Annual Report - Ahli United Bank

Annual Report - Ahli United Bank

OperatingDivisionsCORPORATE BANKING, TREASURY & INVESTMENTSThis division covers all the Bank’s capital-intensive activities in risk asset generation and funding regionally and internationally.- Corporate and Trade Finance- Treasury- Commercial Property Finance- Residential Property Finance- Acquisition and Structured Finance- Correspondent Banking- Islamic BankingPRIVATE BANKING & WEALTH MANAGEMENTThis division generally includes all the low capital-intensive sectors of the business, offering wealth management services to individualsand institutions based on performance and a balanced product mix.- Private Banking and Asset Management- Real Estate Fund Management- Islamic BankingRETAIL BANKINGThis division covers all individual customers’ deposits, loans, overdrafts, credit cards and residential mortgages, covering bothconventional and Islamic.RISK MANAGEMENTThis division is responsible for the identification, assessment and ongoing control of all material risks that could affect the Group’s business& operations.- Risk Management- Legal- Compliance- AuditSUPPORT SERVICESThese divisions provide banking services for on-going business activities of the Group, as well as supporting the Group’s expansionthrough mergers and acquisitions.- Finance & Strategic Development- Information Technology- Operations- Services- Human ResourcesAUB Annual Report 20095

ConsolidatedPerformance SummaryUSD $200.7 millionNet Profit for the Year2009 2008 2007 2006 2005US $ ‘000 US $ ‘000 US $ ‘000 US $ ‘000 US $ ‘000NET PROFIT* 200,718 255,723 296,317 207,480 164,865TOTAL ASSETS 23,573,983 23,582,727 23,049,852 20,798,907 13,872,229TOTAL LOANS 13,299,999 13,632,220 12,035,153 8,873,357 5,986,396TOTAL LIABILITIES (INCLUDINGSUBORDINATED LIABILITIES) 20,992,552 21,187,950 20,401,731 18,972,235 12,249,031SHAREHOLDERS’ EQUITY* 2,213,523 1,995,435 2,309,720 1,543,118 1,367,618NON-CONTROLLING INTEREST 367,908 399,342 338,401 283,554 255,580RETURN ON AVERAGE ASSETS 0.9% 1.3% 1.7% 1.7% 2.1%RETURN ON AVERAGE EQUITY 9.6% 11.4% 18.0% 15.1% 13.5%COST TO INCOME RATIO 34.2% 39.1% 37.5% 40.1% 37.6%FINANCIAL LEVERAGE 9.2 10.2 8.5 12.0 8.7RISK ASSET RATIO** 15.1% 13.8% 16.2% 14.8% 16.4%NET INTEREST MARGIN 2.4% 2.2% 2.2% 1.8% 1.9%EARNINGS PER SHARE (US CENTS) - BASIC 4.2 5.3 7.9 5.5 4.5EARNINGS PER SHARE (US CENTS) - DILUTED 4.2 5.3 6.9 4.9 3.9* Attributable to Bank’s equity shareholders** Under BASEL II from 2008.AUB Annual Report 20097

PrincipalSubsidiariesAHLI UNITED BANK(UK) P.L.C.2009 2008 2007 2006 2005US $ ‘000 US $ ‘000 US $ ‘000 US $ ‘000 US $ ‘000NET PROFIT 7,164 7,088 25,370 15,152 12,176TOTAL ASSETS 2,030,367 2,305,646 2,541,853 3,445,908 2,619,619TOTAL LOANS 1,309,903 1,095,061 1,210,724 1,089,040 830,621TOTAL LIABILITIES 1,813,063 2,101,818 2,323,757 3,220,410 2,397,599SHAREHOLDERS’ EQUITY 217,304 203,828 218,096 225,498 222,020RETURN ON AVERAGE ASSETS 0.3% 0.3% 0.8% 0.5% 0.5%RETURN ON AVERAGE EQUITY 3.4% 3.4% 11.1% 6.8% 5.7%COST TO INCOME RATIO 41.3% 48.3% 44.1% 70.3% 66.0%FINANCIAL LEVERAGE 8.2 10.0 10.4 14.0 10.5RISK ASSET RATIO* 16.5% 15.6% 14.6% 13.9% 18.0%EARNINGS PER SHARE (US CENTS) 3.6 3.5 12.3 7.6 6.1* Under BASEL II from 2008.8 AUB Annual Report 2009

COMMERCIALBANK OF IRAQ P.S.C.2008 2007 2006 2005 2004NET PROFIT 4,263 2,407 2,101 1,660 1,416TOTAL ASSETS 204,674 213,177 164,594 155,585 73,466TOTAL LOANS 17,567 23,434 25,706 25,044 14,482TOTAL LIABILITIES 89,338 96,559 78,864 92,943 60,917SHAREHOLDERS’ EQUITY 67,053 65,304 63,777 62,642 12,549RETURN ON AVERAGE ASSETS 2.2% 1.3% 1.3% 1.8% 2.2%RETURN ON AVERAGE EQUITY 6.4% 3.7% 3.3% 11.3% 15.9%COST TO INCOME RATIO 27.2% 26.4% 24.7% 41.6% 53.1%FINANCIAL LEVERAGE 1.3 1.5 1.2 1.3 2.7RISK ASSET RATIO 348.1% 201.5% 114.8% 101.3% 47.8%EARNINGS PER SHARE (FILS) 71.1 40.1 35.0 117.1 142.02009 Financial Statements are under audit.Based on Financial Statements under local GAAP.AUB Annual Report 200911

PrincipalSubsidiaries (Contd.)KUWAIT & MIDDLE EASTFINANCIAL INVESTMENTCOMPANY K.S.C.(C)(KMEFIC)2009 2008 2007 2006 2005KD ‘000 KD ‘000 KD ‘000 KD ‘000 KD ‘000NET (LOSS) PROFIT (9,443) 3,934 13,262 8,610 10,168TOTAL ASSETS 86,236 95,107 112,869 81,106 65,067TOTAL LOANS 14,418 15,486 13,719 10,129 12,710TOTAL LIABILITIES 39,607 39,900 48,258 38,367 21,921SHAREHOLDERS’ EQUITY 44,797 52,565 62,184 40,792 43,090RETURN ON AVERAGE ASSETS (10.4%) 3.8% 13.7% 12.4% 15.6%RETURN ON AVERAGE EQUITY (19.4%) 6.9% 27.4% 20.8% 32.1%COST TO INCOME RATIO 115.7% 62.4% 38.1% 46.9% 37.0%EARNING PER SHARE (FILS) - BASIC (36.2) 15.1 51.7 34.3 39.312 AUB Annual Report 2009

PrincipalAssociatesAHLI BANK Q.S.C.2009 2008 2007 2006 2005QR’ 000 QR’ 000 QR’ 000 QR’ 000 QR’ 000NET PROFIT 300,515 425,781 302,652 202,241 138,621TOTAL ASSETS 18,449,561 17,799,276 15,576,381 9,556,360 6,181,033TOTAL LOANS 12,407,056 11,547,061 10,105,785 6,294,372 3,490,141TOTAL LIABILITIES 16,496,986 16,158,893 14,052,534 8,373,890 5,108,875SHAREHOLDERS’ EQUITY 1,952,575 1,640,383 1,523,847 1,182,470 1,072,158RETURN ON AVERAGE ASSETS 1.7% 2.6% 2.7% 2.7% 2.8%RETURN ON AVERAGE EQUITY 17.5% 26.0% 24.6% 18.5% 15.0%COST TO INCOME RATIO 31.4% 25.3% 30.0% 37.7% 39.4%FINANCIAL LEVERAGE 8.3 9.6 9.1 6.9 4.6RISK ASSET RATIO * 15.2% 12.0% 12.9% 13.2% 19.5%EARNINGS PER SHARE (QR) 4.9 7.3 5.2 3.5 2.4* Under BASEL II from 2006AUB Annual Report 200913

PrincipalAssociates (Contd.)AHLI BANK S.A.O.G.2009 2008 2007 2006 2005RO’ 000 RO’ 000 RO’ 000 RO’ 000 RO’ 000NET PROFIT 8,541 5,933 2,219 3,914 4,418TOTAL ASSETS 616,058 456,405 305,967 175,178 155,258TOTAL LOANS 443,562 375,298 239,413 150,717 132,592TOTAL LIABILITIES 523,440 369,349 224,978 143,512 123,476SHAREHOLDERS’ EQUITY 92,618 87,056 80,988 31,666 31,783RETURN ON AVERAGE ASSETS 1.6% 1.6% 0.9% 2.4% 3.2%RETURN ON AVERAGE EQUITY 9.5% 7.1% 3.9% 12.3% 14.5%COST TO INCOME RATIO 44.3% 54.0% 56.0% 36.7% 25.1%FINANCIAL LEVERAGE 5.5 4.2 2.7 4.4 3.8RISK ASSETS RATIO* 17.6% 23.4% 40.9% 33.1% 41.2%EARNINGS PER SHARE (BAIZA) 12.6 8.7 4.9 8.9 10.0* Under BASEL II from 2007.14 AUB Annual Report 2009

AUB Annual Report 200915

Board ofDirectors’ Report“WE ARE ENCOURAGED BY THE BANK’SSTRONG FUNDAMENTALS WHICHHAVE ENABLED IT TO SUCCESSFULLYNAVIGATE THE REGIONAL RIPPLEEFFECTS OF THE GLOBAL ANDREGIONAL ECONOMIC SLOWDOWN”.The Directors of Ahli United Bank (“AUB” or the “Bank”) are pleased to submit the Annual Report and accompanying consolidated FinancialStatements for the year ended 31 December 2009.GENERAL OPERATING ENVIRONMENTThe global financial meltdown of Q4 2008 left indelible marks on the financial and economic landscape which shaped all banks’ operatingenvironment and related performance in 2009. The salient features of these changes were an initial disruption of normal fundingoperations given widespread uncertainty related to underlying risks. Secondly, a massive widening of risk premium as corporates, banksand governments struggled to fund their needs. Thirdly, a pattern of recurrent sovereign and corporate problems emerging, sendingfurther waves of instability into shaken markets.Regionally, all economies faced with varying degrees of intensity, the consequence of the OECD financial and economic crisis. The theoryof economic de-coupling proved to be illusory. Large quasi-sovereign and corporate failures reflected the risks pervading global marketsand revealed the imprudent excesses of boom time lending sprees.16 AUB Annual Report 2009

These adverse trends gradually receded in the second half of the year with a degree of stability, albeit at very low growth levels, settingin. Massive OECD fiscal and monetary interventions have hopefully removed the risk of double-dip global recession but the economicoutlook remains a concern, as sustainable signs of a broad based, robust recovery have not yet emerged.In the Gulf and broader MENA region, strong oil prices have given governments the ability to increase spending without running downlegacy reserves which has created a degree of cautious optimism in most markets that the worst of the storm is behind us.At AUB, we remain in a very prudent and risk averse stance, by very closely monitoring the potential impact of OECD stimulus reductionand the policies of our different host governments in terms of helping their respective economies to return to better levels of economicperformance.PERFORMANCE OVERVIEWWhile the Bank remained focused on its core regional commercial banking business model within its established strategy, further focuswas given to the following:• Tight asset liability management ;• Focused monitoring of identified risk exposures to ensure prompt recognition of impaired assets, related provisioning with a morevigorous asset review and remedial asset management approach;• Selective business growth within prudent risk parameters focusing on contra-cyclical sectors;• A phased de-risking of the balance–sheet profile by deploying liquidity from corporate credits to sovereign and quasi sovereignbond and FRN exposures with better risk and liquidity features;• Maintaining counterparty and client confidence at high levels;• Continuing operational streamlining and disciplined cost control.Against the backdrop of the continuing challenging operating environment and the Bank’s pro-active management responses as outlinedearlier, the key highlights of our performance for the fiscal 2009 are:• Consolidated net profit, attributable to the Bank’s equity shareholders, of US$200.7 million as against US$255.7 million in 2008, adrop of 21.5%, impacted by prudent provisioning for loan losses and contingencies of US$228.1 million (2008: US$98.6 million) toensure adequate mitigation of identified risks. This included provisions of US$171.5 million allocated representing circa 90% of itsexposures to specified impaired Saudi corporate assets.• Total operating income increased by 4.6% to US$ 696.4 million from US$ 665.5 million in 2008, supported by a higher Net InterestIncome (+15.7%).• Total assets were maintained at US$23.6 billion (2008 – US$ 23.6 billion) with loans and advances conservatively placed at US$13.3billion (2008: US$13.6 billion).• Given the set policy of limiting absolute asset growth due to prevailing risk factors, customers’ deposits were maintained at US$13.2 billion (2008: US$ 13.2 billion).• Deposit stability facilitated prepayment of US$ 400 million of the US$1.2 billion syndicated loan in August 2009 ahead of its finalmaturity date to reduce interest charges.• Reduction of cost to income ratio to 34.2% (2008: 39.1%) is a testament to the effectiveness of the cost discipline measures and tothe increase in staff productivity levels.AUB Annual Report 200917

Board ofDirectors’ Report (Contd.)BUSINESS & STRATEGIC DIVERSIFICATIONThe re-affirmation of AUB credit ratings by S & P, Fitch and Capital Intelligence at A-, A- & A respectively with a Stable outlook reflects thesuccess of AUB’s prudent stance.To tap the large potential in the Sharia’a compliant business segments, Bank of Kuwait and the Middle East (BKME), AUB’s c.75% subsidiary,is being fully converted into an Islamic banking institution from Q/2-2010, subject to completion of final statutory measures. This conversionwill add an important dimension to the AUB Group’s product offerings and services. BKME will be re-branded as Ahli United Bank KSC.In addition to BKME’s full conversion, AUB has increased the number of its fully dedicated Islamic branches under the Al-Hilal brand inBahrain and Qatar to 9 branches (2008: 6 branches)AUB also raised its stake in Ahli United Bank, Egypt (AUBE) from 35.3% to 79.6% through a path-breaking Mandatory Dual Tender Offerwhich was successfully concluded in January 2010. It provided a unique opportunity for AUBE investors to sell their shares or to co-partnerwith AUB in its regional operations through a share and Lower Tier II subordinated debt swap.Legal & General Gulf B.S.C (c) and Legal & General Gulf Takaful B.S.C (c), AUB’s joint ventures with the U.K. based Legal & General Group,have commenced offering life insurance products and services beginning with Bahrain through their respective conventional and Takafuloperations. These joint venture initiatives are in line with AUB Group’s objective of being a comprehensive financial services providerwithin its operating markets.RECOGNITIONThe Bank continued to be recognised as a leading bank in the region as evidenced by its receipt of the following prestigious awards duringthe year:• Best Bank in Middle East 2009 - Global Finance (fourth consecutive year)• Best Bank Bahrain 2009 - Global Finance (fourth consecutive year)• Bank of the Year Bahrain 2009 - The Banker Magazine (fourth consecutive year)• Best Middle Eastern Loan for Financial Institutions for the Year 2009 - Euroweek Magazine• Best Foreign Exchange Bank – Middle East 2009 – Global Finance (fourth consecutive year)• Best Trade Finance Bank in Bahrain - Global Finance (second consecutive year)• Elite Quality Recognition Award by J P Morgan Chase as an acknowledgement of the Bank’s outstanding track record and highquality operational performance standards in the area of funds transfers and trade finance activities (eleventh consecutive year)DIRECTORS’ SHAREHOLDINGS & REMUNERATIOND irectors held 270,694,339 ordinary shares (2008:250,827,650), 45,302,513 Class-A preference shares (2008: 52,517,513) and 101,424,832Class-B preference shares as at 31 December 2009 (2008: 95,602,794). Directors’ fees, allowances, expenses, salaries and remunerationtotaled to US$3,535,949 (2008: US$4,091,905). Senior management held 31,473,475 Class-B preference shares as at 31 December 2009(2008: 30,169,192).18 AUB Annual Report 2009


Board ofDirectorsFAHAD AL-RAJAANChairman and Chairman of the Executive Committee; Non-ExecutiveDirectorDirector since 30 July 2000, holds a BA in Business Administration from theAmerican University of Washington D.C., 1975. Director General, The PublicInstitution for Social Security (Kuwait); Chairman, Ahli United Bank (UK) plc;Chairman, Wafra Investment Advisory Group (New York); Board Member,National Industries Group (Kuwait); Chairman, Ahli United Bank (Egypt) S.A.E.HAMAD A. AL MARZOUQDeputy Chairman and Member of the Executive Committee; ExecutiveDirectorDirector since 30 July 2000, holds a MBA in Finance & International Business fromClairmont Graduate School, 1987, and a BS in Industrial & System Engineeringfrom University of Southern California, 1985. Chairman & Managing Director,Ahli United Bank K.S.C. Kuwait; Chairman, Kuwait Banking Association Kuwait;Deputy Chairman, Ahli United Bank (UK) PLC.; Deputy Chairman, Ahli UnitedBank (Egypt) S.A.E.; Deputy Chairman, Ahli Bank Q.S.C. Qatar; Deputy Chairman,Ahli Bank S.A.O.G. Oman; Deputy Chairman, Commercial Bank of Iraq, Iraq;Deputy Chairman, United Bank for Commerce & Investment L.S.C., Libya; BoardMember, Kuwait & Middle East Financial Investment Company Kuwait; BoardMember, Middle East Financial Investment Company Kingdom of Saudi Arabia;Board Member, Institute of Banking Studies Kuwait; Board Member, PublicAuthority for Higher Education & Training, Kuwait.RASHID ISMAIL AL-MEERDeputy Chairman, and Member of the Executive Committee;Non-Executive DirectorDirector since 29 March 2003, hold a High Diploma in Statistics from theUniversity of Alexandria-Egypt, 1973 and a B.Com from Baghdad University,Iraq, 1969. Director, Ahli United Bank (UK) plc; Director, Social InsuranceOrganisation & Member of Investment Committee; Director, (Deputy Chairman),Esterad Investment Co. and Member of the Board Investment Committee;Deputy Chairman of the Board of Directors, Solidarity Islamic Insurance &Assurance Co. and Chairman of Audit Committee; Formerly Director General,Pension Fund Commission; Formerly, Asst. Undersecretary for Financial Affairs,Ministry of Finance & National Economy; Formerly, Asst. Undersecretary forEconomic Affairs, Ministry of Finance & National Economy. Formerly, Directorof Investment, Various Positions, Central Bank of Bahrain; Formerly, Head ofStatistics Section, Ministry of Health.MOHAMMED AL-GHANIMDirector and Member of the Audit Committee; IndependentNon-Executive DirectorDirector since 29 March 2003, holds a degree in Degree in BusinessAdministration from Kuwait University, 1993. Vice Chairman and ManagingDirector, Fouad Alghanim & Sons Group of Companies, Kuwait; Chairman,AlGhanim Industrial Company KSC, Kuwait; Board Member, Tamdeen Real EstateCompany KSCC, Kuwait; Member, Supervisory Board, Jet Alliance Holding AG,Austria.; Chairman, Fluor Kuwait Co. KSC, Kuwait.ABDULLA MH AL-SUMAITDirector and Member of the Audit Committee; Non-Executive DirectorDirector since 16 May 2001, holds a B.A. in Law from Kuwait University, 1976.Head of Legal Department, The Public Institution for Social Security, (Kuwait);Director, Kuwait Commercial Facilities Company; Director, Ahli United Bank(Egypt) SAE.MOHAMMED SALEH BEHBEHANIDirector and Member of the Executive Committee; IndependentNon-Executive DirectorDirector since 30 July 2000, Partner & President, Mohammad Saleh & RezaYousuf Behbehani Co.; Partner, Mohammad Saleh Behbehani & Co. W.L.L.;Partner & President, Shereen Travels, Kuwait.; Partner, Behbehani Bros., W.L.L,Bahrain.; President, Shereen Real Estate Co.; Chairman, Maersk Kuwait Co. W.L.L.;Chairman, Kuwait Insurance Co. S.A.K.; Partner & President, Behbehani JeepMotors Co. W.L.L.; President, Shereen Investment Co.; Chairman, Maersk LogisticsCo. W.L.L.; Vice Chairman, United Beverage Co.; Board & Executive CommitteeMember, Ahli United Bank, K.S.C.; President, Shereen Motor Co.W.L.L.; President,Behbehani Automall Co. W.L.L.; Partner, Al Mulla & Behbehani Motor Co. W.L.L.;Former Dy. Chairman, Al Ahli Bank of Kuwait K.S.C.; Former Director, SwissKuwaiti Bank.; Former Director, UBAF (Hong Kong) Limited.; Director, Purchase &Imports, Public Works Dept., Govt. of KuwaitMOHAMMED JASSIM AL-MARZOUKDirector and Member of the Executive Committee; Non-Executive DirectorDirector since 27 March 2006, holds a Bachelor of Commerce from MajorFinance Kuwait University, 1991. Chairman & CEO, Tamdeen Real Estate Co.Kuwait;Board Member, Fateh Al Khear Holding Co., Kuwait; Board Member,Global Omani Development & Investment Co. , Oman; Board Member of AlMaalem Holding Co, Bahrain; Chairman, Tamdeen Bahraini Real Estate Co,Bahrain; Former Deputy Chairman, Tamdeen Shopping Centres Co. Kuwait;Former Board Member Bank of Kuwait & The Middle East, Kuwait; FormerDeputy Chairman, Tamdeen Investment Co, Kuwait; Former Board Member, AlAhli Bank of Kuwait; Former Board Member, Kuwait National Cinema Co, Kuwait; Former Board Member, Arab Financial Consulting Co, Kuwait; Former Chief ofExecutive Staff, Real Estate Investment Fund, Kuwait; Former Board Member, ThePublic Warehousing Co., KuwaitHERSCHEL POSTDirector and Chairman of the Audit Committee; IndependentNon-Executive DirectorDirector since 25 December 2001, holds a Financial Advisers from The CharteredInstitute of Bankers, 2000, a B.A. & M.A. (Rhodes Scholar) from Oxford University,a L.L.B from Harvard Law School, 1966 and a Bachelor of Arts from YaleUniversity, 1961. Director and Chairman of the Audit Committee, Ahli UnitedBank (UK) plc; Director and Chairman of the Audit Committee, Ahli UnitedBank (Egypt) SAE.; Director and Chairman of the Audit Committee, Ahli UnitedBank KSC, Kuwait ; Director and Chairman of the Audit Committee, Kuwait &Middle East Financial Investment Company (KMEFIC).Director Euroclear SA/NV & Euroclear plc; Director and Chairman of the Audit Committee, EuroclearUK and Ireland Ltd; Director, Investors Capital Trust plc.; Director and Chairmanof the Audit Committee, Threadneedle Asset Management Holdings S.A.R.L.;Trustee, Earthwatch Institute (Europe). Former Deputy Chairman of the LondonStock Exchange; Former CEO and Deputy Chairman, Coutts & Co.; Former ChiefOperating officer, Lehman Brothers International Ltd.; Former Director, Christie’sInternational Limited;TURKI BIN MOHAMMED AL-KHATERBoard of Director and Member of the Audit Committee; IndependentNon-Executive DirectorDirector since 29 July 2009, holds a BSC in Economics & Social Science fromPortland State University, U.S.A., 1982. President, General Retirement and SocialInsurance Authority, Qatar; Board Member, Masraf Al-Rayan, Qatar; Chairman ofDlala Holding Co, Qatar.ADEL A. EL-LABBANBoard of Director and Executive Committee Member; Executive DirectorDirector since 30 July 2000, holds a Masters in Economics from the AmericanUniversity, Cairo, 1980, Bachelors in Economics from American University, Cairo,1977 and a General Certificate of Education from London University, 1973.Group Chief Executive Officer and Managing Director – Ahli United Bank BSC,Bahrain; Director - Ahli United Bank (UK) PLC; Director Ahli United Bank KSC,Kuwait; Director - Ahli Bank QSC, Qatar; Director - Ahli United Bank (Egypt)SAE, Egypt; Director - Ahli Bank SAOG, Oman; Director - Commercial Bank ofIraq, Iraq; Director - Kuwait & Middle East Financial Investment Co. (KMEFIC),Kuwait; Director Middle East Financial Investment Co. (MEFIC), Saudi Arabia;Director - United Bank for Commerce & Investment L.S.C., Libya; Board Member- Bahrain Stock Exchange, Bahrain; Director - Bahrain Association of Banks,Bahrain; Formerly: Chief Executive Officer and Director of the United Bank ofKuwait PLC, UK; Managing Director - Commercial International Bank of Egypt,(Egypt); Chairman - Commercial International Investment Company, Egypt; VicePresident, Corporate Finance - Morgan Stanley, USA; Assistant Vice President-Arab Banking Corporation, Bahrain.AUB Annual Report 200921

22 AUB Annual Report 2009AUB Group remains committedto its regional growth strategyand we shall continue to focuson cross-border business flowsin the Gulf region and beyond.

