CONSOLIDATED FINANCIAL STATEMENTS - … report/5.Bilan financier consolidé-09.pdf · An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness

CONSOLIDATEDFINANCIAL

STATEMENTS

inside report 09-part1 12/21/10 8:01 PM Page 27

28

SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN S.A.LCONSOLIDATED FINANCIAL STATEMENTS 31 DECEMBER, 2009

CONSOLIDATEDFINANCIALSTATEMENTS


SOCIÉTÉ GÉNÉRALE DE BANQUE AU LIBAN | ANNUAL REPORT 2009 29

INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF SOCIETE GENERALE DE BANQUE AU LIBAN SAL

We have audited the accompanying consolidated financial statements of Société Générale de Banque au Liban SAL (theBank) and its subsidiaries (the Group), which comprise the consolidated statement of financial position as at 31 December2009 and the consolidated income statement, consolidated statement of comprehensive income, consolidated statementof changes in equity and consolidated statement of cash flows for the year then ended, and a summary of significantaccounting policies and other explanatory notes.

Management’s Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these financial statements in accordance withInternational Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from 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 financial statements based on our audit. We conducted our audit inaccordance with International Standards on Auditing. Those standards require that we comply with ethical requirementsand plan and perform the audit to obtain reasonable assurance whether the financial statements are free from materialmisstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financialstatements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of materi-al misstatement of the 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 financial statements in order todesign audit procedures that are appropriate for 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 used and the reasonableness of accounting estimates made by management, as well as evaluating the overallpresentation of the 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 theGroup as of 31 December 2009 and its financial performance and its cash flows for the year then ended in accordance withInternational Financial Reporting Standards.

12 April 2010

Except as to Note 39d which is as of 21 July 2010 (date of audit procedures related to the shareholders’ resolutiondescribed in Note 39d).Beirut, Lebanon


30


CONSOLIDATED INCOME STATEMENTYear ended 31 December 2009

2009Notes

2008[In LL million]

Interest and similar income 4 323,747 271,449

Interest and similar expense 5 (171,669) (144,561)

NET INTEREST INCOME 152,078 126,888

Fee and commission income 64,895 64,183

Fee and commission expense (21,589) (18,916)

NET FEE AND COMMISSION INCOME 6 43,306 45,267

Net trading income 7 7,113 5,824

Net gain (loss) on financial assets designated at fair value

through profit or loss 2,011 (2,248)

Net gain on financial investments 8 16,212 2,528

Other operating income 9 18,185 14,708

TOTAL OPERATING INCOME 238,905 192,967

Net write-back of credit losses 10 2,694 2,360

Write-back of impairment (impairment losses) on financial investments 951 (1,282)

NET OPERATING INCOME 242,550 194,045

Personnel expenses 11 (65,303) (61,724)

Depreciation of property and equipment 25 (4,847) (4,152)

Amortization of intangible assets 26 (341) (343)

Other operating expenses 12 (46,289) (47,953)

TOTAL OPERATING EXPENSES (116,780) (114,172)

OPERATING PROFIT 125,770 79,873

Share of profit from non-consolidated subsidiaries 24 904 -

Net profit from sale or disposal of other assets 52 51

PROFIT BEFORE TAX 126,726 79,924

Income tax expense 34 (20,413) (14,219)

PROFIT FOR THE YEAR 106,313 65,705

Attributable to:

Equity holders of the parent 100,013 58,127

Non-controlling interests 6,300 7,578

106,313 65,705

The attached notes 1 to 56 form part of these consolidated financial statements. T




STATEMENTS

2009Notes

2008

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Year ended 31 December 2009[In LL million]

PROFIT FOR THE YEAR 106,313 65,705

Other comprehensive income

Net gain on available-for-sale financial assets 28,770 9,446

Net movement in foreign currency reserve 38 (250)

Income tax relating to components of other comprehensive income (5,489) (1,060)

Other comprehensive income for the year, net of tax 23,319 8,136

TOTAL COMPREHENSIVE INCOME FOR THE YEAR, NET OF TAX 129,632 73,841

Attributable to:

Equity holders of the parent 122,925 66,499

Non-controlling interests 6,707 7,342

129,632 73,841

The attached notes 1 to 56 form part of these consolidated financial statements.


32


CONSOLIDATED STATEMENT OF FINANCIAL POSITIONAt 31 December 2009

The attached notes 1 to 56 form part of these consolidated financial statements. T

[In LL million]

ASSETSCash and balances with the Central Banks 13 879,086 640,776Deposits with banks and financial institutions 14 203,718 180,363Amounts due from Head Office, branches and affiliates 15 806,604 458,971Derivative financial instruments 16 6,937 300Financial assets held-for-trading 33 927Financial assets designated at fair value through profit or loss 17 6,967 4,401Loans and advances to customers, net 18 2,029,016 1,401,753Loans and advances to related parties, net 19 63,211 55,941Debtors by acceptances 20 65,929 74,642Financial investments – available-for-sale 21 1,029,885 390,347Financial assets classified as loans and receivables 22 1,279,410 1,178,352Financial investments – held-to-maturity 23 500,372 383,824Investments in non-consolidated subsidiaries 24 2,510 1,606Property and equipment 25 62,231 53,200Intangible assets 26 2,561 2,106Non-current assets held for sale 27 122,328 143,567Deferred tax assets 34 5,046 2,208Other assets 28 52,607 72,960Goodwill 29 15,854 2,706Total assets 7,134,305 5,048,950

LIABILITIES AND EQUITYLIABILITIESDue to Central Banks 30 305,110 305,101Due to banks and financial institutions 31 167,658 127,684Amounts due to Head Office, branches and affiliates 32 316,386 322Derivative financial instruments 16 299 783Customers' deposits 33 5,515,275 3,903,315Related parties’ deposits 7,808 11,568Engagements by acceptances 20 65,929 74,642Current tax liabilities 34 12,310 9,779Deferred tax liabilities 34 5,489 1,060Other liabilities 35 127,940 118,726Provision for risks and charges 36 11,883 12,443Employees’ end of service benefits 37 15,394 12,744Total liabilities 6,551,481 4,578,167

EQUITYShare capital – common shares 38a 10,620 10,620Share capital – preferred shares 38b 1,912 1,912Share premium – preferred shares 38b 133,121 133,121Cash contribution by shareholders 38c 106,746 106,746Reserves related to share capital 39 92,038 75,016Revaluation reserve of property 41 3,934 3,934Available-for-sale reserve 42 30,258 7,232Foreign currency reserve (49) (28)Reserve for non-current assets held for sale 40 10,628 5,261Profit for the year 100,013 58,127Retained earnings 17,245 10,624

506,466 412,565Non-controlling interests 76,358 58,218Total equity 582,824 470,783Total liabilities and equity 7,134,305 5,048,950

The consolidated financial statements were authorized for issue on behalf of the Board of Directors on 13 February 2010 by:

Antoun Sehnaoui Georges SaghbiniChairman Deputy General Manager

2009Notes

2008




STATEMENTS

CONSOLIDATED STATEMENT OF FINANCIAL POSITIONAt 31 December 2009

The attached notes 1 to 56 form part of these consolidated financial statements.

[In LL million]

Off-balance sheet

Financing commitments

- Commitments issued to customers 49 29,018 872

- Commitments issued to financial institutions 49 105,208 119,272

- Undrawn commitments to lend 49 367,683 342,616

Guarantees commitments

- Guarantees issued to financial institutions 49 39,138 21,566

- Guarantees issued to customers 49 178,923 135,426

- Guarantees received from financial institutions 160,418 14,777

Foreign currency operations

- Foreign currencies to receive 16 144,645 36,906

- Foreign currencies to deliver 138,007 37,389

Commitments on term financial instruments 16 9,849 17,254

Fiduciary deposits 47 203,854 156,066

Financial assets under management – non discretionary 48 791,924 870,318

Impaired loans fully provided for transferred to off-balance sheet 46 180,975 125,540

2009Notes

2008


34The attached notes 1 to 56 form part of these consolidated financial statements.


CONSOLIDATED STATEMENT OF CHANGES IN EQUITYYear ended 31 December 2009

Sharecapital – common

shares

Attributable to equity holders of the parent

Sharecapital –

preferredshares

Sharepremium –preferred

shares

Cashcontribution

byshare-

holders

[In LL million]

Balance at 1 January 2008 10,620 - - 106,746 67,944 3,934 (1,265) 97 - 16,486 6,471 211,033 36,021 247,054Profit for the year 2008 - - - - - - - - - 58,127 - 58,127 7,578 65,705Other comprehensive income - - - - - - 8,497 (125) - - - 8,372 (236) 8,136

Total comprehensive income - - - - - - 8,497 (125) - 58,127 - 66,499 7,342 73,841Transfer to retained earnings - - - - - - - - - (16,486) 16,486 - - -Transfer to reserve for non-current assets held for sale - - - - - - - - 5,513 - (5,513) - - -Release of reserve upon sale of non-current assets held for sale (note 40) - - - - - - - - (252) - 252 - - -Transfer to reserves related to share capital (note 39) - - - - 7,072 - - - - - (7,072) - - -Issuance of preferred shares (note 38) - 1,912 133,121 - - - - - - - - 135,033 - 135,033Net increase in non-controlling interests’ share due to increase inshare capital of SGBJ (note 3) - - - - - - - - - - - - 17,637 17,637Acquisition of non-controlling interests in Sogecap SAL (note 3) - - - - - - - - - - - - (2,782) (2,782)

Balance at 31 December 2008 10,620 1,912 133,121 106,746 75,016 3,934 7,232 (28) 5,261 58,127 10,624 412,565 58,218 470,783Profit for the year 2009 - - - - - - - - - 100,013 - 100,013 6,300 106,313Other comprehensive income - - - - - - 22,892 20 - - - 22,912 407 23,319

Total comprehensive income - - - - - - 22,892 20 - 100,013 - 122,925 6,707 129,632Transfer to retained earnings - - - - - - - - - (58,127) 58,127 - - -Transfer to reserve for non-current assets held for sale - - - - - - - - 6,830 - (6,830) - - -Release of reserve upon sale of non-current assets held for sale (note 40) - - - - - - - - (1,463) - 1,463 - - -Transfer to reserves related to share capital (note 39) - - - - 17,823 - - - - - (17,823) - - -Acquisition of non-controlling interests in SGBJ (note 3) - - - - - - - - - - - - (3,901) (3,901)Acquisition of non-controlling interests inSociété Générale Bank – Cyprus Ltd (note 3) - - - - - - - - - - - - 15,327 15,327Dividends paid to equity holders of the parent (note 43) - - - - - - - - - - (28,334) (28,334) - (28,334)Dividends paid to non-controlling interests - - - - - - - - - - - - (2) (2)Others - - - - (801) - 134 (41) - - 18 (690) 9 (681)Balance at 31 December 2009 10,620 1,912 133,121 106,746 92,038 3,934 30,258 (49) 10,628 100,013 17,245 506,466 76,358 582,824




STATEMENTS

CONSOLIDATED STATEMENT OF CHANGES IN EQUITYYear ended 31 December 2009

y holders of the parent

Reservesrelated to

sharecapital

Revaluationreserve ofproperty

Available-for-sale

reserve

Foreigncurrency reserve

Reservefor

non-currentassets

held forsale

Profitfor the

year

Retainedearnings

Total

Non-controlling

interests

Totalequity

6 67,944 3,934 (1,265) 97 - 16,486 6,471 211,033 36,021 247,054- - - - - - 58,127 - 58,127 7,578 65,705- - - 8,497 (125) - - - 8,372 (236) 8,136

- - - 8,497 (125) - 58,127 - 66,499 7,342 73,841- - - - - - (16,486) 16,486 - - -- - - - - 5,513 - (5,513) - - -

- - - - - (252) - 252 - - -- 7,072 - - - - - (7,072) - - -- - - - - - - - 135,033 - 135,033

- - - - - - - - - 17,637 17,637- - - - - - - - - (2,782) (2,782)

6 75,016 3,934 7,232 (28) 5,261 58,127 10,624 412,565 58,218 470,783- - - - - - 100,013 - 100,013 6,300 106,313- - - 22,892 20 - - - 22,912 407 23,319

- - - 22,892 20 - 100,013 - 122,925 6,707 129,632- - - - - - (58,127) 58,127 - - -- - - - - 6,830 - (6,830) - - -

- - - - - (1,463) - 1,463 - - -- 17,823 - - - - - (17,823) - - -- - - - - - - - - (3,901) (3,901)

- - - - - - - - - 15,327 15,327- - - - - - - (28,334) (28,334) - (28,334)- - - - - - - - - (2) (2)- (801) - 134 (41) - - 18 (690) 9 (681)

6 92,038 3,934 30,258 (49) 10,628 100,013 17,245 506,466 76,358 582,824


36The attached notes 1 to 56 form part of these consolidated financial statements.


CONSOLIDATED STATEMENT OF CASH FLOWS Year ended 31 December 2009

[In LL million]

OPERATING ACTIVITIESProfit before income tax 126,726 79,924Adjustments for:

Depreciation and amortization 25 & 26 5,188 4,495(Write-back of ) impairment on financial investments – available-for-sale 21 (951) 963Share of profit from non-consolidated subsidiaries 24 (904) -Amortization of the deferred costs resulting from the acquisition of Inaash Bank SAL 28 24,435 27,430Provision for impaired loans – customers 18 14,571 11,696Provision for impaired loans – related parties 10 661 -Loans written off 10 154 1,480Net provision for other impaired debit balances 10 383 3,313Recoveries of credit losses 10 (18,463) (18,849)Provision for employees’ end of service benefits 37 1,394 4,527Gain on sale of property and equipment (52) (40)Gain on sales of non-current assets held for sale 27 (8,920) (2,937)Write-back of provisions on non-current assets held for sale (989) (303)Write-off of intangible assets 318 379Net provision for risks and charges (2,191) 2,687Unrealized (gain) loss on financial assets carried at fair valuethrough profit or loss (2,011) 2,240Unrealized gain on derivative financial instruments (7,121) 69

132,228 117,074Working capital changes:

Cash and balances with the Central Banks (134,611) (1,022)Deposits with banks and financial institutions (1,408) 126Amounts due from Head Office, branches and affiliates 17,712 85,252Due to Central Banks 9 8,840Due to banks and financial institutions (3,421) 16,577Due to Head Office, branches and affiliates (17,293) (1,526)Loans and advances to customers (96,619) (212,546)Loans and advances to related parties (6,974) (28,435)Other assets (3,320) (5,428)Customers’ deposits 1,110,167 529,843Related parties’ deposits (4,790) (2,676)Other liabilities 1,870 1,634

Cash from operations 993,550 507,713Employees’ end of service benefits paid 37 (1,524) (1,541)Taxation paid (17,426) (9,407)Net cash from operating activities 974,600 496,765

INVESTING ACTIVITIESProceeds from sale (purchase) of financial assets held-for-trading 894 (609)Net (purchase) proceeds upon maturity of financial investments – held-to-maturity (161,167) 14,003Net (purchase) proceeds from sales of financial assets carried atfair value through profit or loss (555) 12,079Net purchase of financial assets classified as loans and receivables (101,058) (703,662)Net purchase of financial investments – available-for-sale (610,877) (132,273)Net purchase of property and equipment 25 (11,538) (3,914)Purchase of intangible assets 26 (847) (1,818)Proceeds from sale of property and equipment 84 1,133Acquisition of additional shares in Société Générale de Banque - Jordanie 3 (5,287) (1,544)Proceeds from sales of non-current assets held for sale 37,412 14,467Net cash acquired with the acquisition of Société Générale - Cyprus Ltd 3 237,237 -Acquisition of additional shares in Sogecap Liban 3 - (3,365)Net cash used in investing activities (615,702) (805,503)

FINANCING ACTIVITIESIssuance of preferred shares 38b - 1,912Share premium – preferred shares 38b - 133,121Dividend paid (28,334) -Minority interest share due to increase of subsidiary’s capital - 18,160Net cash (used in) from financing activities (28,334) 153,193Effect of exchange rate changes and other adjustments 266 985

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 330,830 (154,560)Cash and cash equivalents at 1 January 44 640,696 795,256

CASH AND CASH EQUIVALENTS AT 31 DECEMBER 44 971,526 640,696

2009Notes

2008



NOTES TO THECONSOLIDATED

FINANCIALSTATEMENTS

1. ACTIVITIES

Société Générale de Banque au Liban SAL (the Bank) is a shareholding company registered in Beirut, Lebanon. It wasregistered in 1953 under no. 3696 at the Commercial Registry of Beirut and no. 19 on the list of banks published by theBank of Lebanon. The headquarters of the Bank are located at Saloumé Square, Sin El Fil, Lebanon.

The Bank is 19% owned by Société Générale SA (France), which is referred to in these financial statements as the “HeadOffice”.

The Bank, together with its subsidiaries (the Group), Société Générale Bank – Cyprus Ltd, Société Générale de Banque- Jordanie, Sogelease Liban SAL, Sogecap Liban SAL and Fidus SAL are involved in insurance, banking and financialservices activities (commercial, investment and private). The Bank is regulated by the Laws in Lebanon mainly the Codeof Commerce, the Money and Credit Act and the circulars issued by the Bank of Lebanon and the Banking ControlCommission.

The Bank provides a full range of banking activities through its headquarters and its branches in Lebanon.

2. ACCOUNTING POLICIES

2.1 Basis of preparationThe consolidated financial statements are prepared under the historical cost convention as modified for therestatement of certain tangible real estate properties in Lebanon according to the provisions of law No 282 dated 30December 1993, and for the measurement at fair value of derivatives and financial assets held-for-trading andavailable-for-sale financial instruments and fair value through profit or loss investments (related to unit-linkedcontracts) investments.

The consolidated financial statements are presented in million of Lebanese Lira (LL million), which is the functionalcurrency of the Bank, and all values are rounded to the nearest million (LL million) except when otherwise indicated.All other currencies are denominated in units.

Statement of complianceThe consolidated financial statements have been prepared in accordance with International Financial ReportingStandards (IFRS) as issued by the International Accounting Standards Board (IASB), and the regulations of the Bank ofLebanon and the Banking Control Commission.

The Group presents its consolidated statement of financial position broadly in order of liquidity. An analysis regardingrecovery or settlement within 12 months after the consolidated statement of financial position date (current) and morethan 12 months after the consolidated statement of financial position date (non-current) is presented in note 51.

Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement offinancial position only when there is a legally enforceable right to offset the recognized amounts and there is anintention to settle on a net basis, or to realise the assets and settle the liability simultaneously. Income and expense willnot be offset in the income statement unless required or permitted by any accounting standard or interpretation, asspecifically disclosed in the accounting policies of the Bank.

Basis of consolidationThe consolidated financial statements comprise the financial statements of Société Générale de Banque au Liban SALand its controlled subsidiaries drawn up to 31 December each year. The financial statements of the subsidiaries areprepared for the same reporting year as the Bank, using consistent accounting policies.

All intra-group balances, transactions, income and expenses are eliminated in full.

