Financial Statements 2003 - National Bank of Kuwait

Consolidated Balance Sheet31 December 20032003 2002 2003 2002Notes KD 000’s KD 000’s USD 000’s USD 000’sAssetsCash and short term funds 4 158,776 390,181 538,772 1,323,994Kuwait government treasury bills 418,345 621,271 1,419,562 2,108,147Kuwait government treasury bonds 227,782 164,615 772,928 558,585Deposits with banks and other financial institutions 1,207,530 977,080 4,097,489 3,315,507Loans and advances to customers 5 2,478,389 2,142,578 8,409,871 7,270,370Investment securities 6 717,794 706,392 2,435,677 2,396,987Kuwait government debt bonds 7 135,320 165,829 459,179 562,704Land, premises and equipment 39,593 39,244 134,350 133,166Other assets 8 55,576 67,257 188,585 228,222Total assets 5,439,105 5,274,447 18,456,413 17,897,682Liabilities and shareholders’ equityLiabilitiesDue to banks and other financial institutions 1,385,556 1,502,037 4,701,581 5,096,834Customers’ deposits 3,002,576 2,916,897 10,188,585 9,897,852Certificates of deposit issued 9 220,000 84,500 746,522 286,732Floating rate bonds issued 10 133,088 135,216 450,000 450,000Other liabilities 11 119,854 99,430 408,303 346,220Total liabilities 4,861,074 4,738,080 16,494,991 16,077,638Minority interests 1,914 1,854 6,495 6,291Shareholders’ equityShare capital and reservesShare capital 147,419 147,419 500,234 500,234Proposed bonus shares 12 7,371 - 25,012 -Statutory reserve 13 73,710 73,710 250,119 250,119Share premium account 13 37,862 37,862 128,476 128,476General reserve 13 116,410 116,326 395,012 394,727Retained earnings 106,216 65,953 360,421 223,797Cumulative changes in fair values 13 13,420 (2,579) 45,538 (8,751)Total share capital and reserves 502,408 438,691 1,704,812 1,488,602Proposed cash dividend 12 73,709 95,822 250,115 325,151Total shareholders’ equity 576,117 534,513 1,954,927 1,813,753Total liabilities and shareholders’ equity 5,439,105 5,274,447 18,456,413 17,897,682Mohammed Abdul Rahman Al-Bahar Nasser Musaed Abdullah Al-Sayer Ibrahim Shucri DabdoubChairman Deputy Chairman Chief Executive OfficerThe attached notes 1 to 27 form part of these financial statements.29

Notes to the Consolidated Financial Statements31 December 2003Kuwait government treasury bondsKuwait government treasury bonds are initially recognised at cost and subsequently adjusted for premium or discount.These treasury bonds are issued by the Central Bank of Kuwait on behalf of the Ministry of Finance and are consideredas liquid assets in accordance with the instructions of the Central Bank of Kuwait.Deposits with banks and other financial institutionsDeposits with banks and other financial institutions are stated at cost less any amounts written off and provision forimpairment.The carrying value of such assets which are being effectively hedged for changes in fair value are adjustedto the extent of the changes in fair value being hedged.Loans and advances to customersLoans and advances are stated at cost less any amounts written off and provision for impairment.The carrying value ofsuch assets which are being effectively hedged for changes in fair value are adjusted to the extent of the changes in fairvalue being hedged.Investment securitiesThese are classified as follows:• Held for trading• Held to maturity• Available for saleHeld for tradingInvestment securities held for trading are initially recognised at cost and subsequently re-measured at fair value with anyunrealised gain or loss arising from a change in fair value being included in the statement of income in the period inwhich it arises.Held to maturityInvestments which have fixed or determinable repayment dates which are intended to be held to maturity, are carriedat amortised cost, less provision for impairment in value.Available for saleInvestments not classified as either “held for trading”, or “held to maturity” are classified as “available for sale”. Initiallythese are recognised at cost and subsequently re-measured to fair value, net of any effective hedges, with the resultantunrealised gain or loss being recorded in the cumulative fair value reserve until the investment is sold, collected orotherwise 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 statement of income for the period.33

Notes to the Consolidated Financial Statements31 December 20032 Significant accounting policies (continued)Kuwait government debt bondsKuwait government debt bonds are stated at cost less provision for impairment in value, if any.Certificates of deposit issuedCertificates of deposit are recognised initially at cost being their issue proceeds less transaction costs. Subsequentlycertificates of deposit are stated at amortised cost less amounts repaid.Floating rate bonds issuedFloating rate bonds issued are recognised initially at cost being their issue proceeds less transaction costs. Subsequentlyfloating rate bonds issued are carried at amortised cost less amounts redeemed.Fair valuesThe fair value for financial instruments approximates to the amount at which an asset could be exchanged, or a liabilitysettled, between knowledgeable willing parties in an arm’s length transaction.Fair values are based on quoted market bid prices, where available. A reasonable estimate of fair value for other financialinstruments is derived from use of discounted cash flow techniques or reference to market values of similar investments.TaxationTaxation is provided for in accordance with the fiscal regulations of the respective countries in whichthe group operates.DepreciationFreehold land is not depreciated.The cost less estimated residual value of premises and equipment is depreciated byequal annual instalments over the estimated useful lives of the assets.Revenue recognitionInterest receivable and payable and discounts and premiums on investment securities are recognised on a timeproportion basis taking account of the principal outstanding and the rate applicable.The recognition of interest incomeceases when the loans become doubtful of collection, such as when overdue by more than 90 days, or, when theborrower or securities’ issuer defaults. Other fees receivable or payable are recognised when earned. Dividend incomeis recognised when the right to receive the payment is established.34