Group CEO & ManagingDirector’s Statement“OUR VISION FOR THE GROUP REMAINSCLEAR AND CONSISTENT: TO BE THELEADING PROVIDER OF INTEGRATEDFINANCIAL SERVICES ACROSS THEMIDDLE EAST”.In 2009, AUB’s operating environment was impacted significantlyby the global financial crisis with some regional economiesfurther aggravated by deflating real estate prices, tight liquidityand increasing cost of funds. Consumer spending remainedweak with general credit conditions in the market affectingoverall returns and the pace of recovery in the global economy.In the face of these challenging market conditions, assetand liability management was tightened supported byimplementation of a more robust risk management process.Selective business growth was pursued within prudent riskparameters, focusing on contra-cyclical sectors. A phased deriskingof the balance sheet profile was achieved by deployingliquidity from corporate credits to sovereign and quasi sovereigninstruments with better risk and liquidity profiles. Disciplined costcontrol, operational streamlining and maintaining counterpartyand client confidence at high levels were key priorities inmanagement’s pro-active response to the unprecedentedbusiness environment.For 2009, the Bank achieved a 4.6% growth in total operatingincome which increased to US$ 696.4 million, supported bya 15.7% increase in net interest income to US$ 466.6 million(2008: US$ 403.1 million). Despite the tight liquidity and creditconditions that prevailed in the first half of 2009, the Banksuccessfully managed to contain its cost of funding throughtight asset liability management and asset re-pricing resulting inimproving Net Interest Margin from 2.2% (2008) to 2.4% (2009).The Bank reported net profit of US$ 200.7 million for the year,a drop of 21.5% over the US$ 255.7 million net profit of 2008,was impacted by increased levels of provisioning on its loansportfolio to ensure prudent mitigation of identified risks giventhe continuing uncertain operating environment furtheraffected by regional credit events. Consequently, the charge forprovisions for loan losses and contingencies rose to US$ 228.1million (2008: US$ 98.6 million). This included provisions ofUS$171.5 million exceeding 90% coverage for its entire portfolioexposures to specified impaired Saudi corporate assets so as tofully absorb any potential losses related to these accounts. Nonperformingloans portfolio represented 2.8% of its total loanportfolio in 2009.In view of the uncertainty in timing and prospects of economic24 AUB Annual Report 2009

CorporateGovernanceBOARD OF DIRECTORSThe Board is collectively accountable to and reports to the collective body of shareholders of Ahli United Bank B.S.C in respect of the overallgovernance, direction and control of the Bank’s affairs on behalf of the shareholders. It has ultimate authority for the management of theBank, but in practice delegates this duty to the Group CEO and Managing Director. It also delegates certain other of its responsibilities tocommittees it establishes with defined mandates.BOARD OF DIRECTORS[10 members in total comprising4 independent non-executive Directors , 4 non-executive Directors and2 executive Directors including the Group CEO & MD]AUDIT & COMPLIANCE COMMITTEE EXECUTIVE COMMITTEE COMPENSATION COMMITTEE[4 members comprising3 independent non-executive Directorsand 1 non-executive Director][6 members comprising1 independent non-executive Director,3 non-executive Directorsand 2 executive Directorsincluding the Group CEO & MD][3 members comprising1 Independent non-executive Directorand 1 non-executiveand 1 executive Director]The classification of “executive” Directors, “non-executive” Directors and “independent non-executive” Directors is as per definitionsstipulated in the Central Bank of Bahrain Rulebook.The Executive Committee assists the board in discharging the Board’s responsibilities relating to matters including credit and marketrisk matters.The Audit & Compliance Committee assists the board in discharging the Board’s responsibilities relating to the bank’s accounting policies,internal audit controls, compliance procedures, risk management system, financial reporting functions and liaison with the bank’s externalauditors and regulators. The committee does not oversee the day to day work of management and has no executive powers.The Compensation Committee has been established to provide an efficient mechanism for reviewing the bank’s compensationarrangements for its management, staff and directors and making recommendations for the board’s own approval on these matters.COMPENSATION COMMITTEEThe Compensation Committee has been established to provide an efficient mechanism for reviewing the Bank’s compensationarrangements for its management, staff and Directors and making recommendations for the Board’s own approval on these matters.The Chairman and members of the Committee are appointed by the Board from amongst its Directors. The Committee comprises3 members including one Independent Director.The Group Head Human Resources & Development acts as the Secretary to the Committee.26 AUB Annual Report 2009

PRINCIPAL RESPONSIBILITIESConsider and approve guidelines, structure and quantum for the Group’s fixed and variable compensation arrangements, including cashand share performance related incentive remuneration.Consider and recommend for Board approval the form and amount of compensation for all Directors.Consider and approve the annual fixed cash and performance related compensation of the Group CEO & MD and the senior executiveswho report directly to the Group CEO&MD.Consider, review and approve the design of all equity / equity linked performance related compensation plans for approval by the Board.Consider, review and approve any major changes in other employee benefits structures throughout the Group.Review and note annually the remuneration trends across the Group.MANAGEMENTThe Bank’s management monitors the performance of the parent bank and each of the subsidiaries and associates on an ongoing basisand advises the Board. The monitoring of the performance is carried out through a regular assessment of performance trends againstbudget, and prior periods and peer banks in each of the markets and collectively through Group Committees and Sub Committees. Theminutes of all management committees are sent to the Audit and Compliance Committee who assess the effectiveness of the committees.The Group Management Committee (GMC) is the collective group management forum providing a formal framework for effectiveconsultation and transparent decision-making by the Group CEO & MD and senior management on cross-organisational matters.Appropriate checks and balances ensure the “four eyes” regulatory requirement is met. The committee operates in a flexible way with aminimum of formality and a broad mandate encompassing group wide as well as bank and unit specific issues as determined by the GroupCEO & MD and other members of the committee. It is chaired by the Group CEO & MD and comprises of twelve other memebers.The Group Asset and Liability Committee (GALCO) sets, reviews and manages the liquidity, market risk and funding strategy of the Groupand reviews and allocates capacity on the balance sheet to achieve targeted return on capital, return on asset and liquidity ratios. It ischaired by the Sr.DGCEO-Banking Group and has seven other members.The Group New Product Committee (GNPC) to review and approve new products, processes and services for wealth management, treasury,retail, commercial banking and other areas of the Group. GNPC assesses all related reputational, operational, credit, liquidity and marketrisk, IT, legal, compliance, control, staffing and capital/profit allocation issues related to approving new products. The approval by theGNPC follows the new product or process development according to the New Product Approval and Development Procedure. It is chairedby Sr.DGCEO-Banking Group and has nine other members.The Group Information Technology Steering Committee (GITSC) oversees the information technology role, strategy formulation, prioritisedimplementation and delivery of IT projects of the Group within an acceptable, secure and standardised framework. It recommends theannual IT budget to the Group CEO & Managing Director in response to and part of the annual business planning/budgetary exercise forsubmission, on finalisation, to the Board of Directors for review and approval. It supervises the implementation of the approved IT annualplan within set deadlines and budgetary/Board approved allocations within the Bank’s CAPEX policy. The Group will operate in compliancewith regulatory requirements in the respective operating jurisdictions. It is chaired by the DGCEO-Finance& Strategic Development andcomprises of seven other members.AUB Annual Report 200927

CorporateGovernance (Contd.)The Group Risk Committee (GRC), reviews and manages the risk asset policies, approvals, exposures and recoveries related to credit,operational and compliance risks. It acts as a general forum for the discussions of any aspect of risk facing or which could potentiallyface AUB or its subsidiaries and affiliate banks resulting in reputational or financial loss to the Group. It also oversees the operation of theOperational Risk Sub-Committee and Group Special Assets Sub-Committee. It is chaired by the DGCEO- Risk, Legal & Compliance and hassix other members.The Group Operational Risk Sub-Committee (GORC) administers the management of operational risk throughout the AUB Group. It ischaired by the Group Head of Risk Management and has eight other embers.The Group Special Assets Committee (GSAC) is responsible for the management of the criticized and non-performing assets of the bank. Ithas responsibility for monitoring accounts downgraded to watch list and criticized asset status and ensuring that a focused and disciplinedrecovery strategy is adopted to maximize recoveries. It is chaired by DGCEO Risk, Legal & Compliance and has seven other members.The Management Committee (MC) is the senior collective management forum of AUB, the parent Bank, providing a formal framework foreffective consultation and transparent decision-making on cross-organisational matters. Appropriate checks and balances ensure the“four eyes” regulatory requirement is met as described under Quorum below. The Committee operates in a flexible way with a minimumof formality and a broad mandate encompassing both bank-wide and unit specific issues as determined by the GCEO & MD and its othermembers in relation to the business of Ahli United Bank’s business as a legal entity. It is chaired by the Sr. DGCEO-Banking Group and hassix other members.AUB Solo Assets and Liability Committee (ALCO) sets, reviews and manages the liquidity, market risk and funding strategy of AB Bahrainand reviews and allocates capacity on the balance sheet to achieve targeted return on capital, return on asset and liquidity ratios. It ischaired by Group Head Treasury and has six other members.ADDITIONAL GOVERNANCE MEASURESIn addition to the Board and management committee structures, the Board of Directors has approved a number of group policies tosupport clarity and consistency in the operations of the AUB Group. These policies, which are communicated to staff, cover issues such asthe prevention of money laundering, confidentiality, personal share dealing, communications, legal issues and human resources relatedissues. Underpinning these policies is the Group Code of Business Conduct which was introduced by the Board in 2005 to establishstandards of ethical business behaviour and personal conduct for the Bank’s Directors, its senior management (officers) and its employees.As a supporting governance measure, the Board is able to rely on the ongoing reviews performed by internal and external auditors on theAUB Group’s internal control functions. These reviews are conducted in order to identify any weaknesses, which then enables managementto immediately put remedial action plans in place. It is important to highlight that the AUB Group maintains adequate insurance coverageand contingency plans for systems failure including back-up systems with off-site data storage.The Board of Directors and management believe that these high standards of corporate governance will continue to enhance the AUBGroup’s performance and hence shareholder value over the long-term, as well as provide confidence to all shareholders, customers,regulators, rating agencies and current and future staff.28 AUB Annual Report 2009

Group Business& Risk ReviewUKIraqLibyaEgyptKuwaitBahrainQatarOman30 AUB Annual Report 2009

PRIVATE AND PREMIUM BANKINGIn a year without precedent, characterized by uncertainty and volatility, most global private banks adopted a conservative approach for2009. For private banking and wealth management in particular, the year began on a cautionary note with limited prospects. Althoughworld stock markets posted a record rally from the end of the first quarter, investor appetite remained subdued in the face of marketvolatility coupled with an ambiguous outlook and a reluctance to engage in new investments following the 2008 decline in portfolio values.Against this backdrop, our strategy focused on providing the necessary comfort to our investors through evaluating markets and productswith an investment perspective beyond short-term fluctuations in financial markets, by enhancing the process of investor risk profilingand by introducing innovative products to address the broader scope of investor risk appetite.With a prudent risk management approach, our discretionary portfolio management mandate delivered a strong investment performancefor our institutional investors in 2009. In addition, the AUB Wealth Management product offering was accorded global recognition withthe introduction of the AUB Al Hilal Islamic Index. This Index, which has the key attributes of exclusive geographical coverage, Sharia’acompliant screening and an outstanding risk control mechanism, provides a major platform for delivering numerous products that meetinvestors’ needs across the risk return spectrum.During the year, 6-month capital protected structures, linked to currencies, were among various products made available to investors byPrivate Banking Wealth Management.These structures are linked to AUB Al Hilal Islamic Index, which in 2009 outperformed both the MSCI World Market Index as well as MSCIEmerging Market Index. Other products included AUB Al Hilal Islamic Certificate, AUB Elite Capital Protected Note andAUB Outperformance Certificate, the latter structured to extract value in various market conditions. In serving investors in this challengingenvironment, PBWM was also able to offer various types of global bond issues, providing greater security compared with direct equity andother forms of equity related investments.In delivering superior services to our local, regional and international clientele, we moved to enhance cross border activities and strengthenthe offshore private banking platform by bringing the London offshore and onshore teams together within the PBWM group.Going forward, our challenge remains focused on meeting our client’s needs for high-performing investment products in volatile financialmarkets and unfavourable economic conditions.Our strategic focus in 2010 is to increase our capacity to deliver relationship-oriented services with strong solutions capabilities. We have aunique facility to leverage our broad capabilities across our alliances and to deliver investment strategies that span asset classes, enablingus to provide distinctive solutions that realise clients’ desired outcomes.RETAIL & ISLAMIC BANKINGIn maintaining sustainable growth throughout its retail banking franchise, AUB continued to focus on developing new market opportunitieswhilst improving penetration levels across product and market segments mainly in the higher income sector. The introduction of innovativeproduct offerings, supported by the highest levels of customer service, resulted in attracting and retaining new high value customers tothe AUB network during the year.Growth in liabilities was further consolidated mainly due to sustained success of the flagship product, MyHassad Savings, which wasactively marketed across the AUB network. In 2009 this premium product was relaunched and now offers annually over 6000 prizes with aprize pool amounting to BD 10 million, the largest in the Gulf region.AUB Annual Report 200931

Group Business& Risk Review (Contd.)With a strong regional and international network spanning the GCC countries, Egypt, Iraq and the UK, AUB is able to offer customers awealth of local knowledge, experience and support across various markets. In meeting customers’ banking needs, both in their homecountry and country of residence, services and relationships to facilitate convenient cross border banking continued to be extended.The MyGlobal Clients facility has been developed to access the AUB network and services from any location, supported by dedicatedrelationship managers with in-depth knowledge of local markets to support customer requirements. During the year the Bank’s serviceswere further strengthened with the launch of MyGlobal consolidated statement providing customers with a single view of all their depositsacross the AUB network.Raising customer satisfaction levels and improving turnaround times continued to be key priorities. Centralising account opening andupgrading other branch related activities were among several initiatives implemented to improve the efficiency of operations across theAUB network.In Bahrain, the retail banking product suite was further strengthened with the successful launch of Banc Assurance that complimentsa range of Takaful life Insurance products offered through a joint venture with the UK based Legal & General group. The product rangecovers customer requirements through various life stages from saving for children to financing retirement.During the year, with the launch of EMV chip based cards, all existing debit card holders were migrated to the new EMV cards. In addition,AUB’s continued commitment in the field of e-commerce led to successful partnerships with various governments, in providing onlinepayment systems for services provided by their departments.In addressing future challenges on lending across the region, operations were reviewed to identify avenues that will ensure sustainedgrowth going forward. Consumer loans with variable rates to capitalize on low interbank rates are among products and services plannedto increase the asset portfolio. The introduction of a new packaged bundled product has also been developed to grow assets and liabilitiesacross the network and to meet the Bank’s objectives of increasing low cost liabilities and broadening customer relationships.Development of the Islamic banking franchise will continue to be a key area of focus going forward. In Kuwait, Bank of Kuwait and Middle East(BKME) is being converted to an Islamic bank with effect from 1st April 2010 providing a full range of Sharia’a compliant products. In Bahrain,the distribution of AlHilal Islamic services was further extended in 2009 with the introduction of Islamic windows in selected conventionalbranches in addition to opening two new Islamic branches, increasing the total Islamic branch network in the Kingdom to five. Furtherexpansion of Islamic banking is evident in Qatar where selected conventional branches are being converted to provide AlHilal Islamic servicesand a Sharia’a compliant MyHassad savings offering is planned for to be introduced throughout AUB’s Islamic banking network.COST TO INCOME RATIOCORPORATE BANKING5040302034.2 %39.1 %37.5 %40.1 %37.6 %The global economic downturn, which began in late 2008, continued to presentmajor challenges to the banking system worldwide throughout 2009.With government intervention, on an unprecedented scale, providing globalfinancial institutions with over US$1 trillion in debt and equity capital, the globalbanking system was maintained. Inter bank liquidity, however, remained very tightand the risk appetite of financial institutions was significantly diminished leading toa slowdown in the real economy.1002005 2006 2007 2008 2009As a consequence, the Gulf region witnessed the collapse of some prominentcommercial houses as well as major financial difficulties for certain government relatedentities. In these challenging market conditions, new business opportunities in theregion remained very limited.32 AUB Annual Report 2009

With clients operating in a particularly demanding trading environment, Corporate Banking moved to strengthen relationships providingthe highest levels of service and integrity. Appropriate and prudent measures were pursued in reducing risk and selective repricing of theexisting portfolio, coupled with enhanced monitoring. Managing costs and corporate liabilities were among key priorities whilst businessstrategies renewed focus on SME customers, sovereign and quasi sovereign transactions and on cross-border clients in selective industriesacross the AUB Group locations. Commercial banking continued to take a lead role in revenue generation across the Group.In 2010, with the health of the real economy expected to remain uncertain, Corporate Banking will work closely with those customers inselected industries essential to the core of the real economy, focusing on providing financial solutions engineered to meet their individualbusiness requirements. Vigilance and careful monitoring of account management remains imperative in maintaining the quality of thelending portfolio whilst growth strategies to generate cross-border business will focus on implementing quick turnaround with a focusedapproach for different markets.TREASURY2009 was another year of unprecedented challenges. With the credit crisis shifting away from the banking sector into the corporate sector,banks were required to make significant provisions for non performing loans. As the world sought to emerge from the severe economicrecession, central bank policies focused on easing liquidity and maintaining historic low levels of interest rates.Treasury continued to broaden AUB’s liability base and further reduced dependence on wholesale funding. Proactive and cost effectivemanagement of the liability base enabled the Group to maintain high liquidity levels throughout the year, meeting all of its financialobligations while being a net provider of funds to the wholesale money markets.In challenging market conditions, our client-oriented focus proved to be a key driver in generating revenue. With continued growthrecorded in foreign exchange sales, AUB was recognized as the ‘Best Foreign Exchange Bank in the Middle East’ by a leading global financialjournal for the fourth successive year. We continued to source new products in order to enhance customers’ return on deposits and reducerisk on their loan portfolios.Following significant changes in the global market place over the past two years, 2010 is expected to set global growth on an upward pathwith markets adjusting to the removal of the liquidity measures provided by central banks during the financial crisis.With the onset of a broader market recovery, the Bank will adopt a more dynamic approach, further strengthening our client focus andbroadening our range of product offerings for both risk and asset management. The Group’s extensive regional presence will continue tobe leveraged in enabling Treasury to provide one stop solutions for portfolio management.COMMERCIAL PROPERTY FINANCEReal estate markets declined sharply at the start of the year but subsequently stabilised with indications of recovery particularly evidentin good quality letting property.Close contact with borrowers was critical in monitoring signs of weakness in the portfolio which was revalued and restructured whererequired to reduce the risk profile and improve returns. As a result of successful restructurings and growth in new business, fee incomeand NIM were significantly above budget.Recent falls in UK property values, low interest rates, Sterling weakness and greater availability combined with reduced levels of competitionprovide favourable market conditions for Gulf investors in UK property in the coming year. In addition to presenting selected opportunitiesto the Bank’s client base, AUBUK offers support through debt financing on both a conventional and Sharia’a compliant basis.Going forward, while selectively seeking new business and maintaining portfolio quality, an opportunistic approach will seek to identifydistressed sellers of property where finance on a profit share or joint venture basis can be provided to deliver superior returns.AUB Annual Report 200933

Group Business& Risk Review (Contd.)RESIDENTIAL LENDINGMarket conditions remained difficult for most of 2009 with a continued low level of mortgage transactions recorded. The businessenvironment was further undermined by the contraction in lending activities by the major banks. Together with a lack of quality stockavailable, particularly in Central London, many Gulf based clients were unable to source desirable property at an appropriate price.The strategic focus for Residential Lending remained constant in striving to add quality mortgage business to current portfolios, maximisingreturns to the Bank while minimising any downside. The highest standards of performance were evident in managing the surge in newbusiness towards the end of the year, positioning Residential Lending as the largest asset class in AUB (U.K.). The existing product range,although constantly monitored, continued to attract business at the required level.2010 is expected to present new challenges, mainly arising from pressure on pricing as competition increases from banks returning to themarket. In achieving asset targets, we shall continue to focus on meeting the needs of intermediary introducers as well as supporting theprivate banking teams throughout the Gulf who have facilitated our commitment to increase business levels for Islamic based transactions,in line with Group policy.COMMERCIAL FINANCEThe year began with poor trading prospects for borrowers, overshadowed by the threat of increasing defaults and concerns over liquidity.Banks moved swiftly to address the issues arising, taking a firm stance on restructuring negotiations. In the latter half of 2009 debt marketsrecovered strongly ending the year with pricing on the secondary market 30% higher than 2008.At AUBUK underperforming loans were restructured successfully, improving risk profiles and increasing returns. During the second halfof the year our focus was directed on growing an investment grade bond portfolio providing relatively low risk income in the mediumterm. The annualised NIM made a material contribution to AUBUK earnings and, together with fee income and new business targets,exceeded budget.Going forward, the commercial finance portfolio will continue to be monitored closely whilst building the investment grade bond portfolio,with selective lending to deleveraged sub investment private equity backed borrowers. ON AVERAGE ASSETS2.1 %1.7 % 1.7 %1.3 %0.9 %2005 2006 2007 2008 2009INFORMATION TECHNOLOGYThe Information Technology (IT) division aligns its target application systems andinfrastructure architecture with the Group’s business strategies to deliver efficient andeffective solutions together with a secure and robust operational platform that providesthe highest standards of customer service, business support and information security.During 2009 significant progress was achieved in meeting this key objective.Ahli United Bank’s commitment to offer its retail customers maximum flexibilityin accessing banking services was further enhanced with the introduction of SMSbanking at Ahli Bank Qatar and at Ahli Bank Oman which was also added to theretail internet banking system. These facilities, aligned with the MyGlobal Statementproduct, provide customers with integrated access to banking services across theAUB Group. In addition, the system supporting My Hassad deposit certificate wasalso upgraded to provide additional rewards for customer loyalty.34 AUB Annual Report 2009

Trade Finance processing in AUB Bahrain benefitted from the implementation of an enhanced and fully integrated trade innovationsystem. Automated transaction processing, along with system based workflow management, further streamlined processes enabling theBank to deliver the highest levels of operational excellence for its trade finance customers.Ahli United Bank remains uncompromising in providing a fully safe and secured environment for customers to conduct their bankingtransactions. In meeting this objective, EMV chip Debit and Credit cards certified by Visa and MasterCard were issued to customers of AUBBahrain, AUB Egypt and Ahli Bank Oman, providing them with the highest available level of protection against fraud.Across IT infrastructure and operations, optimisation and consolidation were key drivers during the year. Upgrades to our communicationnetwork were conducted in order to sustain our strategy of centralised roll-out of business systems across the group entities. Reengineeringof internal processes continued to ensure cost effective use of technical resources to deliver consistent levels of businesssupport and customer service.Information security is of primary importance in the provision of banking services to our customers. 2009 saw a continued execution ofpreventive measures and examination of processes and procedures to protect and secure information. AUB was one of the first banksin Bahrain to achieve compliance certification with the Payment Card Industry Data Security Standard (PCI DSS), signifying furtherrecognition of AUB Group’s continued commitment to the highest standards with respect to information security. As a consequence,notable outcomes for the Bank include market recognition and confirmation on the implementation of industry certified practices forprotection of customers’ personal data; insulation from financial losses and remediation costs; increased customer confidence through ahigher level of data security, maintaining customer trust and safeguarding the reputation of the brand.From an IT perspective, AUB will continue to focus on implementing and enhancing business focused and cost effective solutions andservices resulting in centralization and standardization, together with meeting local requirements covering all aspects of informationtechnology deployment, security, infrastructure and operations.HUMAN RESOURCESIn 2009, HR continued to implement a range of programmes and initiatives to strengthen the Group’s human and organisationalcapabilities. With the impact of the global fi nancial crisis strongly felt throughout the year, the focus remained one of cost containment,as well as working with line managers to streamline and refocus operations on the critical challenges faced as a result of the globaleconomic downturn.During 2009, the HR group followed on the implementation of a number of strategic initiatives, including:• Training and accreditation of staff from all Group entities to deliver the core training programmes in the Group’s retail banking andcredit academies, with the subsequent training of staff in all Group entities.• Detailed human resources planning for the conversion of BKME to Islamic banking, including training of staff and the review of HRpolicies to ensure Sharia’a compliance.• Implementation of the new HRMIS in all Group entities, providing a common platform for HR fi nancial transactions, analysis andreporting.Staff development remained a key focus in 2009, with the Group training plan delivering 108 core training programs. Some 277 staff at AUBBahrain attended external training programmes and development conferences. At year end, the Group’s total workforce stood at 3,377 employees.As we look to the uncertainties of 2010, the primary focus will remain one of disciplined cost management. Within this area, criticalattention will be paid to streamlining business units and support functions, performance management, retention of key talent, inhousestaff development and the review of total employment cost. A key strategy in this environment will be the delivery of world classAUB Annual Report 200935

Group Business& Risk Review (Contd.)e-learning development and certification programs, thereby maximising training and development opportunities available to staff whilstsimultaneously achieving substantial reduction in training costs.RISK MANAGEMENTRisk management involves the identification, analysis, evaluation, acceptance and management of all financial and non-financial risks thatcould have a negative impact on the Group’s performance and reputation.The major risks associated with AUB’s business are credit risk, market risk which includes foreign exchange, interest rate and equity pricerisk, liquidity risk, operational risk and reputational risk.AUB’s risk management policies have been developed to:• identify and analyse these risks,• set appropriate risk limits and controls,• monitor the risks and adherence to limits.The risk management function is not responsible for eliminating risks that are embedded in any banking business, but aims to effectivelymanage these risks with the objective of earning competitive returns over the degree of assumed risk. Risk is financially evaluated as thepotential impact on income and asset value, taking into consideration changes in political, economic and market conditions, and thecreditworthiness of the Bank’s clients.The risk management function relies on the competence, experience and dedication of its professional staff, sound risk managementpolicies and procedures, and ongoing investment in technology and training.The Board of Directors and senior management are involved in the establishment of all risk processes and the periodic oversight andguidance of the risk management function. The Board of Directors reviews and approves at least annually the Bank’s key Risk Managementpolicies. The Risk Management processes are subject to additional scrutiny by independent internal and external auditors and the Bank’sregulators which help further strengthen the risk management practices.The risk management control process is based on detailed policies and procedures that encompass:25201050RETURN ON AVERAGE EQUITY18.0 %15.1 %13.5 %11.4 %9.6 %2005 2006 2007 2008 2009• business line accountability for all risks taken. Each business line is responsiblefor developing a plan that includes adequate risk/return parameters, as well asrisk acceptance criteria;• a credit function that understands, monitors and independently controls eachcredit relationship ensuring that the appropriate approval authorities areobtained and a uniform risk management standard including risk ratings havebeen correctly assigned to each and every credit relationship;• product and business policies, which are clearly understood, monitored and are inagreement with the overall credit policy and the Board approved risk framework;• the ongoing assessment of portfolio credit risk and approval of new products;and• an integrated limits structure that permits management to control exposures andmonitor the assumption of risk against predetermined approved tolerances. TheBoard of Directors establishes global limits for each major type of risk which aresub allocated to individual business units.36 AUB Annual Report 2009

CREDIT RISKCredit risk is the risk of potential financial loss due to the failure of a counter party to perform according to agreed terms. It arises principallyfrom lending, trade finance and treasury activities. The credit process is consistent for all forms of credit risk to a single obligor. Overallexposure is evaluated on an ongoing basis to ensure a broad diversification of credit risk. Potential concentrations by country, product,industry, and risk grade are regularly reviewed to avoid excessive exposure and ensure a broad diversification.Credit risk within the Group is actively managed by a rigorous process from initiation to approval to disbursement. All day-to-daymanagement is in accordance with well-defined credit policies and procedures (CP&P) that details all credit approval requirements andare designed to identify at an early stage exposures which require more detailed review and closer monitoring. If an asset is consideredunrecoverable, a mandatory write-off takes place. This is conducted by a risk management process which is completely independent inreporting terms from the asset generating departments.The CP&P includes a robust risk rating system that apportions the credit portfolio by level of risk in order to monitor credit quality; enableassessment of pricing and assist in the prompt identification of problem exposures. Management of material problem exposures is vestedwith Special Exposure Groups in the respective Group operating entities, all of which report to the Group Risk Management area. Allexposures are subject to quarterly and, in certain cases, monthly reviews.In addition to the Group Risk Management function, credit risk is overseen by the Group Risk Committee (GRC) which is charged with theoverall day-to-day responsibility for all matters relating to group credit risk. GRC’s responsibilities include the following:• formulating and implementation of credit policies and monitoring compliance,• acting as a credit approval body for credits within its delegated authority,• recommending to the Executive Committee all policy issue changes related to credit risk as well as credits falling outside itsdiscretion,• determining appropriate pricing and security guidelines for all risk asset products,• reviewing the ongoing risk profile of the Group as a whole and by individual business sectors and countries,• ensuring the adequacy of specific and collective impairment provisions and making appropriate recommendations to theExecutive Committee.MARKET RISKMarket risk is the risk that adverse movements in market risk factors, including foreign exchange rates, interest rates, credit spreads,commodity prices and equity prices, will reduce the Bank’s income or the value of its portfolios.Given the Group’s ongoing low risk strategy, aggregate market risk levels are low relative to the size of the Bank’s balance sheet. The Grouputilizes Value-at-Risk (VaR) models to assist in estimating potential losses that may arise from adverse market movements in addition toother quantitative and non-quantitative risk management techniques.The Group calculates VaR using a one-day holding period at a confidence level of 95%, which takes into account the actual correlationsobserved historically between different markets and rates.AUB Annual Report 200937

Group Business& Risk Review (Contd.)VALUE AT RISK2009US$ Millions2008US$ MillionsAverage 0.46 0.54Minimum 0.19 0.23Maximum 1.82 1.19VaR limits are delegated (should this be: assigned) by the Board to the Group Asset and Liability Committee (GALCO) and passed on to theGroup’s subsidiaries.The Group recognizes that VaR is based on the assumption of normal market conditions and that certain market shocks can result in lossesgreater than anticipated. Therefore, a strict limit structure and control process is adopted to effectively manage market risks and monitordaily position limits and stop losses. Additionally, supplementary risk management techniques, such as stress testing, form a core part ofthe Group’s risk control processes.LIQUIDITY RISKLiquidity risk is the risk of being unable to meet the Bank’s cash commitments without having to raise funds at unreasonable prices orsell assets on a forced basis. It is measured by estimating the Group’s potential liquidity and funding requirements under different stressscenarios.The Group’s liquidity management policies and procedures are designed to ensure that funds are available under all circumstances tomeet the funding requirements of the Group, not only under adverse conditions but at levels sufficient to capitalize on opportunities forbusiness expansion.A prudent mix of liquidity controls, based on expected economic and Group specific events, substantially ensures access to liquiditywithout the need to increase cost. It also provides for the maintenance of a stock of liquid and marketable assets and an adequatelydiversified deposit base in terms of maturity profile and number of counter parties.The Group Risk Management function continuously monitors liquidity risk and actively manages the balance sheet to control liquidity.At the subsidiary level, the respective treasury function manages this risk with monitoring by the Risk Management department andunder the jurisdiction of its Assets and Liabilities Committee (ALCO). At the Group level liquidity risk is managed by the Group Assets andLiabilities Committee (GALCO), which is vested with the overall day-to-day responsibility for all matters relating to Group liquidity.OPERATIONAL RISKAUB defines Operational Risk as the risk of loss resulting from inadequate or failed internal processes, people and systems or fromexternal events.It is noted that no material losses occurred in 2009, however, due to nature of the risk, there is no assurance that this risk can be totallyeliminated.Operational risk is managed by the Group Operational Risk Committee (GORC). The Group adopts an ongoing Operational Risk Self-Assessment (ORSA) process in accordance with best practice. Assessments are made of the operational risks facing each function withinthe Bank and these are reviewed regularly to monitor significant changes. Operational risk loss data is collected and reported to seniormanagement on a regular basis.38 AUB Annual Report 2009

The Group’s independent audit function regularly evaluates operational procedures and advises senior management and the Boardof any potential problems. Additionally, the Group maintains adequate insurance coverage and disaster recovery/business continuitycontingency plans utilizing offsite data storage and backup systems.AUB Annual Report 200939

