GROUP CEO & MANAGING DIRECTOR’S STATEMENT WE WILL CONTINUE OUR EFFORTS TO MITIGATE RISK AND TARGET SELECTIVE BUSINESS GROWTH OPPORTUNITIES THAT FOCUS ON CONTRA-CYCLICAL SECTORS WHILE IMPLEMENTING RIGOROUS COST MANAGEMENT MEASURES ACROSS ALL AREAS OF OUR BUSINESS AND ENSURING THAT CAPITAL PRESERVATION IS ALWAYS THE FOREMOST PRIORITY IN AN ENVIRONMENT OF HEIGHTENED RISKS. 18 ANNUAL REPORT 2008 2008 was an exceptional year marked by a global financial crisis and unprecedented fallouts and challenges for markets and financial institutions everywhere. While AUB was not immune to the ripple effects of the crisis, our focus since early in the year was geared to anticipate and mitigate, to the extent possible, its adverse impact on our financial position and balance sheet. Having recognised the early signs of a potentially widening contagion and worsening operating environment, we responded by realigning our business model, and taking precautionary and corrective measures with particular focus on liquidity, asset quality, risk and operational management. As a result, AUB was able to end the year on an overall positive profitability note, posting a net profit of US$ 255.7 million compared to US$ 296.3 million for 2007. While this represents a drop of 13.7% from the previous year, it nevertheless reflects a prudent and required approach to address prevailing market conditions which have considerably increased risk levels. On a positive and encouraging note, our core business earnings continued to show healthy and diversified growth, generating a 4.5% increase in total operating income to a record US$ 665.5 million (2007: US$ 637.0 million), despite difficult market conditions. AUB’s profits for 2008 were impacted by our conservative stance towards prevailing market and business risks. The bank increased its net provisions to US$ 98.6 million as compared to US$ 26.2 million in 2007 to adequately cover identified loan risks. This decision will maintain our specific provisions against identified problem loans at a solid 90% level, further backed by our strong collective impairment provisions. Non-performing loans stand at an acceptable 1.9% of our overall loan and advances portfolio (1.2% in 2007). AUB has also pro-actively identified and written-off all its impaired international securities and investments, generating a net loss of US$ 12.4 million against a net profit of US$ 25 million on the same non-trading investments account in 2007. This is a practical and tangible demonstration of our risk asset management approach which centres on immediate problem recognition and prompt implementation of required remedial actions including full write-offs as implemented in 2008 to ensure a healthy balance sheet going forward. Given our assessment of increased risk levels, asset growth was also de-accelerated from the second half of 2008 with focus directed towards deposit accumulation and liability management. In this respect, client deposits increased by a very solid 22.2% to US$ 13.2
GROUP CEO & MANAGING DIRECTOR’S STATEMENT billion, reflecting our clients’ strong underlying confidence in the Bank, while total assets growth was prudently managed at a level of 2.3% to reach US$ 23.6 billion by 2008 end (US$ 23.0 billion in 2007). Total equity, including minority interests were at US$ 2.4 billion. The drop in equity funds of US$ 253 million was mostly caused by the full write-off of impaired international investments (mitigated by the sale of investments to realize gains in the first half of 2008 prior to significant market corrections); the sharp drop in values of “available for sale” investment bond portfolios (due to widening of credit spreads) and the cash flow hedges which were hit by the sharp drops in interest rates. In this context, it is important to note that the negative mark to market adjustments were thoroughly analyzed in terms of potential impairment and do not represent currently impaired or problematic exposures. They represent very high quality investment grade bonds (c.90% of portfolio) whose prices have been disrupted by exceptional market conditions but are expected based on historic and current performance to service all their payment obligations as and when they fall due. Their related hedges are not speculative positions. They represent a liability management tool to lock in funding costs enabling maintenance of asset yields. As noted above, all identified impaired assets have been written off in 2008. AUB was also able to secure extended refinancing for two years of US$ 800 million out of its existing medium term syndicated loan facility from 30 October 2009 to 30 October 2011 at very competitive terms, despite adverse market conditions. This represents a watershed transaction, given the prevailing turmoil, demonstrating AUB’s credentials in the global banking community and its successful focus on proper liquidity management and in recognition AUB was a recipient of three prestigious awards for the loan facility from Euroweek, including one for “Best Middle Eastern Loan for Financial Institutions”. Despite the current constraints and challenges, we continue to develop strategically. Our joint venture with the UK-based Legal & General Plc has received its commercial registration. It will add conventional and Takaful life insurance products to our product offerings in 2009 and will broaden our wealth management options. We are also on track to convert our 75% subsidiary bank, Bank of Kuwait & the Middle East K.S.C., into a full fledged Sharia compliant bank by the end of 2009 which will add another important product dimension and business capability to the AUB Group. 19 ANNUAL REPORT 2008 In 2008, AUB Group achieved another milestone, with the number of our branches crossing the 100 threshold, propelling AUB into a more exclusive tier of regional banks. As at 2008 year end, AUB Group’s branch network including associates stood at 106 in seven countries (Bahrain, Kuwait, Qatar, Oman, Egypt, Iraq and the UK), demonstrating our commitment to widen the breadth and depth of our network and other delivery channels to our customers everywhere. Our branch network provides a number of unique cross border services to our 444,000 clients. This represents an integral dimension of our regional strategy to provide effective services on both a single country and cross border basis. We are also pleased with the vote of confidence by the international financial community in AUB’s standing, performance and future outlook, as evidenced in maintaining our ratings to date by international rating agencies. In 2008, both Fitch and Standard & Poor’s reaffirmed AUB’s Credit Rating of “A-“(stable) while Capital Intelligence reaffirmed AUB’s rating as A (Stable). The key reasons cited were AUB’s leading commercial position in the Kingdom of Bahrain, better geographic diversification than other regional peers, improving financial performance and strong asset quality.