the new contractual arrangement apply in determining whether these loans remain past due. Management continually reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loan continues to be subject to an individual or collective impairment assessment calculated using the loan’s original EIR. Repurchase and reverse repurchase agreements Assets sold with a simultaneous commitment to repurchase at a specified future date at an agreed price (repos) are not derecognised in the consolidated statement of financial position as the Group retains substaintially all the risks and rewards of ownership. The cash received is recognised in the consolidated statement of financial position as an asset with a corresponding obligation to return it including the accrued interest as a liability, reflecting the transaction’s economic substance as loan to the Group. The difference between the sale and repurchase price is treated as interest expense using the effective interest rate method. Conversely, assets purchased with a corresponding commitment to resell at a specified future date at an agreed price (reverse repos) are not recognised in the consolidated statement of financial position. Amounts paid under these agreements are treated as interest earning assets and the difference between the purchase and resale price treated as interest income using the effective interest rate method. Cash and cash equivalents Cash and cash equivalents comprises of cash in hand and in current account with banks and OFIs and balances with CBK and due from banks and OFIs with original maturities not exceeding thirty days from acquisition date. Property and equipment Property and equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation is provided on all premises and equipment, other than freehold land, at rates calculated to write off the cost of each asset on a straight line basis over its estimated useful life. Freehold land is stated at cost less impairment losses. The estimated useful lives of the assets for the calculation of depreciation are as follows: Buildings 20 to 35 years Furniture and equipment 4 to 11 years Motor vehicles 3 to 7 years Computers 5 years When assets are sold or retired, their cost and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is recognised in the consolidated income statement. The carrying amounts of property and equipment are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the assets are written down to their recoverable amounts and the impairment loss is recognised in the consolidated income statement. Expenditure incurred to replace a component of an item of property and equipment that is accounted for separately is capitalised and the carrying amount of the component that is replaced is written off. Other subsequent expenditure is capitalised only when it increases future economic benefits of the related item of property and equipment. All other expenditure is recognised in the consolidated income statement as the expense is incurred. Intangible assets Intangible assets represent separately identifiable non-monetary assets without physical substance arising from business combinations. Intangible assets are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is the fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Intangible assets (continued) The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic life, as mentioned below, and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful economic life is reviewed at least at each financial position date. Changes in the expected useful economic life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the consolidated income statement under “other expenses” consistent with the function of the intangible asset. Amortisation is calculated using the straight-line method to write down the cost of intangible assets to their residual values over their estimated useful economic lives as follows: Banking license 10 to 30 years Customer relationships and core deposits 5 to 10 years Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the consolidated income statement when the asset is derecognised.

Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date: whether fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset.

Group as a lessee Leases that do not transfer to the Group substantially all the risks and benefits incidental to ownership of the leased items are operating leases. Operating lease payments are recognised as an expense in the consolidated income statement on a straight-line basis over the lease term. Contingent rental payable is recognised as an expense in the period in which they are incurred. Group as a lessor Leases where the Group does not transfer substantially all of the risk and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Business combinations and goodwill A business combination is the bringing together of separate entities or businesses into one reporting entity as a result of one entity, the acquirer, obtaining control of one or more other businesses. The acquisition method of accounting is used to account for business combinations. Under this method, the acquirer recognises, separately from goodwill, identifiable assets acquired, liabilities assumed and any non-controlling interests in the acquiree at the acquisition date. The identifiable assets acquired and the liabilities assumed at the acquisition date are measured at fair values. For each business combination, the acquirer measures the non-controlling interests in the acquiree at the proportionate share of the acquiree’s identifiable net assets. Acquisition costs incurred are expensed in the period in which they are incurred. If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through the consolidated income statement. Goodwill arising in a business combination is recognised as of the acquisition date as the excess of :

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

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

If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognised in consolidated income statement. Goodwill is allocated to each of the Group’s cash-generating units or for groups of cash generating units and is tested annually for impairment and is assesssed regularly whether there is any indication of impairment. Goodwill impairment is determined by assessing the recoverable amount of cash-generating unit to which goodwill relates. The recoverable value is the value in use of the cash-generating unit, which is the net present value of estimated future cash flows expected from such cash-generating unit. If the recoverable amount of cash generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit prorated on the basis of the carrying amount of each asset in the unit. Any impairment loss recognised for goodwill is not reversed in the subsequent period. Where goodwill forms part of a cash-generating unit (group of cash generating units) and part of the operations within that unit is disposed off, the goodwill associated with the operation disposed off is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. End of service indemnity Provision is made for amounts payable to employees under the Kuwait Labour Law, employee contracts and respective applicable laws in the countries where the subsidiaries operate. This liability, which is unfunded, represents the amount payable to each employee as a result of involuntary termination on the reporting date.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Treasury shares The Bank’s holding in its own shares is stated at acquisition cost and is recognised in shareholders’ equity. Treasury shares are accounted for using the cost method. Under this method, the weighted average cost of the shares reacquired is charged to a contra account in the equity. When the treasury shares are reissued, gains are credited to a separate account in equity, “treasury shares reserve”, which is not distributable. Any realised losses are charged to the same account to the extent of the credit balance on that account. Any excess losses are charged to retained earnings then to the voluntary reserve and statutory reserve. Gains realised subsequently on the sale of treasury shares are first used to offset any previously recorded losses in the order of reserves, retained earnings and the treasury shares reserve account. These shares are not entitled to any cash dividend that the Bank may propose. The issue of bonus shares increases the number of shares proportionately and reduces the average cost per share without affecting the total cost of treasury shares. Share based compensation The Bank operates an equity settled share based compensation plan. The cost of share based compensation transactions with employees is measured by reference to the fair value at the date on which they are granted. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options or shares on the date of grant using the Black Scholes model. Measurement inputs include share price on measurement date, exercise price, volatility, risk free interest rate and expected dividend yield. At each reporting date, the Group revises its estimates of the number of options that are expected to become exercisable. It recognises the impact of the revision of original estimates, if any, in the consolidated income statement, with a corresponding adjustment to equity. Other reserve Other reserve is used to record the effect of changes in ownership interest in subsidiaries, without loss of control. Revenue recognition Interest and similar income and expense Interest income and expense are recognised in the consolidated income statement for all financial instruments measured at amortised cost, interest bearing assets classified as available-for-sale and financial instruments designated at fair value through profit or loss using effective interest rate method. The effective interest rate is the rate that exactly discounts estimated future cash flows through the expected life of the financial instrument or, a shorter period, when appropriate, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, all fees and points paid or received between parties to the contract, transaction costs and all other premiums or discounts are considered, but not future credit losses. Once a financial instrument is impaired, interest is thereafter recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. When the Group enters into an interest rate swap to change interest from fixed to floating (or vice versa) the amount of interest income or expense is adjusted by the net interest on the swap. Credit origination fees are treated as an integral part of the effective interest rate of financial instruments and are recognised over their lives, except when the underlying risk is sold to a third party, at which time it is recognised immediately. Fee and commission income Fee and commission earned for the provision of services over a period of time are accrued over that period. These fee include credit related fee and other management fees. Loan commitment fee and originating fee that are an integral part of the effective interest rate of a loan are recognised (together with any incremental cost) as an adjustment to the effective interest rate on loan. Dividend income Dividend income is recognised when the right to receive payment is established.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Foreign currency Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions in foreign currencies are initially recorded at the spot rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the spot rate of exchange ruling at the reporting date. Any resultant gains or losses are recognised in the consolidated income statement. Non-monetary assets and liabilities in foreign currencies that are stated at fair value are translated to respective entity’s functional currency at the foreign exchange rates ruling on the dates that the values were determined. In case of non-monetary assets whose change in fair values are recognised directly in other comprehensive income, foreign exchange differences are recognised directly in other comprehensive income and for non-monetary assets whose change in fair value are recognised directly in the consolidated income statement, foreign exchange differences are recognised in the consolidated income statement. As at the reporting date, the assets and liabilities of subsidiaries are translated into the Bank’s presentation currency (KD) at the rate of exchange ruling on the reporting date, and their income statements are translated at the average exchange rates for the year. Exchange differences arising on translation are taken directly to other comprehensive income. On disposal of a foreign subsidiary, the deferred cumulative amount recognised in other comprehensive income relating to that particular subsidiary is recognised in the consolidated income statement. Any goodwill or fair value adjustments to the carrying amounts of assets and liabilities arising on acquisition are treated as assets and liabilities of the respective subsidiaries and translated at the rate of exchange ruling on the reporting date. Taxation National Labour Support Tax (NLST) The Bank calculates the NLST in accordance with Law No. 19 of 2000 and the Ministry of Finance Resolutions No. 24 of 2006 at 2.5% of taxable profit for the year. As per law, cash dividends from listed companies which are subjected to NLST have been deducted from the profit for the year. Kuwait Foundation for the Advancement of Sciences (KFAS) The Bank calculates the contribution to KFAS at 1% of profit for the year, in accordance with the modified calculation based on the Foundation’s Board of Directors resolution, which states that the Board of Directors’ remuneration and transfer to statutory reserve should be excluded from profit for the year when determining the contribution. Zakat Contribution to Zakat is calculated at 1% of the profit of the Bank in accordance with Law No. 46 of 2006 and the Ministry of Finance resolution No. 58/2007 effective from 10 December 2007. Taxation on overseas subsidiaries Taxation on overseas subsidiaries is calculated on the basis of the tax rates applicable and prescribed according to the prevailing laws, regulations and instructions of the countries where these subsidiaries operate. Income tax payable on taxable profit (‘current tax’) is recognised as an expense in the period in which the profits arise in accordance with the fiscal regulations of the respective countries in which the Group operates. Deferred tax assets are recognised for deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent it is probable that future taxable profits will be available to utilise this. Deferred tax liabilities are recognised for taxable temporary differences. Deferred tax assets and liabilities are measured using tax rates and applicable legislation at the reporting date. Segment information A segment is a distinguishable component of the Group that engages in business activities from which it earns revenue and incurs costs. The operating segments are used by the management of the Bank to allocate resources and assess performance. Operating segments exhibiting similar economic characteristics, product and services, class of customers where appropriate are aggregated and reported as reportable segments.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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