Group Organisationand ShareholdingExecutiveCommitteeCompensationCommitteeAUBBoard of DirectorsSharia’a Advisory& SupervisoryBoardAuditCommitteeGroup CEO &Managing DirectorABOBoard ofDirectorsBKMEBoard ofDirectorsABQBoard ofDirectorsAUBUKBoard ofDirectorsCBIQBoard ofDirectorsAUBEBoard ofDirectorsSenior DGCEOBanking GroupFor Business areas (Corporate Banking, Treasury, Retail, PB & WM)CEOABOCEOBKMECEOABQCEOAUBUKCEOCBIQCEOAUBEDGCEOCommercialBanking &TreasuryDGCEORetailBankingDGCEOPB & WMDGCEOFinance &StrategicDevelopmentDGCEOOperations&TechnologyDGCEORisk, Legal&ComplianceGroup HeadHumanResources &DevelopmentGroupHeadAuditGroup HeadComplianceSharia’aComplianceOfficerGroup HeadLegal &CorporateAffairs(CorporateSecretary)DISTRIBUTION OF ORDINARY SHARES AS ON 31/12/09Categories No. of Shares No. of Shareholders% of TotalOutstanding Shares50% and above 0 0 0.0020% up to less than 50% 0 0 0.0010% up to less than 20% 1,420,109,663 2 29.705% up to less than 10% 721,699,524 2 15.101% up to less than 5% 1,147,721,315 11 24.00Less than 1% 1,491,486,726 3,410 31.20TOTAL 4,781,017,228 3,425 100.00DISTRIBUTION OF PREFERENCE SHARES AS ON 31/12/09Categories No. of Shares No. of Shareholders% of TotalOutstanding Shares50% and above 0 0 020% up to less than 50% 101,256,515 1 20.2510% up to less than 20% 75,693,442 1 15.145% up to less than 10% 102,383,498 3 20.481% up to less than 5% 134,528,093 11 26.90less than 1% 86,138,452 349 17.23TOTAL 500,000,000 365 100.00LIST OF MAJOR SHAREHOLDERS (5% AND ABOVE)Name Nationality No. of Shares %Public Institution for Social Security Kuwait 921,581,252 19.28Social Insurance Organization Bahrain 498,528,412 10.43Tamdeen Investment Co. Kuwait 452,367,437 9.46Sh. Shalim Sabah Al-Nasser Al-Sabah Kuwait 269,332,087 5.6340 AUB Annual Report 2009

GroupManagementAdel A. El-LabbanBoard Director and Executive Committee MemberGroup Chief Executive Officer and Managing Director – Ahli UnitedBank BSC, Bahrain, Director - Ahli United Bank (UK) PLC; Director -Bank of Kuwait & the Middle East KSC, Kuwait; Director - Ahli BankQSC, Qatar; Director - Ahli United Bank (Egypt) SAE, Egypt; Director- Ahli Bank SAOG, Oman; Director - Commercial Bank of Iraq, Iraq;Director - Kuwait & Middle East Financial Investment Co. (KMEFIC),Kuwait; Director Middle East Financial Investment Co. (MEFIC),Saudi Arabia; Director - United Bank for Commerce & InvestmentS.A.L, Libya; Board Member - Bahrain Stock Exchange, Bahrain;Director - Bahrain Association of Banks, Bahrain; Formerly ChiefExecutive Officer and Director of the United Bank of Kuwait PLC,UK; Managing Director - Commercial International Bank of Egypt,(Egypt); Chairman - Commercial International Investment Company,Egypt; Vice President, Corporate Finance - Morgan Stanley, USA;Assistant Vice President – Arab Banking Corporation, Bahrain.Bassel GamalSenior Deputy Group Chief Executive Officer – Banking GroupDirector, Ahli Bank QSC, Qatar; Director, Bank of Kuwait & theMiddle East KSC, Kuwait; Director, Ahli United Bank (Egypt) SAE,Egypt; Formerly CEO, Ahli Bank QSC, Qatar; DCEO-Risk, Finance& Operations, Ahli Bank QSC, Qatar; Deputy Group Head ofRisk Management, Ahli United Bank, Bahrain; Senior Manager,Corporate Banking-Commercial International Bank (Egypt).Sawsan AbulhassanDeputy Group Chief Executive Officer - Private Banking andWealth ManagementDirector, AUB Nominees Ltd.; Member of the Board of Directorsand Member of Audit Committee, Securities & InvestmentCompany (SICO), Bahrain; Member of the Board of Directors,National Social Work Fund - Bahrain; Previously with CitibankN.A. Bahrain, Head of Wealth Management and Distribution; andStandard Chartered Bank - Bahrain, Head of Wealth Management.Sanjeev BaijalDeputy Group Chief Executive Officer – Finance and StrategicDevelopmentDeputy Chairman, Legal and General Gulf B.S.C.(c) & Legal andGeneral Gulf Takaful B.S.C.(c); Director, Ahli Bank SAOG, Oman;Director, Bank of Kuwait & The Middle East KSC; Previously GroupHead of Finance, Ahli United Bank, Bahrain; Financial Controller,Al-Ahli Commercial Bank, Bahrain; Ernst & Young, Bahrain andPrice Waterhouse in India. Member of the American Institute ofCertified Public Accountants (AICPA) and Associate Member ofthe Institute of Chartered Accountants of India (ACA).Keith GaleDeputy Group Chief Executive Officer – Risk, Legal and ComplianceDirector, Ahli Bank SAOG, Oman; Previously Group Head of RiskManagement, Ahli United Bank, Bahrain; Head of Credit andRisk at ABC International Bank PLC; Assistant Vice President –Internal Audit Department, Arab Banking Corporation, Bahrain.Held various positions in the UK with KPMG and Ernst & Young.Associate Member of the Institute of Chartered AccountantsEngland & Wales (ACA).Shafqat AnwarDeputy Group Chief Executive Officer - Operations and TechnologyDirector, Ahli United Bank (Egypt) SAE ; Director, Ahli UnitedFinance Company ; Formerly Deputy CEO- Finance, Risk andOperations, Ahli United Bank (Egypt) SAE, Egypt; Group Head ofOperations, Ahli United Bank, Bahrain ; Chief Operating Officer,Commercial Bank of Bahrain, Bahrain; Chief Operating Officer,Grindlays Bahrain Bank, Bahrain ; Operations Manager Gulf, ANZGrindlays Bank, UAE. Held various management positions withANZ Banking Group in Bangladesh, the UK, the UAE and Australia.Abdulla Al-RaeesiDeputy Group Chief Executive Officer – Retail BankingDirector, Ahli Bank QSC, Qatar; Director, Ahli United Bank SAE,Egypt; Director, Legal and General Gulf B.S.C.(c) & Legal & GeneralTakaful B.S.C.(c); Director, International Chamber of Commerce,Bahrain; Former Director, Benefit Company, Bahrain; Former ActingCEO, Ahli Bank, Qatar; Deputy CEO Retail Banking, Ahli UnitedBank, Bahrain; AGM & Head of Delivery Channels, Commercial Bankof Qatar; AGM, Support Group, Doha Bank, Qatar; Head of Business& Technology Consulting Group, Arthur Andersen.AUB Annual Report 200941

ContactDetailsAHLI UNITED BANK B.S.C.Bldg. 2495, Road 2832Al Seef District 428P.O. Box 2424, ManamaKingdom of BahrainTelephone : +973 17 585 858Facsimile : +973 17 580 569Email: info@ahliunited.comwww.ahliunited.comAHLI UNITED BANK (UK) P.L.C.35 Portman SquareLondon W1H 6LRUnited KingdomTelephone : +44 20 7487 6500Facsimile : +44 20 7487 6808Email: info@ahliunited.comwww.ahliunited.comAHLI UNITED BANK K.S.C.PO Box 71Safat 13001KuwaitTelephone : +965 802000Facsimile : +965 2461430Email: contact@bkme.comwww.bkme.comAHLI BANK Q.S.C.Suhaim Bin Hamad St.Al Sadd AreaPO Box 2309Doha, QatarTelephone : +974 4232222Facsimile : +974 BANK OF IRAQ P.S.C.Al Sadoon StreetBaghdad, IraqTelephone : +964 1 7405583Facsimile : +964 1 7184312AHLI UNITED BANK (EGYPT) S.A.E.World Trade Center, 9th Floor1191 Corniche El NilP.O. Box 1159Cairo, EgyptTelephone : +20 2 5801200Facsimile : +20 2 5757052www.ahliunited.comAHLI BANK S.A.O.G.P.O. Box 545Postal Code 116Mina Al FahalSultanate of OmanTelephone : +968 24577000Facsimile : +968 24568001UNITED BANK FOR COMMERCE &INVESTMENT5745 Hay Al AndalusTripoli, LibyaTelephone : +00218 214782160Facsimile : +00218 214782160Email: contact@ubci.lywww.ubci.lyKUWAIT AND MIDDLE EAST FINANCIALINVESTMENT COMPANY K.S.C(c)PO Box 819Safat 13009, KuwaitTelephone : +965 2245000Facsimile : +965 2440627Email: AUB Annual Report 2009

Auditors’ Report andConsolidated FinancialStatements 2009Independent auditors’ report to the shareholders of Ahli United Bank B.S.C ................................. 45Consolidated Statement of Income ................................................................................................................ 46Consolidated Statement of Comprehensive Income ............................................................................... 47Consolidated Balance Sheet .............................................................................................................................. 48Consolidated Statement of Cash Flows ......................................................................................................... 49Consolidated Statement of Changes in Equity ........................................................................................... 50Notes to the Consolidated Financial Statements ...................................................................................... 521 Corporate information ............................................................................................................................ 522 Basis of consolidation .............................................................................................................................. 523 Accounting policies .................................................................................................................................. 533.1 Basis of preparation .................................................................................................................................. 533.2 Significant accounting judgements and estimates ...................................................................... 543.3 Summary of significant accounting policies ................................................................................... 544 Interest income .......................................................................................................................................... 635 Interest expense ........................................................................................................................................ 646 Fees and commissions - net .................................................................................................................. 647 Trading income - net ................................................................................................................................ 648 Net loss on available-for-sale investments ...................................................................................... 649 Cash and balances with central banks ............................................................................................... 6510 Loans and advances ................................................................................................................................. 6511 Non-trading investments ....................................................................................................................... 6812 Investment in associates and joint venture ..................................................................................... 6913 Premises and equipment ........................................................................................................................ 7014 Other assets ................................................................................................................................................. 7015 Goodwill and other intangible assets ................................................................................................ 7116 Customers’ deposits ................................................................................................................................. 7217 Term debts ................................................................................................................................................... 7218 Other liabilities ........................................................................................................................................... 7219 Subordinated liabilities ........................................................................................................................... 7320 Share capital ................................................................................................................................................ 7421 Reserves ........................................................................................................................................................ 7622 Corporate taxation .................................................................................................................................... 7923 Earnings per share .................................................................................................................................... 7924 Cash and cash equivalents ..................................................................................................................... 8025 Related party transactions ..................................................................................................................... 8126 Employee benefits .................................................................................................................................... 8227 Managed funds .......................................................................................................................................... 8428 Derivatives ................................................................................................................................................... 8429 Commitments and contingent liabilities .......................................................................................... 8730 Segment information............................................................................................................................... 8831 Credit risk ..................................................................................................................................................... 9032 Concentration analysis ............................................................................................................................ 9333 Market risk.................................................................................................................................................... 9334 Fair value of financial instruments ...................................................................................................... 9535 Liquidity risk ................................................................................................................................................ 9636 Capital adequacy ....................................................................................................................................... 9937 Deposit protection scheme ................................................................................................................... 10038 Islamic banking .......................................................................................................................................... 10044 AUB Annual Report 2009

P.O. Box 14014th Floor - The TowerBahrain Commercial ComplexManama, Kingdom of BahrainTel: +973 1753 5455 Fax: +973 1753 No. 6700INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF AHLI UNITED BANK B.S.C.We have audited the accompanying consolidated financial statements of Ahli United Bank B.S.C. (‘the Bank’) and its subsidiaries(‘the Group’), which comprise the consolidated balance sheet as at 31 December 2009 and the related consolidated statementsof income, comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significantaccounting policies and other explanatory notes.Board of Directors’ Responsibility for the Consolidated Financial StatementsThe Board of Directors is responsible for the preparation and fair presentation of these consolidated financial statementsin accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing andmaintaining internal control relevant to the preparation and fair presentation of consolidated financial statements that are freefrom material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and makingaccounting estimates that are reasonable in the circumstances.Auditors’ ResponsibilityOur responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our auditin accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements andplan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from materialmisstatement.An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financialstatements. The procedures selected depend on the auditors’ judgement, including the assessment of the risks of materialmisstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditorconsiders internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements inorder to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion onthe effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies usedand the reasonableness of accounting estimates made by the Board of Directors, as well as evaluating the overall presentation ofthe consolidated financial statements.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 Groupas at 31 December 2009 and its consolidated financial performance and its consolidated cash flows for the year then ended inaccordance with International Financial Reporting Standards.Other Regulatory MattersWe confirm that, in our opinion, proper accounting records have been kept by the Bank and the consolidated financial statements,and the contents of the Board of Directors’ Report relating to these consolidated financial statements, are in agreement therewith.We further report, to the best of our knowledge and belief, that no violations of the Bahrain Commercial Companies Law, nor ofthe Central Bank of Bahrain and Financial Institutions Law, nor of the memorandum and articles of association of the Bank haveoccurred during the year ended 31 December 2009 that might have had a material adverse effect on the business of the Bank oron its consolidated financial position and that the Bank has complied with the terms of its banking licence.24 February 2010Manama, Kingdom of Bahrain.A member firm of Ernst & Young Global LimitedAUB Annual Report 200945

ConsolidatedStatement of IncomeYear ended 31 December 20092009 2008Note US$ ’000 US$ ’000Interest income 4 934,283 1,240,072Interest expense 5 467,698 836,967Net interest income 466,585 403,105Fees and commissions - net 6 138,530 150,630Trading income - net 7 39,439 24,896Net loss on available-for-sale investments 8 (14,064) (12,391)Share of profit from associates 40,744 66,455Dividend income 13,275 20,032Other operating income 11,877 12,806229,801 262,428OPERATING INCOME 696,386 665,533Provision for loan losses and contingencies - net 10f 228,136 98,625NET OPERATING INCOME 468,250 566,908Staff costs 142,151 152,689Depreciation 20,233 16,834Other operating expenses 75,466 90,930OPERATING EXPENSES 237,850 260,453PROFIT BEFORE TAX 230,400 306,455Income tax expense (credit) 22 4,314 (3,287)NET PROFIT FOR THE YEAR 226,086 309,742Attributable to:Bank’s equity shareholders 200,718 255,723Non-controlling interests 25,368 54,019226,086 309,742EARNINGS PER SHARE ATTRIBUTABLE TOBANK’S EQUITY SHAREHOLDERS FOR THE YEAR:Basic earnings per share (US cents) 23 4.2 5.3Diluted earnings per share (US cents) 23 4.2 5.3The attached notes 1 to 38 form part of these consolidated financial statements46 AUB Annual Report 2009

Consolidated Statement ofComprehensive IncomeYear ended 31 December 20092009 2008US$ ’000 US$ ’000Net profit for the year 226,086 309,742Other comprehensive incomeDirectors’ fees paid (1,168) (1,002)Donations approved (1,000) (1,000)Currency translation adjustments (39,377) (2,825)Available-for-sale investments:Gains (losses) arising during the year 134,119 (268,390)Transfers to consolidated statement of income on sale/impairmentof available-for-sale investments 23,827 (147,473)Cash flow hedges:Gains (losses) arising during the year 17,166 (72,810)Transfers to consolidated statement of income 38,661 1,743Revaluation of freehold land (53,874) 31,661Share of other comprehensive income of associates (1,236) (22,731)Other comprehensive income (loss) for the year 117,118 (482,827)Total comprehensive income (loss) for the year 343,204 (173,085)Total comprehensive income (loss) attributable to:Bank’s equity shareholders 341,706 (184,157)Non-controlling interests 1,498 11,072343,204 (173,085)The attached notes 1 to 38 form part of these consolidated financial statementsAUB Annual Report 200947

ConsolidatedBalance SheetYear ended 31 December 20092009 2008Note US$ ’000 US$ ’000ASSETSCash and balances with central banks 9 304,164 392,251Treasury bills and bonds 969,114 1,236,997Trading securities 376 23,364Deposits with banks and other financial institutions 3,100,446 2,867,959Loans and advances 10 13,299,999 13,632,220Non-trading investments 11 3,898,592 3,353,570Investments in associates and joint venture 12 537,099 534,916Premises and equipment 13 355,956 389,009Other assets 14 483,951 517,871Goodwill and other intangible assets 15 624,286 634,570TOTAL ASSETS 23,573,983 23,582,727LIABILITIES AND EQUITYLIABILITIESDeposits from banks and other financial institutions 5,549,518 5,153,514Customers’ deposits 16 13,241,266 13,178,079Term debts 17 950,054 1,350,000Other liabilities 18 649,498 882,781Subordinated liabilities 19 602,216 623,576TOTAL LIABILITIES 20,992,552 21,187,950EQUITYOrdinary share capital 20 1,193,589 1,126,561Preference share capital 20 6,321 17,128Reserves 21 1,013,613 851,746Attributable to the Bank’s equity shareholders 2,213,523 1,995,435Non-controlling interests 367,908 399,342TOTAL EQUITY 2,581,431 2,394,777TOTAL LIABILITIES AND EQUITY 23,573,983 23,582,727Fahad Al-Rajaan Hamad Al-Marzouq Adel A. El-LabbanChairman Deputy Chairman Group Chief Executive Officer& Managing DirectorThe attached notes 1 to 38 form part of these consolidated financial statements48 AUB Annual Report 2009

ConsolidatedStatement of Cash FlowsYear ended 31 December 20092009 2008Note US$ ’000 US$ ’000OPERATING ACTIVITIESProfit before tax 230,400 306,455Adjustments for:Depreciation 20,233 16,834Net loss on available-for-sale investments 8 14,064 12,391Provision for loan losses and contingencies - net 10f 228,136 98,625Share of profit from associates (40,744) (66,455)Staff costs - fair value amortisation of share based transactions 23 1,108 4,730Operating profit before changes in operating assets and liabilities 453,197 372,580Changes in:Mandatory reserve deposits with central banks 17,713 (48,281)Treasury bills and bonds 267,883 (207,025)Trading securities 22,988 89,604Deposits with banks and other financial institutions (429,548) 1,501,640Loans and advances 96,939 (1,006,360)Other assets 33,920 (75,548)Deposits from banks and other financial institutions 396,004 (1,858,319)Customers’ deposits 63,187 1,258,079Other liabilities (233,283) 113,199Cash from operations 689,000 139,569Income tax paid (5,184) (5,057)Net cash from operating activities 683,816 134,512INVESTING ACTIVITIESPurchase of non-trading investments (1,151,162) (559,596)Proceeds from sale or redemption of non-trading investments 807,290 793,063Investments in associates and joint venture - (12,500)Increase in premises and equipment (41,052) (50,662)Net cost of combinations - (121,944)Dividends received from associates 38,786 16,636Net cash (used in) from investing activities (346,138) 64,997FINANCING ACTIVITIES(Buyback) increase of subordinated liabilities (21,360) 35,352Repayment of term debt (399,946) -Dividends and other appropriations paid (142,762) (162,014)Treasury shares purchased (1,665) -Net cash used in financing activities (565,733) (126,662)Foreign currency translation adjustments (39,377) (2,825)(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (267,432) 70,022Cash and cash equivalents at 1 January 2,446,908 2,376,886CASH AND CASH EQUIVALENTS AT 31 DECEMBER 24 2,179,476 2,446,908The attached notes 1 to 38 form part of these consolidated financial statementsAUB Annual Report 200949

ConsolidatedStatement of Changes in EquityYear ended 31 December 2009Attributable to Bank’s equity shareholdersReservesOrdinarysharecapitalPreferencesharecapitalTreasurysharesSharepremiumStatutoryreserveRetainedearningsProposedappropriationsOtherreserves(Note 21(i))TotalreservesNoncontrollinginterests TotalUS$ ’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000Balance at 31 December 2008 1,126,561 17,128 - 540,029 126,624 237,887 118,319 (171,113) 851,746 399,342 2,394,777Class B preference share dividendpaid (note 21(j))- - - - - - (3,493) - (3,493) - (3,493)Ordinary share dividend paid(note 21(j))- - - - - - (112,658) - (112,658) (26,611) (139,269)Bonus shares issued(note 20(b) and (c))56,917 - - - - (56,917) - - (56,917) - -Arising on acquisition ofa subsidiary- - - - - - - - - (6,321) (6,321)Conversion of preference shares(note 20(d) and (g))11,756 (8,998) - 2,281 - - - (5,039) (2,758) - -Other equity movements of asubsidiary- - - - - - - - - - -Class B preference shares issued(surrendered)20 (1,809) - (4,013) - - - - (4,013) - (5,802)Treasury shares purchased - - (1,665) - - - - - - - (1,665)Total comprehensive incomefor the year- - - - - 200,718 (2,168) 143,156 341,706 1,498 343,204Transfer to statutory reserve(note 21(c))- - - - 20,072 (20,072) - - - - -Proposed dividend on Class Bpreference shares (note 21(j))- - - - - (1,129) 1,129 - - - -Proposed dividend on ordinaryshares (note 21(j))- - - - - (97,043) 97,043 - - - -Proposed directors’ fees - - - - - (1,211) 1,211 - - - -Proposed donations - - - - - (1,000) 1,000 - - - -Balance at 31 December 2009 1,195,254 6,321 (1,665) 538,297 146,696 261,233 100,383 (32,996) 1,013,613 367,908 2,581,431The attached notes 1 to 38 form part of these consolidated financial statements50 AUB Annual Report 2009

ConsolidatedStatement of Changes in EquityYear ended 31 December 2009Attributable to Bank’s equity shareholdersReservesOrdinarysharePreferenceshare Treasury Share Statutory RetainedProposedappropriationsOtherreservesNoncontrollingTotalcapital capital shares premium reserve earnings(Note 21(i)) reserves interests TotalUS$ ’000 US$’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$’000 US$’000 US$’000Balance at 31 December 2007 844,201 173,001 - 561,373 101,052 228,472 128,864 272,757 1,292,518 338,401 2,648,121Class A preference share dividendpaid (note 21(j))- - - - - - (15,366) - (15,366) - (15,366)Class B preference share dividendpaid (note 21(j))- - - - - - (5,716) - (5,716) - (5,716)Ordinary share dividend paid(note 21(j))- - - - - - (105,780) - (105,780) (41,407) (147,187)Bonus shares issued(note 20 (b) and ( c ))102,417 - - - - (102,417) - - (102,417) - -Arising on acquisition of asubsidiary- - - - - - - - - 109,906 109,906Other equity movements of asubsidiary- - - - - - - - - (18,630) (18,630)Conversion of preference shares(note 20(d) and (g))179,963 (154,963) - (19,008) - - - (5,992) (25,000) - -Class B preference shares(surrendered) issued- (910) - (2,336) - - - - (2,336) - (3,246)Treasury shares purchased (20) - - - - - - - - - (20)Total comprehensive incomefor the year- - - - - 255,723 (2,002) (437,878) (184,157) 11,072 (173,085)Transfer to statutory reserve(note 21(c))- - - - 25,572 (25,572) - - - - -Proposed dividend on Class Bpreference shares (note 21(j))- - - - - (3,493) 3,493 - - - -Proposed dividend on ordinaryshares (note 21(j))- - - - - (112,658) 112,658 - - - -Proposed directors’ fees - - - - - (1,168) 1,168 - - - -Proposed donations - - - - - (1,000) 1,000 - - - -Balance at 31 December 2008 1,126,561 17,128 - 540,029 126,624 237,887 118,319 (171,113) 851,746 399,342 2,394,777The attached notes 1 to 38 form part of these consolidated financial statementsAUB Annual Report 200951

Notes to theConsolidated Financial Statements31 December 20091 CORPORATE INFORMATIONThe parent company, Ahli United Bank B.S.C. (AUB or the Bank) was incorporated in the Kingdom of Bahrain on 31 May 2000 originally asa closed company and changed on 12 July 2000 to a public shareholding company by Amiri Decree number 16/2000. The Bank andits subsidiaries as detailed below (collectively known as the Group) are engaged in retail, commercial, Islamic and investment bankingbusiness, global fund management and private banking services through 85 branches, as at 31 December 2009, in the Kingdom ofBahrain, the State of Kuwait, the Arab Republic of Egypt, Republic of Iraq and the United Kingdom. It also operates in the State of Qatarand Sultanate of Oman through its associates with a network of 33 branches as at 31 December 2009. The Bank operates under aretail banking licence issued by the Central Bank of Bahrain. The Bank’s registered office is located at Building 2495, Road 2832, Al SeefDistrict 428, Kingdom of Bahrain.The consolidated financial statements for the year ended 31 December 2009 were authorised for issue in accordance with a resolution ofthe directors on 24 February 2010.2 BASIS OF CONSOLIDATIONThe consolidated financial statements comprise the financial statements of the Bank and its subsidiaries as at and for the year ended 31December 2009. The financial statements of the subsidiaries are prepared for the same reporting year as the Bank, using consistentaccounting policies.All material intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions areeliminated on consolidation.Subsidiaries are fully consolidated from the date on which control is transferred to the Group. Control is achieved where the Bank has thepower to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The results of subsidiariesacquired are included in the consolidated statement of income from the date of acquisition.The following are the Bank’s principal subsidiaries:Nominal holding*NameCountry of incorporation31 December200931 December2008Ahli United Bank (U.K.) PLC (AUBUK) United Kingdom 100% 100%The Bank of Kuwait and the Middle East K.S.C. (BKME) State of Kuwait 74.9% 74.9%Kuwait and Middle East Financial InvestmentCo. K.S.C. (closed) (KMEFIC), a subsidiary of BKME.State of Kuwait 75.2% 75.4%Ahli United Bank (Egypt) S.A.E. (AUBE) Arab Republic of Egypt 50.7% 50.7%Commercial Bank of Iraq P.S.C. (CBIQ) Republic of Iraq 51.5% 50.0%* Adjusted for subsidiaries’ holdingsSubsequent to the balance sheet date, AUB’s equity stake in AUBE increased from 35.3% to 79.6% following a tender offer to AUBE’sshareholders which concluded on 17 January 2010. This resulted in AUB acquiring 26.6 million AUBE shares at Egyptian Pounds (LE) 37per share. The purchase consideration was settled by payment in cash LE 688.8 million (under the cash offer), issue of 74.2 million AUBordinary shares and issuance of US$ 18.0 million subordinated bonds.52 AUB Annual Report 2009

3 ACCOUNTING POLICIES3.1 Basis of preparationThe consolidated financial statements have been prepared on a historical cost basis as modified for the re-measurement at fairvalue of freehold land, trading and available-for-sale financial assets and all derivatives. In addition, as more fully discussed belowin note 3.3(h)(i), assets and liabilities that are fair value hedged are adjusted to the extent of the fair value of the risk being hedged.The consolidated financial statements are presented in US Dollars which is the Group’s functional currency, and all values arerounded to the nearest thousand (US Dollar thousand) except where otherwise indicated.Statement of complianceThe consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards(IFRS) and in conformity with the Bahrain Commercial Companies Law and the Central Bank of Bahrain and Financial Institutions Law.New standards and interpretations issued but not yet effectiveThe following standards and interpretations have been issued by the International Accounting Standards Board (IASB) but are notyet mandatory for the year ended 31 December 2009:- IAS 39 Financial Instruments (Revised): Recognition and Measurement - Eligible Hedged Items effective annual periodscommencing 1 July 2009.- IFRIC 19 – Extinguishing Financial Liabilities – Effective annual periods on or after 1 January 2010.- IFRS 3 Business Combinations (Revised) and consequential amendments to IAS 27 Consolidated and Separate FinancialStatements: effective annual periods commencing 1 July 2009.- IFRS 2 Share-based Payment (Revised): effective for annual periods commencing 1 January 2010.- IAS 32 Financial Instruments (Revised): Presentation - Classification of Rights Issues effective annual periods commencing1 February 2010.- IAS 24 Related Party Disclosures (Revised): effective annual periods commencing 1 January 2011.- IFRS 9: Financial Instruments: Classification and Measurement effective annual periods commencing 1 January 2013.The application of the above standards other than IFRS 9 is not expected to have a material impact on the consolidated financialstatements as and when they become effective. IFRS 9 was issued in November 2009 and replaces the parts of IAS 39 relating tothe classification and measurement of financial assets. The standard is effective for annual periods beginning on or after 1 January2013. The Group is assessing the impact and timing of application of IFRS 9 on the Group’s financial statements.The Group has adopted the following new and amended standards as of 1 January 2009.IAS 1 (Revised) - Presentation of financial statements.The revised IAS 1 was issued by the IASB in September 2007 for application in consolidated financial statements effective1 January 2009. IAS 1 (Revised) mandates the presentation of the income (expenses) recognised directly in equity to be disclosedin a separate statement “Statement of Other Comprehensive Income” which is a part of the consolidated financial statements forthe year ended 31 December 2009.IFRS 8 - Operating SegmentsThe IASB issued IFRS 8 - Operating segments in November 2006. IFRS 8 replaces IAS 14 Segment Reporting (IAS 14) upon itseffective date. The Group concluded that the segments determined in accordance with IFRS 8 are identical to the businesssegments previously identified under IAS 14. IFRS 8 - Operating segments disclosures are shown in note 30 to the consolidatedfinancial statements.AUB Annual Report 200953