Main HeadingMain heading sub copyImpairment and uncollectability of financial assetsAn assessment is made at each balance sheet date to determine whether there is objective evidence that a specificfinancial asset, or group of similar assets, may be impaired. If such evidence exists, the estimated recoverable amount ofthat asset is determined and any impairment loss, based on the net present value of future cash flows discounted atoriginal interest rates, is recognised in the statement of income.The provision for impairment of loans and advances also covers losses where there is objective evidence that probablelosses are present in components of the loans and advances portfolio at the balance sheet date.These have beenestimated based on historical patterns of losses in each component, the credit ratings allocated to the borrowers andreflecting the current economic climate in which the borrowers operate.Foreign currenciesForeign currency transactions are recorded in Kuwaiti dinars at rates of exchange ruling at the date of the transactions.Monetary assets and liabilities in foreign currencies are translated into Kuwaiti dinars at rates of exchange ruling at thebalance sheet date. Any resultant gains or losses are taken to the statement of income.Translation differences arising from the application of closing rates of exchange to the opening net assets of overseassubsidiaries are taken directly to reserves.Derivative instrumentsThe group enters into derivative instrument transactions including futures, forwards, swaps and options in the foreignexchange and capital markets. Derivatives are stated at fair value.The fair value of a derivative is the equivalent of theunrealised gain or loss from marking to market the derivative using prevailing market rates or internal pricing models.For the purposes of hedge accounting, hedges are classified into two categories: (a) fair value hedges which hedge theexposure to changes in the fair value of a recognised asset or liability; and (b) cash flow hedges which hedge exposureto variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or aforecasted transaction.35

Notes to the Consolidated Financial Statements31 December 20032 Significant accounting policies (continued)Derivative instruments (continued)In relation to fair value hedges which meet the conditions for hedge accounting, any gain or loss from remeasuring thehedging instrument is recognised immediately in the statement of income.The hedged items are adjusted for fair valuechanges relating to the risk being hedged and the difference is recognised in the statement of income. Where theadjustment relates to a hedged interest-bearing financial instrument, the adjustment is amortised to the statement ofincome on a systematic basis such that it is fully amortised by maturity.In relation to cash flow hedges which meet the conditions for hedge accounting, the portion of the gain or loss on thehedging instrument that is determined to be an effective hedge is recognised initially in equity and the ineffective portion isrecognised in the statement of income.The gains or losses on cash flow hedges recognised initially in equity aretransferred to the statement of income in the period in which the hedged transaction impacts the statement of income.Where the hedged transaction results in the recognition of an asset or liability the associated gains or losses that hadinitially been recognised in equity are included in the initial measurement of the cost of the related asset or liability.For hedges that do not qualify for hedge accounting, any gains or losses arising from changes in fair value of the hedginginstrument are taken directly to the statement of income.Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or nolonger qualifies for hedge accounting. For cash flow hedges, any cumulative gain or loss on the hedging instrumentrecognised in equity remains in equity until the forecasted transaction occurs. In the case of fair value hedges ofinterest-bearing financial instruments, any adjustment relating to the hedge is amortised over the remaining term tomaturity. Where the hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised inequity is transferred to the income statement.Trade and settlement date accountingAll “regular way” purchases and sales of financial assets are recognised on the trade date, i.e. the date that the groupcommits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets thatrequire delivery of assets within the time frame generally established by regulation or convention in the market place.Fiduciary assetsAssets and related deposits held in trust or in a fiduciary capacity are not treated as assets or liabilities of the groupand accordingly are not included in these consolidated financial statements.36

Main HeadingMain heading sub copy3 Geographical and business segments(a) Geographical segmentsThe group operates in two geographical markets; Kuwait, which is designated as Domestic, and the remainder of theMiddle East, Europe, the Far East and the U.S.A. which are designated as International.These markets form the basis onwhich the group reports its primary segmental information.The geographical analysis of operating income, profit, total assets and total liabilities is based primarily upon the locationof the branch or subsidiary responsible for reporting the results.Transactions between segments are conducted at market rates on an arm’s length basis.Domestic International Total2003 2002 2003 2002 2003 2002KD 000’s KD 000’s KD 000’s KD 000’s KD 000’s KD 000’sOperating income 156,773 132,619 29,753 28,028 186,526 160,647Profit for the year 108,395 95,288 12,948 10,860 121,343 106,148Total assets 3,760,621 3,874,621 1,678,484 1,399,826 5,439,105 5,274,447Total liabilities 3,299,930 3,390,883 1,561,144 1,347,197 4,861,074 4,738,080b) Business segmentsAlthough the management of the group is based primarily on geographical segments, it operates in two major businesssegments; Commercial Banking and Investment Banking & Asset Management. Commercial Banking delivers a variety ofproducts and services to NBK customers which include, lending, deposit taking, trade finance, foreign exchange and custody.Investment Banking provides cross border financial advisory services and other corporate finance services to corporateand institutional clients and government agencies in Kuwait and the Middle East region.37

Notes to the Consolidated Financial Statements31 December 20033 Geographical and business segments (continued)On the Asset Management side the group offers investment services through a diverse range of investment funds toretail customers and portfolio management to high net worth individuals and institutional clients.These services includethe management of a variety of mutual funds, some of which are in association with professional fund managers.Theassets of these funds do not form part of the group’s assets and, accordingly, are not included in the consolidated financialstatements. As at 31 December 2003 the funds under management are KD 1,550 million (2002: KD 1,278 million).2003 2002KD 000’s KD 000’sOperating incomeCommercial banking 175,757 152,374Investment banking and asset management 10,769 8,273186,526 160,647Segment assetsCommercial banking 5,401,743 5,232,126Investment banking and asset management 37,362 42,3215,439,105 5,274,4474 Cash and short term funds2003 2002KD 000’s KD 000’sBalances with Central Bank of Kuwait 594 740Cash on hand and on current account with other banks 49,332 44,788Money at call 40,146 48,357Deposits with banks and other financial institutions maturing within seven days 68,704 296,296158,776 390,18138