Subsidiaries are fully consolidated from the date on which control is transferred to the Bank. Control is achieved wherethe Bank has the power to govern the financial and operating policies of an entity so as to obtain benefits from itsactivities. The results of subsidiaries acquired or disposed of during the year are included in the consolidated incomestatement from the date of acquisition or up to the date of disposal.


38

NOTES TO THECONSOLIDATEDFINANCIALSTATEMENTS

Société Générale Bank - Cyprus Ltd Cyprus Banking 57.70%

Société Générale de Banque - Jordanie Jordan Banking 54.33% 50.62%

Fidus SAL* Lebanon Brokerage services 49.00% 49.00%

Sogelease Liban SAL Lebanon Leasing 99.75% 99.75%

Sogecap Liban SAL Lebanon Insurance 75.00% 75.00%

Percentage of share capitalowned by the Bank

Name Country of Activities 2009 2008incorporation

Non-controlling interests represent the portion of profit or loss and net assets not owned, directly or indirectly, by theBank and are presented separately in the consolidated income statement, consolidated statement of comprehensiveincome and within equity in the consolidated statement of financial position, separately from parent shareholders’equity. Acquisitions of non-controlling interests are accounted for using the parent entity extension method, whereby,the difference between the consideration and the fair value of the share of the net assets acquired is recognized asgoodwill.

The consolidated financial statements represent the financial statements of the Bank and the following subsidiaries:

* Effective 1 January 2004, the Group obtained control, by virtue of agreement with other investors, over Fidus SAL, andconsequently, the financial statements of Fidus SAL have been consolidated with those of the Group.

2.2 Significant accounting judgements and estimates

In the process of applying the Group's accounting policies, management has exercised judgment and estimates indetermining the amounts recognized in the consolidated financial statements. The most significant uses of judgmentand estimates are as follows:

Going concernThe Group’s management has made an assessment of the Group’s ability to continue as a going concern and is satisfiedthat the Group has the resources to continue in business for the foreseeable future. Furthermore, the management isnot aware of any material uncertainties that may cast significant doubt upon the Group’s ability to continue as a goingconcern. Therefore, the consolidated financial statements continue to be prepared on the going concern basis.

Fair value of financial instrumentsWhere the fair values of financial assets and financial liabilities recorded on the consolidated statement of financialposition cannot be derived from active markets, they are determined using a variety of valuation techniques thatinclude the use of mathematical models. The inputs to these models are derived from observable market data wherepossible, but where observable market data are not available, judgment is required to establish fair values. Thejudgments include considerations of liquidity and model inputs such as volatility for longer dated derivatives anddiscount rates, prepayment rates and default rate assumptions for asset backed securities. The valuation of financialinstruments is described in more detail in note 50.

Impairment losses on loans and advancesThe Group reviews its individually significant loans and advances at each consolidated statement of financial positiondate to assess whether an impairment loss should be recorded in the consolidated income statement. In particular,judgment by management is required in the estimation of the amount and timing of future cash flows whendetermining the impairment loss. In estimating these cash flows, the Group makes judgments about the borrower’sfinancial situation and the net realisable value of collateral. These estimates are based on assumptions about anumber of factors and actual results may differ, resulting in future changes to the allowance.




FINANCIALSTATEMENTS

Loans and advances that have been assessed individually and found not to be impaired and all individuallyinsignificant loans and advances are then assessed collectively, in groups of assets with similar risk characteristics,to determine whether provision should be made due to incurred loss events for which there is objective evidencebut whose effects are not yet evident. The collective assessment takes account of data from the loan portfolio (suchas credit quality, levels of arrears, credit utilisation, loan to collateral ratios etc.), concentrations of risks andeconomic data (including levels of unemployment, real estate prices indices, country risk and the performance ofdifferent individual groups).

The impairment loss on loans and advances is disclosed in more detail in note 10 and note 18.

Impairment of available-for-sale investmentsThe Group reviews its debt securities classified as available-for-sale investments at each consolidated statement offinancial position date to assess whether they are impaired. This requires similar judgment as applied to theindividual assessment of loans and advances.

The Group also records impairment charges on available-for-sale equity investments when there has been asignificant or prolonged decline in the fair value below their cost. The determination of what is “significant” or“prolonged” requires judgment. In making this judgment, the Group evaluates, among other factors, historical

share price movements and the duration and extent to which the fair value of an investment is less than its cost.

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

2.3 Changes in accounting policies

The accounting policies adopted are consistent with those used in the previous financial year except that the Grouphas adopted the following standards, amendments and interpretations which did not have any effect on thefinancial performance or position of the Group. They did, however, give rise to additional disclosures.

IAS 1 Presentation of financial statementsThis standard requires an entity to present all owner changes in equity and all non-owner changes to be presentedin either one consolidated statement of comprehensive income or in two separate statements of income andcomprehensive income. The revised standard also requires that the income tax effect of each component ofcomprehensive income be disclosed. In addition, it requires entities to present a comparative consolidatedstatement of financial position as at the beginning of the earliest comparative period when the entity has appliedan accounting policy retrospectively, has made a retrospective restatement, or has reclassified items in theconsolidated financial statements.

The Group has elected to present comprehensive income in two separate statements of income and comprehensiveincome. The Group has not provided a restated comparative set of financial position for the earliest comparativeperiod, as it has not adopted any new accounting policies retrospectively, or has made a retrospective restatement,or retrospectively reclassified items in the consolidated financial statements.

Amendments to IFRS 7 Financial Instruments: Disclosures - Improving Disclosures about Financial Instruments The amendments to IFRS 7 were issued in March 2009 to enhance fair value and liquidity disclosures. With respectto fair value, the amendments require disclosure of a three-level fair value hierarchy, by class, for all financialinstruments recognized at fair value and specific disclosures related to the transfers between levels in the hierarchyand detailed disclosures related to level 3 of the fair value hierarchy. In addition, the amendments modify therequired liquidity disclosures with respect to derivative transactions and assets used for liquidity management.

Comparative information has been restated although this is not strictly required by the transition provisions of theamendment.


40


In addition, the following standards and interpretations are effective for the financial year 2009. The adoption of thesestandards and interpretations did not have any effect on the financial performance or position of the Group:

- IAS 23 Borrowing costs (Revised)- Amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements, – Puttable

Financial Instruments and Obligations Arising on Liquidation- Amendment to IFRS 2 Share-based Payment – Vesting Conditions and Cancellations- Amendments to IFRIC 9 Reassessment of Embedded Derivatives and IAS 39 Financial Instruments: Recognition and

Measurement – Embedded Derivatives- IFRIC 13 Customer Loyalty Programmes- IFRIC 15 Agreements for the Construction of Real Estate- IFRIC 16 Hedges of a Net Investment in a Foreign Operation- Improvements to International Financial Reporting Standards (issued 2008)- Improvements to International Financial Reporting Standards (issued 2009)

Future changes in accounting policiesBelow is the list of standards issued but not yet effective for the year ended 31 December 2009:

- IFRS 2 Share – based Payment: Group Cash-settled Share - based Payment Transactions- IFRS 3 Business Combinations (Revised) and IAS 27 Consolidated and Separate Financial Statements (Amended)- Amendment to IAS 39 Financial Instruments: Recognition and Measurement – Eligible Hedged items- IFRIC 17 Distributions on Non-cash Assets to Owners- IFRIC 18 Transfers of Assets from Customers- IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments

Management does not expect the above standards to have a significant impact on the Group’s financial statementswhen implemented in future years.

Improvements to IFRSsIn May 2008 and April 2009 the IASB issued an omnibus of amendments to its standards, primarily with a view toremoving inconsistencies and clarifying wording. There are separate transitional provisions for each standard. Theamendments to the following standards below did not have any impact on the accounting policies, financial positionor performance of the Group:

IFRS 5: Non-current Assets Held for Sale and Discontinued OperationsIAS 7: Statement of Cash Flows IAS 8: Accounting Policies, Change in Accounting Estimates and ErrorIAS 10: Events after the Reporting PeriodIAS 16: Property, Plant and EquipmentIAS 18: RevenueIAS 19: Employee BenefitsIAS 20: Accounting for Government Grants and Disclosures of Government AssistanceIAS 28: Investment in AssociatesIAS 31: Interest in Joint venturesIAS 34: Interim Financial ReportingIAS 36: Impairment of AssetsIAS 38: Intangible AssetsIAS 39: Financial Instruments: Recognition and MeasurementIAS 40: Investment Properties

2.4 Summary of significant accounting policies

(1) Foreign currency translationThe consolidated financial statements are presented in Lebanese Lira. Each entity in the Group determines its own

fuctional currency and items included in the financial statements of each entity are measured using that functionalcurrency.




FINANCIALSTATEMENTS

(i) Transactions and balancesTransactions in foreign currencies are initially recorded at the functional currency at the rate of exchange ruling atthe date of the transaction.

Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate ofexchange at the consolidated statement of financial position date. All differences arising on non-trading activitiesare taken to the consolidated income statement, with the exception of differences on foreign currency borrowingsthat provide effective hedge against a net investment in a foreign entity. These differences are taken directly toequity until the disposal of the net investment, at which time they are recognized in the consolidated incomestatement. Tax charges and credits attributable to exchange differences on those borrowings are also recorded in equity.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using theexchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreigncurrency are translated using the exchange rates at the date when the fair value was determined. Any goodwill arisingon the acquisition of a foreign operation and any fair adjustments to the carrying amounts of assets and liabilitiesarising on the acquisition are treated as assets and liabilities of the foreign operations and translated at closing rate.

(ii) Group companiesAt the reporting date, the assets and liabilities of subsidiaries are translated into the Bank’s presentation currency atthe rate of exchange as at statement of financial position date, and their income statements are translated at theweighted average exchange rates for the year. Exchange differences arising on translation are taken directly to aseparate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognized inequity relating to that particular foreign operation is recognized in the consolidated income statement in “Otheroperating expenses” or “Other operating income”.

(2) Financial Instruments - initial recognition and subsequent measurement(i) Date of recognitionAll financial assets and liabilities are initially recognized on the trade date, i.e., the date that the Group becomes aparty to the contractual provisions of the instrument. This includes “regular way trades”: purchases or sales offinancial assets that require delivery of assets within the time frame generally established by regulation orconvention in the market place.

(ii) Initial measurement of financial instrumentsThe classification of financial instruments at initial recognition depends on the purpose and the management’sintention for which the financial instruments were acquired and their characteristics. All financial instruments aremeasured initially at their fair value plus transaction costs, except in the case of financial assets and financialliabilities recorded at fair value through profit or loss.

(iii) Derivatives recorded at fair value through profit or lossThe Group uses derivatives such as interest rate swaps and forward foreign exchange contracts. Derivatives arerecorded at fair value and carried as assets when their fair value is positive and as liabilities when their fair value isnegative. Changes in the fair value of derivatives are included in “Net trading income”.

Derivatives embedded in other financial instruments, such as the conversion option in an acquired convertiblebond, are treated as separate derivatives and recorded at fair value if their economic characteristics and risks are notclosely related to those of the host contract, and the host contract is not itself held-for-trading or designated at fairvalue through profit or loss. The embedded derivatives separated from the host are carried at fair value in thetrading portfolio with changes in fair value recognized in the consolidated income statement.

(iv) Financial assets or financial liabilities held-for-tradingFinancial assets or financial liabilities held-for-trading are recorded in the consolidated statement of financialposition at fair value. Changes in fair value are recognized in “Net trading income”. Interest and dividend income orexpense is recorded in “Net trading income” according to the terms of the contract, or when the right to thepayment has been established.

Included in this classification are debt securities and equities which have been acquired principally for the purposeof selling or repurchasing in the near term.



(v) ‘Day 1’ profit or loss When the transaction price is different to the fair value from other observable current market transactions in the sameinstrument or based on a valuation technique whose variables include only data from observable markets, the Bankimmediately recognizes the difference between the transaction price and fair value (a ‘Day 1’ profit or loss) in “Nettrading income”. In cases where fair value is determined using data which is not observable, the difference between thetransaction price and model value is only recognized in the consolidated income statement when the inputs becomeobservable, or when the instrument is derecognized.

(vi) Held-to-maturity financial investmentsHeld-to-maturity financial instruments are non-derivative financial assets with fixed or determinable payments and

have fixed maturities and which the Group has the intention and ability to hold to maturity. After initial measurement,held-to-maturity financial investments are subsequently measured at amortized cost using the effective interestmethod, less allowance for impairment. Amortized 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 amortization is included in “Interestand similar income” in the consolidated income statement. The losses arising from impairment of such investments arerecognized in the consolidated income statement under “impairment losses on financial investments”.

If the Group were to sell or reclassify more than an insignificant amount of held-to-maturity investments beforematurity (other than in certain specific circumstances), the entire category would be tainted and would have to bereclassified as available-for-sale. Furthermore, the Group would be prohibited from classifying any financial asset asheld to maturity during the following two years.

(vii) Financial assets designated at fair value through profit or lossFinancial assets classified in this category are those that have been designated by management on initial recognition.Management may only designate an instrument at fair value through profit or loss upon initial recognition when thefollowing criteria are met, and designation is determined on an instrument by instrument basis:

• The designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise frommeasuring the assets or liabilities or recognizing gains or losses on them on a different basis; or

• The assets are part of a group of financial assets which are managed and their performance evaluated on a fair valuebasis, in accordance with a documented risk management or investment strategy; or

• The financial instrument contains one or more embedded derivatives which significantly modify the cash flows thatwould be otherwise required by the contract.

Financial assets at fair value through profit or loss are recorded in the consolidated statement of financial position atfair value. Changes in fair value are recorded in “Net gain or loss on financial assets designated at fair value throughprofit or loss”. Interest earned is accrued in “Interest income” using the effective interest rate, while dividend income isrecorded in “Other operating income” when the right to the payment has been established.

Included in this classification are listed equities and bonds held to cover unit-linked liabilities.

(viii) Available-for-sale financial investmentsAvailable-for-sale investments include equity and debt securities. Equity investments classified as available-for-sale arethose which are neither classified as held-for-trading nor designated at fair value through profit or loss. Debt securitiesin this category are those which are intended to be held for an indefinite period of time and which may be sold inresponse to needs for liquidity or in response to changes in the market conditions.

After initial measurement, available-for-sale financial investments are subsequently measured at fair value. Unrealizedgains and losses are recognized directly in equity in the “available-for-sale reserve”. When the investment is disposed ofthe cumulative gain or loss previously recognized in equity is recognized in the income statement. Interest earnedwhilst holding available-for-sale financial investments is reported as interest income using the effective interest ratemethod. Dividends earned whilst holding available-for-sale financial investments are recognized in the consolidatedincome statement as “Net gain on financial investments” when the right of the payment has been established. Thelosses arising from impairment of such investments are recognized in the consolidated income statement as“Impairment losses on financial investments” and removed from the “available-for-sale reserve”.

42



FINANCIALSTATEMENTS

(ix) Financial assets classified as loans and receivablesLoans and receivables, include non-derivative financial assets with fixed or determinable payments that are notquoted in an active market. These financial assets are initially recognized at cost, being the fair value of theconsideration paid for the acquisition of the investment. All transaction costs directly attributed to the acquisitionare also included in the cost of investment.

After initial measurement, loans and receivables are measured at amortized cost using the effective interest ratemethod, less allowance for impairment. Amortized cost is calculated by taking into account any discount orpremium on acquisition and fees and costs that are an integral part of the effective interest rate. The amortisation isincluded in “Interest and similar income“ in the consolidated income statement. The losses arising from impairmentare recognized in the consolidated income statement in “Impairment losses on financial instruments”. Gains orlosses are recognized in the consolidated income statement when the investments are derecognized or impaired.The losses arising from impairment are recognized in the consolidated income statement in “Credit loss expenses”.

(x) Due from banks and loans and advances to customers“Due from banks“ and “Loans and advances to customers”, include non-derivative financial assets with fixed ordeterminable payments that are not quoted in an active market, other than:

a. Those that the Group intends to sell immediately or in the near term and those that the Group upon initialrecognition designates as at fair value through profit or loss;

b. Those that the Group, upon initial recognition, designates as available-for-sale; orc. Those for which the Group may not recover substantially all of its initial investment, other than because of

credit deterioration.

After initial measurement, amount “Due from banks” and “Loans and advances to customers” are subsequentlymeasured at amortized cost using the effective interest rate, less allowance for impairment. Amortized cost iscalculated by taking into account any discount or premium on acquisition and fees and costs that are an integralpart of the effective interest rate. The amortization is included in “Interest and similar income” in the consolidatedincome statement. The losses arising from impairment are recognized in the consolidated income statement in“Credit loss expense”.

(xi) Reclassification of financial assetsEffective from 1 July 2008, the Group may reclassify, in certain circumstances, non-derivative financial assets out ofthe “Held-for-trading” category and into the “Available-for-sale”, “Loans and receivables”, or “Held-to maturity”categories. From this date it may also reclassify, in certain circumstances, financial instruments out of the “Available-for-sale“ category and into the “Loans and receivables” category. Reclassifications are recorded at fair value at thedate of reclassification, which becomes the new amortized cost.

The Group may reclassify a non-derivative trading asset out of the “Held-for-trading” category and into the “Loansand receivables” category if it meets the definition of loans and receivables and the Group has the intention andability to hold the financial asset for the foreseeable future or until maturity. If a financial asset is reclassified, and ifthe Group subsequently increases its estimates of future cash receipts as a result of increased recoverability of thosecash receipts, the effect of that increase is recognized as an adjustment to the effective interest rate from the dateof the change in estimate.

For a financial asset reclassified out of the “Available-for-sale” category, any previous gain or loss on that asset thathas been recognized in equity is amortized to profit or loss over the remaining life of the investment using theeffective interest rate. Any difference between the new amortized cost and the expected cash flows is alsoamortized over the remaining life of the asset using the effective interest rate. If the asset is subsequentlydetermined to be impaired then the amount recorded in equity is recycled to the consolidated income statement.

Reclassification is at the election of management, and is determined on an instrument by instrument basis.




(3) Derecognition of financial assets and financial liabilities

Financial assetsA financial asset (or where applicable, a part of a financial asset or part of a group of similar financial assets) isderecognized when:

• The rights to receive cash flows from the asset have expired, or • The Group has transferred its rights to receive cash flows from the asset, or has assumed an obligation to pay the

received cash flow in full without material delay to a third party under a “pass through” arrangement; and • Either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Bank has neither

transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retainedsubstantially all the risks and rewards of the asset nor transferred control of the asset, the asset is derecognized to theextent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guaranteeover the transferred asset is measured at the lower of the original carrying amount of the asset and the maximumamount of consideration that the Group could be required to repay.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of theoriginal carrying amount of the asset and the maximum amount of consideration that the Group could be required torepay.

Financial liabilities A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expired. Wherean existing financial liability is replaced by another from the same lender on substantially different terms, or the termsof an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of theoriginal liability and the recognition of a new liability and the difference in the respective carrying amount isrecognized in the consolidated income statement.