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

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

Significant accounting judgments, estimates and assumptions The preparation of the Group’s consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amount of revenues, expenses, assets and liabilities, and the accompanying disclosures, as well as the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.

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

Classification of financial assets On acquisition of financial assets, management decides whether it should be classified as investments at fair value through profit or loss or investments available for sale or loans and receivables.

Impairment of financial assets available for sale The Group treats available for sale equity investments as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires considerable judgement. In making this judgement, the Group evaluates, among other factors, historical share price movements and duration and extent to which the fair value of an investment is less than its cost

Deferred tax assets Deferred tax assets are recognised in respect of tax losses to the extent that it is probable that future taxable profits will be available against which the losses can be utilised. Judgment is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits, together with future tax planning strategies.

Estimation uncertainty and assumptions The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. The Group based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances beyond the control of the Group. Such changes are reflected in the assumptions when they occur:

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

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

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Significant accounting judgments, estimates and assumptions (continued) Estimation uncertainty and assumptions (continued) Valuation of unquoted equity investments and derivatives Fair valuation of unquoted equity investments and derivatives is normally based on one of the following:

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

characteristics and other valuation models.

The determination of the cash flows and discount factors for unquoted equity financial assets requires significant estimation. 3. CASH AND CASH EQUIVALENTS

2012

KD 000’s 2011

KD 000’s Cash on hand and in current account with banks and OFIs 400,172 329,234 Balances with the CBK 807 776 Due from banks and OFIs maturing within thirty days 386,489 237,342

787,468 567,352

4. DUE FROM BANKS AND OTHER FINANCIAL INSTITUTIONS

2012

KD 000’s 2011

KD 000’s Banks 524,522 659,361 OFIs 144,583 245,968

Less: 669,105 905,329 Provision for impairment (note 5) (58,325) (62,153)

610,780 843,176

5. LOANS AND ADVANCES TO CUSTOMERS a) Balances

2012

KD 000’s 2011

KD 000’s Corporate 3,052,462 1,920,440 Retail 445,592 427,316

Less: 3,498,054 2,347,756 Provision for impairment (113,648) (95,408)

3,384,406 2,252,348

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5. LOANS AND ADVANCES TO CUSTOMERS (continued) b) Provision for impairment

Banks

and OFIs Corporate Retail Total KD 000's KD 000's KD 000's KD 000's At 1 January 2012 62,177 83,360 30,815 176,352 On acquisition of a subsidiary - 24,507 668 25,175 Exchange adjustment 42 (17) 32 57 Amounts written off (18,585) (9,190) (15,533) (43,308) Charged to income statement 14,914 19,522 1,657 36,093 At 31 December 2012 58,548 118,182 17,639 194,369

Banks

and OFIs Corporate Retail Total KD 000's KD 000's KD 000's KD 000's At 1 January 2011 51,077 90,780 30,531 172,388 Exchange adjustment (26) (430) (49) (505) Amounts written off (873) (22,918) (862) (24,653) Charged to income statement 11,999 15,928 1,195 29,122

At 31 December 2011 62,177 83,360 30,815 176,352

Provision for impairment includes KD 22,396 thousand (31 December 2011: KD 18,791 thousand) including provision on OFI’s amounting to KD 223 thousand (31 December 2011: KD 24 thousand), being provision for non-cash facilities reported under other liabilities (note 11) The impairment provision for credit facilities complies in all material respects with the specific provision requirements of the CBK and IFRS. In March 2007, the CBK issued a circular amending the basis of making minimum general provisions on facilities changing the rate from 2% to 1% for cash facilities and 0.5% for non cash facilities. The revised rates are applied effective from 1 January 2007 on the net increase in facilities, net of certain restricted categories of collateral during the reporting period. The general provision as of 31 December 2006 in excess of the present 1% for cash facilities and 0.5% for non cash facilities amounts to KD 16,154 thousand and is retained as a general provision until further directive from the CBK. Interest income on impaired loans and advances is immaterial. The analysis of the provision for impairment based on specific and general provision is as follows:

2012

KD 000’s 2011

KD 000’s Specific provision 63,630 87,114 General provision 130,739 89,238

194,369 176,352

Non-performing loans to customers:

2012

KD 000’s 2011

KD 000’s Loans and advances to customers 247,294 270,364 Provisions 52,433 52,593 Collaterals 180,786 197,614