Notes to theConsolidated Financial Statements (Contd.)3 ACCOUNTING POLICIES (continued)3.1 Basis of preparation (continued)Amendments to IFRS 7 Financial Instruments: Disclosures - Improving Disclosures about financial instrumentsThe amendments to IFRS 7 were issued in March 2009 to enhance fair value and liquidity disclosures. With respect to fair value, theamendments require disclosure of a three-level fair value hierarchy, by class, for all financial instruments recognised at fair valueand specific disclosures related to the transfers between levels in the hierarchy and detailed disclosures related to level 3 of the fairvalue hierarchy. In addition, the amendments modify the required liquidity disclosures with respect to derivative transactions andassets used for liquidity management. Comparative information has not been represented as this is not required by the transitionprovisions of the amendment.The preparation of the consolidated financial statements requires management to make judgements and estimates that affect thereported amount of financial assets and liabilities and disclosure of contingent liabilities. These judgements and estimates alsoaffect the revenues and expenses and the resultant provisions as well as fair value changes reported in equity.3.2 Significant accounting judgements and estimatesJudgementsJudgements are made in the classification of available-for-sale, held-for-trading and held-to-maturity investments based onmanagement’s intention at acquisition of the financial asset, and the allocation of goodwill to cash generating units. Judgementsare also made in determination of the objective evidence that a financial asset is impaired.EstimatesPension plansEstimates and assumptions are used in determining the Group’s pension liabilities. The principal actuarial assumptions used forthe defined benefit plan are set out in note 26 to the consolidated financial statements.Impairment losses on loans and advances and non-trading investmentsEstimates are made regarding the amount and timing of future cash flows when measuring the level of provisions required fornon-performing loans, portfolios of performing loans with similar risk characteristics where the risk of default has increased, aswell as provisions for non-trading investments. These are more fully described in note 3.3 (g).Fair value of financial instrumentsEstimates are also made in determining the fair values of financial assets and derivatives that are not quoted in an active market.Such estimates are necessarily based on assumptions about several factors involving varying degrees of uncertainty and actualresults may differ resulting in future changes in such provisions.The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences betweenloss estimates and actual loss experience.3.3 Summary of significant accounting policiesThe principal accounting policies applied in the preparation of these consolidated financial statements are set out below. Thesepolicies have been consistently applied to all the years presented.(a) Investments in associates and joint ventureAssociated companies are companies in which the Group exerts significant influence but does not control, normallyrepresented by an interest of between 20% and 50% in the voting capital. The Group classifies an investment as “joint venture”54 AUB Annual Report 2009

3 ACCOUNTING POLICIES (continued)3.3 Summary of significant accounting policies (continued)(a) Investments in associates and joint venture (continued)when it is a party to a contractual joint venture agreement. Investments in associated companies and joint ventures areaccounted for using the equity method.The reporting dates of the associates and joint venture and the Group are identical and the associates’ and joint ventures’accounting policies materially conform to those used by the Group for like transactions and events in similar circumstances.Adjustments are made to bring into line any dissimilar accounting policies that may exist.(b) Foreign currency translation(i)Transactions and balancesTransactions in foreign currencies are initially recorded in the relevant functional currency rate of exchange ruling at thedate of the transaction.Monetary assets and liabilities denominated in foreign currencies are retranslated at the relevant functional currencyrate of exchange ruling at the balance sheet date. All differences are taken to “trading income - net” in the consolidatedstatement of income.Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchangerates as at the dates of the initial transactions. Non-monetary available-for-sale items measured at fair value in a foreigncurrency are translated using the exchange rates at the date when the fair value was determined and the differencesare included in equity as part of the fair value adjustment of the respective items, unless these items are part of tradingsecurities as explained in note 3.3(c)(iii) or are part of an effective hedging strategy, in which case it is recorded in theconsolidated statement of income.(ii)Group companiesAssets and liabilities of foreign subsidiaries are translated into US Dollars at the rates of exchange prevailing at the balancesheet date. Income and expense items are translated at average exchange rates prevailing for the period. Any exchangedifferences arising on translation are taken to “foreign exchange translation reserve” forming part of equity.(c) Financial instrumentsThe classification of financial instruments at initial recognition depends on the purpose for which the financial instrumentswere acquired and their characteristics. All financial instruments are initially recognised at the fair value of consideration given,including acquisition costs associated with the investment, except in the case of trading securities, the acquisition costs ofwhich are expensed. Premiums and discounts are amortised on a systematic basis to maturity using the effective interestmethod and taken to interest income or interest expense as appropriate.(i)Date of recognitionAll “regular way” purchases and sales of financial assets are recognised on the settlement date, i.e. the date that the Groupreceives or delivers the asset. Regular way purchases or sales are purchases or sales of financial assets that require deliveryof assets within the time frame generally established by regulation or convention in the market place.The Group accounts for any changes in the fair value of the asset to be received during the period between the trade dateand the settlement date in the same way as it accounts for the acquired asset. The change in fair value is recognised inthe consolidated statement of income for assets classified as “trading securities” and it is recognised in equity for assetsclassified as available-for-sale. The change in value is not recognised for assets carried at cost or amortised cost.AUB Annual Report 200955

Notes to theConsolidated Financial Statements (Contd.)3 ACCOUNTING POLICIES (continued)3.3 Summary of significant accounting policies (continued)(c) Financial instruments (continued)(ii)Treasury bills and bondsTreasury bills and bonds are initially recognised at cost. Premiums and discounts are amortised on a systematic basis totheir maturity. These treasury bonds are issued by the respective Central Banks on behalf of the Governments of Kuwait,Iraq and Egypt and are held to maturity.(iii) Trading securitiesA financial asset is classified as “held-for-trading” if it is acquired or incurred principally for the purpose of generatingprofit from short term fluctuations in price. Trading securities are initially recognised at cost, being the fair value of theconsideration given and are subsequently measured at fair value. Resultant unrealised gains and losses arising fromchanges in fair value are included in the consolidated statement of income under “trading income - net” while dividendincome is recorded in “dividend income” when the right of the payment has been established.(iv) Held-to-maturityNon-trading investments with fixed or determinable payments and fixed maturities and which the Group has the intentionand ability to hold to maturity are classified as held-to-maturity. After initial measurement, these are subsequentlymeasured at amortised cost using the effective interest rate method, less allowance for impairment. The losses arisingfrom impairment of such investments are recognised in the consolidated statement of income line “net loss on availablefor-saleinvestments”.(v)Loans and advancesLoans and advances are financial assets with fixed or determinable payments and fixed maturities that are not quotedin an active market. This accounting policy relates to the balance sheet captions “deposits with banks and other financialinstitutions” and “loans and advances”. After initial measurement, the loans and advances are subsequently measured atamortised cost using the effective interest rate method, adjusted for effective fair value hedges, less any amounts writtenoff and provision for impairment. The losses arising from impairment of such loans and advances are recognised in theconsolidated statement of income in “provision for loan losses and contingencies-net” and in an impairment allowanceaccount in the consolidated balance sheet. Amortised cost is calculated by taking into account any discount or premiumon acquisition and fees that are an integral part of the effective interest rate. The amortisation is included in “interestincome” in the consolidated statement of income.(vi) Available-for-saleNon-trading investments that are not classified as held-to-maturity, held-for-trading or loans and advances are classifiedas available-for-sale. After initial recognition, available-for-sale investments are remeasured at fair value. For investmentsin equity instruments, where a reasonable estimate of the fair value cannot be determined, the investment is carriedat cost less impairment provision. Unless unrealised gains and losses on remeasurement to fair value are part of aneffective hedging relationship, they are reported as a separate component of equity until the investment is sold, settledor otherwise disposed of, or the investment is determined to be impaired, at which time the cumulative gain or losspreviously reported in equity is included in the consolidated statement of income for the period.Any gain or loss arising from a change in fair value of available-for-sale investments, which is part of an effective hedgingrelationship, is recognised directly in the consolidated statement of income to the extent of the changes in fair valuebeing hedged.(vii) DerivativesChanges in fair values of the derivatives held for trading are included in the consolidated statement of income under“trading income - net”.56 AUB Annual Report 2009

3 ACCOUNTING POLICIES (continued)3.3 Summary of significant accounting policies (continued)(c) Financial instruments (continued)Derivatives embedded in other financial instruments are treated as separate derivatives and recorded at fair value, whentheir economic characteristics and risks are not closely related to those of the host contract and the host contract is notcarried as held for trading. The changes in fair value of such embedded derivatives are recognised in the consolidatedstatement of income.(viii) Deposits, term debts and subordinated liabilities.These financial liabilities are carried at amortised cost, less amounts repaid.(ix) Reclassification of financial assetsAs permitted by Reclassification of Financial Assets: Amendments to IAS 39 - Recognition and Measurement and IFRS 7:Disclosures, the Group has made the following reclassifications with effect from 1 July 2008:(i) Certain investments classified initially as “available-for-sale” investments into “loans and receivables” category within“non-trading investments”; and(ii) Certain investments classified initially as “trading securities” into “available-for-sale” category.Refer note 11(i) and 11(ii) for further details.(d) Derecognition of financial assets and financial liabilitiesA financial asset (or,where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised where:- the rights to receive cash flows from the asset have expired;- the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the receivedcash flows 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 (i) has transferred substantially all therisks and rewards of the asset, or (ii) has neither transferred nor retained substantially all the risks and rewards of the asset,but has transferred control of the asset.A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires.(e) Repurchase and resale agreementsWhere investments, including those reclassified into “loans and receivables”, are sold subject to a commitment to repurchasethem at a predetermined price, they remain on the consolidated balance sheet and the consideration received is classified as“deposits from banks and other financial institutions”. The difference between the sale price and repurchase price is treated asinterest expense and is accrued over the life of the agreement using the effective interest rate method.Conversely, securities purchased under similar commitments to resell are not recognised on the consolidated balance sheetand the consideration paid is recorded in “deposits with banks and other financial institutions”. The difference between thepurchase price and resale price is treated as interest income and is accrued over the life of the agreement using the effectiveinterest rate method.(f) Determination of fair valueThe fair value of financial instruments that are quoted in an active market is determined by reference to market bid pricesrespectively at the close of business on the balance sheet date.AUB Annual Report 200957

Notes to theConsolidated Financial Statements (Contd.)3 ACCOUNTING POLICIES (continued)3.3 Summary of significant accounting policies (continued)(f) Determination of fair value (continued)The fair value of liabilities with a demand feature is the amount payable on demand.The fair value of interest-bearing financial assets and liabilities that are not quoted in an active market and are not payable ondemand is determined by a discounted cash flow model using the current market interest rates for financial instruments withsimilar terms and risk characteristics.For equity investments that are not quoted in an active market, a reasonable estimate of the fair value is determined byreference to the current market value of another instrument that is substantially similar, or is determined using net presentvaluation techniques.Investments in funds are stated at net asset values provided by the fund managers.The fair value of unquoted derivatives is determined either by discounted cash flows or option-pricing models.(g) Impairment of financial assetsAn assessment is made at each balance sheet date to determine whether there is any objective evidence that a specificfinancial asset or a group of financial assets may be impaired. If such evidence exists, the estimated recoverable amountof that asset or a group of financial assets is determined and any impairment loss, based on the net present value of futureanticipated cash flows, is recognised in the consolidated statement of income and credited to an allowance account. In thecase of equity investments, impairment is reflected directly as a write down of the financial asset. Impairment losses on equityinvestments are not reversed through the consolidated statement of income while any subsequent increases in their fair valueare recognised directly in equity.Objective evidence that financial assets (including equity securities) are impaired can include default or delinquency by aborrower, restructuring of a loan or advance by the Group on terms that the Group would not otherwise consider, indicationsthat a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observabledata relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, oreconomic conditions that correlate with defaults in the group. In addition, for an investment in an equity security, a significantor prolonged decline in its fair value below its cost is objective evidence of impairment.The present value of the estimated future cash flows for loans and other interest bearing financial assets is discounted atthe financial asset’s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring anyimpairment loss is the current effective interest rate. The calculation of the present value of the estimated future cash flows ofa collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling thecollateral, whether or not foreclosure is probable.In addition to specific provisions against individually significant financial assets, the Group also makes collective impairmentprovisions on groups of financial assets, which although not identified as requiring a specific provision, have a greater riskof default than the risk at initial recognition. Financial assets are grouped on the basis of similar credit risk characteristicsthat are indicative of the debtors’ ability to pay all amounts due according to the contractual terms and the collectiveimpairment provision is estimated for any such group where credit risk characteristics of the group of financial assets hasdeteriorated. Factors such as any deterioration in country risk, industry, technological obsolescence as well as identifiedstructural weaknesses or deterioration in cash flows are taken into consideration and the amount of the provision is based onthe historical loss pattern within each group, adjusted to reflect current economic changes.Loans together with the associated allowance are written off when there is no realistic prospect of future recovery andall collateral has been realised or has been transferred to the Group. If, in a subsequent year, the amount of the estimated58 AUB Annual Report 2009

3 ACCOUNTING POLICIES (continued)3.3 Summary of significant accounting policies (continued)(g) Impairment of financial assets (continued)impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previouslyrecognised impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, therecovery is credited to the ‘provision for loan losses and contingencies - net’ in the consolidated statement of income.(h) Hedge accountingThe Group enters into derivative instruments including futures, forwards, swaps and options to manage exposures to interestrate and foreign currency risks, including exposures arising from forecast transactions. In order to manage particular risks,the Group applies hedge accounting for transactions which meet the specified criteria. Derivatives are stated at fair value.Derivatives with positive market values are included in “other assets” and derivatives with negative market values are includedin “other liabilities” in the consolidated balance sheet.At inception of the hedge relationship, the Group formally documents the relationship between the hedged item andthe hedging instrument, including the nature of the risk, management objectives and strategy for undertaking thehedge. The methods that will be used to assess the effectiveness of the hedging relationship form part of the Group’sdocumentation.Also at the inception of the hedge relationship, a formal assessment is undertaken to ensure the hedging instrument isexpected to be highly effective in offsetting the designated risk in the hedged item. Hedges are formally assessed at eachreporting date. A hedge is regarded as highly effective if the changes in fair value or cash flows attributable to the hedged riskduring the period for which the hedge is designated were offset in a range of 80% to 125%. For situations where the hedgeditem is a forecast transaction, the Group assesses whether the transaction is highly probable and presents an exposure tovariations in cash flows that could ultimately affect the consolidated statement of income.For the purposes of hedge accounting, hedges are classified into two categories: (i) fair value hedges which hedge the exposureto changes in the fair value of a recognised asset or liability; and (ii) cash flow hedges which hedge exposure to variability incash flows that is attributable to a particular risk associated with a recognised asset or liability or a forecasted transaction.(i)Fair value hedgesFor fair value hedges which meet the conditions for hedge accounting, any gain or loss from remeasuring the hedginginstrument at fair value is recognised immediately in the consolidated statement of income. The hedged item is adjusted forfair value changes relating to the risk being hedged and the difference is recognised in the consolidated statement of income.If the hedging instrument expires or is sold, terminated or exercised, or where the hedge no longer meets the criteriafor hedge accounting, the hedge relationship is terminated. For hedged items recorded at amortised cost, the differencebetween the carrying value of the hedged item on termination and the value at which it would have been carried withoutbeing hedged is amortised over the remaining term of the original hedge. If the hedged item is derecognised, theunamortised fair value adjustment is recognised immediately in the consolidated statement of income.(ii)Cash flow hedgesFor cash flow hedges which meet the conditions for hedge accounting, the portion of the gain or loss on the hedginginstrument which is determined to be an effective hedge is recognised initially in equity. The ineffective portion of thegain or loss, if any, on the hedging instrument is recognised immediately in the consolidated statement of income as“trading income - net”.The gains or losses on effective cash flow hedges recognised initially in equity are either transferred to the consolidatedstatement of income in the period in which the hedged transaction impacts the consolidated statement of income orincluded in the initial measurement of the related asset or liability.AUB Annual Report 200959

Notes to theConsolidated Financial Statements (Contd.)3 ACCOUNTING POLICIES (continued)3.3 Summary of significant accounting policies (continued)(h) Hedge accounting (continued)For hedges which do not qualify for hedge accounting, any gains or losses arising from changes in the fair value of thehedging instrument are taken directly to the consolidated statement of income for the year.Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longerqualifies for hedge accounting. In the case of cash flow hedges, the cumulative gain or loss on the hedging instrumentrecognised in equity remains in equity until the forecasted transaction occurs, unless the hedged transaction is no longerexpected to occur, in which case the net cumulative gain or loss recognised in equity is transferred to the consolidatedstatement of income for the year.(i) Offsetting financial instrumentsFinancial assets and financial liabilities are only offset and the net amount reported in the consolidated balance sheet whenthere is a currently enforceable legal right to offset the recognised amounts and the Group intends to settle on a net basis.(j) Revenue recognitionRevenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue canbe reliably measured. The following specific recognition criteria must also be met before revenue is recognised:(i)(ii)Interest incomeInterest income is recognised using the effective interest method, taking account of the principal outstanding and therate applicable. Interest that is 90 days or more overdue is excluded from income. Notional interest is recognised onimpaired loans and advances and other financial assets based on the rate used to discount future cash flows to their netpresent values.Fees and commissions incomeCredit origination fees are treated as an integral part of the effective interest rate of financial instruments and arerecognised over their lives, except when the underlying risk is sold to a third party at which time it is recognisedimmediately. Other fees and commissions income are recognised when earned.(iii) Dividend incomeDividend income is recognised when the right to receive payment is established.(k) Business combination, goodwill and other intangible assetsBusiness combinations are accounted for using the purchase method of accounting. Assets and liabilities acquired arerecognised at the acquisition date fair values with any excess of the cost of acquisition over the net assets acquired isrecognised as goodwill.Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the businesscombination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilitiesacquired. Following initial recognition, goodwill is reviewed for impairment annually or more frequently if events or changesin circumstances indicate that the carrying value may be impaired. After initial recognition, goodwill is measured at cost lessany accumulated impairment losses.Impairment is determined by assessing the recoverable amount of the cash-generating unit (or group of cash-generatingunits), to which the goodwill relates. Where the recoverable amount of the cash-generating unit (or group of cash-generating60 AUB Annual Report 2009

3 ACCOUNTING POLICIES (continued)3.3 Summary of significant accounting policies (continued)(k) Business combination, goodwill and other intangible assets (continued)units) is less than the carrying amount, an impairment loss is recognised immediately in the consolidated statement of income.For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated toeach of the Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergiesof the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups ofunits. Each unit or group of units to which the goodwill is allocated:– represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and– is not larger than a segment based on either the Group’s primary or the Group’s geographic segment reporting formatdetermined in accordance with IFRS 8 Operating segments.Intangible assets are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at costless any accumulated impairment losses.The useful lives of intangible assets are assessed to be either finite or infinite. Intangible assets with finite lives are amortisedover their useful economic lives and assessed for impairment whenever there is an indication that an intangible asset maybe impaired. Intangible assets with infinite useful lives are not amortised but are tested annually for impairment or morefrequently whenever there is an indication that they may be impaired.(l) Premises and equipmentFreehold land is initially recognised at cost. After initial recognition, freehold land is carried at the revalued amount. Therevaluation is carried out periodically by independent professional property valuers. The resultant revaluation surplus isrecognised, as a separate component under equity. Revaluation deficit, if any, is recognised in the consolidated statement ofincome, except that a deficit directly offsetting a previously recognised surplus on the same asset is directly offset against thesurplus in the revaluation reserve.Premises and equipment are stated at cost, less accumulated depreciation.Depreciation on buildings and other premises and equipment is provided on a straight-line basis over their estimated useful lives.The estimated useful lives of the assets for the calculation of depreciation are as follows:- Freehold buildings 15 to 30 years- Leasehold land and buildings Over the lease period- Other premises and equipment 2 to 5 years(m) Cash and cash equivalentsCash and cash equivalents comprise cash and balances with central banks, excluding mandatory reserve deposits, together withthose deposits with banks and other financial institutions and treasury bills having an original maturity of three months or less.(n) ProvisionsProvisions are recognised when the Group has a present obligation arising from a past event, and the costs to settle theobligation are both probable and able to be reliably estimated.AUB Annual Report 200961

Notes to theConsolidated Financial Statements (Contd.)3 ACCOUNTING POLICIES (continued)3.3 Summary of significant accounting policies (continued)(o) Employee benefitsDefined benefit pension planPension costs are recognised on a systematic basis so that the costs of providing retirement benefits to employees are evenlymatched, so far as possible, to the service lives of the employees concerned. Any excess or deficiency of the actuarial value ofassets over the actuarial value of liabilities of the pension scheme, outside of a defined corridor, is charged to the consolidatedstatement of income over the remaining service lives of the scheme members.Defined contribution plansThe Group also operates a defined contribution plan, the costs of which are recognised in the period to which they relate.(p) TaxesThere is no tax on corporate income in the Kingdom of Bahrain. Taxation on income from foreign entities is provided for inaccordance with the fiscal regulations of the countries in which the respective Group entities operate.Deferred taxation is provided for using the liability method on all temporary differences calculated at the rate at which it isexpected to be payable. Deferred tax assets are only recognised if recovery is probable.(q) Fiduciary assetsAssets held in trust or in a fiduciary capacity are not treated as assets of the Group and, accordingly, are not incorporated in theconsolidated balance sheet.(r) Non-controlling interestsNon-controlling interests represents the portion of profit or loss and net assets in the subsidiaries not attributable to theBank’s equity shareholders.(s) Redeemable preference sharesPreference shares which carry a mandatory coupon, and are redeemable at a fixed future date, are recognised as liabilitiesin the consolidated balance sheet, at amortised cost. The corresponding dividends on those shares are charged as interestexpense in the consolidated statement of income.(t) Dividends on ordinary sharesDividends on ordinary shares are recognised as liability and deducted from equity when they are approved by the Bank’sshareholders.Dividends for the period that are approved after the balance sheet date are shown as an appropriation and reported in theconsolidated statement of changes in equity, as an event after the balance sheet date.(u) Employees’ share purchase planThe Group operates an employees’ share purchase plan for certain eligible employees. The difference between the issue priceand the fair value of the shares at the grant date is amortised over the vesting period in the consolidated statement of incomewith a corresponding effect to equity.(v) Financial guaranteesIn the ordinary course of business, the Group gives financial guarantees, consisting of letters of credit, guarantees and acceptances.62 AUB Annual Report 2009

3 ACCOUNTING POLICIES (continued)3.3 Summary of significant accounting policies (continued)(v) Financial guarantees (continued)Financial guarantees are initially recognised in the consolidated financial statements at fair value, being the commissionreceived. Subsequent to initial recognition, the Group’s liability under each guarantee is measured at the higher of theamortised commission and the best estimate of expenditure required to settle any financial obligation arising as a result ofthe guarantee.(w) Islamic bankingThe activities of the Islamic branches are conducted in accordance with Islamic Sharia’a principles, as approved by the Sharia’aSupervisory Board. The Islamic branches’ financial statements are prepared in accordance with the Financial AccountingStandards issued by the Accounting and Auditing Organization for The Islamic Financial Institutions (AAOIFI), IFRS and CentralBank of Bahrain regulations.(x) Islamic financingRevenues on Islamic financing transactions are recognised on an accrual basis using the reducing installment method. Incomeon non performing financing accounts is suspended when it is not certain the branches will receive it.(y) Unrestricted investment accounts’ share of profitThe profit computed after taking into account all income and expenses at the end of financial year is distributed betweenunrestricted investment account holders and shareholders. The share of profit of the unrestricted account holders is calculatedon the basis of their daily deposit balances over the year, after reducing the agreed and declared Mudaraba fee.In the case of expenses, which arise out of issues relating to non compliance with Sharia’a regulations, then such expenses arenot to be borne by the unrestricted investment account holders.4 INTEREST INCOME2009 2008US$’000US$’000Treasury bills and bonds 54,022 45,367Deposits with banks and other financial institutions 17,318 142,688Loans and advances 730,497 910,009Non-trading investments 132,446 142,008934,283 1,240,072During the year, the Bank repurchased a portion of its subordinated liabilities with a nominal value of US$ 25 million (2008 : nil). Theresultant net gain on the repurchase amounting to US$ 8.2 million (2008 : nil) is included as a part of “interest income” above.AUB Annual Report 200963

Notes to theConsolidated Financial Statements (Contd.)5 INTEREST EXPENSE2009 2008US$’000US$’000Deposits from banks and other financial institutions 85,110 224,883Customers’ deposits 343,716 528,898Term debts 18,836 49,311Subordinated liabilities 20,036 33,875467,698 836,9676 FEES AND COMMISSIONS - NET2009 2008US$’000US$’000Fees and commissions income- Retail and corporate banking 95,325 78,382- Management, performance and brokerage fees 47,199 76,976Fees and commissions expense (3,994) (4,728)138,530 150,630Included in ‘management, performance and brokerage fees’ is US$ 12.4 million (2008: US$ 23.9 million) of fee income relating to trustand other fiduciary activities.7 TRADING INCOME - NET2009 2008US$’000US$’000Foreign exchange gains 34,336 42,895Loss on trading securities (819) (19,200)Others 5,922 1,20139,439 24,8968 NET LOSS ON AVAILABLE-FOR-SALE INVESTMENTS2009 2008US$’000US$’000Realised gains - net 35,984 147,473(Less): impairment losses - net (50,048) (159,864)(14,064) (12,391)64 AUB Annual Report 2009

9 CASH AND BALANCES WITH CENTRAL BANKS2009 2008US$’000US$’000Cash and balances with central banks, excluding mandatory reserve deposits (note 24) 86,708 157,082Mandatory reserve deposits with central banks 217,456 235,169304,164 392,251Mandatory reserve deposits are not available for use in the day-to-day operations.10 LOANS AND ADVANCESa) By industry sector2009 2008US$ ’000 % US$ ’000 %Consumer/personal 4,130,925 30.2 4,877,669 35.0Real estate 3,272,198 23.9 3,336,675 24.0Trading, manufacturing and services 3,316,917 24.3 3,044,852 21.9Banks and other financial institutions 831,265 6.1 987,376 7.0Construction 890,749 6.5 889,251 6.4Government/public sector 436,369 3.2 245,686 1.8Others 785,771 5.8 540,960 3.913,664,194 100.0 13,922,469 100.0(Less): Impairment Allowance for loan losses (note 10(e)) (364,195) (290,249)13,299,999 13,632,220b) By geographic region2009 2008US$ ’000 % US$ ’000 %GCC countries 11,104,185 81.3 11,652,479 83.7United Kingdom 670,695 4.9 817,492 5.4Europe (excluding United Kingdom) 782,021 5.7 545,329 3.9United States of America 2,698 0.0 2,480 0.0Asia (excluding GCC countries) 64,923 0.5 83,087 0.6Rest of the world (including Arab Republic of Egypt) 1,039,672 7.6 821,602 6.413,664,194 100.0 13,922,469 100.0(Less): Impairment Allowance for loan losses (note 10(e)) (364,195) (290,249)13,299,999 13,632,220GCC countries comprise the members of the Gulf Co-operation Council being Kingdom of Bahrain, State of Kuwait, Sultanate of Oman,State of Qatar, Kingdom of Saudi Arabia and the United Arab Emirates.Refer note 31 (c) for disclosure of credit quality of loans and advances.AUB Annual Report 200965

Notes to theConsolidated Financial Statements (Contd.)10 LOANS AND ADVANCES (continued)c) Age analysis of past due but not impaired loans and advances2009Upto 30 days 31 to 60 days 61 to 90 days TotalUS$ ’000 US$ ’000 US$ ’000 US$ ’000Loans and advancesRetail 26,551 43,456 36,283 106,290Corporate 46,274 30,609 99,737 176,62072,825 74,065 136,020 282,9102008Upto 30 days 31 to 60 days 61 to 90 days TotalUS$ ’000 US$ ’000 US$ ’000 US$ ’000Loans and advancesRetail 40,558 56,770 56,781 154,109Corporate 21,988 82,812 56,579 161,37962,546 139,582 113,360 315,488The above past due loans and advances include those that are only past due by a few days. None of the above past due loans areconsidered to be impaired.d) Individually impaired loans and advances2009 2008Retail Corporate Total Retail Corporate TotalUS$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000Gross Impaired loans 147,216 237,023 384,239 117,381 142,858 260,239Specific impairment provision (113,876) (173,836) (287,712) (103,878) (129,926) (233,804)33,340 63,187 96,527 13,503 12,932 26,435Impaired loan coverage 77% 73% 75% 88% 91% 90%The fair value of collateral that the Group holds relating to loans individually determined to be impaired at 31 December 2009 amountsto US$ 71.4 million (31 December 2008: US$ 115.7 million). The collateral consists of securities, letters of guarantee and properties.The carrying amount of renegotiated loans as at 31 December 2009 is US$ 81.6 million (31 December 2008: US$ 27.6 million).66 AUB Annual Report 2009