(4) Repurchase and reverse repurchase agreementsSecurities sold under agreements to repurchase at a specified future date are not derecognized from the consolidatedstatement of financial position as the Group retains substantially all the risks and rewards of ownership. Thecorresponding cash received is recognized in the consolidated statement of financial position as an asset with acorresponding obligation to return it, including accrued interest as a liability, reflecting the transaction’s economicsubstance as a loan to the Group. The difference between the sale and repurchase prices is treated as interest expenseand is accrued over the life of the agreement using the effective interest rate.

Conversely, securities purchased under agreements to resell at a specified future date are not recognized in theconsolidated statement of financial position. The consideration paid, including accrued interest, is recorded in theconsolidated statement of financial position, reflecting the transaction’s economic substance as a loan by the Bank. Thedifference between the purchase and resale prices is recorded in “Net interest income“ and is accrued over the life ofthe agreement using the effective interest rate.

If securities purchased under agreement to resell are subsequently sold to third parties, the obligation to return thesecurities is recorded as a short sale within “Financial liabilities held-for-trading“ and measured at fair value with anygains or losses included in “Net trading income”.

(5) Securities lending and borrowingSecurities lending and borrowing transactions are usually collateralised by securities or cash. The transfer of thesecurities to counterparties is only reflected on the consolidated statement of financial position if the risks and rewardsof ownership are also transferred. Cash advanced or received as collateral is recorded as an asset or liability.

Securities borrowed are not recognized on the consolidated statement of financial position, unless they are then soldto third parties, in which case the obligation to return the securities is recorded as a trading liability and measured atfair value with any gains or losses included in “Net trading income”.

44



FINANCIALSTATEMENTS

(6) Determination of fair valueThe fair value for financial instruments traded in active markets at the consolidated statement of financial positiondate is based on their quoted market price or dealer price quotations (bid price for long positions and ask price forshort positions), without any deduction for transaction costs.

For all other financial instruments not traded in an active market, the fair value is determined by using appropriatevaluation techniques. Valuation techniques include the discounted cash flow method, comparison to similarinstruments for which market observable prices exist, option pricing models, credit models and other relevantvaluation models.

Certain financial instruments are recorded at fair value using valuation techniques in which current markettransactions or observable market data are not available. Their fair value is determined using a valuation model thathas been tested against prices or inputs to actual market transactions and using the Bank’s best estimate of the mostappropriate model assumptions. Models are adjusted to reflect the spread for bid and ask prices to reflect costs toclose out positions, counterparty credit and liquidity spread and limitations in the models. Also, profit or losscalculated when such financial instruments are first recorded (‘Day 1’ profit or loss) is deferred and recognized onlywhen the inputs become observable or on derecognition of the instrument.

An analysis of fair values of financial instruments and further details as to how they are measured are provided innote 50.

(7) Impairment of financial assetsThe Group assesses at each consolidated statement of financial position date whether there is any objectiveevidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assetsis deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more eventsthat has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event (or events) hasan impact on the estimated future cash flows of the financial asset or the group of financial assets that can bereliably estimated.

Evidence of impairment may include indications that the borrower or a group of borrowers is experiencingsignificant financial difficulty, the probability that they will enter bankruptcy or other financial reorganisation,default or delinquency in interest or principal payments and where observable data indicates that there is ameasurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions thatcorrelate with defaults.

(i) Financial assets carried at amortized costFor financial assets carried at amortized cost (such as deposits with bank and financial institutions, amounts duefrom head office, branches and affiliates, loans and advances to customers, loans and advances to related parties,held to maturity financial instruments and financial assets classified as loans and receivables), the Group first assessesindividually whether objective evidence of impairment exists individually for financial assets that are individuallysignificant, or collectively for financial assets that are not individually significant. If the Group determines that noobjective evidence of impairment exists for an individually assessed financial asset, it includes the asset in a groupof financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets thatare individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are notincluded in a collective assessment of impairment.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as thedifference between the asset’s carrying amount and the present value of estimated future cash flows (excludingfuture expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced throughthe use of an allowance account and the amount of the loss is recognized in the consolidated income statement.Loans together with the associated allowance are written off when there is no realistic prospect of future recoveryand all collateral has been realised or has been transferred to the Group. If, in a subsequent year, the amount of theestimated impairment loss increases or decreases because of an event occurring after the impairment wasrecognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account.If a future write-off is later recovered, the recovery is credited to the ‘Credit loss expense’.




The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate.If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effectiveinterest rate. If the Group has reclassified trading assets to loans and advances, the discount rate for measuring anyimpairment loss is the new effective interest rate determined at the reclassification date. The calculation of the presentvalue of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result fromforeclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the Group’sinternal credit grading system, that considers credit risk characteristics such as asset type, industry, geographicallocation, collateral type, past-due status and other relevant factors.

Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on thebasis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical lossexperience is adjusted on the basis of current observable data to reflect the effects of current conditions on which thehistorical loss experience is based and to remove the effects of conditions in the historical period that do not existcurrently. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in relatedobservable data from year to year (such as changes in unemployment rates, property prices, commodity prices,payment status, or other factors that are indicative of incurred losses in the group and their magnitude). Themethodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differencesbetween loss estimates and actual loss experience.

(ii) Available-for-sale financial investmentsFor available-for-sale financial investments, the Group assess at each statement of financial position date whetherthere is objective evidence that an investment is impaired.

In the case of debt instruments classified as available-for-sale, the Bank assesses individually whether there is objectiveevidence of impairment based on the same criteria as financial assets carried at amortized cost. However, the amountrecorded for impairment is the cumulative loss measured as the difference between the amortized cost and thecurrent fair value, less any impairment loss on that investment previously recognized in the consolidated incomestatement. Future interest income is based on the reduced carrying amount and is accrued using the rate of interestused to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recordedas part of “Interest and similar income”. If, in a subsequent period, the fair value of a debt instrument increases and theincrease can be objectively related to a credit event occurring after the impairment loss was recognized in theconsolidated income statement, the impairment loss is reversed through the consolidated income statement.

In the case of equity investments classified as available-for-sale, objective evidence would also include a “significant“or “prolonged“ decline in the fair value of the investment below its cost. Where there is evidence of impairment, thecumulative loss measured as the difference between the acquisition cost and the current fair value, less anyimpairment loss on that investment previously recognized in the consolidated income statement – is removed fromequity and recognized in the consolidated income statement. Impairment losses on equity investments are notreversed through the consolidated income statement; increases in the fair value after impairment are recognizeddirectly in equity.

(iii) Renegotiated loansWhere possible, the Group seeks to restructure loans rather than to take possession of collateral. This may involveextending the payment arrangements and the agreement of new loan conditions. Once the terms have beenrenegotiated any impairment is measured using the original effective interest rate as calculated before themodification of terms and the loan is no longer considered past due. Management continuously reviews renegotiatedloans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subjectto an individual or collective impairment assessment, calculated using the loan’s original effective interest rate.

(8) Hedge accountingThe Group makes use of derivative instruments to manage exposures to interest rate and foreign currency risks. Inorder to manage particular risks, the Group applies hedge accounting for transactions which meet the specified criteria.

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, the objective and strategy for undertaking the hedge and themethod that will be used to assess the effectiveness of the hedging relationship.

46



FINANCIALSTATEMENTS

Also at the inception of the hedge relationship, a formal assessment is undertaken to ensure the hedginginstrument is expected to be highly effective in offsetting the designated risk in the hedged item. A hedge isexpected to be highly effective if the changes in fair value or cash flows attributable to the hedged risk during theperiod for which the hedge is designated are expected to offset in a range of 80% to 125%. For situations where thathedged item is a forecast transaction, the Group assesses whether the transaction is highly probable and presentsan exposure to variations in cash flows that could ultimately affect the consolidated income statement.

(i) Fair value hedgesFor designated and qualifying fair value hedges, the change in the fair value of a hedging derivative is recognizedin the consolidated income statement in “Net trading income”. Meanwhile, the change in the fair value of thehedged item attributable to the risk hedged is recorded as part of the carrying value of the hedged item and is alsorecognized in the income statement in “Net trading income”.

If the hedging instrument expires or is sold, terminated or exercised, or where the hedge no longer meets thecriteria for hedge accounting, the hedge relationship is terminated. For hedged items recorded at amortized cost,the difference between the carrying value of the hedged item on termination and the face value is amortized overthe remaining term of the original hedge using the effective interest rate. If the hedged item is derecognized, theunamortized fair value adjustment is recognized immediately in the consolidated income statement.

(ii) Cash flow hedgesFor designated and qualifying cash flow hedges, the effective portion of the gain or loss on the hedging instrumentis initially recognized directly in equity in the “Cash flow hedge reserve”. The ineffective portion of the gain or losson the hedging instrument is recognized immediately in the consolidated income statement.

When the hedged cash flow affects the income statement, the gain or loss on the hedging instrument is recordedin the corresponding income or expense line of the consolidated income statement. When a hedging instrumentexpires, or is sold, terminated, exercised, or when a hedge no longer meets the criteria for hedge accounting, anycumulative gain or loss existing in equity at that time remains in equity and is recognized when the hedged forecasttransaction is ultimately recognized in the consolidated income statement. When a forecast transaction is no longerexpected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to theconsolidated income statement.

(iii) Hedge of a net investmentHedges of net investments in a foreign operation, including a hedge of a monetary item that is accounted for as partof the net investment, are accounted for in a way similar to cash flow hedges. Gains or losses on the hedginginstrument relating to the effective portion of the hedge are recognized directly in equity while any gains or lossesrelating to the ineffective portion are recognized in the consolidated income statement. On disposal of the foreignoperation, the cumulative value of any such gains or losses recognized directly in equity is transferred to theconsolidated income statement.

(9) Offsetting financial instrumentsFinancial assets and financial liabilities are offset and the net amount reported in the statement of financial positionif, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intentionto settle on a net basis, or to realise the asset and settle the liability simultaneously. This is not generally the casewith master netting agreements, therefore, the related assets and liabilities are presented gross in the consolidatedstatement of financial position.

(10) LeasingThe determination of whether an arrangement is a lease, or it contains a lease, is based on the substance of thearrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use ofa specific asset or assets and the arrangement conveys a right to use the asset.

Group as a lesseeLeases which do not transfer to the Group substantially all the risks and benefits incidental to ownership of theleased items are operating leases. Operating lease payments are recognized as an expense in the consolidatedincome statement on a straight line basis over the lease term. Contingent rents payable are recognized as anexpense in the period in which they are incurred.




Group as a lessorLeases where the Group does not transfer substantially all the risk and benefits of ownership of the asset areclassified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the carryingamount of the leased asset and recognized over the lease term on the same basis as rental income. Contingentrents are recognized as revenue in the period in which they are earned.

(11) Recognition of income and expenseRevenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and therevenue can be reliably measured. The following specific recognition criteria must also be met before revenue isrecognized.

(i) Interest and similar income and expenses For all financial instruments measured at amortized cost, interest bearing financial assets classified as available-for-saleand financial instruments designated at fair value through profit or loss, interest income or expense is recorded usingthe effective interest rate, which is the rate that exactly discounts estimated future cash payments or receipts throughthe expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of thefinancial asset or financial liability. The calculation takes into account all contractual terms of the financial instrumentand includes any fees or incremental costs that are directly attributable to the instrument and are an integral part ofthe effective interest rate, but not future credit losses. The carrying amount of the financial asset or financial liability isadjusted if the Group revises its estimates of payments or receipts. The adjusted carrying amount is calculated basedon the original effective interest rate. However, for a reclassified financial asset (see Note 2.4 (2) for which the Groupsubsequently increases its estimates of future cash receipts as a result of increased recoverability of those cash receipts,the effect of that increase is recognized as an adjustment to the effective interest rate from the date of the change inestimate.

Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to animpairment loss, interest income continues to be recognized using the rate of interest used to discount the future cashflows for the purpose of measuring the impairment loss.

(ii) Fee and commission incomeThe Group earns fee and commission income from a diverse range of services it provides to its customers. Fee incomecan be divided into the following two categories:

Fee income earned from services that are provided over a certain period of timeFees earned for the provision of services over a period of time are accrued over that period. These fees includecommission income and asset management, custody and other management and advisory fees.

Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (togetherwith any incremental costs) and recognized as an adjustment to the effective interest rate on the loan. When it isunlikely that a loan be drawn down, the loan commitment fees are recognized over the commitment period on astraight line basis.

Fee income from providing transaction servicesFees arising from negotiating or participating in the negotiation of a transaction for a third party, such as thearrangement of the acquisition of shares or other securities or the purchase or sale of businesses, are recognized oncompletion of the underlying transaction. Fees or components of fees that are linked to a certain performance arerecognized after fulfilling the corresponding criteria.

(iii) Dividend incomeDividend income is recognized when the Group’s right to receive the payment is established.

(iv) Net trading incomeResults arising from trading activities include all gains and losses from changes in fair value and related interest incomeor expense and dividends for financial assets and financial liabilities “Held-for-trading”. This includes any ineffectivenessrecorded in hedging transactions.

48



FINANCIALSTATEMENTS

(12) Cash and cash equivalentsCash and cash equivalents as referred to in the consolidated statement of cash flows comprise cash and balanceswith the Central Banks, treasury bills, deposits with banks and financial institutions, amounts due from head office,branches and affiliates, due to banks and other financial institutions and amounts due to head office, branches andaffiliates with an original maturity of three months or less.

(13) Investments in subsidiaries and associatesInvestments in subsidiaries and associates are carried at cost less impairment. Subsidiaries are enterprises which theBank controls, normally where it holds more than 50% of the voting power. Associates are enterprises in which theBank exercises significant influence, but not control, normally where it holds 20% to 50% of the voting power.

(14) Property and equipment Property and equipment are initially recorded at cost less accumulated depreciation and any impairment in value.Buildings acquired prior to 1 January 1994 were restated for the changes in the general purchasing power ofLebanese Lira after the approval of the Bank of Lebanon. Net surplus arising on restatement is credited to“Revaluation reserve of property”. Changes in the expected useful life are accounted for by changing thedepreciation period or method, as appropriate, and treated as changes in accounting estimates.

Depreciation is calculated using the straight line method on all tangible fixed assets. The rates of depreciation arebased upon the following estimated useful lives:

• Buildings 50 years• Furniture and fixtures 5 to 12.5 years• Installations 16.67 years• Vehicles 10 years

Property and equipment is derecognized on disposal or when no future economic benefits are expected from itsuse. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposalproceeds and the carrying amount of the asset) is recognized in “Net profit from sale or disposal of other assets” inthe consolidated income statement in the year the asset is derecognized.

(15) Business combinations and goodwillBusiness combinations are accounted for using the purchase method of accounting. This involves recognizingidentifiable assets (including previously unrecognized intangible assets) and liabilities (including contingentliabilities but excluding future restructuring) of the acquired business at fair value. Any excess of the cost ofacquisition over the fair values of the identifiable net assets acquired is recognized as goodwill. If the cost ofacquisition is less than the fair values of the identifiable net assets acquired, the discount on acquisition isrecognized directly in the income statement in the year of acquisition.

Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of thebusiness combination over the Group’s interest in the net fair value of the identifiable assets, liabilities andcontingent liabilities acquired.

Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill isreviewed for impairment annually or more frequently if events or changes in circumstances indicate that thecarrying value may be impaired. For the purpose of impairment testing, goodwill acquired in a businesscombination is, from the acquisition date, allocated to each of the Bank’s cash-generating units, or groups ofcash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whetherother assets or liabilities of the acquiree are assigned to those units or groups of units. Each unit or group of units towhich 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 in accordance with IFRS 8 Operating Segments.

Where goodwill forms part of a cash generating unit or a group of cash generating units and part of the operationwithin that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying




amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in thiscircumstance is measured based on the relative values of the operation disposed of and the portion of the cashgenerating unit retained.

When subsidiaries are sold, the difference between the selling price and the net assets plus cumulative translationdifferences and goodwill is recognized in the consolidated income statement.

(16) Intangible assetsThe Group’s intangible assets include the value of computer software and key money. An intangible asset is recognizedonly when its cost can be measured reliably and it is probable that the expected future economic benefits that areattributable to it will flow to the Bank.

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquiredin a business combination is their fair value as at the date of acquisition. Following initial recognition, intangible assetsare carried at cost less any accumulated amortization and any accumulated impairment losses.

The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives areamortized over the useful economic life. The amortization period and the amortization method for an intangible assetwith a finite useful life are reviewed at least at each financial year-end. Changes in the expected useful life or theexpected pattern of consumption of future economic benefits embodied in the asset are accounted for by changingthe amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortizationexpense on intangible assets with finite lives is recognized in the consolidated income statement in the expensecategory consistent with the function of the intangible asset.

Amortization is calculated using the straight line method to write down the cost of intangible assets to their residualvalues over 5 years.

(17) Non-current assets held for saleThe Group occasionally acquires real estate in settlement of certain loans and advances. Such real estate is stated atthe lower of the net realizable value of the related loans and advances and the current fair value of such assets basedon the instructions of the regulators. Gains or losses on disposal, and revaluation losses, are recognized in theconsolidated income statement for the period.

(18) Deferred costsDeferred costs are the difference between the cost of the acquisition and the Bank’s interest in the net assets of InaashBank SAL. Deferred costs are amortized over the period of the soft loan granted by the Bank of Lebanon following theacquisition. Amortization expense is reported as a contra revenue account on interest revenue on treasury bills as thesoft loan received from the Bank of Lebanon is invested in Lebanese treasury bills.

Deferred costs are stated at cost less accumulated amortization and accumulated impairment losses.

(19) Impairment of non-financial assetsThe Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any indicationexists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount.An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s (CGU) fair value less costs to sell andits value in use. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is consideredimpaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows arediscounted to their present value using a pre-tax discount rate that reflects current market assessments of the timevalue of money and the risks specific to the asset. In determining fair value less costs to sell, an appropriate valuationmodel is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly tradedsubsidiaries or other available fair value indicators.

For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication thatpreviously recognized impairment losses may no longer exist or may have decreased. If such indication exists, theGroup estimates the asset’s or CGU’s recoverable amount. A previously recognized impairment loss is reversed only ifthere has been a change in the assumptions used to determine the asset’s recoverable amount since the lastimpairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its

50



FINANCIALSTATEMENTS

recoverable amount, nor exceeds the carrying amount that would have been determined, net of depreciation, hadno impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidatedincome statement.

Impairment losses relating to goodwill cannot be reversed in the future periods.

(20) Customers’ depositsAll customer deposits are carried at the amortized cost, less amounts repaid and adjustments for effective hedges.

(21) Financial guaranteesIn the ordinary course of business, the Group gives financial guarantees, consisting of letters of credit, guaranteesand acceptances. Financial guarantees are initially recognized in the financial statements (within “Other liabilities”)at fair value, being the premium received. Subsequent to initial recognition, the Group’s liability under each guaranteeis measured at the higher of the amount initially recognized less, when appropriate, cumulative amortizationrecognized in the consolidated income statement, and the best estimate of expenditure required to settle anyfinancial obligation arising as a result of the guarantee.