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6. INVESTMENT SECURITIES

2012

KD 000’s 2011

KD 000’s Financial assets at fair value through profit or loss Investments held for trading Debt securities - Quoted investments 14,780 - Equity securities - Quoted investments 2,318 1,674

Investments designated at fair value through profit or loss - Managed funds 60,922 -

Total financial assets at fair value through profit or loss 78,020 1,674

Financial assets available for sale Debt securities - Quoted 114,882 40,781 - Unquoted 22,300 23,125

137,182 63,906

Equity securities - Quoted 22,108 21,140 - Unquoted 59,905 54,273

82,013 75,413

Total financial assets available for sale 219,195 139,319

Financial assets held to maturity Debt securities - Quoted 13,806 7,584 - Unquoted - 8

Total financial assets held to maturity 13,806 7,592

Total investment securities 311,021 148,585

All unquoted available for sale investments are recorded at fair value except for investments with a carrying value of KD Nil (31 December 2011: KD 13,977 thousand), which are recorded at cost since fair value cannot be reliably estimated. 7. OTHER ASSETS

2012

KD 000’s 2011

KD 000’s Accrued interest receivable 47,569 26,227 Others * 106,487 73,309

154,056 99,536

* The balance at 31 December 2012 includes assets pending sale amounting to KD 34,930 thousand (31 December 2011: KD 15,900 thousand) acquired in respect of part settlement of loans.

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8. INTANGIBLE ASSETS

Goodwill KD 000’s

Other intangible

assets KD 000’s

Total

KD 000’s Cost At 1 January 2012 85,027 103,720 188,747 Addition (note 9) - 8,995 8,995 Exchange adjustment 706 565 1,271

At 31 December 2012 85,733 113,280 199,013

Accumulated amortisation At 1 January 2012 - 16,226 16,226 Charge for the year - 5,821 5,821

At 31 December 2012 - 22,047 22,047

Net book value At 31 December 2011 85,027 87,494 172,521

At 31 December 2012 85,733 91,233 176,966

The carrying amount of other intangible assets represents banking license KD 72,695 thousand, customer relationship KD 16,747 thousand and core customer deposits KD 1,791 thousand. (31 December 2011: banking license KD 76,206 thousand, customer relationship KD 9,132 thousand and core customer deposits KD 2,156 thousand). Impairment testing of goodwill The carrying value of goodwill is tested for impairment on an annual basis (or more frequently if evidence exists that goodwill might be impaired) by estimating the recoverable amount of the cash generating unit ("CGU") to which these items are allocated using value-in-use calculations. The carrying amount of intangible assets allocated to each CGU is disclosed under note 17. These calculations use pre-tax cash flow projections based on financial budgets approved by management over a five years period and a relevant terminal growth rate of 4% to 7% (31 December 2011: 4% to 7%). These cash flows were then discounted using a pre-tax discount rate of 11% to 17% 31 December 2011: 11% to 17%) to derive a net present value which is compared to the carrying value. The discount rate used is pre-tax and reflects specific risks relating to the relevant CGU. The Group has also performed a sensitivity analysis by varying these input factors by a reasonable possible margin. Based on such analysis, there are no indications that goodwill is impaired. 9. BUSINESS COMBINATION On 21 December 2012, the Bank acquired equity interest of 99.26% in Eurobank Tekfen and the entity has become subsidiary of the Group and has been consolidated from the date of exercise of control. The consideration for the acquisition was paid based on the preliminary closing date Net Asset Value (“NAV”) as of the closing date. Under the terms of the Share Purchase Agreement, a payment constituting an adjustment to the consideration shall be made after the agreement or determination of the closing accounts NAV within a specified timeframe. The consideration payable is subject to adjustments based on the outcome of the above. Eurobank Tekfen is incorporated in Turkey and is operating under the supervision of Banking Regulation and Supervision Agency (BRSA). The main activity of Eurobank Tekfen is Banking and related financial operations in Turkey.

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9. BUSINESS COMBINATION (continued) Eurobank Tekfen has been consolidated based on the provisional values assigned to the identifiable assets and liabilities as on the acquisition date and the management is in the process of determining the fair values of assets acquired and liabilities assumed. The Bank believes that with a wider footprint in the region, there are synergies arising from economies of scale and leverage of operational excellence. The consideration paid and the provisional values of the assets acquired and liabilities assumed, are equivalent to their carrying values (other than intangible assets – see below), at the acquisition date, as well as the non controlling interest’s proportionate share of the acquiree’s identifiable net assets in Eurobank Tekfen, are summarised as follows:

Total KD 000’s Assets Cash and cash equivalents 89,169 Loans and advances to customers 516,585 Investment securities 71,056 Other assets 24,866 Property and equipment 7,402 Other intangible assets (note 8) * 8,995 718,073 Liabilities Due to banks 49,234 Due to other financial institutions 352 Deposits from customers 506,472 Other borrowed funds 23,095 Other liabilities 26,738

605,891 Net assets acquired 112,182 Consideration settled in cash 99,350 Consideration payable 7,395 Non controlling interests in the acquiree 830 107,575 Net assets acquired (112,182) Gain on bargain purchase** (4,607) Consideration settled in cash (99,350) Cash and cash equivalents in the subsidiary acquired 89,169 Cash outflow on acquisition (10,181)

* Other intangible assets of ET represents customer relationship which has been assigned a provisional value. The Bank is in the process of identification of other intangible assets and these are subject to change on the completion of PPA exercise. ** Gain on bargain purchase of KD 4,607 thousand has been recognised in the consolidated income statement under “Other income”.

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9. BUSINESS COMBINATION (continued) The gross amounts due under loans and advances is KD 538,715 thousand, of which KD 22,130 thousand is expected to be uncollectible. The consolidated income statement of the Group for the year ended 31 December 2012 does not include results of the bank since it was acquired only on 21 December 2012 and the results for the period from the date of acquisition upto 31 December 2012 is not material to the Group. Had the acquisition of Eurobank Tekfen taken place at the beginning of the year, the operating income of the Group for the period would have been increased by KD 40,924 thousand amounting to a total of KD 231,040 thousand and the profit attributable to the equity holders of the Bank would have been increased by KD 2,496 thousand amounting to a total of KD 58,096 thousand. 10. OTHER BORROWED FUNDS

Effective

interest rate 2012

KD 000’s 2011

KD 000’s Subordinated notes* 8.125% 109,084 107,864 Subordinated bonds (Fixed tranch)** 5.650% 40,580 - Subordinated bonds (Floating tranch capped at 6.650%)** CBK +3.9% 58,380 - Other borrowings – subsidiaries 0.66% - 3.71% 22,941 -

230,985 107,864

* In 2010, Burgan Finance No. 1 (Jersey) Limited (incorporated with limited liability under the laws of the Jersey), a special purpose entity established by the Bank, has issued US$ 400 million 7.875 per cent subordinated notes due 2020 (the “Notes”) at a discounted price of 98.3 per cent of the principal amount. The Notes meet the requirements to be treated as Tier II eligible capital under Basel II regulations issued by the CBK. ** During the year, the Bank issued KD 100 million bonds due 2022 (the “Subordinated bonds”) at the the principal amount. The Bonds meet the requirements to be treated as Tier II eligible capital under Basel II regulations issued by the CBK. The bonds are callable in whole, or, in part, at the option of the Bank after 5 years from the date of the issuance (subject to certain conditions being satisfied and prior approval of the CBK) . 11. OTHER LIABILITIES

2012

KD 000’s 2011

KD 000’s Accrued interest payable 34,110 20,633 Staff benefits 13,362 9,335 Provision for non-cash credit facilities (note 5) 22,396 18,791 Other balances 135,935 91,524

205,803 140,283

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12. EQUITY AND RESERVES

a) The authorised, issued and fully paid up share capital of the Bank comprises 1,544,967,180 shares (31 December 2011: 1,471,397,310 shares) of 100 fils each.