Main HeadingMain heading sub copy5 Loans and advances to customersLoans and advances to customers are stated net of provisions for losses as follows:Specific General Total2003 2002 2003 2002 2003 2002KD 000’s KD 000’s KD 000’s KD 000’s KD 000’s KD 000’sBalance at beginning of year 51,504 54,716 40,900 36,138 92,404 90,854Amounts written off andforeign exchange movements (1,333) (936) 212 139 (1,121) (797)Adjustments re loans under Law 41/93 (6,557) (238) - - (6,557) (238)Provided/(released) during the year 527 (2,038) 7,798 4,623 8,325 2,585Balance at end of year 44,141 51,504 48,910 40,900 93,051 92,404At 31 December 2003, non-performing loans and advances amounted to KD 51 million (2002: KD 83 million) and aresplit between facilities granted pre-invasion and post liberation as follows:Pre-invasion Post liberation TotalKD 000’s KD 000’s KD 000’s2003Loans and advances 28,329 22,783 51,112Provisions 28,048 16,093 44,1412002Loans and advances 60,145 22,897 83,042Provisions 34,764 16,740 51,504The policy of the group for calculation of the impairment provision for loans and advances complies in all material respectswith the specific provision requirements of the Central Bank of Kuwait. According to the Central Bank of Kuwaitinstructions, a general provision of 2% on all credit facilities not subject to specific provisions has been provided.Theanalysis of specific and general provision set out above is based on the requirements of the Central Bank of Kuwait.The general provision of KD 48.9 million (2002: KD 40.9 million) includes an amount of KD 12.2 million(2002: KD 10.9 million) relating to non-cash facilities.39

Notes to the Consolidated Financial Statements31 December 20036 Investment securities2003 2002KD 000’s KD 000’sHeld for trading 47,369 -Held to maturity 35,936 53,564Available for sale 634,489 652,828717,794 706,3927 Kuwait government debt bondsThe Central Bank of Kuwait purchased resident Kuwaiti and GCC customers’ debts existing at 1 August 1990, inaddition to related interest up to 31 December 1991, on behalf of the Government of Kuwait in accordance withDecree 32/92 and Law 41/93, as amended, in respect of the purchase by the Government of such debts and theprocedure for their collection.The purchase value of these debts was determined in accordance with the Decree and has been settled by the issue ofbonds, with a value date of 31 December 1991 and maturing over a maximum period of twenty years from the date ofissuance. During 2003 there was a net redemption of KD 31 million (2002: KD 44 million). Interest is at a rate fixedsemi-annually by the Central Bank of Kuwait, and is payable semi-annually in arrears.The average rate of interest paid bythe Central Bank of Kuwait for 2003 was 1.89% (2002: 2.67 percent).Under the terms of the purchase agreement with the Central Bank of Kuwait, the amount of the bonds will beadjusted in respect of any difference arising, once the balances of the related debts have been agreed with thecustomers concerned.The group, therefore, has a contingent liability in this regard.8 Other assets2003 2002KD 000’s KD 000’sInterest receivable 42,340 33,133Sundry debtors and prepayments 5,550 4,959Other 7,686 29,16555,576 67,2579 Certificates of deposit issuedThe certificates of deposit outstanding at the balance sheet date amounted to KD 220 million (2002: KD 84.5 million).These certificates of deposit bear interest payable at maturity at rates ranging from 2.375% to 2.5% per annum (2002:2.375% to 2.875% per annum). All certificates of deposit issued and outstanding are maturing within periods up to 4months from the balance sheet date.10 Floating rate bonds issuedOn 19 February 2002, the bank issued floating rate bonds with a principal amount of US$ 450 million at an issue priceof 100%.The bonds bear interest at the rate of 0.25% per annum above the London inter-bank offered rate for threemonth US dollar deposits, payable quarterly in arrears.The bonds are in bearer form in denomination ofUS$ 100,000 and are redeemable at par on or before 19 February 2005.40

Main HeadingMain heading sub copy11 Other liabilities2003 2002KD 000’s KD 000’sInterest payable 30,485 24,269Interest received in advance 9,526 12,415Other 79,843 62,746119,854 99,43012 Proposed dividendThe board of directors recommended distribution of a cash dividend of 50 fils per share (2002: 65 fils per share) andbonus shares of 5% (2002: nil) on outstanding shares as at 31 December 2003.The proposed dividend, if approved, shallbe payable to the shareholders registered in the bank’s records as of the date of the general assembly meeting.13 ReservesThe balance on the share premium account is not available for distribution.In accordance with the Law of Commercial Companies and the Bank’s Articles of Association, the Bank has resolved todiscontinue the annual transfer of 10% of the profit for the year since the statutory reserve would exceed 50% of thecurrent paid up share capital.Distribution of this reserve is limited to the amount required to enable payment of a dividend of 5% of share capital inyears when accumulated profits are not sufficient for the payment of a dividend of that amount.The general reserve was created in accordance with the Bank’s Articles of Association and is freely distributable.The cumulative changes in fair values reserve is analysed as follows:Cash flow Available forhedges sale portfolio TotalKD 000’s KD 000’s KD 000’sBalance at 31 December 2002 (513) (2,066) (2,579)Net unrealised gains (losses) 222 17,100 17,322Net realised gains - (1,323) (1,323)Balance at 31 December 2003 (291) 13,711 13,420Balance at 31 December 2001 (677) 4,891 4,214Net unrealised gains (losses) 164 (4,982) (4,818)Net realised gains - (1,975) (1,975)Balance at 31 December 2002 (513) (2,066) (2,579)41

