Consolidated Financial Statements and Independent Auditors' Report

Board of Directors’ Report
The Directors have pleasure in presenting their report together with the audited consolidated financial statements
of National Bank of Kuwait S.A.K. (“the Bank”) and its subsidiaries (collectively “the Group”) for the year ended 31
December 2010.
Overseas Operations
A long standing pillar of NBK’s diversification strategy has been regional expansion. 2010 witnessed the opening of
additional branches in Egypt and Qatar; internet banking commenced in Qatar and Jordan and a preliminary approval
was secured to setup NBK in Syria. The Group made further progress in integrating AWB into the fuller NBK Group
and is well positioned to extract enhanced benefits going forward.
The contribution from overseas operations continued to increase and accounted for KD 58.1 million of the net profit for
the year, an increase of 12% from 2009. Total international assets at 2010 year end amounted to KD 4,459.4 million.
Stake in Boubyan increased to 47.3%
NBK’s strategy of diversifying into Islamic banking in its home market took further traction in 2010 with the Group
increasing its stake in Boubyan Bank to 47.3% (2009: 40%). Boubyan Bank is well positioned to excel in the provision
of services and products to the growing Islamic sector, witnessed for instance by a double digit growth in Islamic
Financing to customers during 2010.
2010 Financial Performance
The Group reported a net profit after non-controlling interests for 2010 of KD 301.7 million, an increase of KD 36.5
million (14%) compared to the reported net profit of KD 265.2 million for 2009.
Net interest income for 2010 at KD 358.8 million reflects a 5% decrease from the 2009 level of KD 376.8 million. Focused
funding cost management and a diversification of asset classes, offset to some degree the lack of credit growth and
contracting margins that resulted from the prevailing global business conditions.
Fees and commissions for 2010 at KD 98.3 million are down KD 5.2 million from KD 103.5 million in 2009, mainly
reflecting lower loan fees as a result of the lack in loan growth.
Share of results of associates for 2010 amounted to KD 11.8 million compared to a loss of KD 5.2 million for 2009. The
turnaround reflects continued strong performance by IBQ, significant provisions made in 2009 by Boubyan Bank and
an otherwise strong contribution from Boubyan Bank in 2010 fuelled by double digit loan volume growth.
Operating expenses for 2010 at KD 159.1 million are down KD 20.9 million on 2009 operating expenses of KD 179.9 million.
The Bank compensated clients in 2009 to the amount of KD 19.4 million for investments made through the Bank in a fund
that utilized Bernard L. Madoff Investment Securities LLC as its execution agent and sub custodian. Depreciation for 2010
at KD 10.2 million reflects an increase of KD 2.5 million on the 2009 level of KD 7.6 million. The increased depreciation
largely reflects the successful implementation of a substantial portion of the state of the art Core Banking systems in
Kuwait and Egypt. Excluding the client compensation and increased depreciation, the group’s cost base decreased by
KD 4 million, reflecting the positive benefit of various cost saving initiatives implemented across the Group.
The 2010 general provision charge for credit losses at KD 0.4 million compares with a charge of KD 27.2 million in
2009. The 2009 charge included a judgmental loan provision of KD 19 million that was made due to the prevailing
uncertainties in global business conditions.
2010 Balance Sheet
Total assets of the Group were KD 12,898.9 million at the end of 2010, slightly below the KD 12,907.3 million at the end of 2009.
Loans and advances increased by KD 36.2 million to KD 7,853.3 million at 2010 year end. Investment securities increased
by KD 149.0 million to KD 1,320.0 million and Investment in associates increased by KD 116.5 million to KD 504.3 million at
the end of 2010, mainly reflecting the increase in Boubyan Bank stake from 40% to 47.3%. The Group has a strong liquidity
position with cash, short term funds, Central Bank of Kuwait bonds and Kuwait Government treasury bonds amounting to
KD 2,029.3 million at 2010 year end. Deposits with banks amounted to KD 716.4 million at 2010 year end.
The Group’s general provisions relating to on-balance sheet credit facilities were KD 168.3 million at the end of 2010
while specific provisions were KD 111.0 million at 2010 year end compared to KD 127.8 million at 2009 year end. The
drop in specific provision levels in 2010 partly reflects the transfer of pre-invasion loans and advances of KD 21.3
million along with the related provisions to off-balance sheet memorandum accounts with the approval of the Central
Bank of Kuwait. The Group operates a conservative credit policy with a balanced diversification across all business
sectors and geographical areas. Loan collateral mixes and values are continually monitored to ensure that optimum
protection is afforded to the Group at all times.
Customer deposits ended on KD 6,385.2 million at 2010 year end. The Group benefits from a loyal Kuwaiti consumer base
whose deposits are a continuing source of stable funding which can be increased to meet loan growth when needed.
Due to banks and financial institutions decreased by KD 195.2 million to KD 4,073.9 million at 2010 year end.
Cash and non-cash credit facilities provided by the Bank to members of the Board of Directors and to related parties
amounted to KD 213.0 million at 2010 year end against collateral of KD 357.7 million. Deposits of Board members and
related parties were KD 94.2 million. Loans and facilities to the Bank’s executive management amounted to KD 634
thousand while deposits of the Bank’s executive management amounted to KD 1,133 thousand.
Equity Attributable to the Shareholders of the Bank
Total equity attributable to the shareholders of the Bank, after deducting the proposed cash dividend of KD 143.5
million, amounted to KD 2,074.1 million at the end of 2010 from KD 1,708.1 million at the end of 2009. In October 2010,
the bank made a rights issue to its shareholders of 327.1 million shares at KD 0.500, resulting in an increase in equity
of KD 163.5 million. The Group also had a net sale of KD 46.8 million in value of treasury shares during the year which
reflected as an increase to total share capital.
The Basel II capital adequacy ratio at the 2010 year end was 18.3% compared to the minimum 12% prescribed by
the Central Bank of Kuwait.
Share Based Compensation Plan
The Bank operates an equity settled share based compensation plan and granted 2,746,160 (2009: 3,189,990) share
options to its senior executives in 2010 with a fair value of KD 0.915 (2009: KD 0.957) per share option. These options
will vest if employees remain in service for a period of three years from the grant date and the employees can exercise
the options within one year from the vesting date.
Bonus Shares, Dividends and Proposed Appropriations
The net profit for the year was principally allocated as follows:
1. KD 143.5 million to the dividend account for the distribution of a cash dividend of 40 fils per share (40 fils in 2009)
subject to the approval of shareholders at the annual general meeting.
2. KD 36.0 million to the share capital account to cover the issuance of bonus shares equal to 10% of share capital
at the end of 2010 (equivalent to 359,793,192 shares with a nominal value of 100 fils per share) subject to the
approval of shareholders at the annual general meeting.
3. KD 31.2 million to the statutory reserve account to increase the balance to the minimum requirement of 50% of
share capital.
4. KD 91.1 million to retained earnings.
Important Financial Indicators
KD million 2010 2009 2008
Total assets 12,898.9 12,907.3 11,973.3
Loans and advances to customers 7,853.3 7,817.1 6,955.4
Customer deposits 6,385.2 6,600.2 5,545.2
Total operating income 498.6 518.5 508.5
Profit attributable to shareholders of the parent Bank 301.7 265.2 255.3
50 National Bank of Kuwait - Annual Report 2010 51