Any increase in the liability relating to financial guarantees is recorded in the income statement in “Credit lossexpense”. The premium received is recognized in the consolidated income statement in “Net fees and commissionincome” on a straight line basis over the life of the guarantee.

(22) Taxation(i) Current taxCurrent tax assets and liabilities for the current and prior years are measured at the amount expected to berecovered from or paid to the tax authorities. The tax rates and tax law used to compute the amount are those thatare enacted or substantively enacted by the statement of financial positon date.

The Bank’s profits from operation in Lebanon are subject to a tax rate of 15% after deducting the 5% tax on interestreceived according to Law no. 497/2003 dated 30 January 2003.

(ii)Deferred taxDeferred tax is provided on temporary differences at the consolidated statement of financial position date betweenthe tax bases of assets and liabilities and their carrying amounts in the financial reporting purposes. Deferred taxliabilities are recognized for all taxable temporary differences, except:

• Where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

• In respect of taxable temporary differences associated with investments in subsidiaries, where the timing of thereversal of the temporary differences can be controlled and it is probable that the temporary differences will notreverse in the foreseeable future.

Deferred tax assets are recognized for all deductible temporary differences, carry forward of unused tax credits andunused tax losses, to the extent that it is probable that taxable profit will be available against which the deductibletemporary differences, and the carry forward of unused tax credits and unused tax losses can be utilized except:

• Where the deferred tax asset relating to the deductible temporary difference arises from the initial recognitionof an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

• In respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

The carrying amount of deferred tax assets is reviewed at each statement of financial position date and reduced tothe extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of thedeferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each statement of financial




position date and are recognized to the extent that it has become probable that future taxable profit will allow thedeferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset isrealized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted atthe statement of financial position date.

Current tax and deferred tax relating to items recognized directly in other comprehensive income are also recognizedin other comprehensive income and not in the consolidated income statement.

Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assetsagainst current tax liabilities and the deferred taxes relate to the same taxable entity and the same tax authority.

(23) Provision for risks and chargesProvisions are recognized when the Bank has a present obligation (legal or constructive) arising from a past event andthe costs to settle the obligation are both probable and can be reliably measured.

(24) Employees’ end of service benefitsThe Group makes contributions to the National Social Security Fund and provides for end of service benefits to itsemployees. The entitlement to these benefits is based upon the employees’ length of service, the employees’ salaries,the Bank’s contributions to the National Social Security Fund and other requirements outlined in the Lebanese LaborLaw. The expected costs of these benefits are accrued over the period of employment.

(25) Fiduciary assetsThe Group provides trust and other fiduciary services that result in the holding or investing of assets on behalf of itsclients. Assets held in a fiduciary capacity are not reported in the financial statements, as they are not the assets of theGroup.

(26) Dividends on ordinary and preferred sharesDividends on preferred shares are recognized as a liability and deducted from equity when they are approved by theBank’s shareholders. Interim dividends are deducted from equity when they are declared and no longer at thediscretion of the Bank.

Dividends for the year that are approved after the statement of financial position date are disclosed as an event afterthe statement of financial position date.

(27) Off-balance sheet itemsOff-balance sheet balances include commitments which may take place in the Group’s normal operations such asfinancial commitments, letters of guarantees, and letters of credit.

(28) Accounting policies of subsidiary-insurance companyThe financial statements of the subsidiary insurance company have been prepared in accordance with InternationalFinancial Reporting Standards and the requirements of the local regulations related to insurance and reinsurancecompanies in Lebanon. The key accounting policies are as follows:

(i) Product classificationThe Company issues life insurance contracts which are linked to investment contracts. Where contracts contain bothan investment component and an insurance component and the cash flows from the two components are distinct, theunderlying amounts are unbundled. Any premiums relating to the insurance component are accounted for throughthe consolidated income statement and the remaining element is accounted through the consolidated statement offinancial position as explained below:

Insurance contractsInsurance contracts are defined as those containing significant insurance risk at the inception of the contract, orthose where at the inception of the contract there is a scenario with commercial substance where the level ofinsurance risk may be significant over time. The significance of insurance risk is dependent on both the probabilityof an insurance event and the magnitude of its potential effect.

52



FINANCIALSTATEMENTS

Once a contract has been classified as an insurance contract, it remains an insurance contract for the remainderof its lifetime, even if the insurance risk reduces significantly during this period.

Investment contractsAny contracts not considered insurance contracts under IFRS are classified as investment contracts. Amountscollected under investment contracts are not accounted for through the income statement but are accountedfor directly through the consolidated statement of financial position as an adjustment to investment contractliabilities.

(ii) Premiums earned on insurance contractsPremiums are recognized as revenues over the premium paying period of the related policies.

(iii) ClaimsClaims, comprising amounts payable to contract holders and third parties and related loss adjustment expenses, arecharged to the income statement as incurred. Claims comprise the estimated amounts payable, in respect of claimsreported to the Company and those not reported at the consolidated statement of financial position date.

The Company generally estimates its claims based on previous experience. Claims requiring court or arbitrationdecisions are estimated individually. In addition a provision based on management’s judgement and the Company’sprior experience is maintained for the cost of settling claims incurred but not reported at the statement of financialposition date. Any difference between the provisions at the statement of financial position date and settlements andprovisions for the following year is included in the underwriting account for that year.

The Company does not discount its liability for unpaid claims.

(iv) Reinsurance contracts heldIn order to minimize financial exposure from large claims’ the Company enters into agreements with other partiesfor reinsurance purposes. Claims receivable from reinsurers are estimated in a manner consistent with the claimliability and in accordance with the reinsurance contract. These amounts are shown as part of “reinsurers’ share oftechnical provisions” in the consolidated statement of financial position until the claim is paid by the Company.

At each reporting date, the Company assesses whether there is any indication that a reinsurance asset may beimpaired. Where an indicator of impairment exists, the Company marks a formal estimate of recoverable amount.Where the carrying amount of a reinsurance asset exceeds its recoverable amount the asset is considered impairedand is written down to its recoverable amount.

(v) Insurance contracts liabilitiesMathematical reserveThe mathematical reserve is determined by actuarial valuation of future policy benefits. Actuarial assumptionsinclude a margin for adverse deviation and generally take account of the type of policy, year of issue and policyduration. Mortality and withdrawal rate assumptions are based on experience. Adjustments to the reserves aremade in the consolidated income statement.

Liability adequacy testAt each statement of financial position date the Company assesses whether its recognized insurance liabilitiesare adequate using current estimates of future cash flows under its insurance contracts. If that assessmentshows that the carrying amount of its insurance liabilities is inadequate in the light of estimated future cashflows, the entire deficiency is immediately recognized in the consolidated income statement and an unexpiredrisk provision created.

(vi) Investment contracts liabilitiesThe provision for investment contract liabilities is calculated on the basis of a prudent prospective actuarialvaluation method through the use of prospective discounted cash flow techniques or the current unit fund price.

The actuarial valuation includes a provision for participation which is the amount the Company expects to payinvestment contract holders in addition to their guaranteed returns.




3. BUSINESS COMBINATIONS

Acquisitions in 2009

Société Générale de Banque - Jordanie (SGBJ)On 13 May 2009, the Bank purchased an additional 1,500,000 shares of the total outstanding shares of SGBJ for a priceof US$ 3,507,155 equivalent to LL 5,287 million.

[In LL million] 13 May 2009

Fair value of net assets of SGBJ 105,286

Group’s share (3.7077%) 3,901Goodwill arising from purchase of additional shares 1,386Cost of acquisition 5,287

Société Générale Bank – Cyprus Ltd On 30 July 2009, the General Assembly of the Bank’s shareholders approved the acquisition of 57.7% of the totalvoting shares of Société Générale Cyprus Ltd for EUR 15,433,541 (equivalent to LL 33,357 million). On 16 December2009, the Central Council of the Central Bank of Lebanon approved the Bank’s acquisition. The Group recognizedgoodwill in relation to the above as follows:

[In LL million] 16 December 2009

Fair value of net assets of Société Générale Cyprus Ltd 36,235

Group’s share (57.70%) 20,908Goodwill arising from acquisition 12,449Cost of acquisition 33,357

Cash inflow on acquisition of the subsidiary:Net cash acquired with the subsidiary 270,594Cash paid (33,357)Net cash inflow 237,237

Acquisitions in 2008

Société Générale de Banque - Jordanie (SGBJ)During January 2008, Société Générale de Banque - Jordanie (SGBJ) increased its capital whereby each shareholder hada pre-emptive right to subscribe to one share for every two shares he or she previously owned at an issue price of JD1.27 per share allocated between JD 1 par value per share and JD 0.27 per share issue premium. The gross amount ofthe capital increase amounted to LL 36,530 million detailed as follows:


Gross amount of capital increase of SGBJ 36,530Minority share from capital increase (6,733,199 shares) (18,239)Group’s share from capital increase (6,752,078 shares) 18,291

On 29 February 2008, the Bank subscribed to its share of the capital increase in the amount of US$ 12,133,182 or LL18,291 million to retain its percentage of ownership at 50.07%.

Minority shareholders owning 0.55% of the total shares did not subscribe to their share of the capital increase,accordingly the unsubscribed shares were placed at the quoted market price of JD 3.66.

On 30 April 2008, the Bank purchased all the unsubscribed shares of 222,374 shares (representing 1.65% of the totalcapital increase of SGBJ or 0.55% of the overall capital) for a purchase price of US$ 1,024,278.

54



FINANCIALSTATEMENTS

[In LL million] 30 April 2008

Fair value of net assets of SGBJ 97,714

Group’s share (0.55%) 537Goodwill from the arising increase in share 1,007Cost of acquisition 1,544

Sogecap Liban SALOn 12 November 2008, the Board of Directors approved the acquisition of additional shares in Sogecap SAL previouslyowned by related parties totaling 8,620 shares for a price of US$ 2,232,149 or LL 3,365 million. Accordingly, the Bank’sshare in Sogecap increased by 25%.

[In LL million] 12 November 2008

Fair value of net assets of Sogecap 11,129

Group’s share (24.97%) 2,782Goodwill arising from purchase of additional shares 583Cost of acquisition 3,365

4. INTEREST AND SIMILAR INCOME

[In LL million] 2009 2008

Financial investments – available-for-sale 51,727 44,275Financial assets classified as loans and receivables 18,594 4,020Financial investments – held-to-maturity 11,505 7,071Deposits with banks and financial institutions 114,109 76,102Deposits with Head Office, branches and affiliates 8,095 21,864Loans and advances to customers 116,898 115,776Loans and advances to related parties 2,819 2,341

323,747 271,449

5. INTEREST AND SIMILAR EXPENSE


Deposits from banks and financial institutions 7,086 7,636Deposits from Head Office, branches and affiliates 332 75Deposits from customers and other credit balances 161,916 134,630Deposits from related parties 2,335 2,220

171,669 144,561

6. NET FEE AND COMMISSION INCOME


Credit related fees and commissions 19,328 18,098Portfolio and other management fees 37,215 38,391Other commissions received 8,352 7,694

64,895 64,183Commissions paid (21,589) (18,916)

43,306 45,267




56

7. NET TRADING INCOME


Equities 9 (2)Debt securities - -Foreign exchange 7,104 5,826

7,113 5,824

“Equities” income includes the results of buying and selling, and changes in the fair value of equity securities. “Debtsecurities” income includes the results of buying and selling and changes in the fair value of debt securities as well asrelated interest income. “Foreign exchange” income includes gains and losses from spot and forward contracts.

8. NET GAIN ON FINANCIAL INVESTMENTS


Dividend income 2,300 2,340Gain on sale of financial investments – available-for-sale (note 42) 9,228 191Gain on sale of financial assets classified as loans and receivables 4,857 -Other losses (173) (3)

16,212 2,528

9. OTHER OPERATING INCOME

In LL million] 2009 2008

Income from services rendered 720 720Other operating income 8,338 10,647Net provisions written back against risks and charges 207 404Gain from sale of assets taken in recovery of bad debts (note 27) 8,920 2,937

18,185 14,708

10. NET WRITE-BACK OF CREDIT LOSSES


Provision for doubtful corporate loans (note 18) (6,795) (8,103)Provision for doubtful retail loans (note 18) (7,776) (3,593)Provision for doubtful corporate loans - related parties (note 19) (661) -Provision for other doubtful debit balances - other assets (658) (3,313)Loans written off (154) (1,480)

(16,044) (16,489)Less: Write-back of provision for doubtful corporate loans (note 18) 14,633 12,992

Write-back of provision for doubtful retail loans (note 18) 3,830 5,857Write-back of provisions on other doubtful debit balances 275 -

2,694 2,360

11. PERSONNEL EXPENSES


Salaries and wages 43,805 38,180National Social Security Fund contributions 6,333 5,686Provisions for employees’ end of service benefits (note 37) 1,394 4,527Other allowances 13,771 13,331

65,303 61,724



FINANCIALSTATEMENTS


12. OTHER OPERATING EXPENSES


Telecommunication and postage 6,030 5,454Rent 4,773 4,485Professional services 6,280 7,211Maintenance and repairs 4,019 3,382Taxes and fees 3,350 3,317Net provisions for risks and charges - 387Premiums for guarantee of deposits 1,775 1,761Electricity, water and fuel 2,234 2,239Publicity and advertising 4,521 3,921Printings and stationery 1,842 1,734Travelling expenses and entertainment 2,106 4,879Legal expenses 974 2,012Insurance premiums 999 1,011Transportation and vehicles maintenance 731 736Donations 234 196Other operating charges 6,421 5,228

46,289 47,953

13. CASH AND BALANCES WITH THE CENTRAL BANKS


Cash 52,014 46,100Current accounts with the Central Banks 196,336 159,138Time deposits with the Central Banks 630,736 435,538

879,086 640,776

Cash and balances with the Central Banks include non-interest bearing balances held by the Group at the Central Bankof Lebanon in coverage of the obligatory reserve requirements for all banks operating in Lebanon on deposits inLebanese Lira as required by the Lebanese banking rules and regulations. This obligatory reserve is calculated on thebasis of 25% of sight commitments and 15% of term commitments.

In addition to the above, all banks operating in Lebanon are required to deposit with the Central Bank of Lebanoninterest-bearing placements at the rate of 15% of total deposits in foreign currencies regardless of nature.

SGBJ and Société Générale Bank – Cyprus Ltd are also subject to obligatory reserve requirements with varyingpercentages, according to the banking rules and regulations of the Kingdom of Jordan and the Republic of Cyprusrespectively.

14. DEPOSITS WITH BANKS AND FINANCIAL INSTITUTIONS


Current accounts 70,821 56,617Time deposits 79,246 80,002Checks for collection 51,146 41,949Discounted bills 1,482 890Pledged account 828 905Debtor accounts against creditor accounts, net 195 -

203,718 180,363

Most current accounts represent balances deposited at correspondent banks for operating activities and do not generateinterest revenues.



58

15. AMOUNTS DUE FROM HEAD OFFICE, BRANCHES AND AFFILIATES


Sight deposits 33,002 109,662Time deposits 773,003 349,027Discounted bills 599 282

806,604 458,971

Time deposits include an amount of LL 64,798 million (equivalent to Euro 30 million) as of 31 December 2009 (2008: Euro30 million, equivalent to LL 64,106 million) pledged in favour of Société Générale SA Paris in guarantee of documentaryletters of credit and guarantees issued in favour of the Bank’s clients with any of the entities under Société Générale Group.

16. DERIVATIVE FINANCIAL INSTRUMENTS

The table below shows the fair values of derivative financial instruments, recorded as assets or liabilities, together with theirnotional amounts. The notional amount, recorded gross, is the amount of a derivative’s underlying asset, reference rate orindex and is the basis upon which changes in the value of derivatives are measured. The notional amounts indicate thevolume of transactions outstanding at year-end and are indicative of neither the market risk nor the credit risk.

[In LL million] 2009 2008Assets Liabilities Notional amount Assets Liabilities Notional amount

Derivatives designated as fair value HedgesInterest rate swaps - - 9,849 - - 17,254

Derivative held-for-trading Forward foreign exchange contracts 6,937 (299) 144,645 300 (783) 36,906

6,937 (299) 154,494 300 (783) 54,160

Derivatives often involve at their inception only a mutual exchange of promises with little or no transfer of consideration.However, these instruments frequently involve a high degree of leverage and are very volatile. A relatively smallmovement in the value of the asset, rate or index underlying a derivative contract may have a significant impact on theprofit or loss of the Group.

Over-the-counter derivatives may expose the Group to the risks associated with the absence of an exchange market onwhich to close out an open position.

The Group’s exposure under derivative contracts is closely monitored as part of the overall management of the Group’smarket risk (note 52.1).

ForwardsForward contracts are contractual agreements to buy or sell a specified financial instrument at a specific price and date inthe future. Forwards are customised contracts transacted in the over-the-counter market.

The Group has credit exposure to the counterparties of forward contracts. Forward contracts are settled gross and are,therefore, considered to bear a higher liquidity risk. Forward contracts result in market risk exposure.

SwapsSwaps are contractual agreements between two parties to exchange streams of payments over time based on specifiednotional amounts, in relation to movements in a specified underlying index such as an interest rate, foreign currency rateor equity index.



FINANCIALSTATEMENTS


Interest rate swaps relate to contracts taken out by the Group with other financial institutions in which the Group eitherreceives or pays a floating rate of interest in return for paying or receiving, respectively, a fixed rate of interest. Thepayment flows are usually netted against each other, with the difference being paid by one party to the other.

Derivative financial instruments held for trading purposesMost of the Group’s derivative trading activities relate to deals with customers which are normally offset by transactionswith other counterparties.

Derivative financial instruments held or issued for hedging purposesAs part of its asset and liability management, the Group uses derivatives for hedging purposes in order to reduce itsexposure to credit and market risks. This is achieved by hedging specific financial instruments, portfolios of fixed ratefinancial instruments and forecast transactions as well as strategic hedging against overall financial position exposures.

The accounting treatment, explained in note 2.4 (8) ‘Hedge accounting’, depends on the nature of the item hedged andcompliance with the IAS 39 hedge accounting criteria.

Fair value hedgesFair value hedges are used by the Group to protect it against changes in the fair value of financial assets and financialliabilities due to movements in exchange rates and interest rates. The financial instruments hedged for interest rate riskinclude loans and advances. The Group uses interest rate swaps to hedge interest rate risk.

17. FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS

These instruments are held to cover unit-linked liabilities associated with certain contracts, for which the investment risklies predominantly with the contract holder.