10 LOANS AND ADVANCES (continued)e) Impairment allowance for loans and advancesA reconciliation of the allowance for impairment losses for loans and advances by class is as follows:2009 2008Retail Corporate Total Retail Corporate TotalUS$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000At 1 January 131,830 158,419 290,249 85,080 85,108 170,188Add/(Less):Arising on acquisition of subsidiary - - - - 30,808 30,808Amounts written off during the year (14,907) (149,237) (164,144) (15,585) (9,665) (25,250)Charge for the year 35,901 201,751 237,652 42,539 79,173 121,712Recoveries during the year (6,981) (9,561) (16,542) (11,446) (13,418) (24,864)Interest suspended during the year (net) 4,702 15,387 20,089 8,042 4,909 12,951Exchange rate and other adjustments (12,014) 8,905 (3,109) 23,200 (18,496) 4,704At 31 December 138,531 225,664 364,195 131,830 158,419 290,249f) Provision for loan losses and contingencies - netThe net charge for the year for provision for loan losses and contingencies in the consolidated statement of income is determinedas follows:2009 2008US$ ’000 US$ ’000Impairment charge for the year on loans and advances (note 10(e)) 237,652 121,712Recoveries from loans and advances during the year(including from fully provided loans written off in previous years) (19,424) (24,864)Net charge for contingencies 9,908 1,777Provision for loan losses and contingencies - net 228,136 98,625AUB Annual Report 200967

Notes to theConsolidated Financial Statements (Contd.)11 NON-TRADING INVESTMENTS2009 2008Held-to- Available- Loans andmaturity for-sale receivables Total TotalUS$’000 US$’000 US$’000 US$’000 US$’000Quoted investmentsGCC and US government bonds and debt securities - 230,997 169,050 400,047 378,247Other government bonds and debt securities 15,927 105,863 35,934 157,724 170,009Floating rate notes and certificates of deposit:- issued by banks and other financial institutions - 904,045 974,944 1,878,989 1,484,311- issued by corporate bodies - 393,226 508,606 901,832 617,587Equity shares - 16,737 - 16,737 137,492Funds at net asset value - 158,603 - 158,603 210,77015,927 1,809,471 1,688,534 3,513,932 2,998,416Unquoted investmentsGCC government bonds - 138,547 - 138,547 -Other government bonds and debt securities - 30,544 - 30,544 30,116Floating rate notes and certificates of deposit:- issued by banks and other financial institutions - - - - 163,066Equity shares at cost - 123,847 - 123,847 79,672Funds at net asset value - 119,423 - 119,423 58,587Other investments - 59,157 - 59,157 111,957- 471,518 - 471,518 443,398Total 15,927 2,280,989 1,688,534 3,985,450 3,441,814(Less): Allowance for impairment - (86,858) - (86,858) (88,244)15,927 2,194,131 1,688,534 3,898,592 3,353,570Refer note 31 (c) for disclosure of credit quality of non-trading investments.Non-trading investments of US$ 1,042 million (31 December 2008: US$ 722 million) have been sold under agreements to repurchase,against which the Group had borrowings of US$ 878 million (31 December 2008: US$ 604 million), included under “deposits frombanks and other financial institutions”.The movements in provision for impairment on available-for-sale investments were as follows:2009 2008US$ ’000 US$ ’000At 1 January 88,244 44,443Add/(Less):Arising on acquisition of subsidiaries - 2,720Charge for the year 35,975 159,864Amounts written off during the year (30,722) (131,121)Exchange rate and other adjustments (6,639) 12,338At 31 December 86,858 88,24468 AUB Annual Report 2009

11 NON-TRADING INVESTMENTS (continued)The deterioration in the financial markets in the third quarter of 2008 was viewed globally as a rare circumstance to have occurred inthe financial sector. The IASB issued “Reclassification of Financial Assets: Amendments to IAS 39 - Recognition and Measurement andIFRS 7: Disclosures” which permits the reclassification of certain financial assets under such rare circumstances. Accordingly, the Grouphad performed the following reclassifications:(i) Financial assets reclassified into the “loans and receivables” category from “available-for-sale” categoryThe carrying value of the financial assets reclassified into the loans and receivables category from available-for-sale category asat the date of reclassification of 1 July 2008 was US$ 1,991,712 thousand and the fair value losses recognised in the cumulativechanges in available-for-sale reserve upto that date was US$ 108,527 thousand.2009 2008US$ ’000 US$ ’000Carrying value as at 31 December 1,688,534 2,001,935Fair value as at 31 December 1,571,622 1,821,130Fair value losses that would have been recognised in the cumulative changesin available-for-sale reserve had the non-trading investments not been reclassified (116,912) (180,805)The Group earns interest income on these investments at an effective interest rate of 4.3% (2008: 6.4%) and the carrying values ofthese financial instruments reflect the cash flows expected to be recovered at the date of reclassification of these financial assets.(ii) Financial assets reclassified into the “available-for-sale” category from “trading securities” categoryThe carrying value of the financial assets reclassified into the available-for-sale category from trading securities category as at thedate of reclassification of 1 July 2008 was US$ 86,901 thousand and the fair value losses recognised in the consolidated statementof income upto that date was US$ 3,823 thousand.2009 2008US$ ’000 US$ ’000Carrying value and fair value as at 31 December 79,142 79,881Fair value losses that would have been recognised in the consolidated statement ofincome for the year had the financial assets not been reclassified. (739) (7,020)12 INVESTMENTS IN ASSOCIATES AND JOINT VENTUREThe principal associates and joint venture of the Group are:a) AssociatesName Country of incorporation Holding2009 2008Ahli Bank Q.S.C. (ABQ) State of Qatar 38.1% 40.0%Ahli Bank S.A.O.G. (ABO) Sultanate of Oman 35.0% 35.0%During 2010, on completion of registration of additional 2.92 million shares due to private placement subscription by QatarInvestment Authority in ABQ, AUB’s holding will be further diluted to 36.4%.AUB Annual Report 200969

Notes to theConsolidated Financial Statements (Contd.)12 INVESTMENTS IN ASSOCIATES AND JOINT VENTURE (continued)b) Joint ventureName Country of incorporation Holding2009 2008Legal & General Gulf B.S.C. (c) Kingdom of Bahrain 50.0% 50.0%The summarised financial information of the Group’s associates and joint venture was as follows:2009 2008US$ ’000 US$ ’000Assets 6,801,870 6,172,919Liabilities 5,892,726 5,399,011Revenues 231,341 292,243Net profit for the year 100,642 167,16713 PREMISES AND EQUIPMENTThe net book values of the Group’s premises and equipment are:2009 2008US$ ’000 US$ ’000Freehold land 138,101 195,439Freehold buildings 22,987 22,607Leasehold land and buildings 83,953 61,636Capital work-in-progress 55,927 54,454Others 54,988 54,873355,956 389,00914 OTHER ASSETS2009 2008US$ ’000 US$ ’000Tax assets (note 22) 4,605 9,423Interest receivable 85,332 173,494Derivative assets (note 28) 191,329 143,098Prepayments and others 202,685 191,856483,951 517,87170 AUB Annual Report 2009

15 GOODWILL AND OTHER INTANGIBLE ASSETS2009 2008GoodwillIntangibleassets Total GoodwillIntangibleassets TotalUS$’000 US$’000 US$’000 US$’000 US$’000 US$’000At 1 January 514,517 120,053 634,570 448,883 46,474 495,357Restatement of provisional goodwill - - - (74,105) 74,105 -Acquisitions during the year 151 - 151 144,479 - 144,479Exchange rate and other adjustments (9,417) (1,018) (10,435) (4,740) (526) (5,266)At 31 December 505,251 119,035 624,286 514,517 120,053 634,570Goodwill:-Additions to goodwill during the year relates to additional stake acquired in a subsidiary.Goodwill acquired through business combinations has been allocated to the cash-generating units of the acquired entities forimpairment testing purposes.The carrying amount of goodwill allocated to each of the cash-generating units is as follows:2009 2008US$’000US$’000Retail banking 177,912 181,287Corporate banking, treasury and investments 215,392 218,144Private banking and wealth management 111,947 115,086505,251 514,517Key assumptions used in estimating recoverable amounts of cash-generating unitsThe recoverable amount of each cash-generating unit’s goodwill is based on value-in-use calculations using cash flow projectionsfrom financial budgets approved by senior management, extrapolated for five year projections using nominal Gross Domestic Productgrowth rate in the respective GCC countries in which they operate. The discount rate applied to cash flow projections represent the costof capital adjusted for an appropriate risk premium for these business segments. The discount rate used in relation to the significantportion of the goodwill requiring impairment testing was 10.9% (2008: 9.8%). The key assumptions used in estimating recoverableamounts of cash generating units were sensitised to test the resilience of value-in-use calculations. On this basis, managementbelieves that reasonable changes in the key assumptions used to determine the recoverable amount of the Group’s cash-generatingunits will not result in an impairment.Other Intangible Assets:-Intangible assets mainly relate to stock exchange brokerage licenses and banking license which have an indefinite life. Based on anannual impairment assessment of the intangible assets, no indication of impairment was identified.AUB Annual Report 200971

Notes to theConsolidated Financial Statements (Contd.)16 CUSTOMERS’ DEPOSITS2009 2008US$ ’000 US$ ’000Current and call accounts 2,221,678 2,432,304Saving accounts 857,831 742,364Time deposits 10,161,757 10,003,41113,241,266 13,178,07917 TERM DEBTS2009 2008US$ ’000 US$ ’000Medium Term Syndicated Deposit[(carrying interest rate of three-month LIBOR plus 0.85% per annum, repayablein October 2011) (2008: carrying interest rate of three-month LIBOR plus 0.325%per annum repayable in October 2009)]Long term debt(carrying interest rate of six-month LIBOR plus 0.275% per annum, repayablein September 2012)800,054 1,200,000150,000 150,000950,054 1,350,000On 31 August 2009, AUB prepaid US$ 400 million of Medium Term Syndicated Deposit ahead of the contractual maturity date of31 October 2009 while the balance was extended for two more years pursuant to a commitment secured earlier in September 2008.18 OTHER LIABILITIES2009 2008US$ ’000 US$ ’000Accruals 79,010 110,662Interest payable 127,540 198,381Derivative liabilities (note 28) 243,287 357,078Other credit balances 199,661 216,660649,498 882,78172 AUB Annual Report 2009

19 SUBORDINATED LIABILITIESThese borrowings are subordinated to the claims of all other creditors of the respective banks.2009 2008US$ ’000 US$ ’000(a) Ahli United Bank B.S.C.– US Dollars – non-convertible portion (50%) of Class A non-cumulative preferenceshares carrying interest at 1.50% over twelve-month LIBOR, repayable on 2 January2015, with an issuer option to redeem after 1 January 2010 subject to three monthsnotice (also refer note 20 (e)).– US Dollars – interest at three-month LIBOR plus a margin of 0.95% up to 2 December2010 and margin of 1.45% thereafter, repayable on 2 December 2015 with an issueroption to redeem after 2 December 2010 subject to one month notice (also refer note 4).225,000 225,00075,000 100,000– Great Britain Pounds – interest at six-month LIBOR plus 1.00%, repayable in 2012. 31,849 29,131– US Dollars - interest at six-month LIBOR plus a margin of 0.82%, repayable on 15December 2016, convertible into ordinary shares at the holder’s option at the rate ofUS$ 1.24 per share between the third and sixth anniversary from the loan agreementdated 18 November 2006 (also refer note 23).– US Dollars - interest at 6.5% p.a., repayable at 5 years and one day with an issueroption to extend for a further period of 5 years and one day at 7% per annum.200,000 200,00050,000 50,000(b) Ahli United Bank (U.K.) PLC– US Dollars – interest at six-month LIBOR plus ¾%, repayable in 2013. 2,267 2,267– Great Britain Pounds - interest at six-month LIBOR plus ¾%, repayable in 2013. 2,558 2,340– Great Britain Pounds - interest at six-month LIBOR plus ¾%, repayable in 2011. 1,675 1,532– US Dollars - interest at six-month LIBOR plus ¾%, repayable in 2011. 1,485 1,485– Great Britain Pounds - interest at six-month LIBOR plus ¾%, repayable at 5 years andone day notice.– US Dollars - interest at six-month LIBOR plus ¾%, repayable at 5 years and one daynotice.6,565 6,0045,817 5,817602,216 623,576AUB Annual Report 200973

Notes to theConsolidated Financial Statements (Contd.)20 SHARE CAPITAL2009 2008US$ ’000 US$ ’000(a) Authorised :– Ordinary share capital8,000 million shares (2008: 8,000 million shares) of US$ 0.25 each 2,000,000 2,000,000– Preference share capital1,000 million (2008:1000 million shares) Class A preference shares of US$ 0.25 each 250,000 250,000250 million (2008: 250 million) Non-Cumulative Fully Convertible Class B preferenceshares of US$ 0.25 each 62,500 62,5002009 2008US$ ’000 US$ ’000(b) Issued and fully paid:– Ordinary share capital4,781.0 million shares of US$ 0.25 each ( 2008: 4,506.3 million shares of US $ 0.25 each)During the year, the Bank issued 47.0 million ordinary shares of US$ 0.25, each uponconversion of Tranche II of Class B preference shares and 227.6 million ordinary sharesof US$ 0.25 each as bonus issue (notes 20 (c), (d) and (g) ). 1,195,254 1,126,561As at 31 December 2009, the Group held 3 million treasury shares (2008: nil) at a cost of US$ 1,665 thousand.– Preference share capital25.3 million Non-Cumulative Fully Convertible Class B preference shares ofUS$ 0.25 each (2008 : 68.4 million Non-Cumulative Fully Convertible Class B preferenceshares) (note 20 (f)). 6,321 17,128(c) The Annual General Assembly of Shareholders on 18 March 2009 approved a bonus share issue of 5% (1 ordinary share forevery 5 shares held) (2008 : 10%) resulting in an increase in the ordinary share capital by US$ 56.9 million (2008 : US$ 102.4million) comprising 227.6 million (2008 : 409.6 million) ordinary shares of US$ 0.25 each. The convertible portion of all issued andoutstanding Class B Preference Shares are automatically adjusted by these bonus share issues upon their conversion into ordinaryshares under the terms of the respective issues.(d) Conversion of Class A preference sharesAs per the terms of issue of the Class A preference shares, 577.5 million ordinary shares were issued, on 1 January 2008, uponconversion of 50% of Class A preference shares, including the bonus adjustment for the years 2005 and 2006.(e) The remaining 50% of the Class A preference shares are redeemable in cash on 1 January 2015, or at an earlier date after1 January 2010 if exercised by the Bank, at US$ 0.45 per share. These preference shares not subject to conversion (recordedas subordinated liabilities) would receive preferential treatment over holders of ordinary shares and Class B preference shares,but shall be subordinated to all other liabilities of the Bank. The redeemable portion of the Class A preference shares amountingto US$ 225 million (31 December 2008: US$ 225 million) is included in subordinated liabilities (note 19(a)).(f) An Employee Share Purchase Plan (“ESPP”) was established in accordance with the Board of Directors’ approval and thesubsequent approval of the Extraordinary General Assembly of Shareholders meeting dated 5 October 2004 and furtherregulatory approvals obtained from:74 AUB Annual Report 2009

20 SHARE CAPITAL (continued)(i) Capital Markets Supervision Directorate of CBB vide their letters dated 2 September 2004, 9 November 2004 and 18 April 2005;(ii) Banking Supervision Directorate of CBB vide their letters dated 5 September 2004 and 17 April 2005; and(iii) Ministry of Commerce vide their letters dated 8 September 2004 and 9 April 2005.Subsequent amendments were duly approved by the regulatory authorities.As per the approved plan, the Non-Cumulative Fully Convertible Class B preference shares (“Class B preference shares”) wereauthorised for issuance to the employees of the Bank and its subsidiary in UK, in five annual tranches over a five-year periodcommencing 1 January 2005 at prices determined by the Board of Directors within set parameters. The Class B Preference Sharesare mandatorily convertible into an equivalent number of ordinary shares adjusted for any bonus share issues on the conversiondate of each tranche.The details of Class B preference shares issued, conversion dates of respective issues and the resultant conversion effect dulyadjusted for bonus share issues for the years 2005, 2006, 2007 and 2008 are as follows:Conversion date Numbers in millionNumber of Class B preference shares issued : 2009 2008Tranche - I 1 January 2008 119.9 119.9Tranche - II 1 January 2009 36.0 36.0Tranche - III 1 January 2010 38.4 38.4Total Issue Class B preference shares - 31 December 2007 194.3 194.3Add: Bonus shares @ 5% for 2005 as approved at the Bank’s Annual GeneralAssembly of Shareholders' meeting held on 27 March 2006.9.7 9.7204.0 204.0Add: Bonus shares @ 10% for 2006 as approved at the Bank’s Annual GeneralAssembly of Shareholders' meeting held on 25 March 2007.20.4 20.4224.4 224.4Add: Rights issue conversion adjustment factor @ 2.834% as approved at theBank's Extraordinary General Assembly of Shareholders' meeting held6.3 6.3on 18 October 2007.230.7 230.7Less: Conversion of Tranche I of Class B preference shares (refer (g) below). (142.3) (142.3)88.4 88.4Add: Bonus shares @ 10% for 2007 as approved at the Bank’s Annual GeneralAssembly of Shareholders' meeting held on 3 March 2008.8.8 8.897.2 97.2Less: Conversion of Tranche II of Class B preference shares (refer (g) below). (47.0) -50.2 97.2Add: Bonus shares @ 5% for 2008 as approved at the Bank’s Annual GeneralAssembly of Shareholders’ meeting held on 18 March 2009.2.5 -Total number of ordinary shares when converted 52.7 97.2(g) Conversion of Tranche I and II of Class B preference sharesAs per the terms of the issue of the Employee Share Purchase Plan (ESPP), upon conversion of Tranche-I of the Class B preferenceshares on 1 January 2008 and Tranche II of the Class B preference shares on 1 January 2009, 142.3 million ordinary shares and 47.0million ordinary shares respectively were issued, including the bonus adjustment for the years 2005, 2006, 2007 and 2008 and therights issue adjustment factor for 2007.AUB Annual Report 200975

Notes to theConsolidated Financial Statements (Contd.)20 SHARE CAPITAL (continued)(h) Upon conversion of the remaining outstanding Class B Preference Shares, the resultant ordinary shares totalling to 52.7 million shares,including the effect of ordinary bonus share issues to 31 December 2009 will rank pari-passu with the ordinary shares in issue.21 RESERVESa) Share premiumThe share premium arising on the issue of ordinary and preference shares is not distributable except in such circumstances asstipulated in the Bahrain Commercial Companies Law.b) Capital reserveAs required by the Bahrain Commercial Companies Law, any profit on the sale of treasury stock is transferred to a capital reserve.The reserve is not distributable except in such circumstances as stipulated in the Bahrain Commercial Companies Law.c) Statutory reserveAs required by the Bahrain Commercial Companies Law and the Bank’s Articles of Association, 10% of the net profit is transferred toa statutory reserve on an annual basis. The Bank may resolve to discontinue such transfers when the reserve totals 50% of the paidup capital. The reserve is not distributable except in such circumstances as stipulated in the Bahrain Commercial Companies Law.d) Property revaluation reserveThe revaluation reserve arising on revaluation of freehold land is not distributable except in such circumstances as stipulated inthe Bahrain Commercial Companies Law.e) Foreign exchange translation reserveIt comprises of translation effects arising on consolidation of subsidiaries, non-monetary equity investments and investments inassociates.f) Available-for-sale reserveThis reserve represents changes in the fair values of available-for-sale investments.g) Cash flow hedge reserveIt represents the effective portion of gain or loss on the Group’s cash flow hedging instruments.h) Employee share purchase plan reserveThe Group operates an employees’ share purchase plan (ESPP) for certain eligible employees through the issuance of Non-Cumulative Fully Convertible Class B Preference Shares. The difference between the issue price and the fair value of the shares atthe grant date is amortised over the vesting period in the consolidated statement of income with a corresponding effect to ESPPreserve under consolidated statement of changes in equity. Upon conversion of these shares, the fair value reserve is transferredto share premium.76 AUB Annual Report 2009

21 RESERVES (continued)i) Movements in other reservesCapitalreservePropertyrevaluationreserveForeignexchangetranslationreserveAvailablefor-salereserveCumulative changes inCash flowhedgereserveESPPreserveTotalotherreservesUS$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000Balance at 1 January 2009 307 121,106 38,419 (251,621) (85,652) 6,328 (171,113)Currency translationadjustments - - (26,791) - - - (26,791)Share of changes in fair valuereserve of associates - - - (1,236) - - (1,236)Transfers to consolidatedstatement of income on sale/impairment of available forsale investments - - - 21,785 - - 21,785Transfers to consolidatedstatement of income - - - - 38,661 - 38,661Net fair value movements duringthe year - - - 140,185 17,166 - 157,351Fair value amortisation of sharebased transaction (note 23) - - - - - 1,108 1,108Conversion of preference shares(note 20(g)) - - - - - (5,039) (5,039)Revaluation of freehold land - (47,722) - - - - (47,722)Balance at 31 December 2009 307 73,384 11,628 (90,887) (29,825) 2,397 (32,996)AUB Annual Report 200977

Notes to theConsolidated Financial Statements (Contd.)21 RESERVES (continued)CapitalreservePropertyrevaluationreserveForeignexchangetranslationreserveAvailablefor-salereserveCumulative changes inCash flowhedgereserveESPPreserveTotalotherreservesUS$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000Balance at 1 January 2008 307 94,290 36,080 149,075 (14,585) 7,590 272,757Currency translationadjustments - - 2,339 - - - 2,339Share of changes in fair valuereserve of associates - - - (22,731) - - (22,731)Transfers to consolidatedstatement of income on sale/impairment of available forsale investments - - - (147,473) - - (147,473)Transfers to consolidatedstatement of income - - - - 1,743 - 1,743Net fair value movements duringthe year - - - (230,492) (72,810) - (303,302)Fair value amortisation of sharebased transactions (note 23) - - - - - 4,730 4,730Conversion of preference shares(note 20(g)) - - - - - (5,992) (5,992)Revaluation of freehold land - 26,816 - - - - 26,816Balance at 31 December 2008 307 121,106 38,419 (251,621) (85,652) 6,328 (171,113)j) Dividends paid and proposedProposed for approval at the forthcoming Annual General Assembly of Shareholders Meeting2009US$’000Cash dividend on the Class B Preference shares @ US cents 2.9 per share 1,129Cash dividend on the Ordinary shares @ US cents 2.0 per share 97,043Bonus share issueNIL2008US$’000Declared and paid during the yearCash dividend on the Class B Preference shares @ US cents 4.7 per share (2008: US cents 3.1 per share) 3,493Cash dividend on the Ordinary shares @ US cents 2.5 per share (2008: US cents 3.5 per share) 112,658Bonus share issue 5%78 AUB Annual Report 2009

22 CORPORATE TAXATION2009 2008US$’000US$’000Consolidated balance sheet (note 14):– Current tax asset 5,810 9,315– Deferred tax (liability) asset (1,205) 1084,605 9,423Consolidated statement of income– Current tax expense (credit) on foreign operations 3,002 (4,618)– Deferred tax expense on foreign operations 1,312 1,3314,314 (3,287)There is no corporate taxation in the Kingdom of Bahrain. In view of the operations of the Group being subject to various taxjurisdictions and regulations, it is not practical to provide a reconciliation between the accounting and taxable profits together withthe details of effective tax rates. Substantially all of the tax expense relates to AUBUK and CBIQ.23 EARNINGS PER SHAREBasic earnings per share is calculated by dividing the net profit for the year attributable to the Bank’s ordinary equity shareholders lessClass B preference share dividends, by the weighted average number of ordinary shares outstanding during the period.Diluted earnings per share amounts are calculated by dividing the net profit attributable to the Bank’s ordinary equity shareholders bythe weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary sharesthat would be issued on the conversion of Class B preference shares into ordinary shares.The convertible subordinated debt issued (note 19(a)) is anti-dilutive for 2009 and 2008 and therefore ignored in calculating dilutedearnings per share. The number of ordinary shares potentially issuable upon conversion of this debt amounts to 161.3 million sharesas at 31 December 2009 (31 December 2008: 161.3 million).AUB Annual Report 200979

Notes to theConsolidated Financial Statements (Contd.)23 EARNINGS PER SHARE (continued)The following reflects the income and share data used in basic and diluted earnings per share computations :2009 2008US$’000US$’000Net profit for basic earnings per share computationNet profit attributable to Bank's equity shareholders 200,718 255,723(Less): Class B preference share dividend (note 21(j)) (1,129) (3,493)Adjusted net profit attributable to Bank’s ordinary equity shareholders forbasic earnings per share 199,589 252,230Net profit for diluted earnings per share computationNet profit attributable to Bank’s equity shareholders before preference share dividend 200,718 255,723Add: Staff costs - fair value amortisation of share based transactions (note 21 (i)) 1,108 4,730Adjusted net profit attributable to Bank’s ordinary equity shareholders fordiluted earnings per share 201,826 260,453Number of shares(in millions)2009 2008Weighted average ordinary shares outstanding during the period adjusted for bonus shares 4,781 4,732Less :- Weighted average treasury shares purchased (2) -Net weighted average number of ordinary shares for basic earnings per share 4,779 4,732Add: Effect of dilution – Class B preference shares (note 20(f)) 40 96Weighted average number of ordinary shares for diluted earnings per share 4,819 4,82824 CASH AND CASH EQUIVALENTSCash and cash equivalents included in the consolidated statement of cash flows include the following balance sheet amounts:2009 2008US$ ’000 US$ ’000Cash and balances with central banks, excluding mandatory reserve deposits (note 9) 86,708 157,082Deposits with banks and other financial institutions -with an original maturity of three months or less2,092,768 2,289,8262,179,476 2,446,90880 AUB Annual Report 2009

25 RELATED PARTY TRANSACTIONSThe Group enters into transactions with major shareholders, associates, directors, senior management and companies which arecontrolled, jointly controlled or significantly influenced by such parties in the ordinary course of business at arm’s length. All the loansand advances to related parties are performing and are free of any provision for possible loan losses.The income, expense and the period end balances in respect of related parties included in the consolidated financial statements wereas follows:2009US$ ’000DirectorsMajorand seniorshareholders Associates management TotalInterest income - 809 4,731 5,540Interest expense 124,875 28 58 124,961Fees and commissions (net) - 3,103 - 3,103Deposits with banks and other financial institutions 24 162,859 - 162,883Loans and advances - - 167,955 167,955Deposits from banks and other financial institutions - 28,499 - 28,499Customers’ deposits (a) 4,097,106 21,341 15,555 4,134,002Subordinated liabilities 92,705 - - 92,705Commitments and contingent liabilities (notional) - 5,000 12,034 17,034Derivatives (notional) - 165,941 - 165,9412008US$ ’000DirectorsMajorand seniorshareholders Associates management TotalInterest income - 2,040 8,845 10,885Interest expense 157,995 2,514 944 161,453Fees and commissions (net) - 4,939 - 4,939Deposits with banks and other financial institutions 25 88,514 - 88,539Loans and advances - 150,000 131,879 281,879Deposits from banks and other financial institutions - 21,934 - 21,934Customers’ deposits (a) 3,553,420 - 19,162 3,572,582Subordinated liabilities 89,495 - - 89,495Commitments and contingent liabilities (notional) - 1,073 26,136 27,209Derivatives (notional) - 152,899 - 152,899AUB Annual Report 200981