At the annual general meeting of the shareholders held on 12 March 2012, 5% bonus shares (2011: 5% bonus shares) for the year ended 31 December 2011 was approved and issued. This resulted in an increase in the number of authorised and issued shares by 73,569,870 shares (2011: 70,066,544 shares) and share capital by KD 7,357 thousand (2011: KD 7,007 thousand).

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

c) The Commercial Companies Law and the Bank’s articles of association require that 10% of the profit for

the year attributable to equity holders of the Bank before Board of Directors remuneration, NLST, KFAS and Zakat be transferred annually to statutory reserve. The Bank may resolve to discontinue such annual transfers when the reserve equals 50% of paid up share capital. Distribution of statutory reserve is limited to the amount required to enable the payment of dividend of 5% of share capital in years when accumulated profits are not sufficient for the payment of a dividend of that amount.

d) The articles of association of the Bank requires an amount of not less than 10% of the profit for the year

attributable to equity holders of the Bank before Board of Directors remuneration, NLST, KFAS and Zakat be transferred annually to the voluntary reserve. There is no restriction on distribution of this reserve.

e) Treasury shares

2012 2011 Number of shares held 73,910,548 62,759,847

Percentage of shares held 4.78% 4.27% Market value KD 000’s 38,433 29,183

f) Proposed dividends The Board of Directors has recommended to distribute cash dividend of 10 fils per share (2011: 10 fils) and 5% bonus shares (2011: 5%) for the financial year ended 31 December 2012. Subject to being approved at the annual general meeting ("AGM") of the shareholders, the cash dividend and bonus shares shall be payable to shareholders registered in the Bank's records as of the AGM date.

13. FEE AND COMMISSION INCOME Fee and commission income includes KD 1,063 thousand (31 December 2011: KD 1,124 thousand) being fee income related to fiduciary activities. 14. NET INVESTMENT INCOME

2012

KD 000’s 2011

KD 000’s Financial assets at fair value through profit or loss: – net gain (loss) on investments held for trading 3 (298) – net gain on investments designated at fair value through profit or loss 1,151 -

1,154 (298)

Net gain from financial assets available for sale 863 6,537 2,017 6,239

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15. TAXATION

2012

KD 000’s 2011

KD 000’s NLST 1,262 1,124 KFAS 443 389 Zakat 498 438 Taxation arising from overseas subidiaries 13,781 8,698

15,984 10,649

Components of taxation arising from overseas subsidiary companies are as follows:

2012

KD 000’s 2011

KD 000’s Current tax 15,085 10,576 Deferred tax (1,304) (1,878)

13,781 8,698

The tax rate applicable to the taxable subsidiary companies is in the range of 15% to 30% (2011: 15% to30%) whereas the effective income tax rate for the year ended 31 December 2012 is in the range of 15% to 30% (2011: 15% to 30%). For the purpose of determining the taxable results for the year, the accounting profit of the overseas subsidiary companies were adjusted for tax purposes. Adjustments for tax purposes include items relating to both income and expense. The adjustments are based on the current understanding of the existing laws, regulations and practices of each overseas subsidiary companies jurisdiction. Deferred tax assets / liabilities are part of other assets / liabilities in the consolidated financial statements. 16. EARNINGS PER SHARE Basic and diluted earnings per share is computed by dividing the profit for the year attributable to equity holders of the Bank by the weighted average number of shares outstanding during the year less treasury shares. The computation of basic and diluted earnings per share is as follows: 2012 2011 KD 000’s KD 000’s (Restated)

Profit for the year attribuitable to equity holders of the Bank 55,600 50,562 Shares Shares

Weighted average number of outstanding shares, net of treasury shares 1,472,460,791 1,502,455,956

Basic and diluted earnings per share (fils) 37.8 33.7 The basic and diluted earnings per share for the comparative year presented have been restated for the effect of bonus shares issued on 12th March 2012 (note 12).

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17. SEGMENT INFORMATION For management purposes, the Group organises its operations by geographic territory in the first instance, primarily Domestic and International. All operations outside Kuwait are classified as International. Within its domestic operations, the Group is organised into the following business segments.

Banking: incorporating private customer current account business current and savings accounts, deposits, investment products, credit and debit cards, consumer and housing loans overdrafts, commercial loans and other credit facilities

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

Executive Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on segment result after provisions which in certain respects is measured differently from operating profit or loss in the consolidated financial statements. The table below presents income and results and certain assets and liabilities information regarding the Group’s operating segments.

Kuwait Operations

International Operations Group

Banking KD 000’s

Treasury and investment

banking KD 000’s

Total KD 000's

KD 000's Total

KD 000’s 31 December 2012 Net interest income 55,710 8,447 64,157 54,783 118,940 Segment operating income 72,731 25,503 98,234 91,882 190,116 Depreciation and amortisation (1,576) (945) (2,521) (8,431) (10,952) Segment result before provisions 59,108 23,083 82,191 52,151 134,342 Provision for impairment of loans and advances (4,414) (15,200) (19,614) (16,479) (36,093) Provision for impairment of investment securities - (12) (12) (4,009) (4,021) Segment result after provisions 54,694 7,871 62,565 31,663 94,228 Unallocated expenses (15,408) - (15,408) Profit for the year before taxation 47,157 31,663 78,820 Total assets 2,091,002 1,275,208 3,366,210 2,610,474 5,976,684 Total liabilities 1,691,919 1,679,086 3,371,005 1,985,786 5,356,791 Intangible assets - - - 176,966 176,966

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17. SEGMENT INFORMATION (continued)

Kuwait Operations International Operations Group

Banking KD 000’s

Treasury and investment

banking KD 000’s

Total KD 000's

KD 000's Total

KD 000’s 31 December 2011 Net interest income 49,910 7,965 57,875 46,702 104,577

Segment operating income 67,713 19,979 87,692 75,689 163,381

Depreciation and amortisation expenses (2,308) (361) (2,669) (8,614) (11,283)

Segment result before provisions 55,593 18,084 73,677 43,899 117,576 Write back of (provision for) impairment of loans and advances 104 (11,941) (11,837) (17,285) (29,122) (Provision for) write back of impairment of investment securities - (4,630) (4,630) 105 (4,525)

Segment result after provisions 55,697 1,513 57,210 26,719 83,929

Unallocated expenses (15,614) - (15,614)

Profit for the year before taxation 41,596 26,719 68,315

Total assets 1,651,228 1,287,726 2,938,954 1,612,818 4,551,772

Total liabilities 1,087,093 1,744,721 2,831,814 1,154,249 3,986,063

Intangible assets - - - 172,521 172,521

18. TRANSACTIONS WITH RELATED PARTIES The Group has entered into transactions with certain related parties (parent company, directors and key management personnel of the Group and entities controlled, jointly controlled or significantly influenced by such parties) who were customers of the Group during the year. The “Others” column in the table below mainly represent transactions with entities that are either controlled or significantly influenced by the parent company. The terms of these transactions are approved by the Group’s management. The balances and transactions are as follows:

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18. TRANSACTIONS WITH RELATED PARTIES (continued)

Parent company KD 000's

Others KD 000's

2012 KD 000s

2011 KD 000s

Due from banks and other financial institutions - 106,926 106,926 216,103 Loans and advances to customers - 322,092 322,092 163,045 Investment securities 4,147 36,614 40,761 41,507 Investment securities managed by a related party* - 64,705 64,705 5,175 Due to banks - 7,177 7,177 2,949 Due to other financial institutions - 25,121 25,121 36,330 Deposits from customers 3,543 50,046 53,589 51,020 Contingent liabilities and commitments Letters of credit - 1,706 1,706 1,536 Letters of guarantee - 8,018 8,018 11,349

Transactions Interest income 85 19,073 19,158 15,167 Interest expense 715 688 1,403 1,633 Fee and commission income 30 2,402 2,432 1,154 Fee and commission expense - 294 294 235 Dividend income 87 334 421 968

No. of Board members or

executive staff 2012

KD 000’s

2011

KD 000’s Board members Loans and advances to customers 1 450 300 Deposits from customers 8 1,581 1,833

Executive staff Loans and advances to customers 18 478 335 Deposits from customers 34 1,383 1,360 Letters of guarantee 1 1 1 * During the year the Bank acquired a Private Equity Portfolio from a related party for KD 59,120 thousand. Key management compensation Remuneration paid or accrued in relation to “key management” (deemed for this purpose to comprise Directors in relation to their committee service, the Chief Executive Officer and other Senior Officers) was as follows:

2012 2011 KD 000’s KD 000’s Short term employee benefits – including salary and bonus 3,637 3,062 Accrual for end of service indemnity 348 374 Accrual for cost of long term incentive rights 493 290 4,478 3,726

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19. COMMITMENTS AND CONTINGENT LIABILITIES

2012

KD 000’s 2011

KD 000’s Acceptances 46,077 33,369 Letters of credit 379,150 246,929 Letters of guarantee 684,127 538,421 Undrawn lines of credit 216,284 168,634 Other commitments 53,935 -

1,379,573 987,353

The primary purpose of these instruments is to ensure that funds are available to customers as required. Acceptances, standby letters of credit and guarantees, which represent irrevocable assurances that the Group will make payments in the event that the customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are undertaken by the Group on behalf of the customer authorising a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct borrowing. Commitments to extend credit represent unused portions of authorisations to extend cash credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments since most of these commitments will expire or terminate without being funded. The Group makes available to its customers guarantees which may require that the Group makes payments on their behalf. Such payments are collected from customers based on the terms of the letter of credit. They expose the Group to similar risks to loans and these are mitigated by the same control processes and policies. 20. DERIVATIVE FINANCIAL INSTRUMENTS In the ordinary course of business the Group enters into various types of transactions that involve derivative financial instruments. Derivatives are carried at fair value. Positive fair value represents the cost of replacing all derivative transactions with a fair value in the Groups’ favour had the rights and obligations arising from that derivative instrument been closed in an orderly market transaction at the reporting date. Credit risk in respect of derivative financial instruments is limited to the positive fair value of instruments. Negative fair value represents the cost to the Groups’ counter parties of replacing all their transactions with the Group. The Group deals in forward foreign exchange contracts, swaps and options for customers and to manage its foreign currency positions and cash flows. The table below shows the fair value of derivative financial instruments, recorded as assets or liabilities, together with their notional amounts analysed by the terms of maturity. The notional amount, recorded gross, is the amount of a derivative’s underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured. The notional amounts indicate the volume of transactions outstanding at the year end and are indicative of neither the market risk nor the credit risk. The credit risk exposure is managed as part of the overall borrowers lending limits, together with potential exposures from market movements. Derivatives held for trading Derivative transactions for customers and derivatives used for hedging purpose but which do not meet the qualifying criteria for hedge accounting are classified as ‘Derivatives held for trading’. The risk exposures on account of derivative transactions for customers are covered by entering in to similar transactions with counter parties or by other risk mitigating transactions.

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20. DERIVATIVE FINANCIAL INSTRUMENTS (continued) Forward foreign exchange contracts Forward foreign exchange contracts are contractual agreements to either buy or sell a specified currency, at a specific price and date in the future, and are customised contracts transacted in the over-the-counter market. Options Options are contractual agreements that convey the right, but not the obligation, for the purchaser either to buy or sell a specified amount of a financial instrument at a fixed price, either at a fixed future date or at any time within a specified period. The Group purchases and sells options through regulated exchanges and in the over–the–counter markets. Options purchased by the Bank provide the Group with the opportunity to purchase (call options) or sell (put options) the underlying asset at an agreed–upon value either on or before the expiration of the option. The Group is exposed to credit risk on purchased options only to the extent of their carrying amount, which is their fair value. Options written by the Group provide the purchaser the opportunity to purchase from or sell to the Bank the underlying asset at an agreed–upon value either on or before the expiration of the option. Swaps Swaps are contractual agreements between two parties to exchange streams of payments over time based on specified notional amounts, in relation to movements in a specified underlying index such as an interest rate, foreign currency rate or equity index. Interest rate swaps relate to contracts taken out by the Bank with other financial institutions in which the Group either receives or pays a floating rate of interest, respectively, in return for paying or receiving a fixed rate of interest. The payment flows are usually netted against each other, with the difference being paid by one party to the other. In a currency swap, the Group pays a specified amount in one currency and receives a specified amount in another currency. Currency swaps are mostly gross–settled. Notional amount

31 December 2012 Positive fair

value Negative fair

value Within 1

year Over 1 year Total

KD 000’s KD 000’s KD 000’s KD 000’s KD 000’s Derivatives held for trading: (non-qualifying hedges) Forward swaps/ foreign exchange contracts 1,048 (1,627)

131,850 1,034 132,884

Interest rate swaps 812 (479) 7,366 40,664 48,030 Options 1,570 (1,570) 223,339 12,941 236,280 Notional amount

31 December 2011 Positive fair

value Negative fair

value Within 1

year Over 1 year Total

KD 000’s KD 000’s KD 000’s KD 000’s KD 000’s Derivatives held for trading: (non-qualifying hedges) Forward swaps/ foreign exchange contracts 105 (56) 21,447 - 21,447

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21. FAIR VALUE OF FINANCIAL INSTRUMENTS 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. Financial instruments comprise of financial assets and financial liabilities. The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities; Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and Level 3: techniques which use inputs that have a significant effect on the recorded fair value that are not based on observable market data. Fair values of all financial instruments, except for certain available for sale investments which are carried at cost less impairment (Note 6) are not materially different from their carrying values. For financial assets and financial liabilities that are liquid or having a short-term maturity (less than three months) it is assumed that the carrying amounts approximate to their fair value. This assumption is also applied to demand deposits, savings accounts without a specific maturity and variable rate financial instruments. At 31 December 2012 Level 1 Level 2 Level 3 Total KD ′000 KD ′000 KD ′000 KD ′000 Financial assets Financial assets at fair value through profit or loss: Financial assets held for trading : Equity securities 2,318 - - 2,318 Debt securities 14,780 - - 14,780 Derivative financial instuments:

- Forward swaps/foreign exchange contracts - 1,048 - 1,048

- Interest rate swaps - 812 - 812 - Options - 1,570 - 1,570

Financial assets designated at fair value through profit or loss : Managed funds 4,503 - 56,419 60,922 Financial assets available for sale : Equity securities 22,108 59,905 - 82,013 Debt securities 114,882 - 22,300 137,182 Financial liabilities Financial liabilites at fair value through profit or loss: Derivative financial instuments:

- Forward swaps/foreign exchange contracts - 1,627 - 1,627

- Interest rate swaps - 479 - 479 - Options - 1,570 - 1,570

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21. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) At 31 December 2011 Level 1 Level 2 Level 3 Total KD ′000 KD ′000 KD ′000 KD ′000 Financial assets Financial assets at fair value through profit or loss: Financial assets held for trading : Derivative financial assets Equity securities 1,674 - - 1,674 Derivative financial instuments:

- Forward swaps/foreign exchange contracts - 105 - 105

Financial assets available for sale : Equity securities 21,140 40,296 - 61,436 Debt securities 40,781 - 23,125 63,906 Financial liabilities Financial liabilites at fair value through profit or loss: Derivative financial instuments:

- Forward swaps/foreign exchange contracts - 56 - 56

During the year ended 31 December 2012, there were no transfer between level 1, level 2 and level 3. 22. FIDUCIARY ASSETS The Group manages investment funds on behalf of customers with net asset value of KD 94,003 thousand (31 December 2011: KD 90,993 thousand). 23. RISK MANAGEMENT INTRODUCTION Monitoring and controlling risks is primarily performed based on limits established by the Group. These limits reflect the business strategy and market environment of the Group as well as the level of risk that the Group is willing to accept, with additional emphasis on selected geographic and industrial sectors. In addition, the Group monitors and measures the overall risk bearing capacity in relation to the aggregate risk exposure across all risk types and activities. The operations of certain subsidiaries are also subject to regulatory requirements within the jurisdictions where it operates. Such regulations not only prescribe approval and monitoring of activities, but also impose certain restrictive provisions (e.g. capital adequacy) to minimise the risk of default and insolvency on the part of the banking and insurance companies to meet unforeseen liabilities as these arise. As part of its overall risk management, the Group uses derivatives and other instruments to manage exposures resulting from changes in interest rates and foreign currency transactions. The risk profile is assessed before entering into hedge transactions, which are authorised by the appropriate level of seniority within the Group.

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23. RISK MANAGEMENT (continued) A. CREDIT RISK The Group classifies the risks faced as part of its day to day activities into certain categories of risks and accordingly specific responsibilities have been given to various officers for the identification, measurement, control and reporting of these identified families of risks. The categories of risks are:

A. Risks arising from financial instruments: i. Credit risk which includes default risk of clients and counterparties ii. Market risk which includes interest rate, foreign exchange and equity price risks and iii. Liquidity risk

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

Credit risk is the risk that a counterparty will be unable to pay amounts in full when due. The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or group of borrowers, and to geographical and industry segments. Such risks are monitored on a regular basis and are subject to regular review. Limits on the level of credit risk by product, industry sector and by country are approved by the Board. The exposure to any one borrower, including Banks and OFIs is further restricted by sub limits covering items on statement of financial position and commitments and contingent liabilities exposures and daily delivery risk limits in relation to trading items such as forward foreign exchange contracts. Actual exposures against limits are monitored daily. The Group has a well documented credit policy that complies with CBK regulations and defines the appetite of the Group for assumption of risks in its various business groups. Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral and corporate and personal guarantees. Credit risk arising from derivative financial instruments is limited to those with positive fair values, recorded in the consolidated statement of financial position. Maximum exposure to credit risk: The table below shows the maximum exposure to credit risk across financial assets before and after taking into consideration the effect of any collateral and other credit enhancements i.e. credit risk mitigation.

2012

KD 000’s 2011

KD 000’s Cash and cash equivalents 714,194 487,836 Treasury bills and bonds with CBK and others 483,588 419,079 Due from banks and other financial institutions 610,780 843,176 Loans and advances to customers 3,384,406 2,252,348 Investments securities 165,768 71,498 Other assets 47,569 26,227

Total 5,406,305 4,100,164

Commitments and contingent liabilities 1,379,573 987,353

Maximum credit risk exposure before consideration of credit risk mitigation 6,785,878 5,087,517

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

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23. RISK MANAGEMENT (continued) A. CREDIT RISK (continued) Collateral and Credit risk mitigation techniques The amount, type and valuation of collateral are based on guidelines specified in the risk management framework. The main types of collaterals accepted include real estate and marketable securities. The revaluation and custody of collaterals are performed independent of the business units. The main credit risk mitigation techniques applied by the Group are based on eligible collaterals. The Group’s management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement, and monitors the market value of the collateral at regular intervals in line with regulatory guidelines. For further details regarding the Group’s use of credit risk mitigation techniques, and collateral policy, refer to Basel II – Pillar 3 Disclosures (Item 7) under the risk management section of the annual report. Credit risk concentration The top 10 largest exposures outstanding as a percentage of gross loans and advances to customers at 31 December 2012 is 16% (31 December 2011: 17%). The concentration across classes within loans and advances to customers, which form the significant portion of assets subject to credit risk, is given in note 5. The Group’s financial assets and commitments and contingent liabilities, before taking into account any collateral held or credit enhancements can be analysed by the following geographic regions: 2012 2011

Assets

KD 000s

Commitments and contingent

liabilities KD 000s

Total KD 000s

Assets KD 000s

Commitments and contingent

liabilities KD 000s

Total KD 000s

Kuwait 2,813,321 629,960 3,443,281 2,350,388 630,018 2,980,406 Other middle east 1,094,284 182,094 1,276,378 1,034,357 179,904 1,214,261 Europe 898,068 266,189 1,164,257 174,443 12,548 186,991 Rest of world 600,632 301,330 901,962 540,976 164,883 705,859

5,406,305 1,379,573 6,785,878 4,100,164 987,353 5,087,517

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

2012

KD 000’s 2011

KD 000’s

Industry sector Sovereign 955,358 601,658 Banking 1,048,470 1,058,181 Investment 205,717 225,098 Trade and commerce 799,005 565,953 Real estate 747,061 675,291 Personal 894,265 768,722 Manufacturing 470,332 313,326 Construction 540,843 370,124 Others 1,124,827 509,164

6,785,878 5,087,517

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23. RISK MANAGEMENT (continued) A. CREDIT RISK (continued) Credit quality per class of financial assets The credit quality of financial assets are summarised by reference to public ratings given to the clients/counterparties by recognised and approved External Credit Assessment Institutions (ECAIs) namely Moody’s, Standard and Poor’s and Fitch. Based on the rating systems as declared by the ECAIs, the ratings are classified into Investment Grade and Non-Investment Grade ratings. Those who are not rated by any of these three ECAIs are considered to be unrated. In order to ensure that the ratings are not considered selectively, if a current rating from one of these ECAIs available in respect of any client/counterparty, it is always taken into account and in such cases, the client/counterparty is not considered as unrated. For further details regarding the Group’s credit risk management policy please refer to Basel II – Pillar 3 Disclosures (Item 6-iii) under the risk management section of the annual report. a) Financial assets neither past due nor impaired