Listed funds- SGAM bonds 1,058 594- SGAM equities 5,909 3,807

6,967 4,401

The movement in investments held to cover unit-linked liabilities at 31 December was as follows:


Beginning balance at 1 January 4,401 18,774Add: Purchases 2,759 4,821

Unrealized gain (loss) 1,752 (2,240)Realized gain (loss) 259 (9)

Less: Sales (2,204) (16,945)Ending balance at 31 December 6,967 4,401

18. LOANS AND ADVANCES TO CUSTOMERS, NET


Corporate loans 1,449,016 1,192,927Retail loans 1,128,310 703,379

2,577,326 1,896,306Less: Allowance for impairment losses (548,310) (494,553)

2,029,016 1,401,753



60

A reconciliation of the allowance for impairment losses by class, is as follows:

[In LL million] 2009Corporate Retail Total

Balance at 1 January 419,359 75,194 494,553Charge for the year (note 10) 6,795 7,776 14,571Unrealized interest for the year 46,453 10,462 56,915Arising from acquisition of a subsidiary 64,204 16,146 80,350Transfers from provisions on loans to related parties (note 19) 326 - 326

537,137 109,578 646,715Less: Recoveries (note 10) (14,633) (3,830) (18,463)Less: Provisions written off (26,254) (3,067) (29,321)

(40,887) (6,897) (47,784)Transfers to off-balance sheet (note 46) (39,202) (12,176) (51,378)Transfers from off-balance sheet (note 46) 542 8 550

(38,660) (12,168) (50,828)Difference of exchange 93 114 207Balance at 31 December 457,683 90,627 548,310Gross amount of loans individually determined to be impaired 493,877 152,015 645,892


Balance at 1 January 395,484 69,897 465,381Charge for the year (note 10) 8,103 3,593 11,696Unrealized interest for the year 48,682 10,737 59,419

452,269 84,227 536,496Less: Recoveries (note 10) (12,992) (5,857) (18,849)Less: Provisions written off (21,888) (2,633) (24,521)

(34,880) (8,490) (43,370)Transfers to off-balance sheet (note 46) (2,706) (433) (3,139)Transfers from off-balance sheet (note 46) 5,334 - 5,334

420,017 75,304 495,321Difference of exchange (658) (110) (768)Balance at 31 December 419,359 75,194 494,553Gross amount of loans individually determined to be impaired 478,182 110,784 588,966

Collateral repossessedDuring the year, the Group took possession of various real estates with carrying value of LL 6,280 million which the Groupis in the process of selling (note 27).

According to the Central Bank of Lebanon regulations and Banking Control Commission Circular no. 240 dated 8 January2004, bad debts and related allowance for credit losses meeting the criteria set out in the circular have been transferredto the off-balance sheet accounts.

The fair value of collateral that the Group holds relating to loans individually determined to be impaired as at 31December 2009 amounted to LL 125,632 million (2008: LL 155,606 million). The collateral consists of cash, securities,letters of guarantee and properties.

19. LOANS AND ADVANCES TO RELATED PARTIES, NET


Corporate loans 59,762 49,375Retail loans 4,152 6,812

63,914 56,187Less: Allowance for impairment losses (703) (246)

63,211 55,941



FINANCIALSTATEMENTS


A reconciliation of the allowance for impairment losses for loans and advances to related parties, by class, is as follows:


Balance at 1 January 246 - 246Unrealized interest for the year 122 - 122Charge for the year (note 10) 661 - 661Transfers to provisions on loans and advances to Customers (note 18)

(326) - (326)Balance at 31 December 703 - 703


Balance at 1 January 21 - 21Unrealized interest for the year 225 - 225Balance at 31 December 246 - 246

20. DEBTORS BY ACCEPTANCES

Acceptances resulted from letters of credit opened for the customers’ accounts for which settlement is delayed and isguaranteed by the Group.

21. FINANCIAL INVESTMENTS – AVAILABLE-FOR-SALE


Quoted:Lebanese treasury bills – Eurobonds 570,850 5,845Shares 9,304 13,564Corporate Bonds 14,943 10,223Funds - 9

595,097 29,641

Unquoted:Lebanese treasury bills – denominated in LL 430,550 358,722Shares 4,684 2,430

435,234 361,152Impairment allowance (446) (446)

434,788 360,7061,029,885 390,347

All unquoted available-for-sale shares are recorded at cost due to the unpredictable nature of future cash flows andlack of suitable other markets for reaching at a reliable fair value.

During 2008, the Group recognized impairment losses against quoted shares due to the significant decline in value forLL 963 million.

During 2009, impairment losses previously booked on quoted shares held by the Group were written back to theconsolidated income statement in the amount of LL 951 million.



62

22. FINANCIAL ASSETS CLASSIFIED AS LOANS AND RECEIVABLES


Quoted:Treasury bills – Eurobonds 186,181 281,520

Unquoted:Certificates of deposit – Central Bank of Lebanon 1,093,229 890,302Certificates of deposit – Central Bank of Jordan - 6,530

1,093,229 896,8321,279,410 1,178,352

23. FINANCIAL INVESTMENTS – HELD-TO-MATURITY


Quoted:Lebanese treasury bills – Eurobonds 27,553 27,846Corporate bonds 3,252 1,560

30,805 29,406Unquoted:

Lebanese treasury bills – denominated in LL 330,387 309,798Other governmental bonds 125,991 42,387Corporate bonds 13,189 2,233

469,567 354,418500,372 383,824

Held to maturity treasury bills include a gross amount of LL 342,920 million net of interest received in advance of LL14,932 million as of 31 December 2009 (2008: LL 342,920 million net of interest received in advance of LL 35,500million) pledged in favour of the Central Bank of Lebanon against a soft loan (note 30).

24. INVESTMENTS IN NON-CONSOLIDATED SUBSIDIARIES

Investments in non-conoslidated subsidiaries represent the following:

Ownership % 2009 20082009 2008 Activity LL million LL million

Société Générale Libanaise Foncière SARL 98.66 98.66 Real Estate 9 14Société Générale de Servicesd’Investissements SARL 98.50 98.50 Services and studies 354 163SGBL Courtage Assurance SARL 100.00 100.00 Brokerage 744 5Centre de Traitement Monétique SAL 50.00 50.00 Financial services 1,501 1,500799 Bassatine Tarablos SAL 60.00 60.00 Investments

and management - 222,608 1,704

Less: Provision for impairmentSociété Générale de Service et d’Investissements SARL (98) (98)

2,510 1,606

During 2009, the Group’s share of profits from non-consolidated subsidiaries amounted to LL 904 million.



FINANCIALSTATEMENTS


25. PROPERTY AND EQUIPMENT

[In LL million]Advances on Land and Furniture Installations Vehicles Total

purchase of buildings and fixturesfixed assets

Cost: At 1 January 2009 1,338 53,859 44,369 30,026 862 130,454Additions 4,649 3,373 2,391 645 480 11,538Arising from acquisition

of a subsidiary 2,728 - 5,283 - 102 8,113Disposals - - (84) (48) (223) (355)Transfers (1,412) - 876 469 67 -Write-off - - (1,462) - - (1,462)Other adjustments - - 2 1 - 3At 31 December 2009 7,303 57,232 51,375 31,093 1,288 148,291

Depreciation:At 1 January 2009 - 10,127 38,029 27,027 714 75,897Provided during the year - 993 2,613 1,132 109 4,847Arising from acquisition of a subsidiary 1,914 - 3,752 - 76 5,742Relating to disposals - - (78) (41) (204) (323)Relating to write-off - - (1,462) - - (1,462)Other adjustments - - 1 1 - 2At 31 December 2009 1,914 11,120 42,855 28,119 695 84,703

Impairment:At 1 January 2009 and 31 December 2009 - 1,357 - - - 1,357

Net carrying amount:At 31 December 2009 5,389 44,755 8,520 2,974 593 62,231

[In LL million]Advances on Land and Furniture Installations Vehicles Total

purchase of buildings and fixturesfixed assets

Cost: At 1 January 2008 1,155 54,799 43,335 28,644 1,022 128,955Additions 1,398 375 1,038 1,071 32 3,914Disposals - (1,315) (713) (173) (192) (2,393)Transfers (1,214) - 723 491 - -Write-off - - (3) - - (3)Other adjustments (1) - (11) (7) - (19)

At 31 December 2008 1,338 53,859 44,369 30,026 862 130,454

Depreciation:At 1 January 2008 - 10,024 36,172 26,093 771 73,060Provided during the year - 405 2,556 1,112 79 4,152Relating to disposals - (302) (689) (173) (136) (1,300)Relating to write-off - - (3) - - (3)Other adjustments - - (7) (5) - (12)

At 31 December 2008 - 10,127 38,029 27,027 714 75,897

Impairment:At 1 January 2008 and 31 December 2008 - 1,357 - - - 1,357

Net carrying amount:At 31 December 2008 1,338 42,375 6,340 2,999 148 53,200



64

According to the provisions of law no. 282 dated 31 December 1993 and the Central Bank of Lebanon circulars, theBank restated the cost of buildings acquired prior to 1 January 1994 for the changes in the general purchasing powerof the Lebanese Lira. The restatement amounted to LL 3,934 million as of 31 December 2009 (2008: same) and wasadded to property and equipment with a corresponding entry to revaluation reserve included in shareholders’ equity(note 41).

26. INTANGIBLE ASSETS[In LL million]

Advances Key money Licenses Totalintangible and software

assets

Cost:At 1 January 2009 297 1,842 6,383 8,522Additions 484 - 363 847Arising from acquisition of a subsidiary 2 - 1,315 1,317Write-off - - (318) (318)Transfers (86) - 86 -At 31 December 2009 697 1,842 7,829 10,368

Amortization:At 1 January 2009 - 1,842 4,574 6,416Provided during the year - - 341 341Arising from acquisition of a subsidiary - - 1,050 1,050Relating to write-off - - - -At 31 December 2009 - 1,842 5,965 7,807

Net book value:At 31 December 2009 697 - 1,864 2,561

[In LL million]Advances Key money Licenses Total

intangible and software assets

Cost:At 1 January 2008 149 1,860 5,086 7,095

Additions 393 106 1,319 1,818Write-off - (124) (267) (391)Transfers (245) - 245 -At 31 December 2008 297 1,842 6,383 8,522

Amortization:At 1 January 2008 - 1,842 4,242 6,084Provided during the year - - 343 343Relating to write-off - - (11) (11)At 31 December 2008 - 1,842 4,574 6,416

Net book value:At 31 December 2008 297 - 1,809 2,106



FINANCIALSTATEMENTS


27. NON-CURRENT ASSETS HELD FOR SALE


Cost:At 1 January 165,662 168,730Additions 6,280 9,283Disposals (28,492) (11,526)Other adjustments (20) (825)

143,430 165,662

Impairment:At 1 January 22,095 22,835Write-back during the year (989) (303)Other adjustments (4) (437)At 31 December 21,102 22,095

Net carrying amount:At 31 December 122,328 143,567

As at 31 December 2009, the fair value of the fixed assets acquired in settlement of debts as estimated by the Groupamounted to LL 180,976 million (2008: LL 177,193 million).

During the year, the Group disposed of non-current assets with carrying value of LL 27,503 million (2008: LL 11,223 million)and recognized a gain of LL 7,931 million (2008: LL 2,634 million), in addition to the release of reserves for non-currentassets held for sale amounting to LL 1,463 million to retained earnings (2008: LL 252 million). This amount relates toappropriations previously booked on property acquired in settlement of debts.

28. OTHER ASSETS


Net deferred costs resulting from the acquisition of Inaash Bank SAL 27,345 51,780Prepaid expenses 3,239 2,951Stamps 482 509Printed materials and stationery 443 346Credit cards inventory 213 170Precious metals 5 5Other debtors 20,880 17,199

52,607 72,960

The net deferred costs resulting from the Inaash Bank SAL acquisition consist of the following:

[In LL million] 2009Additional Total

deferred costs Initial deferred resultingcosts from the subsequent to the

acquisition acquisition

Gross deferred costs:At 1 January 2009 and 31 December 2009 180,120 10,553 190,673

Amortization:At 1 January 2009 131,968 6,925 138,893Amortization for the year 23,116 1,319 24,435

At 31 December 2009 155,084 8,244 163,328

Net deferred costs:At 31 December 2009 25,036 2,309 27,345

At 31 December 2008 48,152 3,628 51,780



66

The initial costs resulting from the acquisition of Inaash Bank SAL amounted to LL 180,120 million. The costs aredeferred and amortized over the period of future economic benefits from the soft loan (LL 250,000 million) andrelated facilities received from the Central Bank of Lebanon. The Bank used the proceeds of the soft loan to subscribeto two-year treasury bills which were pledged in favour of the Central Bank of Lebanon as a guarantee for thesettlement of the soft loan.

On 10 January 2003, the Central Council of the Bank of Lebanon approved granting the Bank an additional soft loanamounting to LL 45,567 million to cover the additional costs of LL 10,553 million (US$ 7 million) incurred subsequentto Inaash Bank SAL’s acquisition by the Bank. The loan bears interest determined by reference to interest rates onLebanese treasury bills or any other benchmark set by the Bank of Lebanon less the margin needed to cover the costs.This rate is reset on a regular basis. The proceeds from the loan were invested in financial instruments issued by theBank of Lebanon which are pledged in favour of the Bank of Lebanon as a guarantee for the settlement of the soft loan.The additional costs are deferred and amortized over the period of the future economic benefits from the soft loan.

29. GOODWILL


Cost:At 1 January 2,706 1,102Additions 13,587 1,604Adjustments (439) -At 31 December 15,854 2,706

Goodwill acquired through business combinations with indefinite lives have been allocated to four individualcash-generating units, which are subsidiaries of the Bank:

• Société Générale de Banque – Jordanie• Fidus SAL• Sogecap Liban SAL• Société Générale Bank - Cyprus Ltd

The carrying amount of goodwill to each of the subsidiaries is as follows:


Société Générale de Banque – Jordanie 2,393 1,635Fidus SAL 199 488Sogecap Liban SAL 813 583Société Générale Bank – Cyprus Ltd 12,449 -

15,854 2,706

30. DUE TO CENTRAL BANKS


Term soft loans 305,110 305,101

Term soft loans include:- 10-year term loan amounting to LL 250,000 million granted in 2000 from the Central Bank of Lebanon as a result of the

acquisition of Inaash Bank SAL with an effective interest rate of two-year treasury bills less 8.22% (note 28);

- 8-year term loan amounting to LL 45,567 million granted in 2003 from the Central Bank of Lebanon subsequent to theacquisition of Inaash Bank SAL with an interest rate determined by the Central Bank of Lebanon every 2 years. The effective interest rate for 2009 was 6.77% (2008: 6.77%) (note 28).

- 5-year term loan amounting to LL 8,431 million granted in 2008 from the Central Bank of Lebanon to cover 60% of thereplacement costs of the Bank’s damaged buildings and installations and to cover 60% of the Bank’s credit lossesrelating to debtors directly affected by the July 2006 war. The effective interest rate for 2009 was 5.07% (2008: 5.07%).



FINANCIALSTATEMENTS


31. DUE TO BANKS AND FINANCIAL INSTITUTIONS


Sight deposits 55,273 20,798Time deposits 110,352 98,610Creditor accounts against debtor accounts, net 2,033 6,734Pledged accounts - 1,542

167,658 127,684

32. AMOUNTS DUE TO HEAD OFFICE, BRANCHES AND AFFILIATES


Sight deposits 36,525 17Time deposits 279,684 -Creditor accounts against debtor accounts, net 177 305

316,386 322

33. CUSTOMERS’ DEPOSITS


Sight deposits 468,056 620,129 1,088,185Net creditor accounts against debtor accounts and blocked margins 58,190 151,326 209,516

526,246 771,455 1,297,701Time deposits 717,066 1,491,631 2,208,697Savings accounts 46,351 1,962,526 2,008,877

1,289,663 4,225,612 5,515,275


Sight deposits 244,914 413,195 658,109Net creditor accounts against debtor accounts and blocked margins 71,762 65,182 136,944

316,676 478,377 795,053Time deposits 266,983 1,110,941 1,377,924Savings accounts 47,221 1,683,117 1,730,338

630,880 3,272,435 3,903,315

Included in customers’ deposits as at 31 December 2009 are coded accounts amounting to LL 20,483 million(2008: LL 8,675 million). These accounts are opened in accordance with article 3 of the Banking Secrecy Law dated 3September 1956.

Included in customers’ deposits as of 31 December 2009, are deposits from related parties amounting to LL 1,967 million(2008: LL 751 million).



68

34. INCOME TAX

The components of income tax expense for the years ended 31 December 2009 and 2008 are:


Current taxCurrent income tax 19,719 13,595

Deferred taxRelating to origination and reversal of temporary differences 694 624

20,413 14,219

Reconciliation of the total tax chargeThe reconciliation between the tax expense and the accounting profit for the years ended 31 December 2009 and 2008is as follows:


Accounting profit before tax 125,822 79,924Less: Revenues previously subject to tax (17,054) (10,916)Add: Non-deductible expenses 6,821 11,499Taxable profit 115,589 80,507

Effective income tax rate 17.66% 17.66%Income tax expense reported in the consolidated income statement 20,413 14,219

Current tax liabilities


Income tax due 20,413 14,219Less: tax withheld on interest (7,735) (4,215)Less: Deferred tax amortized to the consolidated income statement (144) (225)Less: others (224) -

12,310 9,779

Deferred taxThe following table shows deferred tax recorded on the consolidated statement of financial position and changesrecorded in the income tax expense:

[In LL million] 2009 2008Deferred tax Deferred tax Income Deferred tax Deferred tax Income

assets liabilities statement assets liabilities statement

Revaluation offinancial investments– available-for-sale - 5,489 - - 1,060 -Non-current assetsheld for sale 150 - (144) 150 - (225)Depreciation ofproperty and equipment 3,315 - - - - -Provision fordoubtful loans 1,199 - (550) 1,468 - (399)Others 382 - - 590 - -

5,046 5,489 (694) 2,208 1,060 (624)



FINANCIALSTATEMENTS


35. OTHER LIABILITIES


Margins on letters of credit 6,764 7,243Due to the National Social Security Fund 901 599Balances payable as a result of Inaash Bank SAL acquisition 201 201Accrued expenses 17,626 10,984Interest and commissions received in advance 6,844 5,211Customers’ transactions between head office and branches 3,195 20,076Other creditors 29,043 22,486Accrued interest 1,832 1,913Insurance contracts liabilities 5,853 5,148Investment contracts liabilities (i) 55,681 44,865

127,940 118,726

(i) Investment contract liabilities – insurance businessThe change in investment contract liabilities may be analyzed as follows:

[In LL million] 2009Deposit Unit-linked Provision for Total

component liabilities participation

At 1 January 35,639 8,911 315 44,865Investment component of premiums received 8,521 5,182 - 13,703Surrenders paid and cancellations (4,209) (2,986) - (7,195)

39,951 11,107 315 51,373Change in investment contract liabilities:Accrued interest, net 1,586 203 - 1,789Unrealized loss - 1,752 - 1,752Provision for participation - - 528 528Others (383) 622 - 239

1,203 2,577 528 4,308At 31 December 41,154 13,684 843 55,681

[In LL million] 2008Deposit Unit-linked Provision for Total

component liabilities participation

At 1 January 31,390 22,454 151 53,995Investment component of premiums received 7,766 5,014 - 12,780Surrenders paid and cancellations (4,982) (16,379) - (21,361)Transfers of provision for participation 106 - (106) -

34,280 11,089 45 45,414Change in investment contract liabilities:Accrued interest, net 1,359 62 - 1,421Unrealized loss - (2,240) - (2,240)Provision for participation - - 270 270

1,359 (2,178) 270 (549)At 31 December 35,639 8,911 315 44,865

The investment contract liabilities have been determined and certified on 11 January 2010 by an independent swornactuary.