Notes to the Consolidated Financial Statements31 December 200314 Subsidiary companiesPrincipal operating subsidiaries:Name of company and country of incorporation Principal business % Capital heldNational Bank of Kuwait (International) plc - United Kingdom Banking 100.0NBK Investment Management Limited - United Kingdom Investment management 60.0National Bank of Kuwait (Suisse) S.A. - Switzerland Investment management 100.0National Bank of Kuwait (Lebanon) S.A.L. - Lebanon Banking 85.5National Investors Group Holdings Ltd. - Cayman Islands Investment management 100.0At 31 December 2003, 38.14% (2002: 38.14 percent) of the group’s interest in National Bank of Kuwait (Lebanon)S.A.L. was held by an intermediate holding company, NBK Holding (Liban) S.A.L.15 Commitments and contingent liabilities2003 2002KD 000’s KD 000’sCommitments on behalf of customers for which there arecorresponding liabilities by the customers concerned:Acceptances 72,422 57,986Letters of credit 209,774 158,813Guarantees 618,745 584,621Irrevocable commitments to extend credit 413,923 377,9281,314,864 1,179,348In the normal course of business the group has exposure to various indirect credit commitments which, though notreflected in the balance sheet, are subject to normal credit standards, financial controls and monitoring procedures.These credit commitments do not necessarily represent future cash requirements, since many of these commitmentswill expire or terminate without being funded. Credit losses, if any, which may result from exposure to suchcommitments are not expected to be significant.16 Derivative instrumentsThe group deals in interest rate and foreign exchange derivatives to earn fees, generate trading revenues and manageits asset and liability exposures.Notional principal amounts merely represent amounts to which a rate or price is applied to determine the amounts ofcash flows to be exchanged and do not represent the potential gain or loss associated with the market or credit risk ofsuch instruments.Credit risk in respect of derivative financial instruments arises from the potential for a counterparty to default onits contractual obligations and is limited to the positive fair value of instruments that are favourable to the group.Exchange-traded contracts are subject to daily margin requirements and are, therefore, deemed to have no additionalcredit risk.42

Up to 3 to 12 Over3 months months 1 year TotalKD 000’s KD 000’s KD 000’s KD 000’s2003Notional principalFinancial futures 793 - - 793Interest rate swaps 406,813 227,113 82,840 716,766Forward foreign exchange 832,218 131,408 10,865 974,4911,239,824 358,521 93,705 1,692,0502002Notional principalFinancial futures 677 - - 677Forward rate agreements 1,502 42,183 - 43,685Interest rate swaps 337,207 105,144 128,471 570,822Forward foreign exchange 725,931 136,249 6,997 869,1771,065,317 283,576 135,468 1,484,361The fair value (equivalent to market value) of derivative instruments included in the financial records as at 31 December2003 is summarised as follows, and predominately reflects forward foreign exchange and interest rate swap contracts:Net positive (negative)Derivative instruments held as fair value KD 000’s Description of hedged items2003Trading (and non-qualifying hedges) 58Fair value hedges (20,035) Fixed rate bonds and loansCash flow hedges (292) Floating rate loans/deposits(20,269)2002Trading (and non-qualifying hedges) (106)Fair value hedges (14,787) Fixed rate bonds and loansCash flow hedges (517) Floating rate loans/deposits(15,410)Trading items are predominantly made up of non-qualifying hedges under IAS 39.43

Notes to the Consolidated Financial Statements31 December 200317 Related party transactionsCertain related parties (directors, officers of the Bank and companies of which they are principal owners) werecustomers of the Bank and its subsidiaries in the ordinary course of business. Such transactions were made onsubstantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparabletransactions with unrelated parties and did not involve more than a normal amount of risk.In accordance with Central Bank regulations regarding lending to Board Members and their related parties such lendingis secured by tangible collateral.Details of the interests of Board Members and Executive Officers are as follows:The numberof Board Membersor Executive OfficersThe number ofrelated parties2003 2002 2003 2002 2003 2002KD 000’s KD 000’sBoard MembersLoans (secured) 5 5 10 13 39,732 31,788Contingent liabilities 2 2 8 9 53,239 47,203Credit cards - 5 1 - 1 7Deposits 8 8 8 5 24,299 16,687Collateral against loans 5 4 10 15 176,265 126,858Executive OfficersLoans 4 5 - - 282 304Contingent liabilities 2 2 - - 9 6Credit cards 7 7 - - 13 5Deposits 10 10 - - 155 35218 Earnings per shareEarnings per share are calculated by dividing the profit for the year by the weighted average number of ordinary sharesoutstanding during the year as follows:2003 2002KD 000’s KD 000’sProfit for the year 121,343 106,148Weighted average number of ordinary shares outstanding during the year (thousands) 1,474,184 1,474,184Earnings per share 82 fils 72 fils44