2012 Rated Unrated Total

Investment

grade Non investment

grade KD 000’s KD 000’s KD 000’s KD 000’s Sovereigns 530,739 - 282,782 813,521 Banks and OFIs 608,414 54,813 331,349 994,576 Corporates - 3,823 2,617,107 2,620,930 Retail - 778 396,452 397,230 Other credit exposures - - 213,339 213,339

1,139,153 59,414 3,841,029 5,039,596

2011 Rated Unrated Total

Investment

grade Non investment

grade KD 000’s KD 000’s KD 000’s KD 000’s Sovereigns 498,555 - 103,103 601,658 Banks and OFIs 560,332 196,534 343,588 1,100,454 Corporates - - 1,554,022 1,554,022 Retail - - 372,702 372,702 Other credit exposures - - 97,725 97,725

1,058,887 196,534 2,471,140 3,726,561

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

2012 2011

1 to 45 days

45 to 90 days Total

1 to 45 days

45 to 90 days Total

KD000's KD 000's KD 000's KD 000's KD 000's KD 000's Banks and OFIs - - - - - - Corporates 118,195 28,523 146,718 82,552 6,726 89,278 Retail 12,456 12,211 24,667 9,999 8,576 18,575

130,651 40,734 171,385 92,551 15,302 107,853

Fair value of collateral held 51,529 1,549 53,078 69,399 727 70,126

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23. RISK MANAGEMENT (continued) A. CREDIT RISK (continued) Credit quality per class of financial assets (continued) c) Impaired financial assets The Group considers an asset to be impaired if the realisable value of the asset is less than the value at which it is carried in the books of the Group before it considers the necessity of making a specific provision for the same.

2012 2011

Total Provision

Fair value of collateral

held Total Provision

Fair value of collateral

held KD 000's KD 000's KD 000's KD 000's KD 000's KD 000's

Banks and OFIs 2,298 1,835 - 73,356 25,377 18,259 Corporates 235,729 48,836 175,715 244,023 34,828 191,743 Retail 11,565 3,597 5,071 26,341 17,765 5,871

249,592 54,268 180,786 343,720 77,970 215,873

B. MARKET RISK Market risk is the risk that the value of an asset will fluctuate as a result of changes in market variables such as interest rates, foreign exchange rates, and equity prices, whether those changes are caused by factors specific to the individual investment or its issuer or factors affecting all financial assets traded in the market. Market risk is managed on the basis of pre-determined asset allocations across various asset categories, diversification of assets in terms of geographical distribution and industry concentration, a continuous appraisal of market conditions and trends and management’s estimate of long and short term changes in fair value. Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect the fair value or cash flows of the financial instruments. The Group takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. This arises as a result of mismatches or gaps in the amounts of assets and liabilities and off balance sheet instruments that mature or reprice in a given period. The Group manages this risk by matching the repricing of assets and liabilities through risk management strategies. The Group is exposed to interest rate risk on its interest bearing assets and liabilities (treasury bills and bonds with CBK and others, due from banks and other financial institutions, loans and advances to customers, due to banks, due to other financial institutions, deposits from customers and other borrowed funds). The table below summarises the effect on net interest income as a result of the changes in interest rate:

2012 2011 KD 000’s KD 000’s Increase in interest rate "Basis Points" 50 3,854 3,451 100 7,727 6,434

Decrease in interest rate “Basis Points” 50 (2,920) (3,262) 100 (6,002) (6,192)

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23. RISK MANAGEMENT (continued) B. MARKET RISK (continued) Currency risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group takes on exposure to effects of fluctuations in the prevailing currency exchange rates on its financial position and cash flows. The Board of Directors sets limits on the level of exposure by currency and in total for both overnight and intra-day positions, which are monitored daily. The Group had the following net exposures in foreign currencies:

2012 2011 KD 000’s KD 000’s Long/(short) Long/(short) US Dollar 13,642 (14,234) Euro 68 191 Japenese Yen (5) (10) Saudi Riyal 189 552 UAE Dirham 637 904 Others 510 4,483 The Group conducts multiple sensitivity analysis scenarios on regular intervals in order to assess the potential impact of any major fluctuation in exchange rates of major currencies against the KD or functional currency of the entity within the Group. Based on the results of the analysis conducted there are no material implication over the Group’s foreign exchange income or other comprehensive income for a 1% fluctuation in the major currencies exchange rates. Equity price risk Equity price risk is the risk that the fair values of equities will fluctuate as a result of changes in the level of equity indices or the value of individual share prices. Equity price risk arises from the change in fair values of equity investments. The Group manages this risk through diversification of investments in terms of geographical distribution and industry concentration. The majority of the Group’s quoted investments are listed on the regional Stock Exchanges. The Group conducts sensitivity analysis on regular intervals in order to assess the potential impact of any major changes in fair value of equity instruments. Based on the results of the analysis conducted there are no material implication over the Group’s profit or other comprehensive income for a 1% fluctuation in major stock exchanges. Prepayment risk Prepayment risk is the risk that the Group will incur a financial loss because its customers and counterparties repay or request repayment earlier than expected, such as fixed rate mortgages when interest rate fall. The fixed rate assets of the Group are not significant compared to the total assets. Moreover, other market conditions causing prepayment is not significant in the markets in which the Group operates. Therefore the Group considers the effect of prepayment on net interest income is not material after taking in to account the effect of any prepayment penalties.

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23. RISK MANAGEMENT (continued) C. LIQUIDITY RISK Liquidity risk is the risk that the Group will be unable to meet its liabilities when they fall due. The Group is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, loan draw downs, guarantees. To limit this risk, the Group manages assets with liquidity in mind and monitors liquidity on a daily basis. The table below shows an analysis of financial liabilities and contingent liabilities and commitments based on the remaining undiscounted contractual maturities:

Up to 3 months

KD 000’s

3 – 6 months

KD 000’s

6 – 12 months

KD 000’s

More than 12 months KD 000’s

Total

KD 000’s 2012 Financial liabilities Due to banks 270,137 38,338 11,387 10,676 330,538 Due to other financial institutions 172,199 88,171 238,145 226,965 725,480 Deposits from customers 3,093,337 353,881 357,136 176,814 3,981,168 Other borrowed funds - 9,821 9,804 341,226 360,851 Other liabilities* 71,950 28,100 53,184 52,569 205,803 3,607,623 518,311 669,656 808,250 5,603,840 Contingent liabilities and

commitments 626,430 166,300 272,338 314,505 1,379,573

Up to 3 months

KD 000’s

3 – 6 months

KD 000’s

6 – 12 months

KD 000’s

More than 12 months KD 000’s

Total

KD 000’s 2011 Financial liabilities Due to banks 273,735 3,588 14,587 - 291,910 Due to other financial institutions 228,183 39,409 208,331 184,184 660,107 Deposits from customers 2,053,625 330,844 311,943 123,116 2,819,528 Other borrowed funds 2,194 - 4,387 179,155 185,736 Other liabilities* 121,683 8,891 4,398 5,311 140,283 2,679,420 382,732 543,646 491,766 4,097,564 Contingent liabilities and

commitments 446,998 138,950 244,736 156,669 987,353 * Other liabilities includes negative fair value of derivative financial liabilities (note 20).

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23. RISK MANAGEMENT (continued) C. LIQUIDITY RISK (continued) The table below summarises the maturity profile of the Group’s assets and liabilities. The maturities of assets and liabilities have been determined according to when they are expected to be recovered or settled. The maturity profile for financial assets at fair value through profit or loss and financial assets available for sale is determined based on management's estimate of liquidation of those financial assets. The actual maturities may differ from the maturities shown below since borrowers may have the right to prepay obligations with or without prepayment penalties.

Up to 3 months KD 000s

3 – 6 months KD 000s

6 – 12 months KD 000s

More than 12 months KD 000s

Total

KD 000s 2012 ASSETS Cash and cash equivalents 787,468 - - - 787,468 Treasury bills and bonds with CBK and others 241,521 124,749 79,793 37,525 483,588 Due from banks and other financial institutions 370,526 92,185 59,911 88,158 610,780 Loans and advances to customers 1,164,216 388,634 339,256 1,492,300 3,384,406 Investment securities 120,998 3,406 3,978 182,639 311,021 Other assets 70,714 27,229 2,111 54,002 154,056 Property and equipment - - - 68,399 68,399 Intangible assets - - - 176,966 176,966 Total assets 2,755,443 636,203 485,049 2,099,989 5,976,684

LIABILITIES AND EQUITY Due to banks 253,334 37,795 10,743 9,762 311,634 Due to other financial institutions 172,121 87,631 234,236 219,265 713,253 Deposits from customers 3,029,964 347,753 345,959 171,440 3,895,116 Other borrowed funds - 2,338 2,338 226,309 230,985 Other liabilities 71,950 28,100 53,184 52,569 205,803 Equity - - - 619,893 619,893 Total liabilities and equity 3,527,369 503,617 646,460 1,299,238 5,976,684

Net liquidity gap (771,926) 132,586 (161,411) 800,751 -

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23. RISK MANAGEMENT (continued) C. LIQUIDITY RISK (continued)

Up to 3 months

KD 000s

3 – 6 months

KD 000s

6 – 12 months

KD 000s

More than 12 months KD 000s

Total

KD 000s 2011 ASSETS Cash and cash equivalents 567,352 - - - 567,352 Treasury bills and bonds with CBK and others 163,513 126,510 91,818 37,238 419,079 Due from banks and other financial institutions 422,213 110,271 89,472 221,220 843,176 Loans and advances to customers 810,629 313,936 294,963 832,820 2,252,348 Investment securities 17,489 3,350 4,897 122,849 148,585 Other assets 74,873 5,866 2,394 16,403 99,536 Property and equipment - - - 49,175 49,175 Intangible assets - - - 172,521 172,521 Total assets 2,056,069 559,933 483,544 1,452,226 4,551,772

LIABILITIES AND EQUITY Due to banks 273,541 3,585 14,478 - 291,604 Due to other financial institutions 227,847 39,168 205,516 178,002 650,533 Deposits from customers 2,041,699 328,257 307,407 118,416 2,795,779 Other borrowed funds - - - 107,864 107,864 Other liabilities 121,683 8,891 4,398 5,311 140,283 Equity - - - 565,709 565,709 Total liabilities and equity 2,664,770 379,901 531,799 975,302 4,551,772

Net liquidity gap (608,701) 180,032 (48,255) 476,924 -

D. OPERATIONAL RISK Operational risk is the risk of loss arising from the failures in operational process, people and system that supports operational processes. The Group has a set of policies and procedures, which are approved by the Board of Directors and are applied to identify, assess and supervise operational risk in addition to other types of risks relating to the banking and financial activities of the Group. Operational risk is managed by Risk management. Risk management ensures compliance with policies and procedures to identify, assess, supervise and monitor operational risk as part of overall Global risk management. The Operational Risk management function of the Group is in line with the CBK instructions dated 14 November 1996, concerning the general guidelines for internal controls and the instructions dated 13 October 2003, regarding the sound practices for managing and supervising operational risks in banks. 24. CAPITAL MANAGEMENT The primary objectives of the Group's capital management policy are to ensure that the group complies with regulatory capital requirements and that the group maintains strong credit ratings and health capital ratios in order to support its business and maximise shareholder value. Capital adequacy and the use of regulatory capital are monitored regularly by the Group’s management and are governed by guidelines of Basel Committee on Banking Supervision as adopted by the CBK.

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24. CAPITAL MANAGEMENT (continued) The Group’s regulatory capital and capital adequacy ratios are shown below: 2012 2011 KD 000s KD 000s Risk weighted assets 4,003,762 2,985,083

Capital required 480,451 358,211

Capital available Tier 1 capital 479,986 439,456 Tier 2 capital 261,894 146,475

Total capital 741,880 585,931

Tier 1 capital adequacy ratio 12.0% 14.7% Total capital adequacy ratio 18.5% 19.6% Regulatory capital consists of Tier 1 capital, which comprises share capital, disclosed reserves and non-controlling interests less treasury shares and goodwill. The other component of regulatory capital is Tier 2 capital, which includes subordinated long term debt, available for sale reserve and general provisions. Certain adjustments are made to regulatory capital as per CBK. The disclosures relating to the Capital Adequacy Regulations issued by CBK as stipulated in CBK Circular number 2/BS/184/2005 dated 21 December 2005, are included under the ‘Basel II – Pillar 3 discloures’ section of the annual report.

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24. CAPITAL MANAGEMENT (continued) The Group’s regulatory capital and capital adequacy ratios are shown below: 2012 2011 KD 000s KD 000s Risk weighted assets 4,003,762 2,985,083

Capital required 480,451 358,211

Capital available Tier 1 capital 479,986 439,456 Tier 2 capital 261,894 146,475

Total capital 741,880 585,931

Tier 1 capital adequacy ratio 12.0% 14.7% Total capital adequacy ratio 18.5% 19.6% Regulatory capital consists of Tier 1 capital, which comprises share capital, disclosed reserves and non-controlling interests less treasury shares and goodwill. The other component of regulatory capital is Tier 2 capital, which includes subordinated long term debt, available for sale reserve and general provisions. Certain adjustments are made to regulatory capital as per CBK. The disclosures relating to the Capital Adequacy Regulations issued by CBK as stipulated in CBK Circular number 2/BS/184/2005 dated 21 December 2005, are included under the ‘Basel II – Pillar 3 discloures’ section of the annual report.

driven by you How to obtain our 2012 Financial Statements:

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

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

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

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

For further information on our 2012 Financial Statement, please telephone +965 2298 8000.

A member of the KIPCO Group

كيف تحصل على البيانات المالية لعام 2012

للمساهمين الذين يحضرون االجتماع العام، سوف تقدم nلهم نسخة من البيانات المالية للموافقة عليها.

يمكن للمساهمين طلب نسخة عن البيانات المالية، nلتصلهم عبر البريد. لترتيب هذا األمر، الرجاء االتصال على

الرقم 8000 2298 965+

يمكن للمساهمين طلب نسخة عن البيانات المالية، nلتصلهم عبر البريد اإللكتروني. لترتيب ذلك، يرجى ارسال

طلب عبر البريد اإللكتروني على العنوان [email protected]

يمكن للمساهمين تحميل PDF نسخة عن البيانات المالية، nwww.burgan.com على عنواننا اإللكتروني

لمزيد من االستفسار عن البيانات المالية 2012 يرجى االتصال على 8000 2298 965+

annual report2012burgan.com/uploads/burga_annual_review_english_2012.pdfachieved the “best bank in...

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