70

36. PROVISION FOR RISKS AND CHARGES


Provision for miscellaneous risks 9,682 10,067Provisions for contingencies and charges 1,766 2,114Other provisions 435 262

11,883 12,443

37. EMPLOYEES’ END OF SERVICE BENEFITS

Movements in the provision for end of service benefits recognized in the consolidated statement of financial positionis as follows:


Balance at 1 January 12,744 9,758Provided during the year (note 11) 1,394 4,527Arising from acquisition of a subsidiary 2,780 -Paid during the year (1,524) (1,541)Balance at 31 December 15,394 12,744

38. SHARE CAPITAL

a] Common sharesThe authorized, issued and fully paid share capital as of 31 December 2009 comprised of 50,000 shares of nominalvalue of LL 212,400 each (2008: same).

b] Preferred sharesOn 22 July 2008, the Bank issued 9,000 preferred shares (Series 2008) for a nominal amount of LL 212,400 each (a totalof LL 1,912 million) plus a share premium denominated in US Dollars of US$ 9,859. Accordingly, share premium of LL133,121 represents a premium of US$ 88,731,675 (or LL 133,763 million) less issuance costs of LL 642 million.

The payment of dividends for preferred shareholders is dependent on:(1) The availability of non-consolidated net income for a specific year after appropriation of legal and other

regulatory reserves;(2) The continuous compliance with the laws and regulations imposed by the Central Bank of Lebanon and the

Banking Control Commision; and(3) The approval of the Ordinary General Assembly of shareholders to distribute those dividends.

c] Cash contribution by shareholders

Cash contribution to capital of US$ 70,810,000 was paid by the shareholders in prior years. These contributions weregranted by the shareholders of the Bank in order to support and develop the activities of the Bank, in accordance withthe following conditions:

- Every shareholder is committed to retain the contributions during the lifetime of the Bank;- The shareholders commit to cover any loss using their contributions according to the provisions of article 4 (A-B)

of circular N° 1114 of the Bank of Lebanon and article 134 of the Money and Credit Act;- The shareholders have the right to use or not to use these contributions in case of a capital increase; and- Interest rate applied on these contributions is determined based on the latest 3-year Eurobond issue less 0.5% and

payment is subject to the approval of the Banking Control Commission and the shareholders’ general assemblymeeting. The Central Bank did not pay any interest on the cash contribution during the year 2009 (2008: same).

Both the Central Council of the Central Bank of Lebanon and the Ordinary General Assembly of the Bank approvedthese contributions.



FINANCIALSTATEMENTS


39. RESERVES RELATED TO SHARE CAPITAL[In LL million]

Reserve for TotalLegal General general banking

reserve reserve risks

At 1 January 2008 25,051 12,213 30,680 67,944Transfer to reserves 2,068 1,709 3,295 7,072

At 31 December 2008 27,119 13,922 33,975 75,016Transfer to reserves 6,192 8,184 3,447 17,823Others (727) (483) 409 (801)At 31 December 2009 32,584 21,623 37,831 92,038

a) Reserve for general banking risksIn compliance with main circular No. 50 issued by the Central Bank of Lebanon, the Bank should appropriate from itsnet profit for the year, a minimum amount of 2 per thousand and a maximum of 3 per thousand from the total riskweighted assets and off-balance sheet items based on the rates specified by the Central Bank of Lebanon as a reservefor general banking risks. The accumulated balance of this reserve should not be less than 2% of the total riskweighted assets and off balance sheet items at the end of the financial year 2017.

In addition, Société Générale de Banque - Jordanie and Société Générale Bank – Cyprus Ltd are also required toappropriate reserves for general banking risks in accordance with local requirements.

b)Legal reserveAs required by Local regulations where the Group operates a percentage of the net profit should be transferred to legalreserve. This reserve is non available for dividend distribution.

c) General reserveGeneral reserves relate to the Group’s operations in Lebanon, Cyprus and Jordan. These reserves were appropriatedaccording to resolutions by the General Ordinary Assembly of shareholders of respective entities. These reserves aredistributable.

d)Reserve for capital increaseThe shareholders resolved during the general assembly meeting dated 21 July 2010 to appropriate LL 2,634 million toreserve for capital increase as required by the regulators relating to the profit on sale of property acquired insettlement of debts (note 27).

40. RESERVE FOR NON-CURRENT ASSETS HELD FOR SALE

In compliance with pronouncement 10/2008 of the Banking Control Commission issued on 2 April 2008, whenproperties acquired in settlement of debts are not sold within the timeframe required by local regulators, the Bankshould appropriate an amount equal to 5% or 20% of the carrying value of such properties. The annual appropriation,which is from the net profit of the respective year after appropriations to legal reserve and reserve for general bankingrisks, is reported under “reserve for non-current assets held for sale”.

The Bank shall make a transfer from this reserve into retained earnings in the following circumstances:a) The reserve appropriated in prior years related to a property disposed of; orb) The reserve appropriated in prior years (equal or up to) an impairment loss recognized in the income statement

against the acquired property.

41. REVALUATION RESERVE FOR PROPERTY


Revaluation amount 5,499 5,499Book value (945) (945)Sale of real estate (620) (620)Revaluation variance 3,934 3,934

The Central Bank of Lebanon and the tax authorities approved on 29 March 1995 and on 18 April 1995, respectively,the revaluation of some of the buildings owned by the Bank and used for operating purposes in accordance with thelaw no. 282 dated 30 December 1993 (note 25).



72

42. AVAILABLE-FOR-SALE RESERVE


At 1 January 7,232 (1,265)

Net realized gains on financial investments – available-for-sale reclassified to the income statement (note 8) (9,228) (191)Impairment losses transferred to the income statement (note a) - 963Net unrealized gains on financial investments – available for-sale 36,549 8,785Deferred tax liability (4,429) (1,060)Other adjustments 134 -Net movement 23,026 8,497At 31 December 30,258 7,232

(a) For the year ended 31 December 2008, the quoted share price of Société Générale SA – Paris witnessed a significantdecline in value. As a result, the Bank recognized impairment losses against these shares for LL 963 million.

43. DIVIDENDS PAID TO EQUITY HOLDERS OF THE PARENT


Declared and paid during the yearDividends on ordinary shares (LL 482,400 per share) 24,120 -Dividend on preferred shares (LL 468,350 per share) 4,214 -

28,334 -

On 30 April 2009, the Ordinary General Assembly of shareholders approved the above dividend distributions.

44. CASH AND CASH EQUIVALENTS


Cash and balances with the Central Banks 879,086 640,776Treasury Bills 1,538,969 1,048,008Deposits with banks and financial institutions 203,718 180,363Amounts due from Head Office, branches and affiliates 806,604 458,971Due to Central Banks (305,110) (305,101)Due to banks and other financial institutions (167,658) (127,684)Amounts due to Head Office, branches and affiliates (316,386) (322)

2,639,223 1,895,011Less: balances with maturities exceeding 3 monthsCash and balances with the Central Banks 601,531 456,883Deposits with banks and financial institutions 3,160 1,689Amounts due from Head Office, branches and affiliates 175,203 152,466Treasury Bills 1,538,969 1,003,389Due to Central Banks (305,110) (305,101)Due to banks and other financial institutions (66,371) (55,011)Amounts due to Head Office, branches and affiliates (279,685) -

1,667,697 1,254,315Cash and cash equivalents at 31 December 971,526 640,696



FINANCIALSTATEMENTS


45. RELATED PARTY TRANSACTIONS

The Group enters into transactions with major shareholders, directors, senior management and their related concernsin the ordinary course of business at commercial interest and commission rates. Except for a few loans to relatedparties (note 19), all the loans and advances to related parties are performing advances and are free of any allowancefor credit losses.

The following transactions have been entered into with related parties during 2009:

[In LL million] 2009Major Other Total

shareholders related parties

Loans and advances (customers, Head Office, branches and affiliates) 595,723 25,989 621,712Customers’ deposits (customers, Head Office, branches and affiliates) 2,113 8,053 10,166Letters of guarantees 6,970 552 7,522Interest received / loans 9,662 678 10,340Interest paid / deposits 3,196 1,360 4,556Dividends received 68 - 68Commissions received 577 4 581Technical assistance fees paid 1,498 648 2,146Technical assistance received - 671 671Rent paid 2,686 - 2,686Commission paid 354 - 354

The following transactions have been entered into with related parties during 2008:

[In LL million] 2009Major Other Total

shareholders related parties

Loans and advances (customers, Head Office, branches and affiliates) 402,948 89,193 492,141Customers’ deposits (customers, Head Office, branches and affiliates) 18,940 15,373 34,313Letters of guarantees 2,065 1,111 3,176Interest received / loans 22,656 1,314 23,970Interest paid / deposits 1,509 2,065 3,574Commissions received 846 - 846Technical assistance fees paid 4,282 - 4,282Technical assistance received - 671 671Rent paid 2,618 - 2,618Commission paid 435 - 435

Compensation of the key management personnel is as follows:


Board remunerations and attendance fees paid 3,408 1,722

46. IMPAIRED LOANS FULLY PROVIDED FOR TRANSFERRED TO OFF-BALANCE SHEET


Corporate loans 55,627 122,765Retail loans 125,348 2,775

180,975 125,540



74

As per Banking Control Commission Circular no. 240, banks are required to transfer to the off-balance sheet doubtfulloans fully provided for and which meet some additional criteria outlined in the circular.

The movement in allowance for impairment losses for doubtful loans fully provided for was as follows:

In LL million] 2009 2008

Balance at 1 January 125,540 133,073Impairment loss during the year 6,359 4,683Transfer from the statement of financial position (note 18) 51,378 3,139Transfer to the statement of financial position (note 18) (550) (5,334)Less: write-offs (1,756) (9,935)Difference of exchange 4 (86)Balance at 31 December 180,975 125,540

47. FIDUCIARY DEPOSITS

A summary of the Bank’s fiduciary accounts according to law no. 520 dated 6 June 1996 relating to the developmentof financial markets and fiduciary contracts is as follows:


Deposits with banks 83,093 130,990Loans and advances 13,568 13,568Equity instruments 97,518 1,908Certificates of deposit 9,675 9,600

203,854 156,066

48. FINANCIAL ASSETS UNDER MANAGEMENT – NON DISCRETIONARY


Treasury bills and Eurobonds 89,951 84,090Bonds and other debt instruments 61,804 46,939Equity instruments 3,604 3,957Certificates of deposit 9,753 9,677Funds 355,813 554,492Stocks 270,999 171,163

791,924 870,318

49. COMMITMENTS AND CONTINGENT LIABILITIES

To meet the financial needs of customers, the Group enters into various irrevocable commitments and contingentliabilities. These consist of financial guarantees, letters of credit and other undrawn commitments to lend. Even thoughthese obligations may not be recognized on the consolidated statement of financial position, they do contain creditrisk and are therefore part of the overall risk of the Group (note 52.1).

The total outstanding commitments and contingent liabilities are as follows:


Contingent liabilitiesCommitments issued to customers 29,018 872Commitments issued to financial institutions 105,208 119,272Guarantees issued to customers 178,923 135,426Guarantees issued to financial institutions 39,138 21,566Debtors by acceptances 65,929 74,642

418,216 351,778CommitmentsUndrawn commitments to lend 367,683 342,616Fiduciary deposits 203,854 156,066Financial assets under management – non discretionary 791,924 870,318

1,363,461 1,369,000



FINANCIALSTATEMENTS


Contingent liabilitiesLetters of credit, guarantees (including standby letters of credit) and acceptances commit the Group to make paymentson behalf of customers in the event of a specific act, generally related to the import or export of goods. Guarantees andstandby letters of credit carry the same credit risk as loans.

Legal claimsLitigation is a common occurrence in the banking industry due to the nature of the business undertaken. The Grouphas formal controls and policies for managing legal claims. Once professional advice has been obtained and theamount of loss reasonably estimated, the Group makes adjustments to account for any adverse effects which theclaims may have on its financial standing. At year end, the Group had several unresolved legal claims.

Undrawn commitments to lendCommitments to extend credit represent contractual commitments to make loans and revolving credits. Commitmentsgenerally have fixed expiry dates, or other termination clauses. Since commitments may expire without being drawnupon, the total contract amounts do not necessary represent future cash requirements.

However, the potential credit loss is less than the total unused commitments since most commitments to extendcredit are contingent upon customers maintaining specific standards. The Group monitors the term to maturity ofcredit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments.

Capital commitmentsAt 31 December 2009, the Group had capital commitments in respect of premises and equipment purchasesamounting to LL 390 million (2008: LL 1,363 million).

Operating lease commitmentsFuture minimum rentals payable under non-cancelable operating leases mainly in connection with the Group’s branchpremises are as follows as of 31 December:


Within one year 5,374 3,673After one year but not more than five years 17,201 16,799More than five years 328 -

22,903 20,472

Other commitmentsThe Bank’s books and records are being reviewed by the Department of Income Tax for the years 2006 and 2007(inclusive). The ultimate outcome of this review cannot be presently determined.

The Bank’s contributions to the National Social Security Fund (NSSF) have not been reviewed since May 2004. Theultimate outcome of the review that may take place cannot be presently determined.

The Bank’s books and records have not yet been reviewed by the department of Value Added Tax since inception. Theultimate outcome of any tax review that might take place cannot be presently determined.

Sogecap Liban SAL contributions to the National Social Security Fund (NSSF) have not been reviewed by the NSSF since2000. The ultimate outcome of any review that may take place cannot presently be determined.

Sogecap Liban SAL books and records have not been reviewed by the Department of Income Tax since 2006 (inclusive).The ultimate outcome of any review that may take place cannot presently be determined.

Fidus SAL books and records have not been reviewed by the Department of Income Tax for the years 2007 to 2009. Theultimate outcome of any review that may take place cannot presently be determined.

Fidus SAL contributions to the National Social Security Fund (NSSF) have not been reviewed by the NSSF since 2002.The ultimate outcome of any review that may take place cannot presently be detemined.



76

50. FAIR VALUE OF FINANCIAL INSTRUMENTS

A. Determination of fair value and fair value hierarchyThe Group uses the following hierarchy for determining and disclosing the fair value of financial instruments byvaluation technique:

Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;

Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable,either directly or indirectly; and

Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based onobservable market data.

[In LL million]Level 1 Level 2 Level 3 Total

31 December 2009

Financial assets:Derivative financial instruments:

Interest rate swaps - - - -Forward foreign exchange contracts - 6,937 - 6,937

- 6,937 - 6,937

Financial assets – held-for-trading:Equities 28 5 - 33

Financial assets designated at fair value throughprofit or loss:

Financial instruments to cover unit – linked liabilities 6,967 - - 6,967

Financial investments – available-for-sale:Lebanese treasury bills (LL) - 430,550 - 430,550Lebanese treasury bills (Eurobonds) 570,850 - - 570,850Equities 9,304 - - 13,542Debt 14,943 - - 14,943

595,097 430,550 - 1,029,885

Financial liabilities:Derivative financial instruments:

Forward foreign exchange contracts - 299 - 229

Financial instruments recorded at fair valueThe following is a description of the determination of fair value for financial instruments which are recorded at fairvalue using valuation techniques. These incorporate the Group’s estimate of assumptions that a market participantwould make when valuing the instruments.

DerivativesDerivative products valued using a valuation technique with market observable inputs are mainly interest rate swapsand forward foreign exchange contracts. The most frequently applied valuation technique include forward pricing. Themodel incorporates various inputs including foreign exchange spot and forward rates and interest rate curves.

Financial investments – available-for-saleAvailable-for-sale financial assets valued using a valuation technique or pricing models primarily consist of unquoteddebt securities.

These assets are valued using models which only incorporate data observable in the market.




FINANCIALSTATEMENTS

Financial assets held-for-tradingHeld-for-trading financial assets comprise over the counter financial instruments purchased from an internationalbank. Fair value is provided using valuation models which use discounted cash flow analysis which incorporates eitheronly observable data or both observable and non-observable data.

Fair value of financial assets and liabilities not carried at fair valueThe following describes the methodologies and assumptions used to determine fair values for those financialinstruments which are not already recorded at fair value in the financial statements:

Assets for which fair value approximates carrying valueFor financial assets and financial liabilities that have a short term maturity (less than three months) it is assumed thatthe carrying amounts approximate to their fair value. This assumption is also applied to demand deposits, and savingsaccounts without a specific maturity.

Fixed rate financial instrumentsThe fair value of fixed rate financial assets and liabilities carried at amortized cost are estimated by comparing marketinterest rates when they were first recognized with current market rates for similar financial instruments. The Groupdoes not have fixed interest bearing deposits with a maturity greater than one year.

Set out below is a comparison by class of the carrying amounts and fair values of the Group’s financial instruments thatare not carried at fair value in the financial statements. The table does not include the fair values of non-financial assetsand non-financial liabilities.

[In LL million] Level 1 2009 2008Carrying value Fair value Carrying value Fair value

Financial assetsCash and balances with the Central Banks 879,086 879,086 640,776 640,776Deposits with banks and financialinstitutions 203,718 203,718 180,363 180,363Amounts due from Head Office, branchesand affiliates 806,604 806,604 458,971 458,971Loans and advances to customers, net 2,029,016 2,059,151 1,401,753 1,402,590Loans and advances to related parties, net 63,211 63,211 55,941 55,941Financial assets classified as loans andreceivables 1,279,410 1,336,386 1,178,352 1,175,343Financial investments – held-to-maturity 500,372 494,729 383,824 350,163

5,761,417 5,842,885 4,299,980 4,264,147

Financial liabilitiesDue to Central Banks 305,110 302,809 305,101 301,861Due to banks and financial institutions 167,658 167,658 127,684 127,684Amounts due to Head Office, branches andaffiliates 316,386 316,386 322 322Customers’ deposits 5,515,275 5,515,275 3,903,315 3,903,315Related parties’ deposits 7,808 7,808 11,568 11,568

6,312,237 6,309,936 4,347,990 4,344,750

B. Reclassification of financial assetsFollowing the amendments to IAS 39 and IFRS 7 Reclassification of Financial Assets (effective from 1 July 2008) and asa result of the contraction in the market for many classes of assets, the Group has undertaken a review of assets thatare classified as available-for-sale, in order to determine whether this classification remains appropriate. Where it wasdetermined that the market for an asset is no longer active, and that the Group no longer intends to trade,management has reviewed the instrument to determine whether it is appropriate to reclassify it to ‘Loans andReceivables’. This reclassification has only been performed where the Group, at the reclassification date, has the clearintention and ability to hold the financial asset for the foreseeable future or until maturity.