Notes to theConsolidated Financial Statements (Contd.)25 RELATED PARTY TRANSACTIONS (continued)(a) Customers’ deposits include deposits from GCC government-owned institutions totaling to US$ 4,091 million (31 December 2008:US$ 3,528 million).The compensation of key management personnel of the Group included under staff costs was as follows:2009 2008US$ ’000 US$ ’000Short term employee benefits 14,078 14,784End of service benefits 831 1,891Post employment benefits 358 389Total benefits 15,267 17,064Included in short term employee benefits is the fair value amortisation charge relating to share based transactions of US$ 0.3 million(2008: US$ 2.9 million).26 EMPLOYEE BENEFITSDefined benefits pension planAUBUK operates a funded defined benefits scheme for its employees who joined prior to 1 March 2001. The assets of the pensionscheme are held independently of the Group’s assets in a separate trustee administered fund.The pension scheme is valued by independent actuaries periodically using the projected unit cost method. The latest actuarialvaluation of AUBUK’s pension scheme, carried out on 31 December 2009 revealed a deficit in the pension scheme’s assets over itsobligations as noted below. The principal assumptions used in the actuarial valuation were an expected investment return of 6.50%per annum (2008: 6.50% per annum) a future rate of salary progression of 3.60% per annum (2008: 3.00% per annum) future pensionincreases of 3.50% (2008: 2.8% to 5.00% per annum) and discount rate of 5.80% (2008: 6.50% per annum).The overall expected rate of return on plan assets is determined based on best estimates of the fair value of the plan assets over theperiod of the plan.The charge recognised in the statement of income is as follows:2009 2008US$ ’000 US$ ’000Current service cost 800 1,258Interest cost 7,379 8,469(Less): Expected return on plan assets (6,204) (8,289)Net actuarial losses recognised in the year 1,545 7423,520 2,180The amounts recognised in the balance sheet are as follows:2009 2008US$ ’000 US$ ’000Present value of scheme’s obligations 148,900 107,147(Less): Fair value of plan assets (112,561) (82,023)36,339 25,124(Less): Unrecognised net actuarial losses (44,883) (30,969)Asset in the balance sheet (8,544) (5,845)82 AUB Annual Report 2009

26 EMPLOYEE BENEFITS (continued)Defined benefits pension plan (continued)The actual returns (loss) on plan assets were US$ 19,537 thousand (2008: US$ (23,684) thousand).The movement in the asset recognised in the consolidated balance sheet during the year was as follows:2009 2008US$ ’000 US$ ’000At 1 January (5,845) (2,998)Add/(Less):Total expenses as stated above 3,520 2,180Contributions by the Group (5,625) (6,848)Exchange rate and other adjustments (594) 1,821At 31 December (8,544) (5,845)The changes in the present value of the scheme’s obligations were as follows:2009 2008US$ ’000 US$ ’000At 1 January 107,147 158,447Add/(Less):Interest cost 7,379 8,469Employers' part of current service cost 800 1,258Actuarial gains (losses) 25,654 (17,217)Benefits paid (2,796) (2,759)Exchange rate and other adjustments 10,716 (41,051)At 31 December 148,900 107,147The changes in the fair value of the plan assets were as follows:2009 2008US$ ’000 US$ ’000At 1 January 82,023 133,978Add/(Less):Expected return on plan assets 6,204 8,289Contributions paid into the plan 5,625 6,848Actuarial gains (losses) 13,334 (31,973)Benefits paid (2,796) (2,759)Exchange rate and other adjustments 8,171 (32,360)At 31 December 112,561 82,023AUB Annual Report 200983

Notes to theConsolidated Financial Statements (Contd.)26 EMPLOYEE BENEFITS (continued)Defined benefits pension plan (continued)The major categories of plan assets as a percentage of the fair value of the total plan assets were as follows:2009 2008% %Equities 70 69Government bonds 14 13Corporate bonds 15 17Others 1 1Total 100 100All bonds in the plan assets are investment grade and traded in an active market.The present value of scheme’s obligations, the fair value of plan assets and the deficit arising thereon along with the effect ofdifferences between the previous actuarial assumptions and what has actually occurred (experience adjustments) for the years ended31 December have been presented below:2009 2008 2007 2006 2005US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000Present value of scheme’s obligations 148,900 107,147 158,447 149,012 126,380Fair value of plan assets (112,561) (82,023) (133,978) (118,300) (94,600)Deficit 36,339 25,124 24,469 30,712 31,780Experience adjustments on:Plan liabilities 3,330 - 3,690 2,154 4,868Plan assets (13,643) 25,096 874 (1,615) (10,187)Other defined benefit plansThe charge to the consolidated statement of income on account of end of service benefits for the year amounted to US$ 6,400thousand (2008: US$ 6,323 thousand). There are no material differences between the carrying amount of the provision for end ofservice benefits and the amount arising from an actuarial computation thereof.Defined contribution plansThe Group contributed US$ 6,421 thousand (2008: US$ 5,299 thousand) during the year towards defined contribution plans. TheGroup’s obligations are limited to the amounts contributed to various schemes.27 MANAGED FUNDSFunds administrated on behalf of customers to which the Group does not have legal title are not included in the consolidated balancesheet. The total market value of all such funds at 31 December 2009 was US$ 4,190 million (31 December 2008: US$ 5,371 million).28 DERIVATIVESIn the ordinary course of business the Group enters into various types of transactions that involve derivative financial instruments. Aderivative financial instrument is a financial contract between two parties where payments are dependent upon movements in pricein one or more underlying financial instruments, reference rates or indices.84 AUB Annual Report 2009

28 DERIVATIVES (continued)Derivatives include financial options, futures and forwards, interest rate swaps and currency swaps, which create rights and obligationsthat have the effect of transferring between the parties of the instrument one or more of the financial risks inherent in an underlyingprimary financial instrument. On inception, a derivative financial instrument gives one party a contractual right to exchange financialassets or financial liabilities with another party under conditions that are potentially favourable, or a contractual obligation toexchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable. However, theygenerally do not result in a transfer of the underlying primary financial instrument on inception of the contract, nor does such atransfer necessarily take place on maturity of the contract. Some instruments embody both a right and an obligation to make anexchange. Because the term of the exchange are determined on inception of the derivative instruments, as prices in financial marketschange those terms may become either favourable or unfavourable.The table below shows the net fair values of derivative financial instruments together with the notional amounts. The notional amountis the amount of a derivative’s underlying asset, reference rate or index and is the basis upon which changes in the value of derivativesare measured. The notional amounts indicate the volume of transactions outstanding at year-end and are neither indicative of themarket risk nor credit risk.2009 2008NotionalamountDerivativeassetsDerivativeliabilitiesNotionalamountDerivativeassetsDerivativeliabilitiesUS$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000Derivatives held for trading:Interest rate swaps 1,634,354 44,967 44,957 2,648,817 71,114 68,554Forward foreign exchange contracts 5,070,261 106,652 99,003 3,735,890 48,746 50,883Forward rate agreements 1,250,000 3,922 254 - - -Options 226,721 52 170 3,150,479 5,265 4,095Interest rate futures 1,500,000 216 216 - - -Credit derivatives 5,000 55 2,524 35,000 93 -Derivatives held as fair value hedges:Interest rate swaps 2,186,812 25,346 61,154 1,444,941 11,516 143,933Currency swaps 165,871 2,379 3,417 - - -Options 142,014 5,973 - 31,805 2,403 -Derivatives held as cash flow hedges:Interest rate swaps 654,083 1,767 31,592 767,689 3,961 89,61312,835,116 191,329 243,287 11,814,621 143,098 357,078AUB Annual Report 200985

Notes to theConsolidated Financial Statements (Contd.)28 DERIVATIVES (continued)Cash flow hedgesThe schedule of forecast principal balances on which the expected interest cash flows arise and their impact on the consolidatedfinancial statements as at 31 December 2009 is as follows:3 monthsor lessMore than3 monthsupto 1 yearMore than1 yearupto 5 yearsMore than5 years TotalUS$'000 US$'000 US$'000 US$'000 US$'000At 31 December 2009Cash outflows from liabilities 11,129 1,367 57,311 34,387 104,194At 31 December 2008Cash outflows from liabilities 7,446 15,408 140,921 92,169 255,944No hedge ineffectiveness on cash flow hedges was recognised in 2009 and 2008.Fair value hedgesGains (losses) arising from fair value hedge instruments during 2009 were US$ 95,304 thousand (2008 : US$ (114,459) thousand) whilethe (losses) gains on the hedged items attributable to risk were US$ (95,304) thousand (2008 : US$ 114,459 thousand). These gains andlosses are included in “trading income-net” in the consolidated statement of income during 2009 and 2008.Derivative product typesForwards and futures are contractual agreements to either buy or sell a specified currency, commodity or financial instrument at aspecific price and date in the future. Forwards are customised contracts transacted in the over-the-counter market. Foreign currencyand interest rate futures are transacted in standardised amounts on regulated exchanges and are subject to daily cash marginrequirements. Forward rate agreements are effectively tailor-made interest rate futures which fix a forward rate of interest on anotional loan, for an agreed period of time starting on a specified future date.Swaps are contractual agreements between two parties to exchange interest or foreign currency differentials based on a specificnotional amount. For interest rate swaps, counterparties generally exchange fixed and floating rate interest payments based on anotional value in a single currency.Options are contractual agreements that convey the right, but not the obligation, to either buy or sell a specific amount of a commodityor financial instrument at a fixed price, either at a fixed future date or at any time within a specified period.Derivatives held for trading purposesMost of the Group’s derivative trading activities relate to customer driven transactions as well as positioning and arbitrage. Positioninginvolves managing positions with the expectation of profiting from favourable movements in prices, rates or indices. Arbitrageinvolves identifying and profiting from price differentials between markets or products.Derivatives held for hedging purposesThe Group has adopted a comprehensive system for the measurement and management of risk.As part of its asset and liability management the Group uses derivatives for hedging purposes in order to reduce its exposure tocurrency and interest rate movements. This is achieved by hedging specific financial instruments and forecasted transactions, as wellas strategic hedging against overall balance sheet exposures.86 AUB Annual Report 2009

28 DERIVATIVES (continued)Derivatives held for hedging purposes (continued)The Group uses options and currency swaps to hedge against specifically identified currency and equity risks. In addition, the Groupuses interest rate swaps and forward rate agreements to hedge against the interest rate risk arising from specifically identified, or aportfolio of, fixed interest rate investments and loans. The Group also uses interest rate swaps to hedge against the cash flow risksarising on certain floating rate deposits. In all such cases the hedging relationship and objective, including details of the hedged itemand hedging instrument, are formally documented and the transactions are accounted for as fair value hedges.Hedging of interest rate risk is also carried out by monitoring the duration of assets and liabilities and entering into interest rate swapsto hedge net interest rate exposures. Since hedging of net positions does not qualify for special hedge accounting, related derivativesare accounted for the same way as trading instruments.29 COMMITMENTS AND CONTINGENT LIABILITIESCredit-related commitmentsCredit-related commitments include commitments to extend credit, standby letters of credit, guarantees and acceptances which aredesigned to meet the requirements of the Group’s customers.Commitments to extend credit represent contractual commitments to make loans and revolving credits available and generally havefixed expiration dates or other termination clauses. Since commitments may expire without being drawn upon, the total contractamounts do not necessarily represent future cash requirements.Standby letters of credit, guarantees and acceptances (standby facilities) commit the Group to make payments on behalf of customerscontingent upon their failure to perform under the terms of the contract. Standby facilities would have market risk if issued or extendedat a fixed rate of interest. However, these contracts are primarily made at floating rates.The Group has the following credit related commitments:2009 2008US$ ’000 US$ ’000Commitments on behalf of customers:Guarantees 1,395,462 1,880,235Acceptances 45,394 65,670Letters of credit 248,337 578,6351,689,193 2,524,540Irrevocable commitments:Undrawn loan commitments 892,493 942,665The Group’s commitments in respect of non-cancellable operating leases were as follows:2009 2008US$ ’000 US$ ’000Within one year 2,017 1,747Between one to five years 7,652 7,299Over five years 13,066 22,31922,735 31,365AUB Annual Report 200987

Notes to theConsolidated Financial Statements (Contd.)30 SEGMENT INFORMATIONFor management purposes the Group is organised into three major business segments:Retail bankingCorporate banking, treasury and investmentsPrivate banking and wealth managementprincipally handling individual customers’ deposit and current accounts,providing consumer loans, residential mortgages, overdrafts, credit cards andfund transfer facilities.principally handling loans and other credit facilities, and deposit and currentaccounts for corporate and institutional customers and providing money market,trading and treasury services, as well as management of the Group’s funding.principally servicing high net worth clients through a range of investmentproducts, funds, credit facilities, trusts and alternative investments.These segments are the basis on which the Group reports its primary segment information. Transactions between segments areconducted at approximate market rates on an arm’s length basis. Interest is charged/credited to business segments based on a poolrate which approximates the cost of funds.Segmental information for the period was as follows:Year ended 31 December 2009:RetailbankingCorporatebanking,treasury andinvestmentsPrivatebankingand wealthmanagementTotalUS$ ’000 US$ ’000 US$ ’000 US$ ’000Net interest income 142,088 292,972 31,525 466,585Intersegment interest (5,352) 10,716 (5,364) -Fees and commisions - net 50,138 64,381 24,011 138,530Other operating income 4,044 86,902 325 91,271OPERATING INCOME 190,918 454,971 50,497 696,386Provision for loan losses and contingencies - net 36,784 191,261 91 228,136NET OPERATING INCOME 154,134 263,710 50,406 468,250Operating expenses 104,276 109,264 24,310 237,850PROFIT BEFORE TAX 49,858 154,446 26,096 230,400Income tax expense (credit) 1,882 (390) 2,822 4,314NET PROFIT FOR THE YEAR 47,976 154,836 23,274 226,086Less : Attributable to non-controlling interests 25,368NET PROFIT ATTRIBUTABLE TO THE BANK'S EQUITY SHAREHOLDERS 200,718Segment assets 3,116,103 17,346,689 1,438,000 21,900,792Goodwill (note 15) 177,912 215,392 111,947 505,251Investment in associates and joint venture 537,099Unallocated assets 630,841TOTAL ASSETS 23,573,983Segment liabilities 2,901,758 15,684,112 1,813,731 20,399,601Unallocated liabilities - - - 592,951TOTAL LIABILITIES 20,992,55288 AUB Annual Report 2009

30 SEGMENT INFORMATION (continued)RetailbankingCorporatebanking,treasury andinvestmentsPrivatebankingand wealthmanagementTotalUS$ ’000 US$ ’000 US$ ’000 US$ ’000Year ended 31 December 2008:Net interest income 189,113 164,252 49,740 403,105Intersegment interest (46,398) 60,134 (13,736) -Fees and commisions - net 49,139 75,012 26,479 150,630Other operating income 4,472 107,204 122 111,798OPERATING INCOME 196,326 406,602 62,605 665,533Provision for loan losses and contingencies - net 37,135 62,065 (575) 98,625NET OPERATING INCOME 159,191 344,537 63,180 566,908Operating expenses 97,933 126,874 35,646 260,453PROFIT BEFORE TAX 61,258 217,663 27,534 306,455Income tax expense (credit) 1,680 (7,679) 2,712 (3,287)NET PROFIT FOR THE YEAR 59,578 225,342 24,822 309,742Less : Attributable to non-controlling interests 54,019NET PROFIT ATTRIBUTABLE TO THE BANK'S EQUITY SHAREHOLDERS 255,723Segment assets 3,357,446 16,558,530 1,832,939 21,748,915Goodwill (note 15) 181,287 218,144 115,086 514,517Investment in associates and joint venture 534,916Unallocated assets 784,379TOTAL ASSETS 23,582,727Segment liabilities 2,687,654 15,084,621 2,542,847 20,315,122Unallocated liabilities 872,828TOTAL LIABILITIES 21,187,950Geographic segmentationAlthough the management of the Group is based primarily on business segments, the Group’s geographic segmentation is basedon the countries where the Bank and its subsidiaries are incorporated. Thus, the operating income generated by the Bank and itssubsidiaries based in GCC are grouped together, while those generated by the Bank’s subsidiaries located outside the GCC region isgrouped under Rest of the world. Similar segmentation is followed for the distribution of total assets. The following table shows thedistribution of the Group’s operating income and total assets by geographical segment:GCC Rest of the world Total2009 2008 2009 2008 2009 2008US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000Operating income 574,571 629,570 121,815 35,963 696,386 665,533Total assets 16,700,194 17,121,640 6,873,789 6,461,087 23,573,983 23,582,727AUB Annual Report 200989

Notes to theConsolidated Financial Statements (Contd.)RISK MANAGEMENT31 CREDIT RISKCredit risk is the risk that one party to a financial instrument will fail to discharge a financial obligation and cause the other party to incura financial loss. In the case of derivatives this is limited to positive fair values. The Group attempts to control credit risk by monitoringcredit exposures, limiting transactions with specific counterparties, and continually assessing the creditworthiness of counterparties.a) Concentration riskConcentrations of credit risk arise when a number of counterparties are engaged in similar business activities, or activities in thesame geographic region, or have similar economic features that would cause their ability to meet contractual obligations to besimilarly affected by changes in economic, political or other conditions.Concentrations of credit risk indicate the relative sensitivity of the Group’s performance to developments affecting a particularindustry or geographic location.The Group manages its credit risk exposure so as to avoid over concentration to any sector or geographic location. It also obtainssecurity where appropriate. Guidelines are in place regarding the acceptability of types of collateral and valuation parameters.The principal collateral types are as follows:– In the personal sector – mortgages over residential properties and assigments over salary income;– In the commercial sector – charges over business assets such as premises, inventories, receivables and corporate or bank guarantees;– In the commercial real estate sector – charges over the properties being financed; and– In the financial sector – charges over financial instruments, such as debt securities and equities.The Group monitors the market value of collateral and requests additional collateral when necessary in accordance with theunderlying agreement.Details of the concentration of the loans and advances by industry sector and geographic region are disclosed in note 10(a) and 10(b) respectively.Details of the industry sector analysis and the geographical distribution of the assets, liabilities and commitments on behalf ofcustomers are set out in note 32.90 AUB Annual Report 2009

31 CREDIT RISK (continued)b) Maximum exposure to credit risk without taking account of any collateral and other credit enhancementsThe table below shows the maximum exposure to credit risk for the components of the balance sheet. The maximum exposure isshown gross, before the effect of mitigation through the use of master netting and collateral agreements, but after provision forimpairment where applicable.Gross maximumexposure2009Gross maximumexposure2008US$ ’000 US$ ’000Balances with central banks 289,533 288,314Treasury bills and bonds 969,114 1,236,997Deposits with banks and other financial institutions 3,100,446 2,867,959Loans and advances 13,299,999 13,632,220Non-trading investments 3,481,447 2,755,091Other assets 415,225 316,593Total 21,555,764 21,097,174Contingent liabilities 1,689,193 2,524,540Undrawn loan commitments 892,493 942,665Total credit related commitments 2,581,686 3,467,205Total credit risk exposure 24,137,450 24,564,379Where financial instruments are recorded at fair value the amounts shown above represent the current credit risk exposure but notthe maximum risk exposure that could arise in the future as a result of changes in values.c) Credit quality per class of financial assetsThe table below shows distribution of financial assets neither past due nor impaired.At 31 December 2009Neither past due nor impairedHighstandardgradeStandardgradeTotalUS$ ’000 US$ ’000 US$ ’000Balances with central banks 289,533 - 289,533Treasury bills and bonds 863,210 105,904 969,114Deposits with banks and other financial institutions 3,018,249 82,197 3,100,446Loans and advancesRetail 654,746 2,338,258 2,993,004Corporate 6,401,794 3,602,247 10,004,041Non trading investmentsAvailable-for-sale 1,646,099 157,123 1,803,222Held to maturity - 15,927 15,927Loans and receivables 1,554,874 133,660 1,688,534Other assets - derivatives 191,329 - 191,329AUB Annual Report 200991

Notes to theConsolidated Financial Statements (Contd.)31 CREDIT RISK (continued)c) Credit quality per class of financial assetsThe table below shows distribution of financial assets neither past due nor impaired.At 31 December 2008Neither past due nor impairedHighstandardgradeStandardgradeTotalUS$ ’000 US$ ’000 US$ ’000Balances with central banks 288,277 37 288,314Treasury bills and bonds 1,154,214 82,783 1,236,997Deposits with banks and other financial institutions 2,842,911 25,048 2,867,959Loans and advancesRetail 842,256 2,624,517 3,466,773Corporate 7,570,962 2,309,007 9,879,969Non trading investmentsAvailable-for-sale 725,531 99,295 824,826Held to maturity 16,573 - 16,573Loans and receivables 1,722,302 279,633 2,001,935Other assets - derivatives 143,098 - 143,098It is the Group’s policy to maintain consistent internal risk ratings across the credit portfolio. The credit quality of the portfolio ofloans and advances that were neither past due nor impaired can be assessed by reference to the Group’s internal credit ratingsystem. This facilitates focused portfolio management of the inherent level of risk across all lines of business. The credit qualityratings disclosed above can be equated to the following risk rating grades:Credit quality rating Risk rating DefinitionHigh standard Risk rating 1 to 4 Undoubted through to good credit riskStandard Risk rating 5 to 7 Satisfactory through to adequate credit riskThe risk rating system is supported by various financial analytics and qualitative market information for the measurement ofcounterparty risk.There are no financial assets which are past due but not impaired other than those disclosed under note 10(c).92 AUB Annual Report 2009

32 CONCENTRATION ANALYSISThe distribution of assets, liabilities and commitments on behalf of customers by geographic region and industry sector was as follows:2009 2008Assets LiabilitiesCommitmentson behalf ofcustomers Assets LiabilitiesCommitmentson behalf ofcustomersUS$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000Geographic region:GCC countries 16,700,194 14,703,507 1,423,469 17,121,640 16,123,086 2,175,359United Kingdom (UK) 1,404,250 797,392 5,690 2,018,530 218,290 13,534Europe (excluding UK) 1,815,378 587,931 32,488 1,476,178 1,000,459 23,888United States of America 795,051 224,055 18,619 747,462 389,743 21,235Asia (excluding GCC) 576,650 2,317,334 12,845 590,230 2,038,333 23,106Rest of the world(including Arab Republic ofEgypt) 2,282,460 2,362,333 196,082 1,628,687 1,418,039 267,41823,573,983 20,992,552 1,689,193 23,582,727 21,187,950 2,524,540Industry sector:Banks and other financialinstitutions 8,131,987 7,809,843 471,520 8,330,449 8,092,748 416,415Consumer/Personal 3,989,942 3,100,701 24,894 4,689,289 4,677,417 41,783Trading, manufacturing andservices 3,552,899 974,854 518,325 3,330,186 1,330,071 592,101Real estate/construction 4,218,164 375,195 181,345 4,244,077 630,929 1,117,357Government/public sector 1,177,712 4,557,428 - 1,102,274 3,869,785 9,082Others 2,503,279 4,174,531 493,109 1,886,452 2,587,000 347,80223,573,983 20,992,552 1,689,193 23,582,727 21,187,950 2,524,54033 MARKET RISKMarket risk is the risk of potential financial loss that may arise from adverse changes in the value of a financial instrument or portfolioof financial instruments due to movements in interest rates, foreign exchange rates, equity, commodity prices and derivatives. Thisrisk arises from asset - liability mismatches, changes that occur in the yield curve, foreign exchange rates and changes in volatilities/implied volatilities in the market value of derivatives. The Group classifies exposures to market risk into either trading or non-tradingportfolios. Given the Group’s low risk strategy, aggregate market risk levels are considered low. The Group utilises Value-at-Risk (VaR)models to assist in estimating potential losses that may arise from adverse market movements in addition to non-quantitative riskmanagement techniques. The market risk for the trading portfolio is managed and monitored on a VaR methodology which reflectsthe inter-dependency between risk variables. Non-trading portfolios are managed and monitored using stop loss limits and othersensitivity analyses.a. Market risk-tradingThe Group calculates Historical Simulation VaR using a one day holding period at a confidence level of 95%, which takes intoaccount the actual correlations observed historically between different markets and rates.Since VaR is an integral part of the Group’s market risk management, VaR limits have been established for all trading operationsand exposures are reviewed daily against the limits by management. Actual outcomes are compared to the VaR model derivedpredictions on a regular basis as a means of validating the assumptions and parameters used in the VaR calculation.AUB Annual Report 200993

Notes to theConsolidated Financial Statements (Contd.)33 MARKET RISK (continued)a. Market risk-trading (continued)The table below summarises the risk factor composition of the VaR including the correlative effects intrinsic to the trading book:ForeignexchangeInterestrateEffects ofcorrelationTotalUS$ ’000 US$ ’000 US$ ’000 US$ ’0002009 - 31 December (30) 506 1 4772008 - 31 December 248 162 (1) 409b. Market risk-non-tradingInterest rate riskInterest rate risk arises from the possibility that changes in interest rates will affect the value of financial instruments or the futureprofitability of the Group. The Group is exposed to interest rate risk as a result of mismatches or gaps in the amounts of assets andliabilities and off balance sheet instruments that mature or reprice in a given period. The Group measures and manages interestrate risk by establishing levels of interest rate risk by setting limits on the interest rate gaps for stipulated periods. Interest rate gapson assets and liabilities are reviewed on a weekly basis and hedging strategies used to reduce the interest rate gaps to within thelimits established by the Bank’s Board of Directors.The following table demonstrates the sensitivity of the Group’s net interest income to a change in interest rates, with all othervariables held constant. The sensitivity is based on the floating rate financial assets and financial liabilities held at 31 December2009 including the effect of hedging instruments. Equity is not sensitive to changes in interest rates as there are no fixed rateinstruments held in the available-for-sale portfolio.Sensitivity analysis - interest rate risk2009 2008US$ ’000 US$ ’000at 10 bps - increase (+)/decrease (-) +/- 958 664at 25 bps - increase (+)/decrease (-) +/- 2,396 1,661Currency riskCurrency risk is the risk that the functional currency value of a financial instrument will fluctuate due to changes in foreignexchange rates.The risk management process manages the Group’s exposure to fluctuations in foreign exchange rates (currency risk) throughthe asset and liability management process. It is the Group’s policy to reduce its exposure to currency fluctuations to acceptablelevels as determined by the Board of Directors. The Board has established levels of currency risk by setting limits on currencyposition exposures. Positions are monitored on a daily basis and hedging strategies used to ensure positions are maintainedwithin established limits.Sensitivity analysis - currency riskAll foreign currency exposures with the exception of strategic investments are captured as part of the trading book. The risk of theexposures are subject to quantification via a daily VaR calculation, the results of which are disclosed in note 33 (a).The effect of foreign currency translation on the Group’s strategic investments are reported under the “foreign exchange translationreserve” under the note 21(i).94 AUB Annual Report 2009

33 MARKET RISK (continued)b. Market risk-non-trading (continued)Equity price riskEquity price risk arises from fluctuations in equity indices and prices. The Board has set limits on the amount and type of investmentsthat may be accepted. This is monitored on an ongoing basis by the Group Investment Committee. The non-trading equity pricerisk exposure arises from the Group’s investment portfolio.The effect on equity valuations (as a result of a change in the fair value of equity investments held as available-for-sale) due to areasonably possible change in equity indices, with all other variables held constant is as follows:2009 2008Change inequity Effect on Effect onindices equity equityMarket indices % US$ ’000 US$ ’000Bahrain Stock Exchange +10% - 591Doha Securities Market +10% 606 235Saudi Stock Exchange +10% - 652Kuwait Stock Exchange +10% 1,616 2,462Abu Dhabi Stock Exchange +10% - 332Sensitivity to equity price movements will be on a symmetric basis, as financial instruments giving rise to non-symmetricmovements are not significant.34 FAIR VALUE OF FINANCIAL INSTRUMENTSThe fair value of financial instruments, with the exception of unquoted equity investments that are carried at cost and held to maturityinvestments, approximate their carrying values.The Group’s primary medium and long-term financial liabilities are the term debts and subordinated liabilities. The fair values of thesefinancial liabilities are not materially different from their carrying values, since these liabilities are repriced at intervals of three or sixmonths, depending on the terms and conditions of the instrument and the resultant applicable margins approximate the currentspreads that would apply for borrowings with similar maturities.The fair value of unquoted equity investments cannot be determined with sufficient accuracy, as future cash flows are not determinable.The Group has unquoted equity investments carried at cost amounting to US$ 123.8 million (31 December 2008: US$ 79.7 million)where the impact of changes in equity prices will only be reflected when the investment is sold or deemed to be impaired, whenthe consolidated statement of income will be impacted; or when a material third party transaction in the investment gives a reliableindication of fair value which will be reflected in equity.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 liabilitiesLevel 2: Other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directlyor indirectly.Level 3 : techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.AUB Annual Report 200995

Notes to theConsolidated Financial Statements (Contd.)34 FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)Level 1 Level 2 TotalUS$ ’000 US$ ’000 US$ ’000Trading securities 376 - 376Bonds 1,505,648 297,574 1,803,222Equities and funds 175,340 178,580 353,920Derivative assets 107,063 84,266 191,329Derivative liabilities (98,247) (145,040) (243,287)1,690,180 415,380 2,105,560There are no financial instruments that qualify for classification under Level 3 as at 31 December 2009. During the year 2009 there havebeen no transfers between Level 1 and Level 2.For an explanation of valuation techniques used to value these financial instruments refer to note 3.3 (f).Investments in associates include quoted equity investments of ABQ on the Doha Securities Market, and ABO on the Muscat SecuritiesMarket. The table below shows the market value based on closing price as at 31 December 2009 and carrying value of these investments :2009 2008US$ (million) US$ (million)Market value 433 367Carrying value 483 476Impairment testing of the Group’s investments in associates was carried out as required under IAS 28 and IAS 36 and the resultsindicated no impairment.35 LIQUIDITY RISKLiquidity risk is the risk that an institution will be unable to meet its funding requirements. Liquidity risk can be caused by marketdisruptions or a credit downgrade which may cause certain sources of funding to dry up immediately. To guard against this risk,management has diversified funding sources and assets are managed with liquidity in mind, maintaining a healthy balance of cash,cash equivalents and readily marketable securities.The Group Asset and Liability Committee (GALCO) monitors the maturity profile on an overall basis with ongoing liquidity monitoringby the Group’s treasury department.The maturity profile of the assets and liabilities at 31 December 2009 given below reflects management’s best estimates of thematurities of assets and liabilities that have been determined on the basis of the remaining period at the balance sheet date to thecontractual maturity date, except in the case of customer deposits. The liquidity profile of customer deposits has been determined onthe basis of the effective maturities indicated by the Group’s deposit retention history.96 AUB Annual Report 2009

35 LIQUIDITY RISK (continued)US$ ’000Over oneyear tofive yearsUp toone monthOne monthto threemonthsOver threemonths toone yearOver fiveyears Undated TotalASSETSCash and balances withcentral banks 244,930 59,234 - - - - 304,164Treasury bills and bonds 102,700 220,673 508,021 137,720 - - 969,114Trading securities 376 - - - - - 376Deposits with banks andother financial institutions 2,683,053 365,152 52,241 - - - 3,100,446Loans and advances 1,295,524 1,971,161 2,091,411 3,913,596 4,028,307 - 13,299,999Non-trading investments 171,356 180,630 238,556 2,136,463 1,171,587 - 3,898,592Investments in associatesand joint venture - - - - - 537,099 537,099Premises and equipment - - - - - 355,956 355,956Other assets 124,047 207,144 58,715 65,125 28,920 - 483,951Goodwill and otherintangible assets - - - - - 624,286 624,286Total 4,621,986 3,003,994 2,948,944 6,252,904 5,228,814 1,517,341 23,573,983LIABILITIESDeposits from banks andother financial institutions 2,698,810 2,177,202 597,473 76,033 - - 5,549,518Customers’ deposits 2,424,477 1,420,246 2,262,632 4,367,792 2,766,119 - 13,241,266Term debts - - - 950,054 - - 950,054Other liabilities 380,200 96,158 106,614 36,091 30,435 - 649,498Subordinated liabilities - - - 89,834 512,382 - 602,216Total 5,503,487 3,693,606 2,966,719 5,519,804 3,308,936 - 20,992,552Net liquidity gap (881,501) (689,612) (17,775) 733,100 1,919,878 1,517,341 2,581,431AUB Annual Report 200997

Notes to theConsolidated Financial Statements (Contd.)35 LIQUIDITY RISK (continued)The maturity profile of the assets and liabilities at 31 December 2008 was as follows:US$ ‘000Over oneyear tofive yearsUp toone monthOne monthto threemonthsOver threemonths toone yearOver fiveyears Undated TotalASSETSCash and balances withcentral banks 355,968 36,283 - - - - 392,251Treasury bills and bonds 79,235 314,538 710,072 133,152 - - 1,236,997Trading securities 23,364 - - - - - 23,364Deposits with banks andother financial institutions 2,381,111 280,220 198,066 8,562 - - 2,867,959Loans and advances 2,106,536 1,956,177 2,132,707 4,183,693 3,253,107 - 13,632,220Non-trading investments 103,866 230,904 406,110 1,200,386 1,412,304 - 3,353,570Investments in associatesand joint venture - - - - - 534,916 534,916Premises and equipment - - - - - 389,009 389,009Other assets 247,440 174,235 83,285 8,941 3,970 - 517,871Goodwill and otherintangible assets - - - - - 634,570 634,570Total 5,297,520 2,992,357 3,530,240 5,534,734 4,669,381 1,558,495 23,582,727LIABILITIESDeposits from banks andother financial institutions 2,310,087 2,008,559 641,116 193,752 - - 5,153,514Customers’ deposits 3,947,004 1,855,487 2,019,131 3,887,584 1,468,873 - 13,178,079Term debts - - 400,000 950,000 - - 1,350,000Other liabilities 555,505 110,322 113,862 88,780 14,312 - 882,781Subordinated liabilities - - - 86,755 536,821 - 623,576Total 6,812,596 3,974,368 3,174,109 5,206,871 2,020,006 - 21,187,950Net liquidity gap (1,515,076) (982,011) 356,131 327,863 2,649,375 1,558,495 2,394,77798 AUB Annual Report 2009

35 LIQUIDITY RISK (continued)Analysis of financial liabilities by remaining contractual maturitiesThe table below summarises the maturity profile of the Group’s financial liabilities (including interest) based on contractualundiscounted repayment obligations.US$ ’000Over oneyear tofive yearsUp toone monthOne monthto threemonthsOver threemonths toone yearOver fiveyears Undated TotalAs at 31 December 2009Deposits from banks andother financial institutions 2,703,005 2,186,070 607,357 80,995 - - 5,577,427Customers’ deposits 6,578,603 3,326,044 3,048,317 345,943 20,191 - 13,319,098Term debts 175 350 1,575 1,018,358 - - 1,020,458Subordinated liabilities 53 4,297 21,980 105,417 596,135 - 727,882Total 9,281,836 5,516,761 3,679,229 1,550,713 616,326 - 20,644,865Credit related commitmentsand contingencies 467,256 407,799 893,934 653,572 159,125 - 2,581,686Derivatives - net outflow - 111 (2,519) (38,818) (11,284) - (52,510)US$ ’000Over oneyear tofive yearsUp toone monthOne monthto threemonthsOver threemonths toone yearOver fiveyears Undated TotalAs at 31 December 2008Deposits from banks andother financial institutions 2,289,461 2,019,675 651,760 239,018 - - 5,199,914Customers’ deposits 7,262,921 3,143,222 2,498,449 403,181 239 - 13,308,012Term debts 413 8,084 403,713 1,246,624 - - 1,658,834Subordinated liabilities 91 181 4,112 108,380 538,476 - 651,240Total 9,552,886 5,171,162 3,558,034 1,997,203 538,715 - 20,818,000Credit related commitmentsand contingencies 569,844 627,703 1,296,146 824,035 149,477 - 3,467,205Derivatives - net outflow (1,436) (775) (9,608) (105,818) (97,053) - (214,690)36 CAPITAL ADEQUACYThe primary objectives of the Group’s capital management policies are to ensure that the Group complies with externally imposedcapital requirements and that the Group maintains strong credit ratings and healthy capital ratios in order to support its business and tomaximise shareholders’ value. Capital adequacy for each of the group companies is also managed separately at individual company level.AUB Annual Report 200999

Notes to theConsolidated Financial Statements (Contd.)36 CAPITAL ADEQUACY (continued)In order to maintain or adjust the capital structure, the Group may adjust the amount of dividend payment to shareholders or issuecapital securities. No changes were made in the objectives, policies and processes from the previous years.The risk asset ratio, calculated in accordance with the capital adequacy guidelines, under Basel II, approved by the Central Bankof Bahrain, for the Group, is disclosed under Pillar III Table 1, which is included in the annual report. The risk asset ratio is 15.1% as of31 December 2009 (31 December 2008: 13.8%)37 DEPOSIT PROTECTION SCHEMECertain customers’ deposits of the Group are covered by deposit protection schemes established by the Central Bank of Bahrain andFinancial Services Compensation Scheme, UK. The schemes apply to all non-bank private sector deposits subject to specific exclusionsmainly relating to maximum deposit amounts, maximum total amount covered in one calendar year and maximum total amount of theDeposit Protection Board’s financial resources. Eligible depositors are covered by the CBB to the extent of lower of 75% of the combinedtotal of eligible deposits held by the depositor and BD 15,000. In the case of AUBUK, the entire amount of the customer deposit is coveredunder the Financial Services Compensation Scheme, subject to a maximum limit of GBP 50,000 per customer. No up-front contributionis currently required under the schemes and no liability is due unless any member bank of the Deposit Protection Scheme is unable tomeet its depository obligations.38 ISLAMIC BANKINGThe balance sheet and statement of income of the Bank’s Sharia’a compliant Islamic branches which are incorporated into the consolidatedbalance sheet and statement of income, are presented below:Balance sheet as at 31 December2009 2008US$ ’000 US$ ’000ASSETSCash in hand 2,828 1,618Due from banks 291,696 -Receivable balances from Islamic financing activities 774,808 95,836Property, furniture and equipment 1,166 1,016Other assets 4,407 150TOTAL ASSETS 1,074,905 98,620LIABILITIESDue to banks 791,590 25,085Customers’ deposits 164,728 3,616Other liabilities 18,099 10,371Restricted investment accounts 13,992 -988,409 39,072Unrestricted investment accounts 59,867 44,2971,048,276 83,369EQUITYBranch capital 14,000 13,963Retained earnings 12,629 1,28826,629 15,251TOTAL LIABILITIES, UNRESTRICTED INVESTMENT ACCOUNTS AND EQUITY 1,074,905 98,620100 AUB Annual Report 2009

38 ISLAMIC BANKING (continued)Statement of income for the year ended 31 December2009 2008US$ ’000 US$ ’000Net income from Islamic financing activities 12,410 2,71112,410 2,711Fees and commissions - net 1,389 605NET OPERATING INCOME 13,799 3,316Staff costs 949 369Depreciation 241 289Other operating expenses 730 154OPERATING EXPENSES 1,920 812PROFIT OF UNRESTRICTED INVESTMENT ACCOUNT HOLDERS 11,879 2,504Less : Share of profit of unrestricted investment account holders (538) (918)NET PROFIT FOR THE YEAR 11,341 1,586During the year assets and liabilities amounting to US$ 968,637 thousand and US$ 957,194 thousand respectively were transferred tothe Bank’s Sharia’a compliant branches on receipt of Sharia’a Board’s approval.AUB Annual Report 2009101

Pillar III Disclosures - Basel IIIntroduction to the Central Bank of Bahrain’s Basel II guidelines ........................................................ 103Pillar III quantitative & qualitative disclosures1. Capital structure ............................................................................................................................................. 105Table 1 Capital structure ..................................................................................................................... 1052. Group risk governance structure ............................................................................................................. 1063. Credit risk management .............................................................................................................................. 107Table 2 Gross credit risk exposures subject to credit risk mitigants (CRM)...................... 110Table 3 Eligible financial collateral and guarantees ................................................................. 110Table 4 Credit risk exposure post credit risk mitigation and credit conversion ............. 111Table 5 Capital requirement for Credit,Market and Operational Risks .............................. 111Table 6 Geographic distribution of gross credit exposures ................................................... 112Table 7 Sectoral classification of gross credit exposures ........................................................ 113Table 8 Residual contractual maturity ........................................................................................... 113Table 9 Sectoral breakdown of impaired loans and impairment provision ..................... 115Table 10 Geographical distribution of impairment provisions for loans and advances 115Table 11 Movement in impairment provision for loans and advances ................................ 115Table 12 Past due loans - Age analysis ............................................................................................. 116Table 13 Restructured credit facilities .............................................................................................. 117Table 14 Counterparty credit risk in derivative transactions ................................................... 117Table 15 Related party transactions ................................................................................................. 1174. Market risk ...................................................................................................................................................... 118Table 16 Capital requirement for components of market risk ................................................ 119Table 17 Interest rate risk ...................................................................................................................... 120Table 18 Equity position in banking book ...................................................................................... 121Table 19 Gains on equity instruments ............................................................................................. 1215. Liquidity risk and funding management .............................................................................................. 1226. Operational risk .............................................................................................................................................. 1227. Information Technology risk ...................................................................................................................... 1238. Strategic risk .................................................................................................................................................... 1239. Legal, compliance, regulatory and reputational risks ...................................................................... 12310. Environmental risk......................................................................................................................................... 123102 AUB Annual Report 2009

Pillar III Disclosures - Basel IIINTRODUCTION TO THE CENTRAL BANK OF BAHRAIN’S BASEL II GUIDELINESThe Central Bank of Bahrain (CBB) Basel II Guidelines, based upon the BIS Revised Framework – ‘International Convergence of CapitalMeasurement and Capital Standards’, were introduced on 1 January 2008. Basel II is structured around three ‘pillars’: Pillar I - MinimumCapital Requirements; Pillar II – the Supervisory Review Process and the Internal Capital Adequacy Assessment Process (ICAAP); and PillarIII - Market Discipline.Group StructureThe public disclosures under this section have been prepared in accordance with the Central Bank of Bahrain (“CBB”) Rules concerningPublic Disclosure Module (“PD”) , section PD-1: Annual Disclosure Requirements. The disclosures under this section are applicable to AhliUnited Bank B.S.C. (the “Bank”), which is the parent Bank incorporated in Bahrain. The Bank operates under a retail banking license issuedby the Central Bank of Bahrain. The Bank and its subsidiaries (as detailed under note 2 to the audited consolidated financial statements)are collectively known as the Group.Pillar I – Minimum Capital RequirementsPillar I deals with the basis for the computation of the regulatory capital ratio. It defines the various classes and the calculation of RiskWeighted Assets (RWAs) in respect of credit risk, market risk and operational risk, as well as deriving the regulatory capital base. The capitaladequacy ratio is then calculated as the ratio of the Bank’s regulatory capital to its total Risk Weighted Assets. All Bahrain incorporatedbanks are currently required to maintain a minimum capital adequacy ratio of 12%. In addition, the Central Bank of Bahrain requires banksto maintain an additional 0.5% buffer above the minimum capital adequacy ratio.The Group ensures that each subsidiary maintains sufficient capital levels for their repective legal and compliance purposes.Credit riskBasel II provides three approaches to the calculation of credit risk regulatory capital. The Standardised approach which the Bank hasadopted, requires banks to use external credit ratings to determine the risk weightings applied to rated counterparties, and groups othercounterparties into broad categories and applies standardised risk weightings to these categories.Market riskThe Bank has adopted the Standardised approach for determining the market risk capital requirement.Operational riskUnder the basic indicator approach, which the Bank has adopted for operational risk, the regulatory capital requirement for operationalrisk is calculated by applying a co-efficient of 15 per cent to the average gross income for the preceding three financial years.Pillar II – The Supervisory Review and Evaluation ProcessPillar II involves the process of supervisory review of a financial institution’s risk management framework and its capital adequacy.Accordingly, this involves both, the Bank and its regulators taking a view on whether additional capital should be held against risksnot covered in Pillar I. Part of the Pillar II process is the Internal Capital Adequacy Assessment Process (ICAAP) which is the Bank’s selfassessment of risks not captured by Pillar I.As part of the CBB’s Pillar II guidelines, each bank is required to be individually reviewed and assessed by the CBB with the intention ofsetting individual minimum capital adequacy ratios. The CBB is currently in the process of individually assessing the financial strength andrisk management practices of each institution. Until finalised, we will be required to continue to maintain a 12 per cent minimum capitaladequacy ratio.AUB Annual Report 2009103

Pillar III Disclosures - Basel II (Contd.)Pillar III – Market DisciplineThe third pillar is related to market discipline and requires the Bank to publish detailed qualitative and quantitative information of itsrisk management and capital adequacy policies and processes to complement the first two pillars and the associated supervisory reviewprocess. The disclosures in this report are in addition to the disclosures set out in the audited consolidated financial statements of theGroup for the year ended 31 December 2009.PILLAR III QUANTITATIVE & QUALITATIVE DISCLOSURESFor the purpose of computing regulatory minimum capital requirements, the group follows the rules as laid out under the CBB Rulebookmodule PCD: Prudential Consolidation and Deduction Requirements, PCD-1 & PCD-2 and the Capital Adequacy (CA) Module Accordingly,a) All subsidiaries are consolidated as per Note 2 in the audited consolidated Financial Statements on a line by line basis in accordancewith International Financial Reporting Standards. Non-controlling interest (previously called minority interest) arising on consolidationis reported as part of Tier 1 capital;b) Investments in associates as reported under Note 12 are pro-rata consolidated for the purpose of regulatory minimum capitalrequirements and capital deducted from Tier 1 & 2 respectively as aggregation;c) Goodwill is deducted from Tier 1 capital;d) Subordinated term debts, as reported under liabilities in the consolidated balance sheet, are subject to maximum thresholds andadjusted for remaining life; reported as part of Tier 2 capital, ande) Unrealized gains arising from fair valuing equities is reported only to the extent of 45%.f) Property revaluation reserve is included under Tier 2 capital to the extent of 45%; andg) Collective impairment provisions to the extent of maximum threshold of 1.25% of total Credit Risk Weighted Assets is included underTier 2 capital.There are no restrictions on the transfer of funds or regulatory capital within the group and all investments are made fully complying withCBB approval instructions.104 AUB Annual Report 2009

1. CAPITAL STRUCTURETABLE - 1A. NET AVAILABLE CAPITAL Tier 1 Tier 2US$ ’000 US$ ’000Paid-up share capital 1,199,910Less : Loans against Employee Stock Purchase Plan (18,737)ReservesShare premium 538,297Capital reserve 307Statutory reserve 126,624Others 14,025Retained earnings 180,970Minority interest in the equity of subsidiaries 367,908Less : Goodwill (505,251)Less : Unrealized gross losses arising from fair valuing equities (2,249)Current year profit 200,718Asset revaluation reserves- property, plant and equipment (45% only) 33,023Unrealized gains arising from fair valuing equities (45% only) 5,391Collective impairment provisions 94,744Eligible subordinated term debt 564,986TOTAL CAPITAL BEFORE REGULATORY DEDUCTIONS 1,901,804 898,862Less : Regulatory deductions :Material holdings of equities 209,952 209,9521,691,852 688,910Add : Proportionate aggregation 220,181 36,992NET AVAILABLE CAPITAL 1,912,033 725,902TOTAL ELIGIBLE CAPITAL BASE (Tier 1 + Tier 2) 2,637,935The terms and conditions and main features of the capital instruments listed above as part of the Tier 1 and Tier 2 capital are explainedin note 19 and note 20 to the audited consolidated financial statements of the Group for the year ended 31 December 2009.B. CAPITAL ADEQUACY RATIOAs at 31 December 2009, the capital adequacy ratio of the Group and significant subsidiaries were:ConsolidatedThe Bankof Kuwaitand MiddleEast K.S.C.(BKME)SubsidiariesAhli UnitedBank(U.K.)P.L.C.(AUB UK)Ahli UnitedBank(Egypt)S.A.E.(AUBE)Tier 1 - Capital Adequacy Ratio 10.9% 15.3% 15.1% 14.8%Total - Capital Adequacy Ratio 15.1% 16.8% 16.9% 16.2%AUB Annual Report 2009105

Pillar III Disclosures - Basel II (Contd.)2. GROUP RISK GOVERNANCE STRUCTURERisk GovernanceThe AUB Group Board seeks to optimise the Bank’s performance by enabling the various group business units to realize the Group’sbusiness strategy and meet agreed business performance targets by operating within the agreed capital and risk parameters andGroup risk policy framework.AUB Group Risk Governance StructureAUB Group BoardGroupExecutiveCommitteeGroup Asset& LiabilityCommitteeGroup RiskCommitteeGroup ChiefExecutive &MDCompensationCommitteeGroup Audit& ComplianceCommitteeDeputy GroupCEO Risk, Legal &ComplianceGroup Head ofAuditGroup Head ofRisk ManagmentGroup Head ofCredit RiskGroup Head ofComplianceSharia’a Advisory &Supervisory BoardHead ofSpecial AssetsHead ofMarket RiskHead ofOperational RiskHead ofCredit RiskSharia’a ComplianceOfficerThe Board approves the risk appetite and the Group Risk Committee monitors the Group’s risk profile against this appetite.The Deputy Group CEO – Risk, Legal and Compliance under the delegated authority of the Group CEO & MD, supported by theGroup Head of Risk Management and the Group Head of Credit Risk have responsibility for ensuring effective risk management andcontrol. Within Group Risk Management specialist risk-type Heads and their teams are responsible for risk oversight and establishingappropriate risk control frameworks.Internal Audit is responsible for the independent review of risk management and the Group’s risk control environment.The Board and its Executive Committee receive quarterly risk updates including detailed Risk Exposures Analysis reports.The Board approves all risk policies as well as the the Group risk profile and control framework at least annually.The Group Audit Committee considers the adequacy and effectiveness of the Group risk control framework and receives quarterlyupdates on any control issues, impairment provisions, regulatory and compliance related issues.Systems and procedures are in place to identify, control and report on all major risks.106 AUB Annual Report 2009

3. CREDIT RISK MANAGEMENTCredit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. It arises principally fromlending, trade finance and treasury activities. Credit risk also arises where assets are held in the form of debt securities, the value ofwhich may fall.The Group has policies and procedures in place to monitor and manage these risks and the Group Risk Management function provideshigh-level centralized oversight and management of credit risk. The specific responsibilities of Group Risk Management are to:- Set credit policy, risk appetite for credit risk exposure to specific market sectors;- Control exposures to sovereign entities, banks and other financial institutions and set risk ratings for individual exposures. Creditand settlement risk limits to counterparties in these sectors are approved and managed by Group Risk Management, to optimizethe use of credit availability and avoid risk concentration;- Control cross-border exposures, through the centralized setting of country limits with sub-limits by maturity and type of business;- Manage large credit exposures, ensuring that concentrations of exposure by counterparty, sector or geography remain withininternal and regulatory limits in relation to the Group’s capital base;- Maintain the Bank’s Internal Risk Rating framework;- Manage watchlisted and criticised asset portfolios and recommend appropriate level of provisioning and write-offs;- Report to the Group Risk Committee, Audit Committee and the Board of Directors on all relevant aspects of the Group’s credit riskportfolio. Regular reports include detailed analysis of:- risk concentrations- corporate and retail portfolio performance- specific higher-risk portfolio segments, e.g. real estate- individual large impaired accounts, and details of impairment charges- country limits, cross-border exposures.- Specialised management and control of all non-performing assets;- Manage and direct credit risk management systems initiatives; and- Interface, for credit-related issues, with external parties including the Central Bank of Bahrain, rating agencies, investment analysts, etc.All credit proposals are subjected to a thorough comprehensive risk assessment which examines the customer’s financial conditionand trading performance, nature of the business, quality of management and market position. In addition our internal risk ratingmodel scores these quantitative and qualitative factors. The credit approval decision is then made and terms and conditions set.Exposure limits are based on the aggregate exposure to the counterparty and any connected entities across the AUB Group. All creditexposures are reviewed at least annually.AUB Annual Report 2009107

Pillar III Disclosures - Basel II (Contd.)3. CREDIT RISK MANAGEMENT (continued)Counterparty Exposure ClassesThe CBB’s capital adequacy framework for the standardised approach to credit risk sets the following counterparty exposure classesand the risk weightings to be applied to determine the risk weighted assets:Exposure ClassSovereign PortfolioPublic Sector Entity [PSE] PortfolioBanks PortfolioInvestment Company PortfolioCorporate PortfolioRisk Weighting CriteriaExposures to governments of GCC member states and their central banks are zero% risk weighted. Other sovereign exposures denominated in the relevant domesticcurrency are also zero % risk weighted. All other sovereign exposures are risk weightedbased on their external credit ratings.Bahrain PSEs and domestic currency claims on other PSEs [which are assigned a zero% risk weighting by their own national regulator] are assigned a zero % risk weighting.Other PSEs are risk weighted based on their external credit ratings.Exposures to banks are risk weighted based on their external credit ratings, with apreferential weighting given to short term exposures (i.e. with an original tenor of 3months or less).Exposures to investment companies which are supervised by the CBB are treated inthe same way as exposures to banks but without the preferential short term exposureweighting.Other exposures will be treated as a corporate exposure for risk weighting purposes.Exposures to corporates are risk weighted based on their external credit rating.Unrated corporates are 100% risk weighted. A number of corporates owned by theKingdom of Bahrain have been assigned a preferential zero % risk weighting.Regulatory Retail Portfolio Regulatory retail exposures are risk weighted at 75%.Residential Property PortfolioCommercial Property PortfolioExposures fully secured by first mortgages on owner occupied residential propertyare generally 75% risk weighted.Exposures secured by mortgages on commercial real estate are subject to a minimum100% risk weighting, except where the borrower has an external rating below BB- inwhich case the rating risk weighting applies.Equities and Funds Investment Portfolio Investments in listed equities carry a 100% risk weighting. Unlisted equities are 150%risk weighted.Investments in rated instruments are risk weighted according to their external ratingand treated as a corporate exposure. If not rated the investment is treated as anequity investment and risk weighted 100% for listed and 150% for others.Past Due PortfolioThe unsecured portion of any exposure [other than a residential mortgage loan] thatis past due for more than 90 days is:150% risk weighted when specific provisions are less than 20% of the outstandingamount; and100% risk weighted when specific provisions are greater than 20%.108 AUB Annual Report 2009

3. CREDIT RISK MANAGEMENT (continued)External Rating AgenciesThe Group uses the following external credit assessment institutions (ECAI’s): Moody’s, Standard & Poors and Fitch. The external ratingof each ECAI is mapped to the prescribed internal risk rating that in turn produces standard risk weightings.Basel II Reporting of Credit Risk ExposuresAs a result of the methodologies applied credit risk exposures presented under Basel II reporting differs in a number of respects fromthe exposures reported in the consolidated financial statements.1. As per the CBB Basel II framework, off balance sheet exposures are converted, by applying a credit conversion factor (CCF), intodirect credit exposure equivalents.2. Under the Basel II capital adequacy framework eligible collateral is applied to reduce exposure.Credit Risk MitigationThe Group’s first priority when making loans is to establish the borrower’s capacity to repay and not rely principally on security /collateral. Where the customer’s financial standing is strong facilities may be granted on an unsecured basis, but when necessarycollateral is an essential credit risk mitigant.Acceptable forms of collateral are defined within the Group risk framework and conservative valuation parameters are also presetand regularly reviewed to reflect any changes in market conditions. Security structures and legal covenants are also subject toregular review to ensure that they continue to fulfill their intended purpose and remain in line with the CBB’s prescribed minimumrequirements set out in their capital adequacy regulations.The principal collateral types are as follows:- in the retail / personal sector, mortgages over residential properties, charges over investment portfolios, assignment of salaries;- in the corporate / commercial sector, charges over business assets such as premises, stock and debtors, financial guarantees fromacceptable third parties; and- in the commercial real estate sector, charges over the properties being financed.Valuation of CollateralThe type and amount of collateral taken is based upon the credit risk assessment of the borrower. The market or fair value of collateralheld is closely monitored and when necessary top-up requests are made or liquidation initiated as per the terms of the underlyingcredit agreements.Gross Credit Risk Exposures subject to Credit Risk Mitigants (CRM)The following table details the Group gross credit risk exposures before the application of eligible Basel II credit risk mitigationtechniques. The CBB’s Basel II guidelines details which types of collateral and which issuers of guarantees are eligible for preferentialrisk weighting. The guidelines also specify the minimum collateral management processes and collateral documentation requirementsnecessary to achieve eligibility.AUB Annual Report 2009109

Pillar III Disclosures - Basel II (Contd.)3. CREDIT RISK MANAGEMENT (continued)TABLE - 2 GROSS CREDIT RISK EXPOSURES SUBJECT TO CREDIT RISK MITIGANTS (CRM)As atAverage31 December monthly2009 balanceUS$ ’000 US$ ’000Balances with central banks 289,533 262,723Treasury bills and bonds 969,114 1,225,853Deposits with banks and other financial institutions 3,100,446 3,680,275Loans and advances 13,299,999 13,087,787Non-trading investments 3,481,447 3,167,167Other assets 419,247 531,440TOTAL FUNDED EXPOSURES 21,559,786 21,955,245Contingent liabilities 1,689,193 1,603,631Undrawn loan commitments 892,493 920,402TOTAL UNFUNDED EXPOSURES 2,581,686 2,524,033TOTAL CREDIT RISK EXPOSURE 24,141,472 24,479,278The gross credit exposures reported above are as per the consolidated balance sheet as reduced by exposures which do not carrycredit risk.Under the CBB Basel II Guidelines, banks may choose between two options when calculating credit risk mitigation capital relief. Thesimple approach which substitutes the risk weighting of the collateral for the risk weighting of the counterparty or the comprehensiveapproach whereby the exposure amount is adjusted by the actual value ascribed to the collateral. The Bank has selected to use thecomprehensive method where collateral is in the form of cash or bonds or equities. The Bank uses a range of risk mitigation toolsincluding collateral, guarantees, credit derivatives, netting agreements and financial covenants to reduce credit risk.TABLE - 3 ELIGIBLE FINANCIAL COLLATERAL AND GUARANTEESGrossEligibleexposureCRMUS$ ’000 US$ ’000Claims on sovereigns 2,443,370 -Claims on public sector entities 893,358 184,326Claims on banks 5,409,967 75,274Claims on corporates 10,512,542 1,535,934Regulatory retail exposures 2,076,314 48,981Residential retail exposures 719,411 -Equity 192,276 -Investments in funds 224,870 -Other exposures 1,282,131 22,577TOTAL 23,754,239 1,867,092The gross exposure in the above table represents the on and off balance sheet credit exposures before credit risk mitigation,determined in accordance with the CBB issued Pillar III guidelines. The off balance sheet exposures are computed using the relevantconversion factors.110 AUB Annual Report 2009

3. CREDIT RISK MANAGEMENT (continued)TABLE - 4 CREDIT RISK EXPOSURE POST CREDIT RISK MITIGATION AND CREDIT CONVERSIONThe following table details group credit exposures after applying risk mitigation.US$ ’000Claims on sovereigns 93,384Claims on public sector entities 451,474Claims on banks 2,009,338Claims on corporates 8,391,657Regulatory retail exposures 1,520,500Residential retail exposures 251,794Equity 263,352Investments in funds 337,304Other exposures 1,180,91714,499,720Add : Proportionate aggregation 1,457,550TOTAL 15,957,270TOTAL CREDIT RISK CAPITAL REQUIREMENT 1,914,872TABLE - 5 CAPITAL REQUIREMENT FOR CREDIT, MARKET AND OPERATIONAL RISKSCapitalrequirementUS$ ’000Claims on sovereigns 11,206Claims on public sector entities 54,177Claims on banks 241,121Claims on corporates 1,006,999Regulatory retail exposures 182,460Residential retail exposures 30,215Equity 31,602Investments in funds 40,476Other exposures 141,7101,739,966Add : Proportionate aggregation 174,906TOTAL CREDIT RISK CAPITAL REQUIREMENT (STANDARDISED APPROACH) 1,914,872TOTAL MARKET RISK CAPITAL REQUIREMENT (STANDARDISED APPROACH) 50,549TOTAL OPERATIONAL RISK CAPITAL REQUIREMENT (BASIC INDICATOR APPROACH) 132,291TOTAL 2,097,712AUB Annual Report 2009111

Pillar III Disclosures - Basel II (Contd.)3. CREDIT RISK MANAGEMENT (continued)Concentration RiskRefer note 31(a) to the audited consolidated financial statements for definition and policies for management of concentration risk.As per the CBB’s single obligor regulations, banks incorporated in Bahrain are required to obtain the CBB’s approval for any plannedexposure to a single counterparty, or group of connected counterparties, exceeding 15 per cent of the regulatory capital base. As at31 December 2009 the Group had no single obligor exposures which exceeded 15 per cent of the Group’s regulatory capital base (i.e.exceeded US$ 395.7 million).Geographic Distribution of Gross Credit ExposuresThe geographic distribution of credit exposures is monitored on an ongoing basis by Group Risk Management and reported to theBoard on a quarterly basis.The following table details the Group’s geographic distribution of gross credit exposures as at 31 December 2009.TABLE - 6 GEOGRAPHIC DISTRIBUTION OF GROSS CREDIT EXPOSURESGCC *CountriesUnitedKingdomEurope(excludingUnitedKingdom)UnitedStates ofAmericaAsia(excludingGCCCountries)Restof theworld(includingArabRepublic ofEgypt)TotalUS$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000Balances with central banks 177,583 157 - - - 111,793 289,533Treasury bills and bonds 780,278 - - - 105,905 82,931 969,114Deposits with banks and otherfinancial institutions 1,670,396 355,884 644,641 147,813 13,366 268,346 3,100,446Loans and advances 10,596,689 697,969 639,850 2,698 68,974 1,293,819 13,299,999Non-trading investments 1,637,158 191,130 434,694 642,679 304,433 271,353 3,481,447Other assets 335,673 32,162 21 - 8,336 43,055 419,247Total funded exposures 15,197,777 1,277,302 1,719,206 793,190 501,014 2,071,297 21,559,786Contingent liabilities 1,423,469 5,690 32,488 18,619 12,845 196,082 1,689,193Undrawn loan commitments 646,482 127,972 85,574 5,010 5,265 22,190 892,493Total unfunded exposures 2,069,951 133,662 118,062 23,629 18,110 218,272 2,581,686TOTAL 17,267,728 1,410,964 1,837,268 816,819 519,124 2,289,569 24,141,47271.5% 5.8% 7.6% 3.4% 2.2% 9.5% 100.0%* GCC countries are countries which are part of the Gulf Co-operation Council comprising Kingdom of Bahrain, State of Kuwait,Sultanate of Oman, State of Qatar, Kingdom of Saudi Arabia and the United Arab Emirates.112 AUB Annual Report 2009

3. CREDIT RISK MANAGEMENT (continued)TABLE - 7 SECTORAL CLASSIFICATION OF GROSS CREDIT EXPOSURESFunded Unfunded Total %US$ ’000 US$ ’000 US$ ’000 US$ ’000Banks and other financial institutions 6,702,514 578,812 7,281,326 30.2Consumer/personal 3,989,942 89,486 4,079,428 16.9Real estate 3,197,155 174,552 3,371,707 14.0Trading, manufacturing and services 3,550,675 798,904 4,349,579 18.0Construction 885,081 446,823 1,331,904 5.5Government/public sector 1,160,320 - 1,160,320 4.8Others 2,074,099 493,109 2,567,208 10.6TOTAL 21,559,786 2,581,686 24,141,472 100.089.3% 10.7% 100.0%TABLE - 8 RESIDUAL CONTRACTUAL MATURITYUp toone monthOne monthto threemonthsOver threemonths toone yearOver oneyear tofive yearsOverfive toten yearsOver tento twentyyearsOvertwentyyearsTotalUS$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000Balances with central banks 230,298 59,235 - - - - - 289,533Treasury bills and bonds 102,700 220,673 508,021 137,720 - - - 969,114Deposits with banks andother financial institutions 2,683,053 365,152 52,241 - - - - 3,100,446Loans and advances 1,295,524 1,971,161 2,091,411 3,913,596 2,625,626 1,199,644 203,037 13,299,999Non-trading investments 94,464 116,518 237,536 1,831,550 757,044 215,754 228,581 3,481,447Other assets 96,209 198,489 59,845 39,078 17,296 8,330 - 419,247Total funded exposures 4,502,248 2,931,228 2,949,054 5,921,944 3,399,966 1,423,728 431,618 21,559,786Contingent liabilities 206,439 365,143 694,676 307,473 115,462 - - 1,689,193Undrawn loan commitments 260,817 42,656 199,258 346,099 32,091 11,572 - 892,493Total unfunded exposures 467,256 407,799 893,934 653,572 147,553 11,572 - 2,581,686TOTAL 4,969,504 3,339,027 3,842,988 6,575,516 3,547,519 1,435,300 431,618 24,141,472AUB Annual Report 2009113

Pillar III Disclosures - Basel II (Contd.)3. CREDIT RISK MANAGEMENT (continued)Impairment ProvisionsThe Group Risk Committee regularly evaluates the adequacy of the established allowances for impaired loans.Two types of impairment allowance are in place:Individually assessed impairment provisionsThese are determined by evaluating the exposure to loss, case by case, on all individually significant accounts based upon the followingfactors:- aggregate exposure to the customer;- the viability of the customer’s business model and its capacity to trade successfully out of financial difficulties, generating sufficientcash flow to service debt obligations;- the amount and timing of expected receipts and recoveries;- the extent of other creditors’ commitments ranking ahead of, or pari passu with the Bank, and the likelihood of other creditorscontinuing to support the company;- the realisable value of security (or other credit mitigants) and likelihood of successful repossession;- the likely dividend available on liquidation or bankruptcy;- the likely costs involved in recovering amounts outstanding, and- when available, the secondary market price of the debt.Individually assessed impairment allowances are only reversed when there is reasonable and reliable evidence of a reduction in theestablished loss estimate.Collectively assessed impairment provisionsImpairment is assessed on a collective basis in two circumstances:Incurred but not yet identified impairment:Individually assessed loans for which no evidence of impairment has been specifically identified on an individual basis are groupedtogether according to their credit risk characteristics. A collective loan loss allowance is calculated to reflect impairment losses incurredat the balance sheet date which will only be individually identified in the future.The collective impairment provision is determined based upon:- historical loss experience in portfolios of similar credit risk characteristics (for example, by industry sector, risk rating or productsegment); and- judgement as to whether current economic and credit conditions are such that the actual level of inherent losses is likely to begreater or less than that suggested by historical experience.Homogeneous groups of loansCollective impairment provision has been established in respect of homogeneous groups of loans such as unsecured retail lendingproducts. Collectively assessed allowances are generally calculated quarterly and charges for new allowances, or reversals of existingallowances, are determined for each separately identified portfolio.114 AUB Annual Report 2009

3. CREDIT RISK MANAGEMENT (continued)TABLE - 9 SECTORAL BREAKDOWN OF IMPAIRED LOANS AND IMPAIRMENT PROVISIONImpairedand pastdue loansSpecificimpairmentNetspecificchargefor theyear ended 31December 2009Write offduring theyear ended 31December 2009CollectiveimpairmentUS$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000Consumer/personal 146,355 101,217 30,908 14,155 18,485Trading and manufacturing 49,016 29,217 34,523 30,685 16,959Real estate 30,926 17,434 15,381 5,083 17,242Banks and other financialinstitutions 11,988 11,988 20,245 9,500 4,503Construction 76,556 66,264 62,903 99,553 6,386Others 69,398 61,592 24,372 5,168 12,908TOTAL 384,239 287,712 188,332 164,144 76,483TABLE - 10 GEOGRAPHICAL DISTRIBUTION OF IMPAIRMENT PROVISIONS FOR LOANS AND ADVANCESGCCcountriesUnitedKingdomEurope(excluding)UnitedKingdom)UnitedStates ofAmericaAsia(excludingGCCcountries)Restof theworldTotalUS$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000Specific impairment provision 239,928 7,195 8,680 - 13,362 18,547 287,712Collective impairment provision 74,412 533 1,506 - - 32 76,483TOTAL 314,340 7,728 10,186 - 13,362 18,579 364,195TABLE - 11 MOVEMENT IN IMPAIRMENT PROVISION FOR LOANS AND ADVANCESRETAIL CORPORATE TOTALSpecific Collective Total Specific Collective Total Specific CollectiveUS$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000Balance at 1 January 2009 103,878 27,952 131,830 129,926 28,493 158,419 233,804 56,445Amounts written off during theyear (14,907) - (14,907) (149,237) - (149,237) (164,144) -Net charge (release) for the year 31,383 (2,463) 28,920 156,949 35,241 192,190 188,332 32,778Interest suspended during theyear (net) 4,702 - 4,702 15,387 - 15,387 20,089 -Exchange rate adjustments /other movements (11,179) (835) (12,014) 20,810 (11,905) 8,905 9,631 (12,740)113,877 24,654 138,531 173,835 51,829 225,664 287,712 76,483AUB Annual Report 2009115

Pillar III Disclosures - Basel II (Contd.)3. CREDIT RISK MANAGEMENT (continued)Past Due and Impaired Credit FacilitiesAs per CBB guidelines, credit facilities are placed on non-accrual status and interest income suspended when either principal or interestis overdue by 90 days whereupon unpaid and accrued interest is reversed from income. Interest on non-accrual facilities is includedin income only when received. Credit facilities classified as past due are assessed for impairment in accordance with IFRS guidelines. Aspecific provision is established where there is objective evidence that a credit facility is impaired.Impaired credit facilities comprise those facilities where there is objective evidence that the Bank will not collect all amounts due,including both principal and interest. Objective evidence would include:- a breach of contract, such as default or delinquency in interest or principal payments,- the granting of a concession that, for economic or legal reasons relating to the borrower’s financial difficulties, would not otherwisebe considered,- indications that it is probable that the borrower will enter bankruptcy or other financial reorganisation,- for equity securities classified as available-for-sale, a significant or prolonged decline in fair value below cost is considered indetermining whether a security is impaired.Refer to notes 10(a) to 10(d) and note 31(c) to the audited consolidated financial statements for the year ended 31 December 2009 forthe distribution of the loans and advances portfolio by quality.Ratings 1 - 4 comprise of corporate facilities demonstrating financial condition, risk factors and capacity to repay that are good toexcellent and retail borrowers where cash collateral [or equivalent such as pledged investment funds] has been provided.Ratings 5 and 6 represents satisfactory risk and includes corporate facilities that require closer monitoring, and retail accounts whichare maintained within generally applicable product parameters.TABLE - 12 PAST DUE LOANS - AGE ANALYSISi) By Geographical areaThreemonths toone yearOneto threeyearsOverthreeyearsTotalUS$ ’000 US$ ’000 US$ ’000 US$ ’000GCC Countries 177,480 75,523 53,737 306,740United Kingdom 13,271 1,798 453 15,522Europe (excluding UK) 14,368 3,827 - 18,195United States of America - - 104 104Asia (excluding GCC countries) 159 1,424 13,138 14,721Rest of the world 1,390 20,752 6,815 28,957TOTAL 206,668 103,324 74,247 384,23953.8% 26.9% 19.3% 100.0%116 AUB Annual Report 2009

3. CREDIT RISK MANAGEMENT (continued)TABLE - 12 PAST DUE LOANS - AGE ANALYSIS (continued)ii) By SectorThreemonths toone yearOneto threeyearsOverthreeyearsTotalUS$ ’000 US$ ’000 US$ ’000 US$ ’000Consumer/personal 69,609 68,971 7,775 146,355Trading and manufacturing 29,873 19,023 120 49,016Real estate 29,232 849 845 30,926Banks and other financial institutions 4,993 6,995 - 11,988Construction 65,233 441 10,882 76,556Others 7,728 7,045 54,625 69,398TOTAL 206,668 103,324 74,247 384,23953.8% 26.9% 19.3% 100.0%TABLE - 13 RESTRUCTURED CREDIT FACILITIESUS$ ’000Balance of any restructured credit facilities as at year end 81,607Loans restructured during the year 88,568The above restructurings did not have any significant impact on the present or future earnings and were primarily extensions of the loan tenor.TABLE - 14 COUNTERPARTY CREDIT RISK IN DERIVATIVE TRANSACTIONSi) Breakdown of the credit exposureNotionalamountGrosspositivefair valueCreditconversionfactorUS$ ’000 US$ ’000 US$ ’000Foreign exchange related 5,075,261 71,902 126,169Interest rate related 4,669,929 83,142 116,212Options 142,014 - 11,255Derivatives credit exposure 9,887,204 155,044 253,636Gross positive fair value represents the replacement cost of the derivativesii) Amounts of collateral 30,000iii) Notional value of credit derivative exposuresProtection sold 5,000TABLE - 15 RELATED PARTY TRANSACTIONSRefer note 25 to the audited consolidated financial statements of the Group for the year ended 31 December 2009.AUB Annual Report 2009117

Pillar III Disclosures - Basel II (Contd.)4. MARKET RISKMarket risk is the risk that movements in market risk factors, including foreign exchange rates, interest rates, credit spreads and equityprices will reduce the Group’s income or the value of its portfolios. The Group is also exposed to interest rate and potential foreignexchange risks arising from financial assets and liabilities not held for trading.Market Risk Management, Measurement and Control ResponsibilitiesThe Board approves the overall market risk appetite and delegates responsibility for providing oversight on the Bank’s market riskexposures and the sub allocation of Board limits to the Group Asset and Liability Committee (GALCO). Group Risk Management isresponsible for the market risk control framework and for monitoring compliance with the GALCO limit framework.The Group separates market risk exposures into either trading or non-trading portfolios. Trading portfolios include those positionsarising from market-making, proprietary position-taking and other marked-to-market positions. Non-trading portfolios includepositions that arise from the interest rate management of the Group’s retail and commercial banking assets and liabilities, and financialassets designated as available-for-sale and held-to-maturity.Each Group operating entity has an independent market risk function which is responsible for measuring market risk exposures inaccordance with the Group Trading Book Policy and the Interest Rate Risk in the Banking Book Policy, and monitoring these exposuresagainst prescribed limits.Market risk reports covering Trading Book risk exposures and profit and loss are published daily to the Bank’s senior management . Arisk presentation covering both Trading and Banking Book is also compiled monthly and discussed at the Group Asset and LiabilityCommittee.The measurement techniques used to measure and control market risk include:- Value at Risk (VaR); and- Stress testsDaily Value at Risk (VaR)The Group VaR is an estimate of the potential loss which might arise from unfavourable market movements:VaR TypeSampleSizeHoldingPeriodConfidenceIntervalFrequency ofCalculation“Management” VaR 260 days 1 day 95% Daily“Regulatory” VaR 260 days 10 day 99% DailyDaily losses exceeding the VaR figure are likely to occur, on average, either once or five times in every 100 business days depending onthe confidence interval employed in the VaR calculation (per the above). The Group routinely validates the accuracy of its VaR modelsby back testing the actual daily profit and loss results. The actual number of excesses over a given period can be used to gauge howwell the models are performing.Although a useful guide to risk, VaR should always be viewed in the context of its limitations. For example:- the use of historical data as a proxy for estimating future events may not encompass all potential events, particularly those whichare extreme in nature;- the use of a 1-day holding period assumes that all positions can be liquidated or hedged in one day. This may not fully reflect themarket risk arising at times of severe illiquidity, when a 1-day holding period may be insufficient to liquidate or hedge all positionsfully;118 AUB Annual Report 2009

4. MARKET RISK (continued)- the use of a confidence level, by definition, does not take into account losses that might occur beyond the applied level ofconfidence; and- VaR is calculated on the basis of exposures outstanding at the close of business and therefore does not necessarily reflect intra-dayexposures.The VaR for the Group was as followsAverage Minimum MaximumUS$ ’000 US$ ’000 US$ ’000As at 31 December 2009 463 191 1,817TABLE - 16 CAPITAL REQUIREMENT FOR COMPONENTS OF MARKET RISKCapital Maximum Minimumrequirement value valueUS$ ’000 US$ ’000 US$ ’000Interest rate risk 10,646 10,646 5,749Equity position risk 30 1,409 30Foreign exchange risk 32,913 33,441 32,475Options 1 133 -TOTAL MARKET RISK CAPITAL REQUIREMENTBEFORE PROPORTIONATE AGGREGATION OF ASSOCIATES43,590 45,628 38,254Add : Proportionate aggregation 6,959 8,491 4,524TOTAL MARKET RISK CAPITAL REQUIREMENT(STANDARDISED APPROACH)50,549 54,119 42,778Interest Rate Risk (non-trading)Interest rate risk is the risk that the earnings or capital of the Group, or its ability to meet business objectives, will be adversely affectedby movements in interest rates. Accepting this risk is a normal part of banking and can be an important source of profitability andshareholder value. Changes in interest rates can affect a bank’s earnings by changing its net interest income and the level of otherinterest sensitive income and operating expenses. Changes in interest rates also affect the underlying value of the Group’s assets,liabilities and off-balance sheet instruments because the present value of future cash flows and / or the cash flows themselves changewhen interest rates change. The Bank employs a risk management process that maintains interest rate risk within prudent levels.The Board recognises that it has responsibility for understanding the nature and the level of interest rate risk taken by the Bank, andhas defined a risk framework pertaining to the management of non trading Interest Rate Risk and has identified lines of authority andresponsibility for managing interest rate risk exposures.The Board has delegated the responsibility for the management of interest rate risk to the Group Asset and Liability Committee(GALCO). GALCO is responsible for setting and monitoring the interest rate risk strategy of the Group, for the implementation of theInterest Rate Risk framework and ensuring that the management process is in place to maintain interest rate risk within prudent levels.GALCO reviews the Interest Rate Risk framework annually and submits recommendations for changes to the Executive Committee andBoard as applicable.AUB Annual Report 2009119

Pillar III Disclosures - Basel II (Contd.)4. MARKET RISK (continued)The responsibility for the implementation of the Bank’s interest rate risk policies resides with the Group Treasurer. An independentreview of all interest exposure present in the Banking Book is undertaken by the Group Market Risk team and communicated to GALCOon a monthly basis.Interest rate re-pricing reports are based on each product’s contractual re-pricing characteristics overlaid where appropriate bybehavioural adjustments. Behavioural adjustments are derived by an analysis of customer behaviour over time augmented by inputfrom the business units.Reports detailing the interest rate risk exposure of the Bank are reviewed by GALCO and the Board on a regular basis.The following table summarises the repricing profiles of the Group’s assets and liabilities as at 31 December 2009.TABLE - 17 INTEREST RATE RISKLess thanThreethree months to Over oneASSETS months one year year TotalUS$’000 US$’000 US$’000 US$’000Treasury bills and bonds 264,224 508,021 137,721 909,966Deposits with banks and other financial institutions 3,008,575 46,254 - 3,054,829Loans and advances 10,383,877 1,365,153 1,446,676 13,195,706Non-trading investments 1,499,200 318,075 1,776,798 3,594,07315,155,876 2,237,503 3,361,195 20,754,574LIABILITIESDeposits from banks and other financial institutions 4,904,347 587,157 28,389 5,519,893Customers’ deposits 9,362,049 3,006,009 355,044 12,723,102Term debt 800,054 150,000 - 950,054Subordinated liabilities 320,367 281,849 - 602,21615,386,817 4,025,015 383,433 19,795,265On - balance sheet gap (230,941) (1,787,512) 2,977,762Off - balance sheet gap 2,595,691 988,767 (3,693,614)Total interest sensitivity gap 2,364,750 (798,745) (715,852)Cumulative interest sensitivity gap 2,364,750 1,566,005 850,153Interest rate risk sensitivity analysisThe Group’s interest rate risk sensitivity is analysed in note 33(b) to the consolidated financial statements of the Group for the yearended 31 December 2009.Equity RiskEquity risk is the risk of changes in the fair value of an equity instrument. AUB Group is exposed to equity risk on non-trading equitypositions that are primarily focused on the GCC stock markets. The Board has set limits on the amount and type of investmentsthat may be made by the Bank. This is monitored on an ongoing basis by the Group Investment Committee with pre approved lossthresholds.The Bank’s Equity Risk appetite is minimal.120 AUB Annual Report 2009

4. MARKET RISK (continued)Valuation and accounting policies:a) Equity investments held for strategic reasons - investments in associates and joint ventureAssociated companies are companies in which the Group exerts significant influence but does not control, normally representedby an interest of between 20% and 50% in the voting capital. The Group classifies its investments as joint venture where it is aparty to a contractual joint venture agreement. Investments in associated companies and joint ventures are accounted for usingthe equity method.b) Equity investments held for capital gainsAfter initial recognition, equity investments that are held as available-for-sale investments are remeasured at fair value. Forinvestments in equity instruments, where a reasonable estimate of the fair value cannot be determined, the investment is carriedat cost less impairment provision.The fair value of equity instruments that are quoted in an active market is determined by reference to market bid prices respectivelyat the close of business on the balance sheet date. For equity invesments that are not quoted in an active market, a reasonableestimate of the fair value is determined by reference to the current market value of another instruments that is substantiallysimilar, or is determined using net present valuation techniques.An assessment is made at each balance sheet date to determine whether there is any objective evidence that an equity instrumentsecurity may be impaired. For an investment in an equity security, a significant or prolonged decline in its fair value below its costis objective evidence of impairment.Any impairment recognised is reflected directly as a write down of the financial asset. Impairment losses on equity investmentsare not reversed through the consolidated statement of income while any subsequent increase in their fair value are recogniseddirectly in equity.TABLE - 18 EQUITY POSITION IN BANKING BOOKRisk-weightedGross weighted Capitalexposures exposures requirementUS$ ’000 US$ ’000 US$ ’000Listed 50,123 50,123 6,015Unlisted 142,153 213,229 25,587TOTAL 192,276 263,352 31,602TABLE - 19 GAINS ON EQUITY INSTRUMENTSUS$ ’000Realised gains recognised in the statement of income 34,378Unrealised (loss) gains recognised in the balance sheet:- Tier one (eligible portion) (2,249)- Tier two (eligible portion) 5,391AUB Annual Report 2009121

Pillar III Disclosures - Basel II (Contd.)5. LIQUIDITY RISK AND FUNDING MANAGEMENTLiquidity risk is the risk that the Group does not have sufficient financial resources to meet its obligations as they fall due, or will have todo so at an excessive cost. This risk arises from mismatches in the timing of cash flows. Funding risk arises when the necessary liquidityto fund illiquid asset positions cannot be obtained at the expected terms and when required.The management of the Group’s liquidity and funding management is the responsibility of the Group Asset & Liability Committeeunder the chairmanship of the Senior Deputy Group Chief Executive Officer Banking Group supported by the Group Treasurer, and isresponsible for ensuring that all foreseeable funding commitments, including deposit withdrawals, can be met when due, and thatwholesale market access is co-ordinated and controlled.The Group maintains a stable funding base comprising core retail and corporate customer deposits and institutional balances,augmented by wholesale funding and portfolios of highly liquid assets which are diversified by currency and maturity, in order toenable the Group to respond quickly to any unforeseen liquidity requirements.The Group subsidiaries and affiliates maintain a strong individual liquidity position and manage their liquidity profiles so that cashflows are balanced and funding obligations can be met when due.Treasury limits are set by the Group Asset & Liability Committee (GALCO) and allocated as required across the various group entities.Specifically GALCO and the Group Treasurer are responsible for:- projecting cash flows by major currency under various stress scenarios and considering the level of liquid assets necessary inrelation thereto;- monitoring balance sheet liquidity ratios against internal and regulatory requirements;- maintaining a diverse range of funding sources with adequate back-up facilities;- managing the concentration and profile of debt maturities;- managing contingent liquidity commitment exposures within predetermined caps;- monitoring depositor concentration in order to avoid undue reliance on large individual depositors and ensure a satisfactoryoverall funding mix; and- maintaining liquidity and funding contingency plans. These plans must identify early indicators of stress conditions and describeactions to be taken in the event of difficulties arising from systemic or other crises while minimising adverse long-term implicationsfor the business.Maturity Analysis of Assets and LiabilitiesA maturity analysis of cash flows payable by the Group under financial liabilities by remaining contractual maturities at the balancesheet date is shown in note 35 to the audited consolidated financial statements.6. OPERATIONAL RISKOperational risk is the risk of loss arising from inadequate or failed internal processes, people and systems or from external events,whether intentional, unintentional or natural. It is an inherent risk faced by all businesses and covers a large number of operational riskevents including business interruption and systems failures, internal and external fraud, employment practices and workplace safety,customer and business practices, transaction execution and process management, and damage to physical assets.The Board acknowledges that it has ultimate responsibility for operational risk. Oversight rests with the Group Risk Committee, whilstday to day monitoring is carried out by the Group Operational Risk Committee. The Board has approved the operational risk frameworkand reviews it annually.122 AUB Annual Report 2009

6. OPERATIONAL RISK (continued)The operational risk management framework has been in place for a number of years and is ingrained in the Bank’s processes. TheBank has developed a comprehensive ‘operational risk self assessment (ORSA)’ process.7. INFORMATION TECHNOLOGY RISKAll computer system developments and operations are centrally controlled and common systems are employed across the Groupwherever possible.8. STRATEGIC RISKThe Board supported by Strategic Development Unit and the Group Finance manages strategic risk on an ongoing basis. The Boardreceives regular performance reports with details of strategic / regulatory issues as they arise.9. LEGAL, COMPLIANCE, REGULATORY AND REPUTATIONAL RISKSProtecting the reputation of the Group is of paramount importance and all management and staff are expected to apply the higheststandards of business conduct and professional ethics at all times.Regulatory and Reputational Risk is jointly managed by the Compliance, Risk Management, and Legal departments.10. ENVIRONMENTAL RISKThe Bank recognises the importance of environmental and social issues within its risk framework, and has established an Environmentaland Social Management System (ESMS) which details the policy, procedures and workflow that will be followed by the Bank and itssubsidiaries / affiliates in respect of environmental risk.The Bank continually endeavours to ensure effective environmental and social management practices in all its activities, products andservices with a focus on the applicable national laws on environmental, health, safety and social issues.As such the Bank will finance projects only when they are expected to be designed, built, operated and maintained in a mannerconsistent with the applicable national laws.AUB Annual Report 2009123

Ahli United Bank B.S.C.Building 2495, Road 2832, Al-Seef District, P.O. Box 2424, Manama, Kingdom of BahrainTelephone: +973 17 585 858 • Facsimile: +973 17 580 569 • email:

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