Main HeadingMain heading sub copy19 Interest rate sensitivityUp to 3 3 to 12 Over Non interest Effectivemonths months 1 year sensitive Total interest rateKD 000’s KD 000’s KD 000’s KD 000’s KD 000’s %2003AssetsCash and deposits with banksand other financial institutions 1,266,174 54,420 444 45,268 1,366,306 1-3Kuwait government treasury bills 277,942 140,403 - - 418,345 2Kuwait government treasury bonds 57,909 169,873 - - 227,782 3Loans and advances to customers 1,576,668 807,217 94,425 79 2,478,389 3 - 7Investment securities 256,118 81,574 230,507 149,595 717,794 3 - 6Kuwait government debt bonds - 135,320 - - 135,320 2Land, premises and equipment - - - 39,593 39,593Other assets - - - 55,576 55,5763,434,811 1,388,807 325,376 290,111 5,439,105Liabilities and shareholders’ equityDue to banksand other financial institutions 1,167,143 217,203 - 1,210 1,385,556 1 - 3Customers’ deposits 2,789,191 139,977 38,616 34,792 3,002,576 1 - 3Certificates of deposit issued 200,000 20,000 - - 220,000 2 - 3Floating rate bonds issued 133,088 - - - 133,088 2Other liabilities - - - 119,854 119,854Proposed cash dividend - - - 73,709 73,709Shareholders’ equity and minority interests - - - 504,322 504,3224,289,422 377,180 38,616 733,887 5,439,105On balance sheet gap (854,611) 1,011,627 286,760 (443,776) -Off balance sheet gap 147,147 101,549 (248,696) - -Interest rate sensitivity gap (707,464) 1,113,176 38,064 (443,776) -Cumulative gap (707,464) 405,712 443,776Maturities of assets and liabilities have been determined on the basis of contractual pricing or maturity dates, whicheverare earlier.The off balance sheet gap represents the net notional amounts of off-balance sheet financial items such as forward rateagreements and interest rate swaps which are used to manage interest rate risk.A small proportion of customers’ deposits consists of non-interest bearing current and trust accounts.Had the maturities of assets and liabilities been determined solely on the basis of maturity dates, the effect on the tableset out above would have been to increase the assets with remaining maturity over 1 year by KD 1,383 million (2002:KD 1,130 million) and reduce assets in 3 to 12 months and up to 3 months by KD 515 million (2002: KD 213 million)and KD 868 million (2002: KD 917 million) respectively. Similarly, the liabilities with remaining maturity of over one yearwould have shown an increase of KD 390 million (2002: KD 482 million) with a corresponding decrease in liabilities upto three months.45

Notes to the Consolidated Financial Statements31 December 200319 Interest rate sensitivity (continued)Up to 3 3 to 12 Over Non interest Effectivemonths months 1 year sensitive Total interest rateKD 000’s KD 000’s KD 000’s KD 000’s KD 000’s %2002AssetsCash and deposits with banksand other financial institutions 1,290,415 45,370 - 31,476 1,367,261 2-3Kuwait government treasury bills 164,501 456,770 - - 621,271 2-3Kuwait government treasury bonds 67,384 97,231 - - 164,615 3-4Loans and advances to customers 1,383,531 539,273 217,369 2,405 2,142,578 3-9Investment securities 333,128 30,967 200,153 142,144 706,392 3-6Kuwait government debt bonds - 165,829 - - 165,829 2-3Land, premises and equipment - - - 39,244 39,244Other assets - - - 67,257 67,2573,238,959 1,335,440 417,522 282,526 5,274,447Liabilities and shareholders’ equityDue to banksand other financial institutions 1,368,089 133,823 - 125 1,502,037 2-3Customers’ deposits 2,672,366 98,372 115,095 31,064 2,916,897 1-3Certificates of deposit issued 72,500 12,000 - - 84,500 2-3Floating rate bonds issued 135,216 - - - 135,216 2Other liabilities - - - 99,430 99,430Proposed cash dividend - - - 95,822 95,822Shareholders’ equityand minority interests - - - 440,545 440,5454,248,171 244,195 115,095 666,986 5,274,447On balance sheet gap (1,009,212) 1,091,245 302,427 (384,460) -Off balance sheet gap 119,246 35,869 (155,115) - -Interest rate sensitivity gap (889,966) 1,127,114 147,312 (384,460) -Cumulative gap (889,966) 237,148 384,46046

Main HeadingMain heading sub copy20 Exposure to credit risk under financial instrumentsMiddleNorthEast America Europe Asia Other TotalKD 000’s KD 000’s KD 000’s KD 000’s KD 000’s KD 000’s2003Geographic regionCash and deposits with banksand other financial institutions 1,278,343 18,789 53,765 10,869 4,540 1,366,306Kuwait government treasury bills 418,345 - - - - 418,345Kuwait government treasury bonds 227,782 - - - - 227,782Loans and advances to customers 2,244,505 93,226 75,827 51,958 12,873 2,478,389Investment securities 144,250 301,248 151,386 97,945 22,965 717,794Kuwait government debt bonds 135,320 - - - - 135,320Other assets 41,553 1,597 10,201 - 2,225 55,5764,490,098 414,860 291,179 160,772 42,603 5,399,512Commitmentsand contingent liabilities (Note15) 934,148 20,031 153,920 204,651 2,114 1,314,8645,424,246 434,891 445,099 365,423 44,717 6,714,376Industry sectorTrading and manufacturing 1,752,965Banks and other financial institutions 2,953,599Construction and real estate 307,077Other 1,700,7356,714,376Credit risk exposure in respect of earning assets and off balance sheet financial items represents the carrying values ofassets and contingencies which could be impacted as a result of failures by the group’s counterparties to discharge theirobligations under these contracts.Concentrations of credit risk arise from exposure to customers having similar characteristics in terms of the industry inwhich they are engaged or the geographical location in which they operate such that their ability to dischargecontractual obligations may be similarly affected by changes in political, economic or other conditions. Significantconcentrations of the group’s risk assets by region and industry sector are set out above.47

Notes to the Consolidated Financial Statements31 December 200320 Exposure to credit risk under financial instruments (continued)MiddleNorthEast America Europe Asia Other TotalKD 000’s KD 000’s KD 000’s KD 000’s KD 000’s KD 000’s2002Geographic regionCash and deposits with banksand other financial institutions 1,266,194 17,326 79,604 4,080 57 1,367,261Kuwait government treasury bills 621,271 - - - - 621,271Kuwait government treasury bonds 164,615 - - - - 164,615Loans and advances to customers 1,935,448 86,707 79,221 28,450 12,752 2,142,578Investment securities 121,763 328,512 151,759 79,430 24,928 706,392Kuwait government debt bonds 165,829 - - - - 165,829Other assets 38,386 2,378 24,671 1,822 - 67,2574,313,506 434,923 335,255 113,782 37,737 5,235,203Commitmentsand contingent liabilities (Note15) 784,258 23,991 156,600 212,500 1,999 1,179,3485,097,764 458,914 491,855 326,282 39,736 6,414,551Industry sectorTrading and manufacturing 1,547,176Banks and other financial institutions 3,163,417Construction and real estate 206,593Other 1,497,3656,414,55148

Main HeadingMain heading sub copy21 Concentration of deposit liabilities2003 2002KD 000’s KD 000’sGeographic regionMiddle East 3,780,410 3,801,894North America 184,288 189,570Europe 300,912 286,102Asia 98,442 95,176Other 24,080 46,1924,388,132 4,418,934Industry sectorTrading and manufacturing 221,427 160,020Banks and other financial institutions 1,559,680 1,669,167Construction and real estate 77,740 82,693Other 2,529,285 2,507,0544,388,132 4,418,93422 Fair value of financial instrumentsIn the opinion of management, except for Government Debt Bonds, carrying values of all other financial instrumentsare not significantly different from fair values.It is not practicable to determine the fair value of Government Debt Bonds with sufficient accuracy, as the future cashflows are not determinable. Information on the principal characteristics of these bonds is presented in Note 7 to theconsolidated financial statements.23 Risk ManagementIn accordance with the Central Bank of Kuwait’s directives, the group has implemented a comprehensive system for themeasurement and management of risk, including the establishment of an independent unit for this purpose.Credit riskAll policies relating to credit are reviewed and approved by the Board of Directors.Credit limits are established for all customers after a careful assessment of their creditworthiness. Standing procedures,outlined in the group’s Credit Policy Manual, require that all credit proposals be subjected to detailed screening by thedomestic or international credit control divisions pending submission to the appropriate credit committee. Whenevernecessary, all loans are secured by acceptable forms of collateral to mitigate the related credit risks.In accordance with the instructions of the Central Bank of Kuwait dated 18 December 1996, setting out the rules andregulations regarding the classification of credit facilities, the group has formed an internal committee which is composed ofcompetent professional staff and which has as its purpose the study and evaluation of the existing credit facilities of eachcustomer of the group.This committee is required to identify any abnormal situations and difficulties associated with acustomer’s position which might cause the debt to be classified as irregular, and to determine an appropriate provisioninglevel.The committee, which meets regularly throughout the year, also studies the positions of those customers whoseirregular balances exceed 25% of their total debt, in order to determine whether further provisions are required.49

Notes to the Consolidated Financial Statements31 December 200323 Risk Management (continued)The group further limits risk through diversification of its assets by geography and industrial sector. In addition, all creditfacilities are continually monitored based on a periodical review of the credit performance and account rating.Foreign exchange riskForeign exchange risks are controlled through limits pre-established by the Board of Directors on counterparty andcurrency position exposures. Assets are typically funded in the same currency as that of the business being transactedto eliminate exchange exposures. Appropriate segregation of duties exists between the front and back office functionswhile compliance with position limits is independently monitored on an ongoing basis.Hedging transactions are used to manage risks in other currencies.Interest rate riskThe group is not excessively exposed to interest rate risk as its assets and liabilities are repriced relatively frequentlyand exposures arising on any medium term fixed rate lending are immediately covered by interest rate swaps.Furthermore, the reverse cumulative interest rate gap is carefully monitored on a daily basis and adjusted wherenecessary to reflect changing market conditions.Liquidity riskLiquidity is monitored daily with respect to internal funding requirements and adherence to the Central Bank ofKuwait’s regulations. Liquidity is managed by monitoring compliance with internal limits.Operational RiskThe group has a set of policies and procedures, which are approved by the Board of Directors and are applied to identify,assess and supervise operational risk in addition to other types of risk relating to the banking and financial activities ofthe group. Operational risk is managed by the Operational Risk Unit.This unit ensures compliance with policies andprocedures to identify, assess, supervise and monitor operational risk as part of overall Global Risk Management.The Operational Risk Management function of the group is in line with the CBK instructions dated 14 November 1996,concerning the general guidelines for internal controls and the instructions dated 13 October 2003, regarding thesound practices for managing and supervising operational risks in banks.24 Management of purchased debtsIn accordance with Decree 32/92 and Law 41/93 in respect of the financial and banking sector, the Bank is required tomanage the purchased debts without remuneration in conformity with the terms of the debt purchase agreement.25 Comparative figuresCertain of the comparative figures have been restated to conform with the presentation in the current year.26 Number of staffThe number of staff employed by the group at 31 December 2003 was 1,632 (2002: 1,624).27 Board of Directors remunerationThe Board of Directors does not receive any emoluments in the form of fees, salaries or bonuses for their servicesrendered to the Bank.50

Auditors’ Report to the ShareholdersNational Bank of KuwaitWe have audited the accompanying consolidated balance sheet of National Bank of Kuwait S.A.K. and its subsidiaries(the group) as of 31 December 2003, and the related consolidated statements of income, cash flows and changes inequity for the year then ended.These consolidated financial statements are the responsibility of the Bank’s management.Our responsibility is to express an opinion on these consolidated financial statements based on our audit.We conducted our audit in accordance with International Standards on Auditing.Those Standards require that we planand perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures inthe consolidated financial statements. An audit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall consolidated financial statement presentation. Webelieve that our audit provides a reasonable basis for our opinion.In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of thegroup at 31 December 2003 and the results of its operations and its cash flows for the year then ended in accordancewith International Financial Reporting Standards.Furthermore, in our opinion proper books of account have been kept by the group and the consolidated financialstatements, together with the contents of the report of the board of directors relating to these consolidated financialstatements, are in accordance therewith. We further report that we obtained all the information and explanations thatwe required for the purpose of our audit and the consolidated financial statements incorporate all information that isrequired by the Commercial Companies Law of 1960, as amended, and by the Bank’s articles of association, that aninventory was duly carried out and that, to the best of our knowledge and belief, no violations of the CommercialCompanies Law of 1960, as amended, nor of the articles of association have occurred during the year ended 31December 2003 that might have had a material effect on the business of the group or on its financial position.We further report that, during the course of our examination, we have not become aware of any material violationsof the provisions of Law No. 32 of 1968, as amended, concerning currency, the Central Bank of Kuwait and theorganisation of banking business, and its related regulations during the year ended 31 December 2003.We have also reviewed the translation of the financial statements on the basis described in Note 2. In our opinion,the financial statements expressed in US dollars have been properly translated on the basis described in Note 2.WALEED A.AL OSAIMILICENCE NO. 68A – KuwaitAL AIBAN, AL OSAIMI & PARTNERSERNST & YOUNGJASSIM AHMAD AL-FAHADLICENCE NO. 53A – KuwaitAL-FAHAD & CO.DELOITTE & TOUCHE4 January 2004Kuwait51

Group DirectoryHead OfficePO Box 95, Safat 13001, KuwaitTel: +965 242 2011Fax: +965 243 1888Management ExecutiveCommitteeIbrahim S. DabdoubChief Executive OfficerExt: 2000 Fax: 246 2469Isam J.Al-SagerDeputy Chief Executive OfficerExt: 2111 Fax: 246 2469Adel A.Al-MajedGroup General ManagerConsumer BankingExt: 3098 Fax: 246 0160Shaikha K.Al-BaharGroup General ManagerCorporate BankingExt: 2166 Fax: 245 9032George Y. NasraGroup General ManagerInvestment Banking,AssetManagement & TreasuryExt: 3000 Fax: 241 9528Robert M. EidGroup General ManagerInternational Branchesand SubsidiariesTel: +44 20 7317 5500Fax: +44 20 7224 2142Hanafi H. MohammedGroup General ManagerCredit Control, Operations& Legal AffairsExt: 2115 Fax: 246 4162Waleed K.Al-YaqoutGroup General ManagerAdministration &Human ResourcesExt: 3201 Fax: 244 8353Consumer Banking GroupRetail Banking DepartmentExt: 3100 Fax: 246 0160Domestic Branches DivisionExt: 2232 Fax: 246 7929Call Center DivisionExt: 3080 Fax: 241 7641Central Cash DivisionExt: 2153 Fax: 242 9453Internet DivisionExt: 3020 Fax: 241 2373Direct Sales UnitExt: 3147 Fax: 246 7929Consumer Credit &Marketing DepartmentExt: 2188 Fax: 241 2373Cards Services DivisionExt: 2517 Fax: 244 3979Consumer Lending DivisionExt: 2377 Fax: 242 9453Marketing DivisionExt: 3107 Fax: 241 2373Advertising UnitExt: 3068 Fax: 241 2373Private Banking DivisionExt: 2350Fax: 241 8415 or 241 4653Corporate Banking GroupCorporate BankingDepartmentExt: 2411 Fax: 245 9032Trade Finance DivisionExt: 2161 Fax: 245 8972Foreign Corporate DivisionExt: 2307 Fax: 242 6813Institutional Banking UnitExt: 2257 Fax: 243 0104Marketing & BusinessDevelopment UnitExt: 2316 Fax: 245 9032Investment Banking, AssetManagement & Treasury GroupTreasury DivisionExt: 3082 Fax: 246 7627Asset Management &Brokerage DivisionExt: 3205 Fax: 246 7092Investment Banking DivisionExt: 2619 Fax: 246 7092Regional InstitutionalBanking UnitExt: 3013 Fax: 246 4156International Legal Affairs UnitExt: 2065 Fax: 243 6208International Branches andSubsidiaries GroupPlease refer to InternationalNetwork for a complete listingCredit Control, Operations& Legal Affairs GroupOperations DepartmentExt: 3104 Fax: 242 7809Domestic CreditControl DivisionExt: 2462 Fax: 246 4162Legal Affairs DivisonExt: 3091 Fax: 244 5098Bad Loans Collection DivisionExt: 2100 Fax: 241 7625Risk Management UnitExt: 3011 Fax: 246 7926Administration & HumanResources GroupAdministration DivisionExt: 2162 Fax: 246 6864Human Resources DivisionExt: 2552 Fax: 244 3250Information TechnologyDepartmentExt: 2400 Fax: 245 9233Economic Research UnitExt: 3042 Fax: 246 5098Internal Audit & QualityAssurance DivisionTel: 572 4182 Fax: 571 1785Financial Control DivisionExt: 2482 Fax: 242 2730Public & GovernmentRelations UnitExt: 3166 Fax: 246 519052

Local BranchesHead OfficeTel: 242 2011Fax: 241 6922FarwaniyaTel: 472 4704 or 472 4705Fax: 474 0013OthmanTel: 265 4121 or 265 4124Fax: 265 6425SabhanTel: 473 0834 or 471 3957Fax: 474 0074AhmadiTel: 398 1188 or 398 1189Fax: 398 5643FintasTel: 390 0858 or 390 3992Fax: 390 3552QadisiyaTel: 251 5357 or 251 3423Fax: 254 6738SalmiyaTel: 571 1850 or 571 0385Fax: 574 3681Ahmed Al-JaberTel: 243 8379 or 243 8375Fax: 241 9442GhazaliTel: 483 4748 or 483 4728Fax: 483 4752QurainTel: 544 0770 or 544 0771Fax: 544 0772ShamiahTel: 481 8610 or 483 4981Fax: 484 6254ArdiahTel: 488 3925 or 488 3926Fax: 488 3927HamraTel: 244 0801 or 246 4826Fax: 244 7315QurtubaTel: 534 4770 or 534 0218Fax: 534 4780ShuwaikhTel: 481 3266 or 481 8350Fax: 484 4126BayanTel: 538 9380 or 538 9381Fax: 538 9382HawalliTel: 265 3303 or 261 2074Fax: 261 1366Ras-Al SalmiyaTel: 572 1359 or 572 8434Fax: 572 9216Souk SharqTel: 242 1608 or 242 3095Fax: 242 3473Dahyat Abdullah Al-SalemTel: 256 1852 or 256 1853Fax: 256 1854Ibraq KheitanTel: 471 1595 or 471 1587Fax: 472 4084RawdhaTel: 251 4166 or 254 6721Fax: 252 2358Sour StreetTel: 243 7223 or 243 8412Fax: 243 0776DaiyahTel: 251 5743 or 254 9483Fax: 256 3820JabriyaTel: 531 6945 or 531 6946Fax: 531 7742RiqqaTel: 394 4137 or 394 2812Fax: 394 4147Transport CentreTel: 242 2683 or 243 6495Fax: 246 9923DasmaTel: 253 1697 or 251 3461Fax: 252 6485JahraTel: 455 3122 or 455 3123Fax: 455 3121RumaithiyaTel: 564 0965 or 564 0951Fax: 564 0980WatyaTel: 246 9895 or 246 9896Fax: 244 0731DohaTel: 487 4695 or 487 6475Fax: 487 4696JIeeb Al-ShuyoukhTel: 431 8761 or 431 0006Fax: 431 7449Sabah Al-NasserTel: 480 7177 or 480 7277Fax: 480 7577YarmoukTel: 532 2949 or 532 2646Fax: 532 2635Fahad Al-SalemTel: 243 3835 or 243 3834Fax: 241 7642KaifanTel: 481 5088 or 483 5626Fax: 483 9016SabahiyaTel: 361 1397 or 361 7015Fax: 361 7013FahaheelTel: 391 1447 or 391 1557Fax: 392 4447Ministries ComplexTel: 245 2701 or 245 2647Fax: 245 2721FaihaTel: 254 2224 or 254 8043Fax: 254 6741MishrefTel: 538 9830 or 538 9831Fax: 538 9832NuzhaTel: 251 2901 or 254 5118Fax: 255 0858

International NetworkUnited KingdomSwitzerlandLebanonSingaporeNational Bank of Kuwait(International) PlcHead Office:13 George StreetLondon W1U 3QJTel: +44 20 7224 2277Fax: +44 20 7224 2101National Bank of Kuwait(International) PlcPortman Square Branch:7 Portman SquareLondon W1H 6NATel: +44 20 7224 2277Fax: +44 20 7486 3877NBK InvestmentManagement Limited13 George StreetLondon W1U 3QJTel: +44 20 7224 2288Fax: +44 20 7224 2102FranceNational Bank of Kuwait(International) PlcParis Branch:90 Avenue des Champs-Elysees75008 ParisTel: +33 1 5659 8600Fax: +33 1 5659 8623National Bank of Kuwait(Suisse) SA21 Quai du Mont BlancPO Box 1923CH1211 Geneva 1Tel: +41 22 906 4343Fax: +41 22 906 4399United States of AmericaNational Bank of Kuwait SAKNew York Branch299 Park AvenueNew York, NY 10171Tel: +1 212 303 9800Fax: +1 212 319 8269BahrainNational Bank of Kuwait SAKBahrain BranchSeef Tower,Al Seef DistrictPO Box 5290, ManamaTel: +973 1 758 3333Fax: +973 1 758 7111National Bank of Kuwait(Lebanon) SALSanayeh Head Office:BAC Building, Justinien Street,PO Box 11-5727, Riad El-Solh1107 2200 BeirutTel: +961 1 741 111 or 742 222Fax: +961 1 747 846 or 747 866Achrafieh Branch:Tel: +961 1 201 746Fax: +961 1 201 763Chiah Branch:Tel: +961 1 270 176Fax: +961 1 270 177Dora Branch:Tel: +961 1 899 530Fax: +961 1 898 903Hamra Branch:Tel: +961 1 353 416Fax: +961 1 349 825Mazraa Branch:Tel: +961 1 701 025Fax: +961 1 317 076Jounieh Branch:Tel: +961 9 639 951Fax: +961 9 649 954Bhamdoun Branch:Tel: +961 5 260 100Fax: +961 5 260 102Broumana Branch:Tel: +961 4 860 660Fax: +961 4 860 662National Bank of Kuwait SAKSingapore Branch20 Collyer Quay Hex 20-00Tung CentreSingapore 049319Tel: +65 6222 5348Fax: +65 6224 5438ThailandNational Bank of Kuwait SAKThailand RepresentativeOfficeSuite 3241, 24th FloorSindhorn Building Tower III130-132 Wireless RoadPatumwanBangkok 10330Tel: +66 2 263 3838Fax: +66 2 263 3840VietnamNational Bank of Kuwait SAKVietnam Representative Office69 Vo Van TanDistrict 3, Ho Chi Minh CityTel: +84 8 930 3944Fax: +84 8 930 3945National Investors GroupHoldings LtdC/o National Bank of Kuwait SAKPO Box 95, Safat 13001KuwaitTel: +965 246 4158Fax: +965 241 9528