78

The following tables show the carrying amount and fair value of financial assets reclassified from “Available-for-Sale” tothe “Loans and Receivables” category, as at the reporting date. All transfers occurred on 1 July 2008.

[In LL million] Level 1 Available-for-sale2009 2008

Carrying amount Fair value Carrying amount Fair value

Financial assets reclassified during the year as at the date of reclassification:

Lebanese treasury bills - Eurobonds - - 250,667 250,667

Financial assets reclassified during 2008as at year end:

Lebanese treasury bills - Eurobonds 163,308 177,992 248,468 241,262

The following table shows the total fair value gains and losses recorded on available-for-sale assets reclassified to the“Loans and receivables” category, up until the date of transfer. It also shows the undiscounted amount of cash flowsexpected to be recovered from and the expected effective interest rate applied to reclassified assets, as assessed at thedate of reclassification.

[In LL million]Lebanese treasury bills

denominated in foreign currency

Cost of securities transferred 252,204Fair value losses recognized in equity:

Recorded during 2008 and in prior years (1,537)

Carrying amount at date of reclassification 250,667

Expected undiscounted cash recoveries, as assessed at the date of reclassification 319,057

Anticipated average effective interest rate over the remaining life of the assets 7.45%

The following table shows the total fair value gains or losses and the difference in net interest income that would havebeen recognized during the period subsequent to reclassification if the Group had not reclassified financial assets fromthe “Available-for-sale” to the “Loans and receivables” category. This disclosure is provided for information purposesonly; it does not reflect what has actually been recorded in the financial statements of the Group.

[In LL million] Level 1 Available-for-sale Available-for-sale2009 2008

Income statement Equity Income statement Equity

Gain on sale of financial investments 4,857 - - -Fair value gains and losses which would otherwise have been recorded after reclassification, during the current period - 14,684 - (7,206)Net interest income which would otherwisehave been recorded after reclassification,during the current period - - - -Total income or expense which would otherwise have been recorded during the year since reclassification 4,857 14,684 - (7,206)

The following table shows the net profit or loss actually recorded on assets reclassified to loans and receivablessubsequent to reclassification:

[In LL million] Level 1 Available-for-sale2009 2008

Net interest income 18,594 4,020



FINANCIALSTATEMENTS


51. MATURITY ANALYSIS OF ASSETS AND LIABILITIES

The table below shows an analysis of assets and liabilities analyzed according to when they are expected to be recoveredor settled.

[In LL million] At 31 December 2009Less than More than Totalone year one year

ASSETSCash and balances with the Central Banks 441,910 437,176 879,086Deposits with banks and financial institutions 203,718 - 203,718Amounts due from Head Office, branches and affiliates 806,604 - 806,604Derivative financial instruments 6,937 - 6,937Financial assets held-for-trading - 33 33Financial assets designated at fair value through profit or loss 6,967 - 6,967Loans and advances to customers, net 1,016,707 1,012,309 2,029,016Loans and advances to related parties, net 62,367 844 63,211Debtors by acceptances 65,929 - 65,929Financial investments – available-for-sale 216,381 813,504 1,029,885Financial assets classified as loans and receivables 79,222 1,200,188 1,279,410Financial investments – held-to-maturity 417,770 82,602 500,372Investments in non-consolidated subsidiaries - 2,510 2,510Property and equipment 2,780 59,451 62,231Intangible assets 1,045 1,516 2,561Non-current assets held for sale 121,460 868 122,328Deferred tax assets 150 4,896 5,046Other assets 46,259 6,348 52,607Goodwill - 15,854 15,854TOTAL ASSETS 3,496,206 3,638,099 7,134,305

LIABILITIESDue to Central Banks 251,114 53,996 305,110Due to banks and financial institutions 127,331 40,327 167,658Amounts due to Head Office, branches and affiliates 316,386 - 316,386Derivative financial instruments 299 - 299Customers’ deposits 5,421,427 93,848 5,515,275Related parties’ deposits 7,808 - 7,808Engagements by acceptances 65,929 - 65,929Current tax liabilities 12,310 - 12,310Deferred tax liabilities 5,489 - 5,489Other liabilities 70,376 57,564 127,940Provision for risks and charges 1,916 9,967 11,883Employees’ end of service benefits 2,116 13,278 15,394TOTAL LIABILITIES 6,282,501 268,980 6,551,481

NET (2,786,295) 3,369,119 582,824



80

[In LL million] At 31 December 2008Less than More than Totalone year one year

ASSETSCash and balances with the Central Banks 444,802 195,974 640,776Deposits with banks and financial institutions 180,363 - 180,363Amounts due from Head Office, branches and affiliates 458,971 - 458,971Derivative financial instruments 300 - 300Financial assets held-for-trading - 927 927Financial assets designated at fair value through profit or loss 4,401 - 4,401Loans and advances to customers, net 743,537 658,216 1,401,753Loans and advances to related parties, net 55,229 712 55,941Debtors by acceptances 74,642 - 74,642Financial investments – available-for-sale 85,951 304,396 390,347Financial assets classified as loans and receivables 138,780 1,039,572 1,178,352Financial investments – held-to-maturity 11,399 372,425 383,824Investments in non-consolidated subsidiaries - 1,606 1,606Property and equipment 2,508 50,692 53,200Intangible assets 613 1,493 2,106Non-current assets held for sale 142,582 985 143,567Deferred tax assets 150 2,058 2,208Other assets 30,920 42,040 72,960Goodwill - 2,706 2,706TOTAL ASSETS 2,375,148 2,673,802 5,048,950

LIABILITIESDue to Central Banks 1,103 303,998 305,101Due to banks and financial institutions 105,078 22,606 127,684Due to Head Office, branches and affiliates 322 - 322Derivative financial instruments 783 - 783Customers’ deposits 3,785,259 118,056 3,903,315Related parties’ deposits 11,568 - 11,568Engagements by acceptances 74,642 - 74,642Current tax liabilities 5,852 3,927 9,779Deferred tax liabilities 1,060 - 1,060Other liabilities 65,391 53,335 118,726Provision for risks and charges 2,219 10,224 12,443Employees’ end of service benefits 1,668 11,076 12,744TOTAL LIABILITIES 4,054,945 523,222 4,578,167

NET (1,679,797) 2,150,580 470,783

52. RISK MANAGEMENT

The Group devotes significant resources to the ongoing adaptation of its risk management framework, in order to keeppace with the increasing diversification of its activities. The risk management is implemented in compliance with thetwo following fundamental principles:• risk assessment departments are completely independent from the operating divisions• a consistent approach to risk assessment and monitoring is applied at the Group level

a) Risk management structureThe Board of Directors is ultimately responsible for identifying and controlling risks; however, there are separateindependent bodies responsible for managing and monitoring risks.

Board of DirectorsThe Board of Directors is responsible for the overall risk management approach and for approving the risk strategiesand principles.

Risk ManagementThe Risk Management Unit is responsible for implementing and maintaining risk related procedures to ensure anindependent control process.



FINANCIALSTATEMENTS


Group TreasuryGroup Treasury is responsible for managing the Group’s assets and liabilities and the overall financial structure. It is alsoprimarily responsible for the funding and liquidity risks of the Group.

Internal AuditRisk management processes throughout the Group are audited annually by the internal audit function, that examinesboth the adequacy of the procedures and the Group’s compliance with the procedures. Internal Audit discusses theresults of all assessments with management, and reports its findings and recommendations to Board of Directors.

b)Risk measurement and reporting systemsIn 2003, the Group launched a major project to quantify its credit risks using a RAROC (Risk-Adjusted Return onCapital) approach. One of the main objectives is to establish, using quantitative methods, the level of loss expected oncredit transactions over the course of the business cycle.

Taking advantage of the experience gained on this project, the Group has also begun work to upgrade its riskmanagement procedures in line with Basel II standards.

Monitoring and controlling risks is primarily performed based on limits established by the Group. These limits reflectthe business strategy and market environment of the Group as well as the level of risk that the Group is willing toaccept, with additional emphasis on selected industries. In addition, the Group monitors and measures the overall riskbearing capacity in relation to the aggregate risk exposure across all risk types and activities.

c) Risk mitigationAs part of its overall risk management, the Group uses derivatives and other instruments to manage exposures resultingfrom changes in interest rates, foreign currencies, credit risks, and exposures arising from forecast transactions.

The Group actively uses collateral to reduce its credit risks.

d)Excessive concentrationThe Group also attempts to control credit risk by regular monitoring of its credit exposures and continuous assessmentof the creditworthiness of counterparties by the credit risk committee.

52.1 [ CREDIT RISK ]

In line with the Group’s conservative lending policy, the Group seeks to diversify its lending activities to avoid undueconcentrations of credit risks with individuals and groups of customers in specific geographical locations or businesssectors. Collateral is also taken where appropriate.

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the otherparty to incur a financial loss. The Group attempts to control credit risk by monitoring credit exposures, limitingtransactions with specific counterparties, and continuously assessing the creditworthiness of counterparties. TheGroup seeks to manage its credit risk exposure through diversification of lending activities to avoid undueconcentrations of risks with individuals or groups of customers in specific locations or businesses.

The Group has established a credit quality review process to provide early identification of possible changes in thecreditworthiness of counterparties, including regular collateral revisions. Counterparty limits are established by the useof a credit risk classification system, which assigns each counterparty a risk rating. Risk ratings are subject to regularrevision. The credit quality review process aims to allow the Group to assess the potential loss as a result of the risks towhich it is exposed and take corrective action. The risk rating system, which is managed by an independent unit,provides a rating based on client and transaction level. The classification system includes eight grades, of which fivegrades relate to the performing portfolio (regular credit facilities: risk rating “1”, “2”, “3”, “4” and “5” and special mention– watch list: risk rating “6a” and “6c”), one grade relates to substandard loans (risk rating “6b”) and two grades relate tonon-performing loans (risk rating “7” and “8”). The Group uses the above internal rating system for the classifications ofall of its financial assets portfolio.


Derivative financial instrumentsCredit risk arising from derivative financial instruments is, at any time, limited to those with positive fair values, asrecorded on the statement of financial position. In the case of credit derivatives, the Group is also exposed to orprotected from the risk of default of the underlying entity referenced by the derivative.

With gross-settled derivatives, the Group is also exposed to a settlement risk, as being the risk that the Group honorsits obligation but the counterparty fails to deliver the counter-value.

Credit-related commitment risks The Group makes available to its customers guarantees which may require that the Group makes payments on theirbehalf and enters into commitments to extend credit lines to secure their liquidity needs. Letters of credit andguarantees (including standby letters of credit) commit the Group to make payments on behalf of customers in theevent of a specific act, generally related to the import or export of goods. Such commitments expose the Group tosimilar risks as loans and are mitigated by the same control processes and policies.

Risk concentrations: maximum exposure to credit risk without taking account of any collateral and othercredit enhancementsThe Bank’s concentrations of risk are managed by client/counterparty and by geographical location. The maximumcredit exposure as at 31 December 2009 was LL 734,952 million (2008: LL 519,638 million) before taking account ofcollateral or other credit enhancements and LL 429,842 million (2008: LL 214,537 million) net of such protection.

The following table shows the maximum exposure to credit risk for the components of the statement of financialposition, including derivatives, by geography and by industry before the effect of mitigation through the use of mas-ter netting and collateral agreements. Where financial instruments are recorded at fair value, the amounts shown rep-resent the current credit risk exposure but not the maximum risk exposure that could arise in the future as a result ofchanges in values.

[In LL million] 2009 2008Lebanon Outside Total Lebanon Outside Total

Lebanon Lebanon

Cash and balances withthe Central Banks 754,728 124,358 879,086 539,101 101,675 640,776Deposits with banks and financial institutions 57,563 146,155 203,718 52,691 127,672 180,363Derivative financial instruments 369 6,568 6,937 300 - 300Amounts due from Head Office,branches and affiliates 822 805,782 806,604 547 458,424 458,971Financial assets held-for-trading 33 - 33 927 - 927Financial assets designated atfair value through profit or loss 6,967 - 6,967 4,401 - 4,401Loans and advancesto customers, net 1,143,007 886,009 2,029,016 1,029,620 372,133 1,401,753Loans and advancesrelated parties, net 60,367 2,844 63,211 50,733 5,208 55,941Financial investments– available-for-sale 1,028,506 1,379 1,029,885 386,374 3,973 390,347Financial assets classified asloans and receivables 1,279,410 - 1,279,410 1,171,822 6,530 1,178,352Financial investments– held-to-maturity 359,190 141,182 500,372 338,903 44,921 383,824Total credit exposure 4,690,962 2,114,277 6,805,239 3,575,419 1,120,536 4,695,955

The maximum credit risk for the financial assets is based on their net carrying amounts as recorded in theconsolidated statement of financial position.


82



FINANCIALSTATEMENTS


Collateral and other credit enhancementsThe amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelinesare implemented regarding the acceptability of types of collateral and valuation parameters.

The main types of collateral obtained are as follows: • For commercial lending, charges over real estate properties, inventory, trade receivables, cash and securities• For retail lending, mortgages over residential properties

Management monitors the market value of collateral, requests additional collateral in accordance with the underlyingagreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowancefor impairment losses.

It is the Group’s policy to dispose of repossessed properties in an orderly fashion. The proceeds are used to reduce orrepay the outstanding claim. In general, the Group does not occupy repossessed properties for business use.

Credit quality per class of financial assetsThe credit quality of financial assets is managed by the Group using internal credit ratings. The table below shows thecredit quality by class of asset based on the Group’s credit rating system. The amounts presented are gross ofimpairment allowances.

[In LL million] Neither past due Past due Individually impaired Totalnor impaired but not impaired Substandard Doubtful

2009Balances with the Central Banks 827,072 - - - 827,072Deposits with Banks andfinancial institutions 203,718 - - - 203,718Amounts due from Head Office,branches and affiliates 806,604 - - - 806,604Derivative financial instruments 6,937 - - - 6,937Financial assets held-for-trading 33 - - - 33Financial assets designated atfair value through profit or loss 6,967 - - - 6,967Loans and advances to customers, net

- Corporate 1,007,957 44,022 23,090 426,765 1,501,834- Retail 923,914 33,309 5,563 112,706 1,075,492

Loans and advances torelated parties, net

- Corporate 58,602 - - 1,161 59,763- Retail 3,714 437 - - 4,151

Financial investments– available-for-sale 1,029,885 - - 446 1,030,331Financial assets classified as loansand receivables 1,279,410 - - 30 1,279,440Financial investments– held-to-maturity 500,372 - - - 500,372

6,655,185 77,768 28,653 541,108 7,302,714Moody’s equivalent Aaa-B3* Not rated Not rated Not rated Not rated



84

[In LL million] Neither past due Past due Individually impaired Totalnor impaired but not impaired Substandard Doubtful

2008Balances with the Central Banks 594,676 - - - 594,676Deposits with Banks andfinancial institutions 180,363 - - - 180,363Amounts due from Head Office,branches and affiliates 458,971 - - - 458,971Derivative financial instruments 300 - - - 300Financial assets held-for-trading 927 - - - 927Financial assets designated at fairvalue through profit or loss 4,401 - - - 4,401Loans and advances to customers, net

- Corporate 719,892 43,622 38,055 391,358 1,192,927- Retail 587,449 25,176 11,968 78,786 703,379

Loans and advances torelated parties, net

- Corporate 11,420 2,314 - 246 13,980- Retail 42,207 - - - 42,207

Financial investments– available-for-sale 390,347 - - 446 390,793

Financial assets classified asloans and receivables 1,178,352 - - 30 1,178,382Financial investments – held-to-maturity 383,824 - - - 383,824

4,553,129 71,112 50,023 470,866 5,145,130Moody’s equivalent Aaa-B3* Not rated Not rated Not rated Not rated

(*) The normal grade (neither past due nor impaired category) includes due from head office, branches and affiliates,derivative financial instruments, loans and advances to customers, loans and advances to related parties, financialassets held-for-trading which are not rated by Moody’s.

Past due but not impaired loans and advances include those that are past due by a few days.

It is the Group’s policy to maintain accurate and consistent risk rating across the credit portfolio. This facilitates focusedmanagement of the applicable risks and the comparison of credit exposures across all lines of business, geographicregions and products. The rating system is supported by a variety of financial analytics, combined with processedmarket information to provide the main inputs for the measurement of counterparty risk. All internal risk ratings aretailored to the various categories and are derived in accordance with the Group’s rating policy. The attributable risksare assessed and updated regularly.

See note 18 and 19 for more information with respect to the allowance for impairment losses on loans and advances.

Carrying amount by class of financial assets whose terms have been renegotiatedThe carrying value of renegotiated financial assets included in the consolidated statement of financial position is asfollows:


Loans and advances 49,454 40,927

Impairment assessmentFor accounting purposes, the Group uses an incurred loss model for the recognition of losses on impaired financialassets. This means that losses can only be recognized when objective evidence of a specific loss event has beenobserved.

The main considerations for the loan impairment assessment include whether any payments of principal or interest areoverdue by more than 90 days or whether there are any known difficulties in the cash flows of counterparties, creditrating downgrades, or infringement of the original terms of the contract. The Group addresses impairment assessmentin two areas: individually assessed allowances and collectively assessed allowances.



FINANCIALSTATEMENTS


Individually assessed allowancesThe Group determines the allowance appropriate for each individually significant loan or advance on an individualbasis. Items considered when determining allowance amounts include the sustainability of the counterparty’s businessplan, its ability to improve performance once a financial difficulty has arisen, projected receipts and the expectedpayout should bankruptcy ensue, the availability of other financial support, the realizable value of collateral and thetiming of the expected cash flows. Impairment allowances are evaluated at each reporting date, unless unforseencircumstances require more careful attention.

Collectively assessed allowancesAllowances are assessed collectively for losses on loans and advances that are not individually significant (includingcredit cards, residential mortages and unsecured consumer lending) and for individually significant loans that havebeen assessed individually and found not to be impaired. Allowances are evaluated separately at each reporting datewith each portfolio.

The collective assessment is made for groups of assets with similar risk characteristics, in order to determine whetherprovision should be made due to incurred loss events for which there is objective evidence but whose effects are notyet evident in the individual loans assessments. The collective assessment takes account of data from the loanportfolio (such as historical losses on the portfolio, levels of arrears, credit utilization, loan to collateral ratios andexpected receipts and recoveries once impaired) or economic data (such as current economic conditions,unemployment levels and local or industry-specific problems). This approximate delay between the time a loss islikely to have been incurred and the time it will be identified as requiring an individually assessed impairmentallowance is also taken into consideration. Local management is responsible for deciding the length of this periodwhich can extend for as long as one year. The impairment allowance is then reviewed by credit management to ensurealignment with the Group’s overall policy.

Financial guarantees and letters of credit are assessed and provisions are made in a similar manner as for loans.

Commitments and guaranteesTo meet the financial needs of customers, the Group enters into various irrevocable commitments and contingentliabilities. Even though these obligations may not be recognized on the consolidated statement of financial position,they do contain credit risk and are therefore part of the overall risk of the Group.

The table below shows the Group’s maximum credit risk exposure for commitments and guarantees.

The maximum exposure to credit risk relating to a financial guarantee is the maximum amount the Group could haveto pay if the guarantee is called on. The maximum exposure to credit risk relating to a loan commitment is the fullamount of the commitment. In both cases, the maximum risk exposure is significantly greater than the amountrecognized as a liability in the consolidated statement of financial position.


Financial guarantees 218,061 156,992Letters of credit 134,226 120,144Undrawn commitments to lend 367,683 342,616Bank acceptances 65,929 74,642

785,899 694,394

52.2 [ MARKET RISK ]

Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to changes inmarket prices.

Market risk arises from fluctuations in interest rates, foreign exchange rates and equity prices. The Board has set limitson the value of risk that may be accepted. This is monitored on a weekly basis by the Asset and Liability Committee.

52.2.1 [ INTEREST RATE RISK ]

Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair valuesof financial instruments. The Group is exposed to interest rate risk as a result of mismatches of interest rate repricing ofassets and liabilities and financial instruments not recognized in the consolidated statement of financial position which



86

will mature or reprice in a particular period. The Group manages this risk by matching the repricing of assets andliabilities through risk management strategies.

Interest rate sensitivityThe following table demonstrates the sensitivity to a reasonable possible change in interest rates, with all othervariables held constant, of the Group’s income statement and equity.

The sensitivity of the income statement is the effect of the assumed changes in interest rates on the profit or loss forthe year, based on the floating rate financial assets and financial liabilities held at 31 December, including the effect ofhedging instruments. The sensitivity of equity is calculated by revaluing fixed rate available-for-sale financial assets,including the effect of any associated hedges and swaps designated as cash flow hedges, at 31 December for theeffects of the assumed changes in interest rates. The total sensitivity of equity is based on the assumption that thereare parallel shifts in the yield curve.

[Currency] 2009 2008Sensitivity of Sensitivity of

Increase/ net interest Sensitivity Increase/ net interest Sensitivity decrease income of equity decrease income of equity

in basis points LL million LL million in basis points LL million LL million

Lebanese Lira + 50 558 - + 50 319 -US Dollars + 50 965 (1,980) + 50 1,354 (2,895)Euro + 50 (36) - + 50 (109) -

Lebanese Lira - 50 (558) - - 50 (319) -US Dollars - 50 (965) 1,980 - 50 (1,354) 2,895Euro - 50 36 - - 50 109 -

Interest rate sensitivity gapThe table below analyses the Group’s interest risk exposure on non-trading financial assets and liabilities. The Group’sassets and liabilities are included at carrying amount and categorized by the earlier of contractual repricing ormaturity date.

[In LL million] 2009Non

Up to 1 1 to 3 3 months 1 to 2 2 to 5 Over 5 interestmonth months to 1 year years years years bearing Total

ASSETSCash and balances with the Central Banks 497,627 226,125 - - - - 155,334 879,086Deposits with banks and financial institutions 98,324 48,906 - - - - 56,488 203,718Amounts due from Head Office,branches and affiliates 659,404 81,333 64,543 - - - 1,324 806,604Loans and advances to customers, net 413,711 138,201 911,934 131,976 246,792 179,757 6,645 2,029,016Loans and advances to related parties, net 59,864 467 2,633 209 35 3 - 63,211Financial investments – available-for-sale - 80,632 119,387 149,321 228,421 422,879 29,245 1,029,885Financial assets classified asloans and receivables 25,000 18,000 2,636 85,443 1,011,910 102,835 33,586 1,279,410Financial investments – held-to-maturity - - 309,876 129,149 58,749 - 2,598 500,372TOTAL ASSETS 1,753,930 593,664 1,411,009 496,098 1,545,907 705,474 285,220 6,791,302

LIABILITIES Due to Central Banks - 8,430 45,567 - - - 251,113 305,110Due to banks and financial institutions 90,552 33,419 15,938 - 23,493 4,071 185 167,658Amounts due to Head Office,branches and affiliates 38,567 43 277,678 - - - 98 316,386Customers’ deposits 3,639,755 1,468,066 227,531 208 1,261 5,505 172,949 5,515,275Related parties’ deposits 3,749 4,023 - - - - 36 7,808TOTAL LIABILITIES 3,772,623 1,513,981 566,714 208 24,754 9,576 424,381 6,312,237Total interest sensitivity gap (2,018,693) (920,317) 844,295 495,890 1,521,153 695,898 (139,161) 479,065



FINANCIALSTATEMENTS


[In LL million] 2008Non

Up to 1 1 to 3 3 months 1 to 2 2 to 5 Over 5 interestmonth months to 1 year years years years bearing Total

itemsASSETSCash and balances with the Central Banks 185,396 150,750 180,900 - - - 123,730 640,776Deposits with banks and financial institutions 131,621 2,405 1,478 - - - 44,859 180,363Amounts due from Head Office,branches and affiliates 195,819 126,676 133,629 - - - 2,847 458,971Loans and advances to customers, net 121,469 118,427 501,683 229,419 270,029 158,741 1,985 1,401,753Loans and advances to related parties, net 54,970 2 259 465 230 15 - 55,941Financial investments – available-for-sale 20,047 30,287 28,064 88,853 199,997 166 22,933 390,347Financial assets classified asloans and receivables 6,530 - 98,853 91,360 926,717 21,494 33,398 1,178,352Financial investments – held-to-maturity - 4,252 4,252 253,724 113,059 5,943 2,594 383,824TOTAL ASSETS 715,852 432,799 949,118 663,821 1,510,032 186,359 232,346 4,690,327

LIABILITIES Due to Central Banks - 8,430 45,567 - - - 251,104 305,101Due to banks and financial institutions 66,307 13,978 7,585 10,631 17,798 11,177 208 127,684Amounts due to Head Office,branches and affiliates 317 - - - - - 5 322Customers’ deposits 1,973,869 1,692,794 70,594 41,626 17,554 - 106,878 3,903,315Related parties’ deposits 6,928 - - - - - 4,640 11,568TOTAL LIABILITIES 2,047,421 1,715,202 123,746 52,257 35,352 11,177 362,835 4,347,990Total interest sensitivity gap (1,331,569) (1,282,403) 825,372 611,564 1,474,680 175,182 (130,489) 342,337

52.2.2 [ CURRENCY RISK ]

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates.The Board has set limits on positions by currency. Positions are monitored on a daily basis and hedging strategies areused to ensure positions are maintained within established limits.

The following table shows the effect of a reasonably probable change in currencies, with all other variables heldconstant, against the Lebanese Lira on the income statement and statement of changes in equity.

The negative amounts represent probable losses in the income statement or equity while positive amounts representprobable gains. An equivalent decrease in each of the below currencies against the LL would have resulted in anequivalent opposite impact.

[Currency] 2009 2008Effect on the Effect Effect on the Effect

Change in income On Change in income On currency rate statement equity currency rate statement equity

in % LL million LL million iin % LL million LL million

US Dollars + 25 222 - + 25 49 884Euro + 25 38 - + 25 (20) -



88

The following consolidated statement of financial position as at 31 December 2009 and 2008 are detailed in LebaneseLira (LL million) and foreign currencies, primarily US$, translated into LL million:

[In LL million] 31 December 2009 31 December 2008Foreign Total Foreign Total

currencies LL million currencies LL millionLL million LL million LL million LL million

ASSETSCash and balances withthe Central Banks 264,348 614,738 879,086 139,218 501,558 640,776Deposits with banks andfinancial institutions 12,489 191,229 203,718 12,808 167,555 180,363Amounts due from Head Office,branches and affiliates - 806,604 806,604 123 458,848 458,971Derivative financial instruments 6,778 159 6,937 300 - 300Financial assets held-for-trading - 33 33 - 927 927Financial assets designated at fair valuethrough profit or loss - 6,967 6,967 - 4,401 4,401Loans and advances to customers, net 247,915 1,781,101 2,029,016 199,642 1,202,111 1,401,753Loans and advances to related parties, net 830 62,381 63,211 250 55,691 55,941Debtors by acceptances - 65,929 65,929 - 74,642 74,642Financial instruments – available-for-sale 431,022 598,863 1,029,885 359,193 31,154 390,347Financial assets classified asloans and receivables 584,250 695,160 1,279,410 316,057 862,295 1,178,352Financial investments – held-to-maturity 330,387 169,985 500,372 309,798 74,026 383,824Investments in non-consolidated subsidiaries 2,510 - 2,510 1,606 - 1,606Property and equipment 56,045 6,186 62,231 49,060 4,140 53,200Intangible assets 1,712 849 2,561 1,285 821 2,106Non-current assets held for sale (1,388) 123,716 122,328 (972) 144,539 143,567Deferred tax assets 150 4,896 5,046 150 2,058 2,208Other assets 35,585 17,022 52,607 60,519 12,441 72,960Goodwill 1,012 14,842 15,854 2,706 - 2,706TOTAL ASSETS 1,973,645 5,160,660 7,134,305 1,451,743 3,597,207 5,048,950

LIABILITIES Due to Central Banks 305,110 - 305,110 305,101 - 305,101Due to banks and financial institutions 11,729 155,929 167,658 10,382 117,302 127,684Amounts due to Head Office,branches and affiliates 727 315,659 316,386 47 275 322Derivative financial instruments 115 184 299 783 - 783Customers’ deposits 1,404,578 4,110,697 5,515,275 958,334 2,944,981 3,903,315Related parties’ deposits 1,483 6,325 7,808 3,694 7,874 11,568Engagements by acceptances - 65,929 65,929 - 74,642 74,642Current tax liabilities 8,354 3,956 12,310 5,636 4,143 9,779Deferred tax liabilities 2,417 3,072 5,489 996 64 1,060Other liabilities 13,479 114,461 127,940 12,098 106,628 118,726Provision for risks and charges 7,257 4,626 11,883 10,436 2,007 12,443Employees’ end of services benefits 5,898 9,496 15,394 5,930 6,814 12,744TOTAL LIABILITIES 1,761,147 4,790,334 6,551,481 1,313,437 3,264,730 4,578,167NET EXPOSURE 212,498 370,326 582,824 138,306 332,477 470,783

52.2.3 [ EQUITY PRICE RISK ]

Equity price risk is the risk that the fair value of equities decreases as the result of changes in the level of equity indicesand individual stocks. The non-trading equity price risk from equity securities classified as available-for-sale. A 10percent increase in the value of the Group’s available-for-sale equities at 31 December 2009 would have increasedequity by LL 1,399 million (2008: LL 1,599 million). An equivalent decrease would have resulted in an equivalent butopposite impact.



FINANCIALSTATEMENTS


52.2.4 [ PREPAYMENT RISK ]

Prepayment risk is the risk that the Group will incur a financial loss because its customers and counterparties repay orrequest repayment earlier than expected. The fixed rate asset of the Group is not significant compared to the totalassets. Moreover, other market conditions causing prepayment is not significant in the markets in which the Groupoperates. Therefore the Group considers the effect of prepayment on net interest income is not material after takinginto account the effect of any prepayment penalties.

52.3 LIQUIDITY RISK AND FUNDING MANAGEMENT

Liquidity risk is the risk that the Group will be unable to meet its liabilities when they fall due. To limit this risk,management has arranged diversified funding sources, manages assets with liquidity in mind, and monitors liquidityon a daily basis. In addition, the Group maintains a statutory deposit with the Central Banks (refer to note 13 for detail).

The Group maintains a portfolio of highly marketable and diverse assets that are assumed to be easily liquidated in theevent of an unforeseen interruption of cash flow. The Group also has committed lines of credit that it can access tomeet liquidity needs. In addition, the Group maintains a statutory deposit with its Central Banks on customer deposits.In accordance with the Group’s policy, the liquidity position is assessed and managed under a variety of scenarios,giving due consideration to stress factors relating to both the market in general and specifically to the Group. The mostimportant of these is to maintain limits on the ratio of net liquid assets to customer liabilities, set to reflect marketconditions. Net liquid assets consist of cash, short-term bank deposits and liquid debt securities available for immedi-ate sale, less deposit from banks and other issued securities and borrowings due to mature within the next month. Theratio during the year was as follows:


At 31 December 29.40 41.74Average during the year 34.88 39.40Highest 37.80 41.74Lowest 29.40 37.59

Analysis of financial liabilities by remaining contractual maturitiesThe table below summarizes the Group’s financial assets and liabilities at 31 December 2009 and 2008 based oncontractual undiscounted repayment obligations. As the special commission payments up to contractual maturity areincluded in the table, totals do not match with the statement of financial position. The contractual maturities of assetsand liabilities have been determined on the basis of the remaining period at the statement of financial position dateto the contractual maturity date and do not take into account the effective expected maturities as shown in maturityanalysis of assets and liabilities. Repayments which are subject to notice are treated as if notice were being givenimmediately. However, the Group expects that many customers will not request repayment on the earliest date theGroup could be required to pay and the table does not reflect the expected cash flows indicated by the Group’s depositretention history.



90


Up to 1 1 to 3 3 months 1 to 2 2 to 5 Over 5month months to 1 year years years years Total

Cash and balances with the Central Banks 442,003 - - 69,419 387,523 - 898,945Deposits with banks and financial institutions 201,463 2,263 - - - - 203,726Amount due from Head Office,branches and affiliates 669,934 73,649 65,175 - - - 808,758Financial assets held-for-trading - - - - - 33 33Financial assets designated atfair value through profit or loss - - 6,967 - - - 6,967Loans and advances to customers, net 232,929 144,522 517,873 178,601 465,338 644,558 2,183,821Loans and advances to related parties, net 58,517 1,325 2,564 209 50 585 63,250Financial investments – available-for-sale 18,412 84,333 143,562 167,779 271,438 690,085 1,375,609Financial assets classified asloans and receivables 60,324 27,561 45,918 148,664 1,157,681 123,718 1,563,866Financial investments – held-to-maturity 128,890 4,081 292,959 62,302 30,824 - 519,056Total undiscounted financial assets 1,812,472 337,734 1,075,018 626,974 2,312,854 1,458,979 7,624,031

Due to Central Banks 1,113 - 250,333 60,003 - - 311,449Due to banks and financial institutions 88,685 17,473 21,255 12,762 23,493 4,072 167,740Amounts due to Head Office,branches and affiliates 38,723 43 281,751 - - - 320,517Customers’ deposits 3,673,089 1,497,078 262,849 103,485 1,764 6,923 5,545,188Related parties’ deposits 6,971 914 - - - - 7,885Total undiscounted financial liabilities 3,808,581 1,515,508 816,188 176,250 25,257 10,995 6,352,779Net undiscounted assets (liabilities) (1,996,109) (1,177,774) 258,830 450,724 2,287,597 1,447,984 1,271,252


Up to 1 1 to 3 3 months 1 to 2 2 to 5 Over 5month months to 1 year years years years Total

Due to Central Banks 1,103 - - 250,789 63,567 - 315,459Due to banks and financial institutions 95,433 6,556 3,333 - 17,798 4,808 127,928Amounts due to Head Office, branches and affiliates 330 - - - - - 330

Customers’ deposits 2,446,655 1,306,938 140,256 9,732 16,344 - 3,919,925Related parties’ deposits 11,568 - - - - - 11,568Total undiscounted financial liabilities 2,555,089 1,313,494 143,589 260,521 97,709 4,808 4,375,210



FINANCIALSTATEMENTS


The table below shows the contractual expiry by maturity of the Group’s contingent liabilities and commitments:

[In LL million] 31 December 2009On demand Less than 3 to 12 1 to 5 Over 5

3 months months years years Total

Commitments issued to customers 24,290 4,728 - - - 29,018Guarantees issued to financial institutions 15,780 12,739 6,121 847 3,652 39,139Guarantees issued to customers 73,599 17,318 62,433 12,155 13,418 178,923Foreign currencies to deliver 71,518 64,037 2,451 - - 138,006Commitments on term financial instruments 50 1,382 2,814 5,603 - 9,849Undrawn commitments to lend 367,683 - - - - 367,683Total 552,920 100,204 73,819 18,605 17,070 762,618

[In LL million] 31 December 2008On demand Less than 3 to 12 1 to 5 Over 5

3 months months years years Total

Commitments issued to customers 872 - - - - 872Guarantees issued to financial institutions 1,484 7,536 6,148 2,778 3,620 21,566Guarantees issued to customers 10,299 19,390 73,406 11,154 21,177 135,426Foreign currencies to deliver 25,268 5,127 6,994 - - 37,389Commitments on term financial instruments 93 1,467 3,910 11,784 - 17,254Undrawn commitments to lend 342,616 - - - - 342,616Total 380,632 33,520 90,458 25,716 24,797 555,123

The Group expects that not all of the contingent liabilities or commitments will be drawn before expiry of thecommitments.

53. OPERATIONAL RISK

Operational risk is the risk of loss arising from systems failure, human error, fraud or external events. When controls failto perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financialloss. The Group cannot expect to eliminate all operational risks, but through a control framework and by monitoringand responding to potential risks, the Group is able to manage the risks. Controls include effective segregation ofduties, access, authorization and reconciliation procedures, staff training and assessment processes, including the useof internal audit.

54. CAPITAL MANAGEMENT

The Group maintains an actively managed capital base to cover risks, inherent to the business. The adequacy of theGroup’s capital is monitored using, among other measures, the rules and ratios established by the Central Bank ofLebanon and the Banking Control Commission.

The Group should maintain a required capital adequacy ratio (equal to or greater than 12%) based on the total tier onecapital over the total risk weighted assets and off-balance sheet items.

The Group manages its capital structure and makes adjustments to it in the light of changes in economic conditionsand the risk characteristics of its activities. No changes were made in the objectives, policies and processes for the yearsended 31 December 2009 and 2008.



92

Capital consists of the following as of 31 December 2009 and 2008:


Tier 1 capital 535,127 498,829Tier 2 capital 20,525 9,886

555,652 508,715

55. SUBSEQUENT EVENTS

On 17 February 2010, the Central Council of the Central Bank of Lebanon approved the capital increase of the Bank inthe amount of LL 12,531,600,000 by issuing 10,000 preferred shares with a nominal amount of LL 212,400 per sharesubscribed-for in cash in accordance with the Extraordinary General Assembly of the Bank dated 30 December 2009.



FINANCIALSTATEMENTS


56. COMPARATIVE INFORMATION

- Derivative financial instruments have been reclassified from other assets and other liabilities. Comparative amountstotaling LL 300 million and LL 783 million respectively have been reclassified accordingly.

- Taxes payable have been reclassified from provision for risk and charges into other liabilities. Comparative amountstotaling LL 951 million have been reclassified accordingly.

- Net profit from sale of non-current assets held for sale has been reclassified to other operating income in the incomestatement. Comparative amounts totaling to LL 2,937 million have been reclassified accordingly.

These changes have been made to improve the quality of the information presented.



Documents

CONSOLIDATED FINANCIAL STATEMENTS - … report/5.Bilan financier consolidé-09.pdf · An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness