· Ghanem Al Suweidi Ahmed Bin Atiq Al Mazroui Mohammed Omar Abdulla Khalifa Sultan Al Suweidi Mohammed Bin Jauan Rashed Al Badi Al Dhaheri Mohammed ...

Board of Directors and General Management 10

Chairman’s Report to the Shareholders 15

Chief Executive Review 19

Consolidated Financial Statements 33

Group Network 80

Vision, Mission and Values 85

1

His Highness Sheikh Khalifa Bin Zayed Al Nahyan

President of the UAE and Ruler of Abu Dhabi

The Late His Highness Sheikh Zayed Bin Sultan Al Nahyan

First President of the United Arab Emirates

His Highness Lt. General Sheikh Mohamed Bin Zayed Al NahyanCrown Prince of Abu Dhabi and Deputy Supreme Commander

of the U.A.E. Armed Forces

10

EXECUTIVE COMMITTEE - 2005:

Chairman H.E. Dr. Jauan Salem Al Dhahiri

Deputy Chairman H.E. Obaid Saif Al Nasseri

Members Mohammed Khalifa Al Youssif Al Suweidi

Sultan Bin Rashid Al Dhahiri

Sheikh Ahmed Bin Mohammed Bin Sultan Al Dhahiri

Ahmed Bin Atiq Al Mazroui

Nasser Ahmed Khalifa Al Suweidi

Michael H. Tomalin

BOARD OF DIRECTORS - 2005:

Chairman H.E. Mohammed Bin Habroush Al Suweidi

Deputy Chairman H.E. Khalaf Bin Ahmed Al Otaiba

Members H.E. Dr. Jauan Salem Al Dhahiri

Rahma Al Masaood

H.E. Obaid Saif Al Nasseri



Mohammed Joaan Al Badi

Mohammed Bin Brook

Mohammed Khalifa Al Youssif Al Suweidi


Mohammed Omar Abdulla


BOARD OF DIRECTORS - 2006:

Chairman H.E. Khalifa Mohd Al Kindi

Deputy Chairman H.E. Dr. Jauan Salem Al Dhahiri

Members Nasser Ahmed Khalifa Al Suweidi

Eissa Mohd. Ghanem Al Suweidi



Khalifa Sultan Al Suweidi

Mohammed Bin Jauan Rashed Al Badi Al Dhaheri

Mohammed Khalifa Al Youssif Al Suweidi



Sheikh Mohammed Bin Seif Bin Mohammed Al Nahyan

11

AUDIT COMMITTEE - 2005:

Chairman H.E. Khalaf Bin Ahmed Al Otaiba

Member Mohammed Joaan Al Badi

GENERAL MANAGEMENT - 2005:

Chief Executive Michael H. Tomalin

GM & Chief Operating Officer Abdulla Mohammed Saleh Abdulraheem

GM, Domestic Banking Division Saif Ali Munakhas Al Shehhi

GM, International Banking Division Qamber Ali Al Mulla

GM & Chief Risk Officer Saket Mousa Al Jundi

GM, Investment Banking Division Richard J. Amos

GM & Chief Audit &Compliance Officer John Garrett

BOARD MANAGEMENT COMMITTEE - 2005:

Chairman H.E. Obaid Saif Al Nasseri

Members Mohammed Khalifa Al Youssif Al Suweidi

H.E. Dr. Jauan Salem Al Dhahiri





Michael H. Tomalin

From top left: Saif Ali Munakhas Al Shehhi, Saket Mousa Al Jundi, Richard J. Amos and John Garrett.

From bottom left: Qamber Ali Al Mulla, Michael H. Tomalin and Abdulla Mohammed Saleh Abdulraheem.

Chairman’s Report to the Shareholders

For the financial year 2005

With the start of the year 2006, the UAE lost its Vice President and Ruler ofDubai, the late His Highness Sheikh Maktoum Bin Rashid Al Maktoum whopassed away. We pray to God to rest his soul in peace.

On behalf of the Board of Directors of National Bank of Abu Dhabi, I have thehonour of presenting you the Annual Report for the year 2005.

For the financial year ended 31 December 2005, the Bank reported record netprofits of AED 2,580 million, 127% above 2004. Accordingly, the Board ofDirectors has recommended the distribution of a 40% cash dividend and 30%bonus shares to shareholders.

The considerable growth in the Bank’s profits for the year 2005 can be attributedto higher volumes and to the exceptionally strong economic performance whichresulted in AED 1,011 million or a 140% increase in commissions and otheroperating income. Expenses, on the other hand, increased by AED 134 millionor 28% to finance the growth in the Bank’s network, IT systems and staffmembers.

Total assets reached a record AED 83.7 billion, 49% above 2004 levels, mainlyas a result of higher loans and advances which increased by AED 16 billion.Customer’s deposits increased by AED 20.8 billion during the year.

All business units performed well with operating profits of Investment Bankingbusiness up 233%, Domestic Banking up 107% and International Banking up20% year on year.

The excellent performance has resulted from the efforts exerted by the boardcommittees and the dedication of the Bank’s management and staff towardsachieving the Bank’s objectives. I should also like to express my appreciation toour loyal customers for their valued business with the Bank.

Finally, on behalf of the shareholders, the members of the Board of Directorsand the management and staff of the Bank, I wish to extend our most sincereappreciation and gratitude to His Highness Sheikh Khalifa Bin Zayed Al Nahyan,President of the UAE and Ruler of Abu Dhabi, to His Highness SheikhMohammed Bin Rashid Al Maktoum, Vice President and Ruler of Dubai, and toHis Highness Sheikh Mohamed Bin Zayed Al Nahyan, Crown Prince andDeputy Supreme Commander of the UAE Armed Forces, for their continuedsupport and interest in the Bank’s activities.

Mohammed Bin Habroush Al Suweidi

Chairman

15

2005, was an excellent year affirming our flagship position as the number one bank. We broke our

own and UAE banking industry records of 2004 for total assets, loans, customer deposits and net

profit.

Our focused work in earlier years to develop our systems, processes and staff, put the Bank in a

position to take advantage of the favorable market and economic conditions to expand and develop

further.

2005, was the first year of our second 5-year strategic plan which looks out to 2010. The

fundamentals of our plan remain: increase the return on equity and grow the profit substantially. The

corner stone of our strategy is to put the customer at the heart of the business.

NBAD has the highest rating assigned by international credit rating agencies to a UAE bank, which

compares favorably with those of other banks from Europe, North America and Australasia.

RECORD RESULTS - NET PROFIT IN AED Mn3,000

2,600

2,200

1,800

1,400

1,000

600

2001999 2000 2001 2002 2003 2004 2005

311513 608 654

8061,137

2,580

KEY RATINGS 2005

S&P

Moodys

Fitch

Capital Intelligence

ST LT

A-1 A

P1 A1

F1 A

A1 A+

Chief Executive Review For the year 2005

19

TECHNOLOGY

Technology brings greater opportunities and also challenges.

In 2005, we launched the next phase of our IT Strategy in parallel with the Bank’s Business Plan for

2005-2010. We focused on renewing the technological foundation of our banking systems starting

with our core banking and credit card systems.

Continuing with the Bank’s strategy to improve customer service, we launched the NBAD Direct

virtual branch, introduced the MasterCard Money Transfer Prepaid Cards, provided electronic

statements to, and established systems-to-systems interfaces with, some of our top corporate

customers. We rolled out the Funds Registrar System to manage customer subscriptions to our funds

and commenced the implementation of an Order Management System that will directly connect to

both the Abu Dhabi Securities Market and the Dubai Financial Market.

We widened SMS Alerts to include credit card renewals, NBAD Online payments and remittances,

and weekly NAVs of various funds.

At our international branches in Egypt, we implemented a Call Centre system, IP Telephony,

Electronic Document Management system, Payroll Processing system for Corporate Customers, and

added a Retail Banking module to the banking system there.

We upgraded our ATM system to use the advanced Aptra operating system and the latest VISA

encryption standards so as to achieve EMV compliance which will position ourselves to offer

innovative Secure Smart Card Services to our customers. In addition, our ATM network has been

upgraded to use the TCP/IP protocol and we boosted communication lines to our branches, as well

as the local area network within our branches, by introducing high capacity switches.

20

We created an Enterprise Storage Environment that was built on tiered storage, information

archiving, data replication and data access security. This environment will take us closer to our aim

of instituting an Information Lifecycle Management process for information retention that is

benchmarked against the best industry standards.

Internally, more of our business and administrative processes were computerized. We automated

our risk rating calculations using the Moody’s Internal Risk Rating system, developed a Loan Control

Card for our Wholesale Banking Operations Centre, and enabled Survey Polls to be conducted on

NBAD Intranet. At the Human Resources Group, the headcount budgeting and recruitment

requisition processes were computerized.

As we move closer towards paperless offices, we extended Electronic Document Management to

the Internet Banking Unit, Legal Department and the Policies and Business Excellence Department.

COMMITMENT TO OUR COMMUNITIES

We remain committed to make a difference in the communities we work and live in.

We support Emiratisation initiatives by offering UAE Nationals training and development and

sponsor students in local universities and colleges. In 2005 we donated AED 10M to the Emirates

Foundation in support of technology and research fund.

During 2005, NBAD was a Co-sponsor of the Clean-Up UAE Drive organized by the Emirates

Environmental Group and organized its first Blood Donation event which will be organized

annually.

We encourage donations to the Red Crescent through our ATMs and publish community related

awareness advertisement.

OUR PEOPLE

We value our people

and encourage them to

think and act like

owners, taking care of

the Bank and its

customers.

We motivate and

reward top performers

who constantly strive to

enhance the business

and develop a career

with us.

Our firm commitment to increasing the proportion of our UAE staff was demonstrated by hiring 122

UAE nationals during 2005 bringing the proportion of our UAE staff to above 26.00% at the year-

end. Overall our talented and diverse staff numbers increased over the year from 1932 to 2320.

21

We have restructured our Human Resources Group and strengthened its operations and capabilities,

to attract, develop and retain the best, most talented and committed human assets who wish to work

in our demanding, yet challenging and rewarding environment. We focus on training,

communications, talent development and performance appraisal.

In recognition of our efforts to make NBAD a better, challenging and exciting place to work and

build a career, we received the Human Resources Development Award from the Emirates Institute

of Banking & Financial Studies and the Dubai Human Development Award.

BUSINESS EXCELLENCE & RECOGNITION

During 2005, NBAD won the following awards:

• Best Bank in UAE 2005 from Euromoney

• Best Bank in UAE 2005 from the Banker-UK

• Middle East e-Banking Country Award

• Outstanding Use of IT in Financial Services Award

• The Euromoney Deal of the Year Award for the Taweelah Project

The Bank achieved ISO 9000 Certification for its Card Centre Operations Department during 2005.

Additionally, Internal Service Level Agreements were set up between various bank departments to

ensure better service for our customers.

CUSTOMERS AT THE HEART OF THE BUSINESS

Our business is aligned with customers’ needs and we raise the bar each year for the excellent

products or services we offer.

We appreciate the long term value of the customer relationship and continue to build a broader

foundation of satisfied customers.

22

GROUP RESULTS AND BALANCE SHEET

Thanks to the loyalty of our customers and the dedication and hard work of our 2320 employees,

2005 was a year marked with record returns.

• With net profits increasing to AED, 2,580M, 127% over 2004, the highest in the Bank’s history

and for UAE banks, we have exceeded the target set out in our Strategic Plan.

• Operating income rose 97% and expenses rose 28%. The cost income ratio in 2005 was 18.24%,

down from 28.15% in 2004. We keep a close watch on our costs while at the same time we invest

in our businesses.

• Net interest income increased during the year due to higher volumes and improved interest rates

which increased the value of capital and free balances.

• Non-interest income rose 140% during the year in line with our strategy to focus on fee income.

• Capital resources at the end of 2005 reached AED 7.3 billion, 41% up on 2004.

• Earnings per share increased from AED 1.21 to AED 2.74.

• Total year end assets increased by 49% from AED 56.3 billion to AED 83.7 billion, making NBAD

the first UAE bank to exceed the AED 80 billion mark.

• The AED 16 billion increase in loans and advances to AED 51.5 billion reflects primarily our

relationship led credit strategy to support our corporate customers both in the UAE and abroad.

COST - INCOME RATIO45%

35%

25%

15%

PERC

ENT

1999 2000 2001 2002 2003 2004 2005

TOTAL ASSETS IN AED’Mn90000

80000

70000

60000

50000

40000

30000

200001999 2000 2001 2002 2003 2004 2005

31,30136,435 32,252

39,04643,623

56,331

83,661

23

• Non-trading investments increased by 43.3% or AED 2.8 billion. These securities include loans

to prime names in securities form to facilitate balance sheet management, and AAA marketable

securities such as US Treasuries.

• Total customer deposits increased by a net AED 20.8 billion to AED 59.6 billion.

• We launched successfully the first $850M (AED 3.1 billion) tranche of our EMTN programme in

December.

• The Bank remained a net AED 15 billion lender in the inter-bank market.

• Repo balances increased in line with the increase of non-trading investments.

• Off balance sheet activities rose to AED 80.2 billion. The Weighted risk of these contingent

liabilities however, was AED 11.6 billion in 2005.

• The Bank remains well capitalised with a 15.27% ratio on UAE Central Bank formula, and 11.43%

on Basle Accord principles, considerably in excess of the required 10% and 8% respectively.

• The Bank’s loan portfolio continues to be well provided with 105% cover against impaired loans

in 2005 compared to 92% in 2004. An AED 97M of portfolio provision was created in 2004.

DOMESTIC BANKING DIVISION

Domestic Banking operating profit increased 107% from AED 590 million in 2004 to AED 1,221

million in 2005.

The Domestic Banking Division with its four segments, Retail Banking Group (RBG), Corporate

Banking Group (CBG), Private Banking and Elite Banking, delivers a complete range of banking and

financial services to every segment of the UAE market.

In 2005, RBG continued to focus on offering better value to the retail customer launching different

schemes in deposit accounts, credit cards and loans to meet every aspect of the client’s financial

needs.

RBG also launched two savings plans that are aimed at saving for different purposes such as

education, home purchase and to set up a new business. The saving plan tenor can start from 5 years

and up to 25 years.

We strengthened our card business and introduced Free for life credit card including gold and

classic cards and ‘Money Share’ which is a prepaid fund transfer card.

During 2005, RBG continued its innovative channel promotion program which gives incentives to

customers to use automated channels. NBAD continued to develop its ATM network which at 140

is the largest in the UAE.

NBAD Online, already established as one of the UAE’s leading internet banking services, continued

to witness impressive growth with the number of online users rising by over 40% to reach 25,000.

The Bank’s state of the art 24x7 call centre experienced similar growth with the introduction of new

24

IVR system. The call centre now handles more than 300,000 calls via IVR per month, in addition to

average 65,000 incoming calls per month.

In 2005, NBAD Direct, the bank that comes to the customer continued to serve customers

throughout the UAE. NBAD Direct is equipped to provide the highest levels of convenience and

service direct to retail customers.

During 2005 NBAD opened six new branches at: Industrial City Abu Dhabi, Jumeirah, Emirates

Palace, New Shahama, Mall of the Emirates and Mussafah. The total Domestic 62 Branch network

cover all seven Emirates. In 2006 we are planning to open 15 retail outlets.

The Corporate Banking Group again made a significant contribution to the revenues of the Domestic

Banking Division. The focus continues to be the development of new full service corporate

relationships, and the maintenance of existing relationships through the provision of the highest

service quality which our clients have come to expect from the bank.

Whilst the core commercial lending business showed good growth, there was also an exceptional

contribution to income from meeting our clients’ demands for support in their applications for the

several Initial Public Offerings of shares in the local market which took place during the year.

Our Project Finance and Syndicated Loan team enjoyed a very active year, with increased revenues

derived not only from the major participations we were able to take in local loan transactions, but

also from fee income earned as a result of increased underwriting appetite and of various agency

roles, our appointment to which is a reflection of our prominent market position.

The wide range of initiatives announced in recent months by the Government of Abu Dhabi,

involving major investments in real estate, infrastructure, industrial development, tourism and travel

will continue to provide the bank with ample opportunities to capitalize.

25

The fully owned leasing subsidiary,

Abu Dhabi National Leasing LLC,

developed a pipeline of potential

transactions, a number of which are

expected to be realized during 2006.

Private Banking which provides

specialized banking services to high

net worth individuals and UAE

residents had a very successful year.

Elite Banking which provides red

carpet personal banking services for

resident UAE clients with income

between AED 20,000 and AED

100,000 per month, enjoyed another

year of strong growth.

INTERNATIONAL BANKING DIVISION

The operating profits of the International Banking Division (IBD), rose 20% to AED 308 million.

The major growth was in Egypt, Sudan, Oman and in the US due to increased business volumes.

The division’s post provision profits rose from AED 257 million in 2004 to AED 274 million in 2005.

Although the Egyptian banking

market has been difficult for many

local and foreign players, NBAD’s

activities there have remained

profitable. Network expansion

continued by adding three new

units in Heliopolis, Sharm El Sheikh

and Al Hurghada in the Red Sea

area. We are also planning to open

five more units in Egypt by end of

2006.

IBD’s network expansion plan in the

Middle East is on track and our

Kuwait Office established in June

2005 will start as a full fledged Branch in the second quarter of 2006.

We will continue to build our business in Oman and Sudan by opening new units during 2006.

The Division’s locally based Abu Dhabi International Group has maintained its leading position in

arranging and underwriting syndicated facilities for borrowers within the GCC in addition to focusing

on expanding the fee income by building a portfolio of unfunded assets, mainly Credit Derivatives.

26

Our business in Europe and in the US continues to serve the cross border banking needs of

companies and individuals with business ties with the UAE.

INVESTMENT BANKING DIVISION

Our investments over recent years in people, infrastructure and product development within the

Investment Banking Division proved to be both wise and warranted in 2005. The Division took full

advantage of its dominant position and the strength of the local markets to deliver unprecedented

results. Its contribution to overall Bank earnings increased from AED 363 million in 2004 to AED

1.207 billion in 2005, an increase

of over 233%.

Our stockbroker, Abu Dhabi

Financial Services LLC, maintained

its position as the Number One

broker in the UAE in markets that

witnessed an increase in total

traded value from 67 billion in

2004 to AED 510 billion in 2005.

This huge increase in volumes

resulted in a correspondingly large

increase in revenues in our

brokerage operation, despite the

halving of brokerage fees from the

beginning of August. The activity in the local exchanges encouraged several new brokerage firms

to open which inevitably led to a small erosion of market share for the majority of the top 10

brokers. We are confident of maintaining our Number One position despite an increase in

competition from the existing firms and new entries.

Our Asset Management business also experienced very strong growth, increasing domestic assets

under management from some AED 2.5 billion at the beginning of the year to AED 10.5 billion by

year end. The NBAD Growth Fund delivered returns of 96% during the year and our UAE Trading

Fund, taking particular advantage of the many trading opportunities that arose, delivered 127%.

Both these funds are considered to be amongst the top 10 best performing mutual funds globally in

their class during 2005 according to Bloomberg statistics. The UAE Islamic Fund, Al Na’eem, which

was launched in January 2005 mirrored the spectacular success of its 2 sister funds delivering,

within its fully Sharia compliant mantle, a return of 90% in its 11 months of existence from launch

in January to year end. A UAE Distribution Fund which aims to capture long-term capital

appreciation in UAE and GCC markets, as well as distributing semi-annual dividends, was launched

in February 2006, attracting some AED 1 billion of subscriptions at launch.

Given the excitement of local markets, sales activity in our Global Growth Funds were relatively

subdued. Nevertheless all of the funds continued to perform as expected, with the India Equities

Fund showing a particularly pleasing performance of 27 % reflecting the ever increasing highs of

27

the Bombay Sensex Index. With local markets expected to be less buoyant and more volatile this

year, we will continue our efforts to encourage diversification of asset class and geographies

amongst our clients in order to reduce concentration, risk and volatility.

Our Corporate Finance business had an extremely successful year. It continued to act as lead-

collecting bank for many of the successful IPOs launched during the year and advised on several

other financings, including the financial advisory mandate for the privatisation of 5 ADWEA power

and desalination plants and the lead collecting bank role for the resultant IPO, Al Taqa

Our core Treasury operations, Money Markets, Foreign Exchange and Capital Markets continued to

be strong contributors to our bottom line profits. Our Money Market Department dominates the

local Dirham markets and

benefited from the frenetic

activity surrounding the active

IPO market during the year. Our

Foreign Exchange business made

strong progress, particularly on

the back of increased FDI,

foreign interest in our local

markets, and hedging activities of

UAE corporates. The Capital

Markets Department had a less

active year due to lower volatility

in interest rates but maintained a

solid performance in these more

subdued market conditions.

SUPPORTING THE BUSINESSES

We manage Head Office as a business providing the three line businesses - Domestic, Investment

and International Banking with support services on commercial terms governed by internal service

level agreements.

Head Office also manages the Bank’s free capital, which is employed in cash and bond markets. In

2005, we earned AED 177M compared with AED 121M in 2004.

INCREASING SHAREHOLDER VALUE

In 1999 the return on average equity was 12.1% rising to 43.9% in 2005, ahead of our medium

term target return of 25% set in the 5 year plan. The value added return on equity was 39%, ahead

of the target 15% value added return.

28

A cash dividend of 40% and a 30% bonus shares is proposed.

FOCUS FOR 2006

Our underlying business is strong and we are firmly establishing our brand. Our domestic and

international network allows us to meet customer needs and increase our business. We are proud

of the record achievements during our first 5-year strategic plan 1999-2004 and we are confident

about our future.

During early 2006 we received a licence to establish an Islamic finance company in UAE to offer

Islamic products, services and solutions. We are also applying for a licence to open an international

private banking subsidiary in Switzerland. We plan to set up a real estate subsidiary in UAE. These

three initiatives will bring new bottom line revenue to NBAD.

2005 was a remarkable year with exceptional results. We start 2006 equipped with the support of

our shareholders, customers and staff to build from this strong base.

Michael H Tomalin

RETURN ON EQUITY50%

40%

30%

20%

10%

0%

PERC

ENT

1999 2000 2001 2002 2003 2004 2005

12.06%

43.90%

29

31 December 2005

We have audited the accompanying consolidated balance sheet of National Bank of Abu Dhabi –

Public Joint Stock Company (“the Bank”) as of 31 December 2005, and the related consolidated

statements of income, cash flows and changes in equity for the year then ended. These consolidated

financial statements are the responsibility of the Bank’s management. Our responsibility is to

express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing. Those Standards

require that we plan and perform the audit to obtain reasonable assurance about whether the

consolidated financial statements are free of material misstatement. An audit includes examining,

on a test basis, evidence supporting the amounts and disclosures in the consolidated financial

statements. An audit also includes assessing the accounting principles used and significant estimates

made by management, as well as evaluating the overall consolidated financial statement

presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements present fairly, in all material respects, the

financial position of the Bank as of 31 December 2005 and the results of its operations and its cash

flows for the year then ended in accordance with International Financial Reporting Standards.

We also confirm that in our opinion, proper books of account have been kept by the Bank, and the

contents of the Chairman’s Report which relate to these consolidated financial statements are in

agreement with the books of account. We have obtained all the information and explanations we

required for the purpose of our audit, and to the best of our knowledge and belief no violations of

the U.A.E. Commercial Companies Law No. 8 of 1984 (as amended) or the articles of association of

the Bank have occurred during the year which would have had a material effect on the business of

the Bank or on its financial position.

Ernst & Young

Bassam E Hage

Partner

Registration No. 258

Auditors’ Report to the Shareholdersof National Bank of Abu Dhabi- Public Joint Stock Company

12 February 2006

Abu Dhabi

33

Consolidated Balance Sheet31 December 2005

2005 2004

Note AED 000 AED 000

ASSETS

Cash and balances with central banks 3 2,633,634 3,277,429

Trading investments 4 394,588 404,025

Due from banks 5 18,238,733 8,742,110

Loans and advances to customers 6 51,467,993 35,428,475

Non-trading investments 7 9,414,159 6,570,364

Other assets 8 1,123,204 1,544,347

Premises and equipment 9 388,449 364,671

TOTAL ASSETS 83,660,760 56,331,421

LIABILITIES

Due to banks 3,116,482 2,690,835

Repurchase agreements with banks 6,935,732 4,739,994

Customers’ deposits 10 59,572,805 38,748,293

Medium-term floating rate notes 11 3,122,050 0

Other liabilities 12 3,589,702 4,967,460

TOTAL LIABILITIES 76,336,771 51,146,582

SHAREHOLDERS’ EQUITY

Share capital 14 941,600 941,600

Reserves 14 5,959,726 3,859,726

Cumulative changes in fair values 16 (85,822) (27,660)

Foreign currency translation adjustment 5,612 7,779

Retained earnings 502,873 403,394

TOTAL SHAREHOLDERS’ EQUITY 7,323,989 5,184,839

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 83,660,760 56,331,421

H.E. Mohammed Bin Habroush Al Suweidi Michael H. TomalinCHAIRMAN CHIEF EXECUTIVE

The attached notes 1 to 38 form part of these consolidated financial statements.

2005

US$ 000

717,025

107,429

4,965,623

14,012,522

2,563,071

305,800

105,758

22,777,228

848,484

1,888,302

16,219,114

850,000

977,321

20,783,221

256,357

1,622,577

(23,366)

1,528

136,911

1,994,007

22,777,228

34

Consolidated Income StatementYear Ended 31 December 2005


2005 2004


OPERATING INCOME

Interest income 17 3,852,038 1,956,476

Interest expense 18 (2,175,444) (946,692)

Net interest income 1,676,594 1,009,784

Other operating income 19 1,734,630 723,297

3,411,224 1,733,081

OPERATING EXPENSES

General, administration and other

operating expenses 20 (622,265) (487,929)

PROFIT FROM OPERATIONS BEFORE

IMPAIRED ASSETS CHARGE AND TAXATION 2,788,959 1,245,152

Impaired assets charge, net 21 (154,799) (81,354)

PROFIT FROM OPERATIONS

BEFORE TAXATION 2,634,160 1,163,798

Overseas income tax expense 13 (53,911) (26,366)

NET PROFIT FOR THE YEAR 2,580,249 1,137,432

Basic earnings per share (in AED) 36 2.74 1.21

2005

US$ 000

1,048,744

(592,280)

456,464

472,266

928,730

(169,416)

759,314

(42,145)

717,169

(14,678)

702,491

0.746

35

Consolidated Statement of Cash FlowsYear Ended 31 December 2005


2005

US$ 000

717,169

14,191 53,081

0

(8,201)

776,240 2,848

125,290 (4,414,564)

113,560 115,885 597,805

5,669,341 850,000 (367,381)

3,469,024(12,263)

3,456,761

(1,664,592)867,163(20,665)

818,094

(102,543) (590)

(103,133)

2,535,534

2,991,701

5,527,235

2005 2004


OPERATING ACTIVITIESProfit from operations before taxation 2,634,160 1,163,798Adjustments for :Depreciation 9 52,125 50,015Write-offs and provisions for impaired loans and advances 21 194,967 137,875Write-offs and provisions for impaired non-trading investments 21 0 2,530Write back of provisions for loans and

advances and non-trading investments 21 (30,122) (55,470)Operating profit before changes in operating

assets and liabilities 2,851,130 1,298,748Trading investments 10,460 1,229,010Due from banks and central banks 460,190 151,901Loans and advances to customers (16,214,694) (6,417,240)Other assets 417,105 (1,067,456)Due to banks 425,647 (540,993)Repurchase agreements with banks 2,195,738 1,245,918Customers’ deposits 20,823,489 7,319,644Medium-term floating rate notes 3,122,050 0Other liabilities ( 1,349,390) 3,945,002Cash from operations 12,741,725 7,164,534Overseas income tax paid 13 ( 45,042) (32,436)

Net cash generated from operating activities 12,696,683 7,132,098

INVESTING ACTIVITIESPurchase of non-trading investments (6,114,046) ( 3,577,759)Proceeds from sale or maturity of non-trading investments 3,185,091 2,361,170Purchase of premises and equipment, net of disposals (75,903) (51,235)

Net cash used in investing activities (3,004,858) (1,267,824)

FINANCING ACTIVITIESDividend paid 15 (376,640) (329,560)Foreign currency translation adjustment (2,167) 2,400Cash used in financing activities (378,807) (327,160)

INCREASE IN CASH AND CASH EQUIVALENTS 9,313,018 5,537,114

Cash and cash equivalents at 1 January 22 10,988,519 5,451,405

CASH AND CASH EQUIVALENTS AT 31 DECEMBER 22 20,301,537 10,988,519

36


Foreign

Cumulative currency

Share Statutory Special General changes in translation Retained

capital reserve reserve reserve fair values adjustment earnings Total

Note AED 000 AED 000 AED 000 AED 000 AED 000 AED 000 AED 000 AED 000

Balance at 1 January 2004 941,600 715,400 470,800 1,913,526 (21,214) 5,379 358,542 4,384,033

Portion of realised (losses) on sale of

available for sale investments 0 0 0 0 0 0 (225) (225)

Foreign currency translation adjustment 0 0 0 0 0 2,400 0 2,400

Net movement in cumulative changes

in fair values 16 0 0 0 0 (6,446) 0 0 (6,446)

Total income and expense for

the year recognised directly in equity 0 0 0 0 (6,446) 2,400 (225) (4,271)

Net profit for 2004 0 0 0 0 0 0 1,137,432 1,137,432

Total income and expense for the year 0 0 0 0 (6,446) 2,400 1,137,207 1,133,161

2003 dividend paid 15 0 0 0 0 0 0 (329,560) (329,560)

Directors’ remuneration 0 0 0 0 0 0 (2,795) (2,795)

Transfer to general reserve 0 0 0 760,000 0 0 (760,000) 0

Balance at 31 December 2004 941,600 715,400 470,800 2,673,526 (27,660) 7,779 403,394 5,184,839

Foreign currency translation adjustment 0 0 0 0 0 (2,167) 0 (2,167)

Net movement in cumulative

changes in fair values 16 0 0 0 0 (58,162) 0 0 (58,162)

Total income and expense for

the year recognised directly in equity 0 0 0 0 (58,162) (2,167) 0 (60,329)

Net profit for 2005 0 0 0 0 0 0 2,580,249 2,580,249

Total income and expense for the year 0 0 0 0 (58,162) (2,167) 2,580,249 2,519,920

2004 dividend paid 15 0 0 0 0 0 0 (376,640) (376,640)

Directors’ remuneration 0 0 0 0 0 0 (4,130) (4,130)

Transfer to general reserve 0 0 0 2,100,000 0 0 (2,100,000) 0

Balance at 31 December 2005 941,600 715,400 470,800 4,773,526 (85,822) 5,612 502,873 7,323,989

US$ 000

1,193,584

(61)

653

(1,755)

(1,163)

309,674

308,511

(87,725)

(761)

0

1,411,609

(590)

(15,835)

(16,425)

702,491

686,066

(102,543)

(1,125)

0

1,994,007

Consolidated Statement ofChanges in Shareholders’ Equity

Year Ended 31 December 2005

37

1 ACTIVITIES

National Bank of Abu Dhabi (“the Bank”) was established in Abu Dhabi in 1968 with limited

liability and is registered as a public joint stock company in accordance with the United Arab

Emirates (UAE) Commercial Companies Law No. (8) of 1984 (as amended). Its registered office

address is P.O.Box 4, Abu Dhabi, United Arab Emirates. The Bank is engaged primarily in

commercial banking in the UAE and at selected overseas locations in Bahrain, Egypt, France, Oman,

Sudan, Kuwait, the United Kingdom and the United States of America.

The consolidated financial statements were authorised for issue in accordance with a resolution of

the Board of Directors on 12 February 2006.

2.1 BASIS OF PREPARATION

The consolidated financial statements have been prepared in accordance with International

Financial Reporting Standards (IFRS), and applicable requirements of UAE law.

The consolidated financial statements of the Bank are presented in UAE Dirhams (AED) which is the

Bank’s functional currency.

The consolidated financial statements are prepared under the historical cost convention as modified

for the measurement at fair value of derivative financial instruments and investment securities. The

carrying values of recognised assets and liabilities that are hedged items in fair value hedges, and

are otherwise carried at cost, are adjusted to record changes in fair values attributable to risks that

are being hedged.

Consolidation

The consolidated financial statements comprise the financial statements of the Bank and of the

following subsidiaries:

Subsidiaries Activities Country of incorporation % HoldingAbu Dhabi International Bank Inc. Commercial banking Curacao, Netherlands Antilles 100%

Abu Dhabi Financial Services LLC. Shares brokerage Abu Dhabi, United Arab Emirates 100%

Abu Dhabi National Leasing LLC. Leasing Abu Dhabi, United Arab Emirates 100%

The carrying amount of the Bank’s investment in each subsidiary and the equity of each subsidiary

are eliminated on consolidation. All significant intra-group balances, income and expense items are

eliminated on consolidation. The financial statements of the subsidiaries are prepared for the same

reporting year as the Bank using consistent accounting policies.

38

Notes to the ConsolidatedFINANCIAL STATEMENTS

31 December 2005

2.2 SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

Judgements

In the process of applying the Bank’s accounting policies management has made the following

judgements, apart from those involving estimations, which have the most significant effect on the

amounts recognised in the consolidated financial statements.

Classification of investments

Management decides on acquisition of an investment whether it should be classified as held for

trading or available for sale.

The Bank classifies investments as trading if they are acquired primarily for the purpose of making

a short term profit by the dealers. All other investments are classified as available for sale.

Impairment of investments

The Bank treats available for sale equity investments as impaired when there has been a significant

or prolonged decline in the fair value below its cost or where other objective evidence of

impairment exists.

Litigation

Due to the nature of its banking business, the Bank may be involved in litigations arising in the

ordinary course of business. Such matters are subject to many uncertainties and the outcome of

individual matters is not predictable with assurance. The Bank’s management believes that the final

resolution of any such matters is unlikely to have a material effect on the Bank’s consolidated

operating results or financial position.

Estimation uncertainty

The preparation of the consolidated financial statements requires management to make estimates

and assumptions that have a significant risk of causing a material adjustment to the reported amount

of financial assets and liabilities, revenues, expenses, disclosure of contingent liabilities and the

resultant provisions and fair value for the next financial year.

39


31 December 2005

2.2 SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES (continued)

Impairment losses on loans and advances and investment in debt instrumentsThe bank reviews its problem loans and advances and investment in debt instruments on a quarterly

basis to assess whether a provision for impairment should be recognised in the income statement.

In particular, considerable judgement by management is required in the estimation of the amount

and timing of future cash flows when determining the level of provisions required. Such estimates

are necessarily based on assumptions about several factors involving varying degrees of judgement

and uncertainity, and actual results may differ resulting in future changes to such provisions.

Collective impairment provisions on loans and advancesIn addition to specific provisions against individual impaired assets, the Bank also makes a collective

impairment provision against specific groups of loans and advances which although not specifically

identified as requiring a specific provision have a greater risk of default than when originally

granted. The amount of the provision is based on the historical loss pattern for which losses are

considered incurred but not yet specifically identified and is adjusted to reflect current economic

changes.

2.3 SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies adopted are as follows:

Trading investments

These are initially recognised at cost and subsequently remeasured at fair value. All related realised

and unrealised gains or losses are included in net income from trading investments. Interest earned

or dividends received are included in interest and dividend income respectively.

Due from banks

These are stated at cost, adjusted for effective fair value hedges, less any amounts written off and

provision for impairment.

Non-trading investments

These are classified upon initial recognition as available for sale and are recognised at cost, being

the fair value of the consideration given including acquisition charges associated with these

investments.

40


31 December 2005

2.3 SIGNIFICANT ACCOUNTING POLICIES (continued)

Non-trading investments (continued)

After initial recognition, these investments are remeasured at fair value. For investments which are

not part of an effective hedge relationship, unrealised gains or losses are reported as a separate

component of shareholders’ equity until the investment is derecognised or until the investment is

determined to be impaired, at which time the cumulative gain or loss previously recognised in

shareholders’ equity, is included in the income statement for the period. For investments which are

part of an effective fair value hedge relationship, any unrealised gain or loss arising from a change

in fair value is recognised directly in the income statement to the extent of the changes in fair value

being hedged.

For unquoted equity investments where fair value cannot be reliably measured, these are carried at

cost less provision for impairment in value. Upon subsequent derecognition, the profit or loss on

sale is recognised in the income statement for the period.

Loans and advances to customers

These are stated at cost, adjusted for effective fair value hedges, net of interest suspended and

provisions for impairment. Loans are written off after all reasonable restructuring and collection

initiatives have taken place and the possibility of further recovery is considered to be remote.

Impairment of financial assets

An assessment is made at each balance sheet date and periodically during the year to determine

whether there is any objective evidence that a specific financial asset is impaired. If any such

evidence exists, the estimated recoverable amount of that asset is determined and any impairment

loss is measured and recognised in the income statement.

Impairment is determined as follows:

(a) for assets carried at amortised cost, impairment is based on estimated cash flows

discounted at the original effective interest rate.

(b) for assets carried at fair value, impairment is the difference between the cost and fair value.

(c) for assets carried at cost because fair value cannot be reliably measured, impairment is

based on the present value of future cash flows discounted at the current market rate of

return for a similar financial asset.

41


31 December 2005


For available for sale equity investments reversal of impairment losses are recorded as increases in

cumulative changes in fair value through shareholders’ equity.

In addition, a provision is made to cover impairment for specific groups of assets where there is a

measurable decrease in estimated future cash flows.

Fair values

For investments and derivatives that are actively traded in organized financial markets, fair value is

determined by reference to quoted market prices. Bid prices are used for assets and offer prices are

used for liabilities. The fair value of investments in mutual funds, unit trusts, or similar investment

vehicles, are based on the last published bid price. For financial instruments where there is no

active market, fair value is based on recent transactions or brokers’ quotes or the expected cash

flows discounted at current rates applicable for items with similar terms and risk characteristics or

pricing models. The estimated fair value of deposits with no stated maturity, which includes non-

interest bearing deposits, is the amount payable on demand.

Premises, equipment and depreciation

All items of premises and equipment are initially recorded at cost. Depreciation is provided on a

straight-line basis over the estimated useful lives of all premises and equipment, other than freehold

land which is deemed to have an indefinite life. The carrying amounts are reviewed at each balance

sheet date for impairment to assess whether they are recorded in excess of their recoverable

amounts. Where carrying values exceed their recoverable amounts, assets are written down.

Capital projects in progress are initially recorded at cost, and upon completion are transferred to the

appropriate category of premises and equipment and thereafter depreciated.

Collateral pending sale

The Bank occasionally acquires real estate in settlement of certain loans and advances. Real estate

is stated at the lower of the net realisable value of the related loans and advances and the current

fair value of such assets. Gains or losses on disposal, and unrealised losses on revaluation, are

recognised in the income statement.

42


31 December 2005


Revenue and expense recognition

Interest income and expense are recognised on a time proportion basis, taking account of the

principal outstanding and the rate applicable. Loan commitment and management fees which are

considered an integral part of the effective yield of a loan are recognised using the effective yield

method unless collectibility is in doubt. The recognition of interest income is suspended when loans

become impaired, such as when overdue by more than 90 days. Other fees and commissions

receivable or payable are recognised when earned or incurred. Dividend income is recognised

when the right to receive payment is established.

When the Bank enters into an interest rate swap to change interest from fixed to floating (or vice

versa) the amount of interest income or expense is adjusted by the net interest on the swap.

Settlement date accounting

All ‘regular way’ purchases and sales of financial assets are recognised on the settlement date, i.e.

the date the asset is delivered to or received from the counterparty. Regular way purchases or sales

of financial assets are those that require delivery of assets within the time frame generally established

by regulation or convention in the market place.

Foreign currencies

Foreign currency transactions are recorded at rates of exchange ruling at the dates of the

transactions.

Monetary assets and liabilities in foreign currencies, other than those relating to subsidiaries and

branches based outside the UAE, are translated to UAE Dirhams at closing rates of exchange at the

balance sheet date. Resulting gains and losses are taken to the income statement.

The activities of subsidiaries and branches based outside the UAE are not deemed an integral part

of the parent company or head office operations, as they are financially and operationally

independent of the parent company or the head office. The assets and liabilities of the subsidiaries

and overseas branches are translated into UAE Dirhams at closing rates of exchange at the balance

sheet date. Income and expense items are translated at applicable exchange rates during the year.

Exchange differences (including those on transactions which hedge such investments) arising from

retranslating the opening net assets, are taken directly to foreign currency translation adjustment

account in shareholders’ equity.

43


31 December 2005


Due to banks, customer deposits and medium-term floating rate notes

These are carried at amortised cost, less amounts repaid and adjustments for effective hedges.

Liabilities which are held for trading are subsequently re-measured at fair value and any gain or loss

arising from a change in fair value is included in the income statement in the period in which it

arises.

Taxation

Taxation is provided for in accordance with fiscal regulations of the respective countries in which

the Bank operates.

Deferred income taxation is provided using the liability method on all temporary differences at the

balance sheet date. Deferred income tax assets and liabilities are measured at the tax rates that are

expected to apply to the period when the asset is realised or the liability is settled, based on laws

that have been enacted at the balance sheet date. The carrying amount of deferred income tax assets

is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that

sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be

utilized.

Derivative financial instruments

Derivatives are stated at fair value. The fair value of a derivative is the equivalent of the unrealised

gain or loss from marking to market the derivative using prevailing market rates. Derivatives with

positive market values (unrealised gains) are included in other assets and derivatives with negative

market values (unrealised losses) are included in other liabilities.

Certain derivatives embedded in other financial instruments are treated as separate derivatives when

their economic characteristics and risks are not closely related to those of the host contract and the

host contract is not carried at fair value through the income statement. These embedded derivatives

are measured at fair value with the changes in fair value recognized in the income statement.

For the purpose of hedge accounting, hedges are classified into three categories: (a) fair value

hedges which hedge the exposure to changes in the fair value of a recognised asset or liability; (b)

cash flow hedges which hedge exposure to variability in cash flows that is either attributable to a

particular risk associated with a recognised asset or liability or a forecasted transaction; and (c)

portfolio hedges which hedge the exposure to changes in the fair value of a portfolio of fixed rate

assets or liabilities.

44


31 December 2005


In relation to effective fair value hedges, any gain or loss from remeasuring the hedging instrument

to fair value, as well as related changes in fair value of the item being hedged, are recognised

immediately in the income statement. In relation to effective cash flow hedges, the gain or loss on

the hedging instrument is recognised initially in shareholders’ equity and transferred to the income

statement in the period in which the hedged transaction impacts the income statement. In relation

to effective portfolio hedges, any gain or loss from remeasuring the hedging instrument to fair

values, as well as related changes in fair value of the portfolio of assets or liabilities being hedged,

are recognized immediately in the income statement.

For those hedges which do not qualify for hedge accounting, any gain or loss arising from changes

in the fair value of the hedging instrument is taken directly to the income statement for the period.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or

exercised, or no longer qualifies for hedge accounting. For effective fair value hedges of financial

instruments with fixed maturities, any adjustment arising from hedge accounting is amortised over

the remaining term to maturity. For effective cash flow hedges, any cumulative gain or loss on the

hedging instrument recognised in shareholders’ equity remains in equity until the hedged

transaction occurs. If the hedged transaction is no longer expected to occur, the net cumulative gain

or loss recognised in shareholders’ equity is transferred to the income statement.

Cash and cash equivalents

These comprise cash, balances with central banks and due from banks with original maturity of

three months or less from the date of placement.

Provisions

Provisions are recognised when the Bank has a present obligation (legal or constructive) arising from

a past event and the costs to settle the obligation are both probable and able to be reliably measured.

Employees’ end of service benefits

The Bank provides end of service benefits to its expatriate employees. Entitlement to these benefits

is usually based upon the employees’ length of service and the completion of a minimum service

period. The expected costs of these benefits are accrued over the period of employment.

45


31 December 2005


With respect to its UAE national employees, the Bank makes contributions to the relevant

government pension scheme calculated as a percentage of the employees’ salaries. The Bank’s

obligations are limited to these contributions, which are expensed when due.

Off-setting

Financial assets and financial liabilities are only offset and the net amount reported in the balance

sheet where there is a legally enforceable right to set off the recognised amounts and the Bank

intends to settle either on a net basis, or to recognise the asset and settle the liability simultaneously.

Derecognition of financial assets

A financial asset (in whole or in part) is derecognised either when the Bank has transferred

substantially all the risks and rewards of ownership or when it has neither transferred nor retained

substantially all the risks and rewards when it no longer has control over the asset or a proportion

of the asset.

Fiduciary activities

Assets held in trust or in a fiduciary capacity are not treated as assets of the Bank and, accordingly,

are not included in these consolidated financial statements.

Repurchase and resale agreements

Assets sold with a simultaneous commitment to repurchase at a specified future date (repos) are not

derecognised. The counterparty liability for amounts received under these agreements is shown as

repurchase agreements with banks in the balance sheet. The difference between sale and repurchase

price is treated as interest expense and accrued over the life of the repo agreement using the

effective yield method. Assets purchased with a corresponding commitment to resell at a specified

future date (reverse repos) are not recognised in the balance sheet, as the Bank does not obtain

control over the assets. Amounts paid under these agreements are included in due from banks. The

difference between purchase and resale price is treated as interest income and accrued over the life

of the reverse repo agreement using the effective yield method.

46


31 December 2005

3 CASH AND BALANCES WITH CENTRAL BANKS

2005 2004

AED 000 AED 000

Cash balances 383,027 337,160

Balances with UAE Central Bank 2,087,338 2,439,160

Balances with other central banks 163,269 501,109

2,633,634 3,277,429

4 TRADING INVESTMENTS

2005 2004

AED 000 AED 000

Managed portfolios 190,985 286,079

Equity securities 4,877 2,257

Debt instruments 198,726 115,689

394,588 404,025

5 DUE FROM BANKS

2005 2004

AED 000 AED 000

Current, call and notice deposits 794,061 360,970

Fixed deposits 17,444,672 8,170,402

Fixed rate certificates of deposit 0 210,738

18,238,733 8,742,110

47


31 December 2005

6 LOANS AND ADVANCES TO CUSTOMERS

2005 2004

AED 000 AED 000

Government 8,291,516 7,654,586

Public sector 7,675,186 5,156,898

Banks 719,596 807,873

Corporate / Private sector 24,316,451 16,597,201

Retail sector 11,313,487 5,925,859

52,316,236 36,142,417

Less : Provision for impaired loans and advances (848,243) (713,942)

51,467,993 35,428,475

The movements in the provision for impaired loans and advances during the year were as follows:

2005 2004

AED 000 AED 000

At 1 January 713,942 669,905

Charge for the year (Note 21) 190,811 133,471

Recoveries (Note 21) (9,600) (3,567)

Write-back during the year (Note 21) (27,028) (55,470)

Write-off during the year (19,882) (30,397)

At 31 December 848,243 713,942

At 31 December 2005, loans and advances to customers on which interest is suspended is analysed as follows:

2005 2004

AED 000 AED 000

Impaired loans and advances to customers 2,490,470 2,480,440

Suspended interest (1,684,333) (1,704,462)

806,137 775,978

48


31 December 2005

7 NON-TRADING INVESTMENTS

2005 2004

AED 000 AED 000

Available For Sale Investments

Unquoted investments 65,701 43,034

Less : Provision for impaired unquoted investments (184) (184)

65,517 42,850

Quoted investments 9,366,272 6,578,283

Less : Provision for impaired quoted investments (17,630) (50,769)

9,348,642 6,527,514

Total non-trading investments 9,414,159 6,570,364

Debt instruments under repurchase agreements included in quoted available for sale investments

at 31 December 2005 amounted to AED 6,948 million (2004: AED 4,669 million).

The classification by industry sector:

2005 2004

AED 000 AED 000

Banks and Financial Institutions 3,212,661 2,100,969

Sovereign and Government 5,544,338 3,555,099

Corporate and Public 657,160 914,296

9,414,159 6,570,364

49


31 December 2005

7 NON-TRADING INVESTMENTS (continued)

Included under available-for-sale investments is an equity investment amounting to AED 10 million

(2004: AED 10 million), which is carried at cost due to the unpredictable nature of future cash flows

and the lack of suitable other methods for arriving at a reliable fair value. The net asset value of the

investment based on the latest available audited financial statements amounted to AED 25.3 million

(2004: AED 20.2 million).

The movements in the provision for impaired non-trading investments during the year were as

follows:

2005 2004

AED 000 AED 000

At 1 January 50,953 46,800

Charge for the year (Note 21) 0 2,530

Write-back during the year (Note 21) (3,094) 0

Write-off during the year (26,991) 0

Exchange movements (3,054) 1,623

At 31 December 17,814 50,953

8 OTHER ASSETS

2005 2004

AED 000 AED 000

Interest receivable 514,189 311,065

Sundry debtors, prepayments and other assets 363,624 1,156,946

Deferred tax asset 15,593 22,572

Positive fair value of derivatives (Note 24) 229,798 53,764

1,123,204 1,544,347

50


31 December 2005

9 PREMISES AND EQUIPMENT

The estimated useful lives of assets for the calculation of depreciation are as follows:

Buildings 20 years Office furniture and equipment 1 to 5 years

Alterations to premises 4 years Safes 10 to 20 years

Computer systems and equipment 3 to 7 years Vehicles 3 years

Office

Land and Computer furniture, Capital

buildings, systems equipment, projects

including and safes and in

alterations equipment vehicles progress Total

AED 000 AED 000 AED 000 AED 000 AED 000

Cost:

At 31 December 2004 453,993 138,629 98,517 15,360 706,499

Additions 12,679 14,474 11,547 37,567 76,267

Transfers 15,633 7,928 1,785 (25,346) 0

Disposals (6) (3,664) (4,845) 0 (8,515)

At 31 December 2005 482,299 157,367 107,004 27,581 774,251

Depreciation:

At 31 December 2004 167,850 102,040 71,938 0 341,828

Charge for the year 23,361 16,739 12,025 0 52,125

On disposals (6) (3,649) (4,496) 0 (8,151)

At 31 December 2005 191,205 115,130 79,467 0 385,802

Net book value:

At 31 December 2005 291,094 42,237 27,537 27,581 388,449

At 31 December 2004 286,143 36,589 26,579 15,360 364,671

51


31 December 2005

10 CUSTOMERS’ DEPOSITS

2005 2004

AED 000 AED 000

Account type:

Current accounts 11,305,781 8,593,580

Savings accounts 1,676,821 1,338,661

Notice and time deposits 46,264,790 28,618,124

Certificates of deposit 325,413 197,928

59,572,805 38,748,293

Customer type:

Government 31,434,838 14,960,401

Public sector 8,250,346 5,811,730

Corporate / Private sector 6,882,147 4,644,801

Retail 13,005,474 13,331,361

59,572,805 38,748,293

Tharwa Bond deposits amounting to AED 43.8 million (2004: AED 42.7 million) are included in

notice and time deposits. These bonds are structured and capital guaranteed on maturity by the

Bank which has entered into back to back deals with an external party.

11 MEDIUM-TERM FLOATING RATE NOTES

The Bank established a Euro Medium Term Note (EMTN) programme for US$ 5,000 million

(AED 18,365 million) under agreement dated 7 December 2005 with Barclays Capital and Credit

Suisse First Boston.

Under the EMTN programme, the Bank has issued the first tranche of US$ 850 million (AED 3,122

million) Floating Rate Notes on 14 December 2005 due on 14 December 2010 at discount of

0.09%. The notes bear an interest rate equal to 3 months LIBOR plus 0.30% paid quarterly.

52


31 December 2005

12 OTHER LIABILITIES

2005 2004

AED 000 AED 000

Interest payable 416,329 148,352

Provision for employees’ end of service benefits (see below) 240,424 201,470

Accounts payable, sundry creditors and other liabilities 2,609,580 4,379,799

Negative fair value of derivatives (Note 24) 259,727 175,969

Overseas income tax (Note 13) 63,642 61,870

3,589,702 4,967,460

Included in sundry creditors is an amount of AED 1,631 million (2004: 3,273 million) in relation

to founders money and subscriptions refund balances of an initial public offering.

The negative fair value in respect of derivatives held for hedging certain loans and advances and

non-trading investments is not indicative of any current or future losses, as a similar positive

amount has been adjusted to the carrying value of the hedged loans and advances and non-trading

investments.

The Bank provides for employees’ end of service benefits in accordance with the employees’

contracts of employment. The movement in the provision was as follows:

2005 2004

AED 000 AED 000

Balance at 1 January 201,470 186,148

Provided during the year 49,898 30,558

Paid during the year (10,944) (15,236)

Balance at 31 December 240,424 201,470

53


31 December 2005

13 OVERSEAS INCOME TAX

The Bank has made full provision for the tax due in respect of all taxation periods which have not

been formally agreed with the appropriate taxation authorities in accordance with management’s

estimate of the total amount payable. Where appropriate the Bank has made payments of tax on

account in respect of these estimated liabilities.

In addition to adjustments relating to deferred taxation, the charge for the year is calculated based

upon the adjusted net profit for the year at rates of tax applicable in certain overseas locations.

The charge to the income statement for the year was as follows:

2005 2004

AED 000 AED 000

Income statement

Charge for the year 46,814 25,525

Adjustments relating to prior years 118 0

Adjustments relating to deferred taxation 6,979 841

53,911 26,366

Liability

At 1 January 61,870 68,781

Charge for the year 46,814 25,525

Payments during the year net of recoveries (45,042) (32,436)

At 31 December 63,642 61,870

14 SHAREHOLDERS’ EQUITY

Share capital: On 21 March 2005, the Bank effected a ten-for-one stock split approved at the

Extraordinary Annual General Meeting held on 20 March 2005. Accordingly, the issued and fully

paid share capital as at 31 December 2005 comprises 941,600,000 ordinary shares of AED 1 each

(2004: 94,160,000 ordinary shares of AED 10 each) and the basic earnings per share information

in these consolidated financial statements has been restated to reflect the stock split.

54


31 December 2005

14 SHAREHOLDERS’ EQUITY (continued)

The Extraordinary General Meeting held on 22 November 2005 approved the increase of the share

capital which the Bank is authorised to issue from 941,600,000 ordinary shares of AED 1 each to

2,000,000,000 ordinary shares of AED 1 each. The issued and fully paid share capital at 31

December 2005 comprises 941,600,000 ordinary shares of AED 1 each (2004: 94,160,000

ordinary shares of AED 10 each)

Statutory reserve: The UAE Commercial Companies Law No. (8) of 1984 (as amended) and

Article 56 of the Bank’s articles of association require that 10% of the annual net profit is to

be transferred to a statutory reserve until it equals 50% of the paid-up share capital. The statutory

reserve is not available for distribution to the shareholders.

Special reserve: Transfers to the special reserve are made in accordance with Union Law No. 10

of 1980 and Article 56 of the Bank’s articles of association under which not less than 10% of the

annual net profit is to be transferred to this reserve until it equals 50% of the paid-up share capital.

The special reserve is not available for distribution to the shareholders.

General reserve: The general reserve is available for distribution to the shareholders at the

recommendation of the Board of Directors to the shareholders.

Proposed issue of bonus shares: The Board of Directors has proposed a 30% bonus issue of

282,480,000 ordinary shares of AED 1 each amounting to AED 282,480,000 (2004 : AED Nil)

which is subject to the approval of the shareholders at the Annual General Meeting to be held in

2006.

Subordinated convertible notes: The Extraordinary General Meeting held on 22 November 2005

approved the issue of subordinated convertible notes (in part or in full), provided their total value

shall not exceed AED 2,500,000,000. The Board of Directors was authorised to specify the date,

amounts and conditions for that issue.

15 DIVIDEND PAID AND PROPOSED

During the year 2005, a cash dividend of AED 4 per ordinary share totalling AED 376.6 million

relating to 2004 was declared and paid (2004 : AED 3.5 per ordinary share totalling AED 329.6

million relating to 2003.)

The Board of Directors has proposed a cash dividend of AED 0.4 per ordinary share, totalling AED

376.6 million which is subject to the approval of the shareholders at the Annual General Meeting.

55


31 December 2005

16 CUMULATIVE CHANGES IN FAIR VALUES

2005 2004

AED 000 AED 000

Available for sale investments

At 1 January (27,660) (21,214)

Net adjustment arising from the application of IAS 39 (revised) 0 3,070

Net movement in unrealised (losses)/gains during the year (52,289) (13,825)

Net realised (gains)/losses during the year (5,873) 4,309

At 31 December (85,822) (27,660)

17 INTEREST INCOME

2005 2004

AED 000 AED 000

Due from banks 499,052 193,413

Trading and non-trading investments 401,927 257,842

Loans and advances to customers 2,951,059 1,505,221

3,852,038 1,956,476

18 INTEREST EXPENSE

2005 2004

AED 000 AED 000

Due to banks 378,242 304,854

Repurchase agreements with banks 203,184 63,388

Customers’ deposits 1,564,553 568,704

Certificates of deposit 21,990 9,746

Medium-term floating rate notes 7,475 0

2,175,444 946,692

56


31 December 2005

19 OTHER OPERATING INCOME

2005 2004

AED 000 AED 000

Fees and commission income 1,370,235 552,393

Fees and commission expense (38,866) ( 26,086)

Net fees and commission income 1,331,369 526,307

Net income from trading investments and derivatives 249,363 51,781

Net gains from sale of non-trading investments 1,382 11,905

Net gains from dealing in foreign currencies 123,976 86,131

Dividend income 1,467 1,141

Other operating income 27,073 46,032

1,734,630 723,297

20 GENERAL, ADMINISTRATION AND OTHER OPERATING EXPENSES

2005 2004

AED 000 AED 000

Staff costs 361,157 289,577

Other general and administration expenses 194,692 140,057

Depreciation 52,125 50,015

Donations and charity 14,291 8,280

622,265 487,929

The number of employees as of 31 December 2005 was 2,320 (2004 : 1,932).

57


31 December 2005

21 IMPAIRED ASSETS CHARGE

2005 2004

AED 000 AED 000

Specific provision for impaired loans and advances (Note 6) 93,195 78,411

Collective impairment provision on loans and advances 97,616 55,060

190,811 133,471

Provision for impaired non-trading investments (Note 7) 0 2,530

Write-off of impaired loans and advances to income statement 4,156 4,404

Recovery of loan loss provisions (Note 6) (9,600) (3,567)

Recovery of loans previously written off (446) (14)

Write back of provisions for loans and advances (27,028) (55,470)

Write back of provisions for non-trading investments (Note 7) (3,094) 0

154,799 81,354

22 CASH AND CASH EQUIVALENTS

Cash and cash equivalents included in the consolidated statement of cash flows comprise the

following consolidated balance sheet amounts:

2005 2004

AED 000 AED 000

Cash and balances with central banks maturing within

three months of placement 2,621,445 3,261,041

Due from banks maturing within three months of

placement 17,680,092 7,727,478

Cash and cash equivalents 20,301,537 10,988,519

58


31 December 2005

23 COMMITMENTS AND CONTINGENT LIABILITIES

2005 2004

AED 000 AED 000

Commitments on behalf of customers :

Letters of credit 20,347,425 21,754,197

Acceptances 650,099 641,701

Letters of guarantee 24,223,997 21,810,508

Undrawn loan commitments to extend credit 2,273,378 3,239,747

Others 2,467,356 2,081,770

49,962,255 49,527,923

Capital and operating lease commitments: (see note below)

Commitments for future capital expenditure 15,904 16,728

Commitments for future operating lease payments for premises 35,496 44,509

51,400 61,237

Total 50,013,655 49,589,160

Credit-related commitments include commitments to extend credit, credit default swaps, standby

letters of credit, guarantees and acceptances which are designed to meet the requirements of

customers.

Letters of credit, guarantees and acceptances commit the Bank to make payments on behalf of

customers contingent upon the failure of the customer to perform under the terms of the contract.

Credit default swaps, included in others, commit the Bank to make payments to the buyer of the

credit default swaps, contingent upon the failure of the primary obligator to perform under the

terms of the contract.

Commitments to extend credit represent contractual commitments to make loans and revolving

credits. Commitments generally have fixed expiration dates or other termination clauses and may

require a payment of a fee. Since commitments may expire without being drawn upon, the total

contracted amounts do not necessarily represent future cash requirements.

Undrawn loan commitments maturing after one year amounted to AED 1,590 million (2004: AED

1,752 million).

Commitments for operating lease payments falling due in more than one year amounted to AED

24.8 million (2004: AED 33.7 million).

59


31 December 2005

31 December 2005 Notional amounts by term to maturity

Positive Negative Notional Less than From three From one

market market amount three months to year to Over

value value Total months one year five years five years

AED 000 AED 000 AED 000 AED 000 AED 000 AED 000 AED 000

Held for trading:

Interest rate swaps 215,442 168,356 15,978,050 1,469,200 31,749 5,521,130 8,955,971

Currency options 0 21 34,823 34,823 0 0 0

Bond options 10 0 5,510 5,510 0 0 0

Foreign exchange -

spot / forward 6,637 0 12,057,027 10,537,988 545,963 973,076 0

Held as fair value hedges:

Interest rate swaps 7,595 88,037 1,922,232 21,764 118,807 587,385 1,194,276

Cross currency interest

rate swaps 114 3,313 169,551 70,711 36,730 62,110 0

Foreign exchange -

spot / forward 0 0 23,375 23,375 0 0 0

229,798 259,727 30,190,568 12,163,371 733,249 7,143,701 10,150,247

24 DERIVATIVE FINANCIAL INSTRUMENTS

In the ordinary course of business the Bank enters into various types of transactions that involve

derivative financial instruments. A derivative financial instrument is a financial contract between

two parties where payments are dependent upon movements in price of one or more underlying

financial instrument, reference rate or index. Derivative financial instruments include forwards,

futures, swaps and options.

Derivatives are measured at fair value by reference to published price quotation in an active market

or counterparty prices.

The table below shows the positive and negative fair values of derivative financial instruments,

which are equivalent to the market values, together with the notional amounts analysed by the term

to maturity. The notional amount, is the amount of a derivative’s underlying asset, reference rate or

index and is the basis upon which changes in the value of derivatives are measured. The notional

amounts indicate the volume of transactions outstanding at year end and are neither indicative of

the market risk nor credit risk.

60


31 December 2005

31 December 2004 Notional amounts by term to maturity

Positive Negative Notional Less than From three From one

market market amount three months to year to Over

value value Total months one year five years five years

AED 000 AED 000 AED 000 AED 000 AED 000 AED 000 AED 000

Held for trading:

Interest rate swaps 45,953 45,140 6,896,648 734,600 2,571,100 3,590,948 0

Forward rate agreements 987 1,065 367,300 367,300 0 0 0

Currency options 0 29 23,598 23,598 0 0 0

Bond options 0 5,648 1,895,672 7,346 1,888,326 0 0

Foreign exchange -

spot / forward 3,707 0 8,968,030 7,592,012 168,770 913,142 294,106

Held as fair value hedges:

Interest rate swaps 3,117 111,019 2,765,093 0 591,826 852,480 1,320,787

Cross currency interest

rate swaps 0 13,068 188,259 0 0 188,259 0

Foreign exchange -

spot / forward 0 0 41,853 41,853 0 0 0

53,764 175,969 21,146,453 8,766,709 5,220,022 5,544,829 1,614,893

Derivative product types

Forwards and futures are contractual agreements to either buy or sell a specified currency,commodity or financial instrument at a specific price and date in the future. Forwards arecustomised contracts transacted in the over-the-counter market. Foreign currency and interestrate futures are transacted in standardised amounts on regulated exchanges and are subject todaily cash margin requirements. Forward rate agreements are effectively tailor made interest ratefutures which fix a forward rate of interest on a notional loan, for an agreed period of time startingon a specified future date.

Swaps are contractual agreements between two parties to exchange interest or foreign currencydifferentials based on a specific notional amount. For interest rate swaps, counterparties generallyexchange fixed and floating rate interest payments based on a notional value in a single currency.For cross-currency swaps, fixed interest payments and notional amounts are exchanged in differentcurrencies. For cross-currency interest rate swaps, notional amounts and fixed and floating interestpayments are exchanged in different currencies.

24 DERIVATIVE FINANCIAL INSTRUMENTS (continued)

61


31 December 2005

Options are contractual agreements that convey the right, but not the obligation, to either buy orsell a specific amount of a commodity or financial instrument at a fixed price either at a fixed futuredate or at any time within a specified period.

Derivative related credit risk

Credit risk in respect of derivative financial instruments arises from the potential for a counterpartyto default on its contractual obligations and is limited to the positive market value of instrumentsthat are favourable to the Bank, which are included in other assets. The positive market value isalso referred to as the ”replacement cost” since it is an estimate of what it would cost to replacetransactions at prevailing market rates if a counterparty defaults. The majority of the Bank’sderivative contracts are entered into with other financial institutions.

Derivatives held or issued for trading purposes

The Bank’s trading activities involve sales, positioning and arbitrage activities. Sales activities involveoffering products to customers at competitive prices in order to enable them to transfer, modify orreduce current and expected risks. Positioning involves managing market risk positions with theexpectation of making profit from favourable movements in prices, rates or indices. Arbitrageactivities involve identifying and profiting from price differentials between markets and products.

Derivatives held or issued for hedging purposes

The Bank uses derivatives for hedging purposes as part of its asset and liability managementactivities. This is achieved by hedging specific financial instruments and forecasted transactions aswell as strategic hedging against overall balance sheet exposures in order to manage and reduce itsexposure to currency and interest rate risks to acceptable levels as determined by the Board ofDirectors. The Board of Directors has established levels of currency risk by setting limits oncounterparty and currency position exposures. Positions are monitored on a daily basis andhedging strategies used to ensure positions are maintained within established limits. The Board ofDirectors has established levels of interest rate risk by setting limits on the interest rate gaps forstipulated periods. Assets and liabilities interest rate gaps are reviewed on a daily, weekly andmonthly basis and hedging strategies are used to reduce the interest rate gaps to within the limitsestablished by the Board.

The Bank uses forward foreign exchange contracts and currency swaps to hedge against specificallyidentified currency risks. In addition, the Bank uses interest rate swaps, forwards and interest ratefutures to hedge against the changes in fair value arising from specifically identified fixed interestrate assets. The Bank also uses interest rate swaps as cash flow hedges against the interest rate risksarising on certain floating rate loans. In all such cases, the hedging relationship and objective,including details of the hedged item and hedging instrument, are formally documented and thetransactions are accounted for appropriately.

For interest rate risk, strategic hedging is carried out by monitoring the repricing of financial assetsand liabilities and entering into interest rate swaps, futures and options to hedge a proportion ofthe interest rate exposure. As strategic hedging does not qualify for special hedge accounting,related derivatives are accounted for as trading instruments.

24 DERIVATIVE FINANCIAL INSTRUMENTS (continued)

62


31 December 2005

25 RELATED PARTY TRANSACTIONS

These represent transactions with certain related parties (major shareholders, directors and keymanagement of the Bank and their related concerns) who were customers of the Bank during theyear. The terms of these transactions are approved by the Bank’s management and are made onterms equivalent to those that prevail in arms length transactions with third parties.

Abu Dhabi Investment Authority holds 72.96% (2004: 72.96%) of the issued and fully paidshare capital.

The year end balances and transactions with related parties, in total, included in the financialstatements are as follows:

At 31 December Directors andMajor Key

Shareholders Management 2005 2004

AED 000 AED 000 AED 000 AED 000

Loans and advances 1,501,139 538,637 2,039,776 1,959,316Less: Provision for impaired

loans and advances 0 (27,680) (27,680) (27,512)

Net loans and advances 1,501,139 510,957 2,012,096 1,931,804

Trading investments 0 192,136 192,136 286,079

Customers’ deposits 17,442,431 564,435 18,006,866 3,280,983

Contingent liabilities and commitments 0 176,185 176,185 197,465

At 31 December 2005, impaired loans and advances to related parties on which interest issuspended amounted to AED 57.8 million (2004: AED 59.6 million).

For the year ended 31 December 2005 2004

AED 000 AED 000

Interest income 107,505 130,623

Interest expense 140,011 91,857

Compensation of key management:-Short term employee benefits 15,616 12,558-Post employment benefits 406 371-Termination benefits 627 497

Total compensation of key management 16,649 13,426

Directors’ remuneration 4,130 2,795

63


31 December 2005

26 SEGMENTAL INFORMATION

Primary segmental information: The Bank is organised into the following four major segments, which form the basis on which theprimary segment information is reported:

Domestic Banking Division;International Banking Division;Investment Banking Division; andHead Office Support Functions

The Investment Banking Division includes the results of the Bahrain Offshore Banking Unit.Transactions between segments, and between branches within a segment, are conducted atestimated market rates on an arm’s length basis. Interest is charged or credited to branches andbusiness segments either at contracted or pool rates, both of which approximate the replacementcost of funds.

Segmental information for the year ended 31 December 2005 was as follows:

Domestic International Investment Head OfficeBanking Banking Banking SupportDivision Division Division Functions Total

AED m AED m AED m AED m AED m

(a) Statement of Income:Operating Income 1,469 457 1,285 200 3,411 Profit from operations before impairedassets charge and taxation 1,221 308 1,207 53 2,789Impaired assets charge, net (108) (34) (15) 2 (155)

Profit from operations before taxation 1,113 274 1,192 55 2,634Overseas taxation (54)

Net profit for the year 2,580

(b) Assets:Segment total assets 30,418 28,242 54,266 10,453 123,379

Inter segment balances (39,718)

83,661

Segment capital expenditure 9 18 2 47 76

Segment depreciation 20 11 3 18 52

(c) Liabilities:

Segment liabilities 29,087 27,987 49,828 9,153 116,055Inter segment balances (39,718)

76,337

64


31 December 2005

26 SEGMENTAL INFORMATION (continued)

Segmental information for the year ended 31 December 2004 was as follows:

Domestic International Investment Head OfficeBanking Banking Banking SupportDivision Division Division Functions Total


(a) Statement of Income:Operating Income 786 380 406 161 1,733

Profit from operations before impaired assets charge and taxation 589 257 363 36 1,245Impaired assets charge, net (93) 12 0 0 (81)

Profit from operations before taxation 496 269 363 36 1,164

Overseas taxation (26)

Net profit for the year 1,138

(b) Assets:Segment total assets 25,345 24,816 34,836 9,148 94,145Inter segment balances (37,814)

56,331

Segment capital expenditure 8 13 1 30 52

Segment depreciation 20 11 2 17 50

(c) Liabilities:Segment liabilities 24,772 24,590 33,898 5,701 88,961Inter segment balances (37,814)

51,147

Secondary segmental information:

Although the management of the Bank is based primarily on its business segments, the Bank operatesin two geographical markets, the United Arab Emirates and Overseas. The geographical analysis has beenbased primarily upon the location of reporting branches and subsidiaries.

United Arab Emirates Overseas Total

2005 2004 2005 2004 2005 2004AED m AED m AED m AED m AED m AED m

Net profit for the year 2,452 1,016 128 122 2,580 1,138

Total assets 102,725 76,490 20,654 17,655 123,379 94,145Inter segment balances (39,718) (37,814)

83,661 56,331

65


31 December 2005

27 CONCENTRATION OF ASSETS, LIABILITIES AND OFF BALANCE SHEET ITEMS

Concentrations of risk arise when a number of counterparties are engaged in similar business

activities, or activities in the same geographic region, or have similar economic features that would

cause their ability to meet contractual obligations to be similarly affected by changes in

economic, political or other conditions. Concentrations of risk indicate the relative sensitivity of

the Bank’s performance to developments affecting a particular industry or geographic location.

The geographic and industry sector distribution of assets, liabilities and off balance sheet items

of the Bank at 31 December was as follows:

2005 2004

Off balance Off balance

Assets Liabilities sheet items Assets Liabilities sheet items

AED m AED m AED m AED m AED m AED m

Geographic region:

UAE 36,706 57,853 51,042 24,762 39,193 45,409

Other Arab / Middle East 6,732 6,193 2,136 5,407 5,300 1,291

Europe 32,873 12,012 18,096 20,659 6,178 20,639

Indian subcontinent & Asia 3,313 37 716 2,303 25 1,106

USA 3,665 30 7,191 2,941 238 1,933

Rest of the world 372 212 1,023 259 213 358

83,661 76,337 80,204 56,331 51,147 70,736

Industry sector:

Government 13,813 31,435 20,143 11,187 14,961 20,339

Banks 24,818 13,174 43,690 14,639 7,431 37,703

Others 45,030 31,728 16,371 30,505 28,755 12,694

83,661 76,337 80,204 56,331 51,147 70,736

66


31 December 2005

28 MARKET RISK

Market risk is the risk that the value of a financial instrument will fluctuate because of changes inmarket interest rates, foreign exchange rates, market prices equity and commodity prices. The Boardof Directors has set limits based on sensitivity analysis and notional limits which are monitored ona daily basis by the Risk Management Division, reported weekly to Senior Management anddiscussed bi-weekly by the Asset and Liability Committee.

29 CREDIT RISK

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligationand cause the other party to incur a financial loss. The Bank manages credit risk throughdiversification of lending and investment activities to avoid undue concentrations of risks withindividuals or groups of customers in specific locations or businesses and by setting limits forindividual borrowers, and groups of borrowers and for geographical and industry segments. TheBank also monitors credit exposures by limiting transactions with specific counterparties, andcontinually assesses the creditworthiness of counterparties. In addition, the Bank manages the creditexposure by obtaining security where appropriate and entering into master netting arrangements inappropriate circumstances, and limiting the duration of exposure. In certain cases, the Bank mayalso close out transactions or assign them to other counterparties to mitigate credit risk. Credit riskin respect of derivative financial instruments is limited to those with positive fair values.

30 LIQUIDITY RISK

Liquidity or funding risk is the risk that an entity will encounter difficulties in raising funds to meetcommitments associated with financial instruments. Liquidity risk can be caused by marketdisruptions or credit downgrades which may cause certain sources of funding to dry upimmediately. To guard against this risk, management has diversified funding sources and monitorsliquidity on a daily basis to ensure adequate liquidity is maintained. In addition, the Bank maintainsa statutory cash reserve with central banks where it operates as a percentage of deposits andmaintains adequate balance of cash, cash equivalents, and readily marketable securities.

The table below summarises the maturity profile of the Bank’s assets and liabilities based on thecontractual repayment arrangements and does not take account of the effective maturities asindicated by the Bank’s deposit retention history. The contractual maturities of assets and liabilitieshave been determined on the basis of the remaining period at the balance sheet date to thecontractual maturity date. The maturity profile is monitored by management to ensure adequateliquidity is maintained.

67


31 December 2005

30 LIQUIDITY RISK (continued)

The maturity profile of assets, liabilities and shareholders’ equity at 31 December 2005 was asfollows:

Less than From three From one

three months to year to Over

Total months one year five years five years


Assets

Cash and balances with central banks 2,634 2,622 0 0 12

Trading investments 395 395 0 0 0

Due from banks 18,239 18,119 120 0 0

Loans and advances to customers 51,468 26,242 2,072 9,916 13,238

Non-trading investments 9,414 661 200 2,854 5,699

Other assets 1,123 446 670 2 5

Premises and equipment 388 0 0 0 388

83,661 48,485 3,062 12,772 19,342

Liabilities and Shareholders’ Equity

Due to banks 3,116 3,116 0 0 0

Repurchase agreements with banks 6,936 6,936 0 0 0

Customers’ deposits 59,573 53,553 5,114 532 374

Medium-term floating rate notes 3,122 0 0 3,122 0

Other liabilities 3,590 1,003 2,504 28 55

Shareholders’ Equity 7,324 0 377 0 6,947

83,661 64,608 7,995 3,682 7,376

68


31 December 2005

Less than From three From one

three months to year to Over

Total months one year five years five years


Assets

Cash and balances with central banks 3,277 3,271 0 0 6

Trading investments 404 404 0 0 0

Due from banks 8,742 8,247 395 100 0

Loans and advances to customers 35,429 15,070 1,861 7,710 10,788

Non-trading investments 6,570 221 337 2,200 3,812

Other assets 1,544 423 1,119 1 1

Premises and equipment 365 0 0 0 365

56,331 27,636 3,712 10,011 14,972

Liabilities and Shareholders’ Equity

Due to banks 2,691 2,506 185 0 0

Repurchase agreements with banks 4,740 4,740 0 0 0

Customers’ deposits 38,748 33,290 4,556 517 385

Other liabilities 4,967 1,248 3,619 47 53

Shareholders’ Equity 5,185 0 377 0 4,808

56,331 41,784 8,737 564 5,246

30 LIQUIDITY RISK (continued)

The maturity profile of assets, liabilities and shareholders’ equity at 31 December 2004 was as

follows:

69


31 December 2005

31 INTEREST RATE RISK

Interest rate risk arises from the possibility that changes in interest rates will affect future

profitability, cash flows or the fair values of financial instruments. The Bank is exposed to interest

rate risk as a result of mismatches or gaps in the amounts of assets and liabilities and off balance

sheet instruments that mature or reprice in a given period. The Board of Directors has established

acceptable levels of interest rate risk by setting limits on the interest rate gaps for stipulated periods.

The Bank manages interest rate risk by matching the repricing of assets and liabilities through risk

management strategies and monitors the positions on a daily basis to ensure they are maintained

within established limits.

The substantial majority of the Bank’s assets and liabilities reprice within one year. Accordingly,

there is limited exposure to interest rate risk.

The effective interest rate (effective yield) of a monetary financial instrument is the rate that, when

used in a present value calculation, results in the carrying amount of the instrument, excluding

non-interest bearing items. The rate is a historical rate for a fixed rate instrument carried at

amortised cost and a current market rate for a floating rate instrument or an instrument carried at

fair value.

The off balance sheet gap represents the net notional amounts of off balance sheet financial

instruments which are used to manage the interest rate risk.

70


31 December 2005

Non EffectiveLess than From three From one interest interest

three months to year to Over five bearing rate Total months one year five years years items range

AED m AED m AED m AED m AED m AED m %

Cash and balances with central banks 2,634 226 0 0 5 2,403 3 - 3.25%

Trading investments 395 199 0 0 0 196 3.75 - 4.5%Due from banks 18,239 17,562 120 0 0 557 3.25 - 3.5%Loans and advances to

customers 51,468 40,152 6,330 3,199 1,457 330 4.5 - 6.5%Non-trading investments 9,414 6,810 319 2,219 0 66 4 - 5.5%Other assets 1,123 0 0 0 0 1,123 -Premises & equipment 388 0 0 0 0 388 -

Total Assets 83,661 64,949 6,769 5,418 1,462 5,063

Due to banks 3,116 2,789 0 0 0 327 3.25 - 3.5%Repurchase agreements

with banks 6,936 6,936 0 0 0 0 3 - 3.25%Customers’ deposits 59,573 49,451 1,604 444 1 8,073 0.75 - 2.75%Medium-term floating

rate notes 3,122 3,122 0 0 0 0 4.80%Other liabilities 3,590 0 0 0 0 3,590 -Shareholders’ Equity 7,324 0 0 0 0 7,324 -

Total Liabilities andShareholders’ Equity 83,661 62,298 1,604 444 1 19,314

On balance sheet gap 0 2,651 5,165 4,974 1,461 (14,251)Off balance sheet gap 0 2,038 (55) (796) (1,187) 0

Total interest rate sensitivity gap 0 4,689 5,110 4,178 274 (14,251)

Cumulative interest rate sensitivity gap 0 4,689 9,799 13,977 14,251 0

31 INTEREST RATE RISK (continued)

The Bank’s interest sensitivity position, based on the contractual repricing or maturity dates,

whichever dates are earlier, as at 31 December 2005 was as follows:

71


31 December 2005

Non EffectiveLess than From three From one interest interest

three months to year to Over five bearing rate Total months one year five years years items range

AED m AED m AED m AED m AED m AED m %

Cash and balances with

central banks 3,277 1,535 0 0 5 1,737 1.5 - 2%

Trading investments 404 73 0 0 0 331 2.25 - 2.75%

Due from banks 8,742 8,067 395 100 0 180 1.75 - 2.25%

Loans and advances to

customers 35,429 27,601 3,359 2,711 1,328 430 3.5 - 5.5%

Non-trading investments 6,570 5,376 365 771 12 46 3 - 4.5%

Other assets 1,544 0 0 0 0 1,544 -

Premises & equipment 365 0 0 0 0 365 -

Total Assets 56,331 42,652 4,119 3,582 1,345 4,633

Due to banks 2,691 2,320 185 0 0 186 1.75 - 2.25%

Repurchase agreements

with banks 4,740 4,740 0 0 0 0 1.25 - 1.75%

Customers’ deposits 38,748 31,365 1,026 82 192 6,083 0.5 - 2%

Other liabilities 4,967 0 0 0 0 4,967 -

Shareholders’ Equity 5,185 0 0 0 0 5,185 -

Total Liabilities and

Shareholders’ Equity 56,331 38,425 1,211 82 192 16,421

On balance sheet gap 0 4,227 2,908 3,500 1,153 (11,788)

Off balance sheet gap 0 1,758 (618) 173 (1,313) 0

Total interest rate

sensitivity gap 0 5,985 2,290 3,673 (160) (11,788)

Cumulative interest rate

sensitivity gap 0 5,985 8,275 11,948 11,788 0

31 INTEREST RATE RISK (continued)

The Bank’s interest sensitivity position, based on the contractual repricing or maturity dates,

whichever dates are earlier, as at 31 December 2004 was as follows:

72


31 December 2005

32 CURRENCY RISK

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in

foreign exchange rates. The Bank is an entity based in the UAE and its functional

currency is the UAE Dirham. The Board of Directors has set limits on positions by currency.

Positions are monitored on a daily basis and hedging strategies are used to ensure positions are

maintained within established limits. At 31 December, the Bank had the following significant net

exposures denominated in foreign currencies:

2005 2004

AED 000 AED 000

equivalent equivalent

Long (short) Long (short)

Euros 19,991 16,502

Kuwaiti Dinar 188,241 147

Omani Riyals 79,362 41,338

Saudi Riyals 2,418 2,321

Sterling Pounds 80,465 76,215

US Dollars 2,585,655 6,489,889

33 EQUITY PRICE RISK

Equity price risk arises from the change in fair values of equity investments. The Bank manages this

risk through diversification of investments in terms of geographical distribution and industry

concentration. The majority of the Bank’s investments are quoted on United Arab Emirates stock

exchanges.

73


31 December 2005

34 FAIR VALUE OF FINANCIAL INSTRUMENTS

All assets and liabilities are measured at historical cost except for derivatives, trading and availablefor sale investments which are measured at fair value by reference to published price quotations inan active market or from prices quoted by counterparties.

Fair value is the amount for which an asset could be exchanged, or a liability settled, betweenknowledgeable willing parties in an arm’s length transaction. Consequently, differences can arisebetween book values and the fair value estimates. Underlying the definition of fair value is thepresumption that the Bank is a going concern without any intention or requirement to materiallycurtail the scale of its operation or to undertake a transaction on adverse terms.

The fair values of due from banks, due to banks, repurchase agreements and customers’ deposits,being predominantly short term in tenure and issued at market rates, are largely considered toapproximate their book value. Included in due from banks are floating rate certificates of depositwhere fair values are arrived at with reference to secondary market prices.

As explained in Note 7, non-trading investments include an equity investment with a value of AED10 million (2004 : AED 10 million) for which fair value cannot be reliably determined.

The Bank estimates that the fair value of its loans and advances portfolio is not materially differentfrom its book value since the majority of loans are frequently repriced and mature within one year.For loans considered impaired, expected cash flows, including anticipated realisation of collateral,were discounted using an appropriate rate considering the time of collection and a premium for theuncertainty of the flows, the net result of which is not materially different from the carrying value.

35 FIDUCIARY ACTIVITIES

The Bank held assets in trust or in a fiduciary capacity for its customers at 31 December 2005amounting to AED 10,563 million (2004 : AED 2,468 million). Furthermore, the Bank providescustodian services for certain of its customers.

The underlying assets held in a custodial or fiduciary capacity are excluded from the consolidatedfinancial statements of the Bank.

36 BASIC EARNINGS PER SHARE

Earnings per share is calculated by dividing the net profit for the year of AED 2,580 million (2004:AED 1,137 million) by the number of ordinary shares in issue during the year of 941,600,000shares (2004 : 94,160,000 shares restated to 941,600,000 shares following the ten-for-one stocksplit approved at the Extraordinary General Meeting held on 20 March 2005 and effected on 21March 2005). No figure for diluted earnings per share has been presented as the Bank has notissued any instruments which, when exercised, would have a dilutive impact on earnings per share.

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31 December 2005

37 CAPITAL ADEQUACY

The Bank calculates its risk asset ratio in accordance with capital adequacy guidelines establishedby both the UAE Central Bank as well as those established by the Basle I Accord, and these ratiosas at 31 December were as follows:

2005 2004

AED 000 AED 000

In accordance with guidelines issued by

the UAE Central Bank (Minimum 10%)

Capital base 6,944,007 4,804,857

Risk weighted assets:

On balance sheet 34,692,050 20,087,031

Off balance sheet 10,796,134 9,292,691

45,488,184 29,379,722

Risk asset ratio 15.27% 16.35%

In accordance with guidelines issued

by the Basle I Accord (Minimum 8%)

Capital base 7,103,241 4,866,475

Risk weighted assets:

On balance sheet 50,520,546 32,988,133

Off balance sheet 11,632,328 10,712,358

62,152,874 43,700,491

Risk asset ratio 11.43% 11.14%

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31 December 2005

38 SPECIAL PURPOSE ENTITIES

The Bank has created Special Purpose Entities (SPEs) with defined objectives to carry on fund

management and investment activities on behalf of customers. The equity and investments managed

by the SPEs are not controlled by the Bank and the Bank does not obtain benefits from the SPEs’

operations, apart from commissions and fee income. In addition, the Bank does not provide any

guarantees or assume any liabilities of these entities. Consequently, the SPEs’ assets, liabilities and

results of operations are not included in the consolidated financial statements of the Bank. The SPEs

are as follows:

Special Purpose Entity Activities Country of incorporation % holding

NBAD Nominees Limited Dormant England 100

NBAD Fund Managers (Guernsey) Limited Equity management Bailiwick of Guernsey 100

NBAD Global Growth Fund PCC Limited Equity management Bailiwick of Guernsey 100

NBAD Private Equity 1 Fund management Cayman Islands 58

NBAD Trust Company (Jersey) Limited Trust services Jersey, Channel Islands 100

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31 December 2005

United Arab Emirates

80

Bahrain, Manama

United Arab Emirates

Oman, Muscat

France, ParisUK, London

US, Washington

Egypt

Sudan, Khartoum

Kuwait, Kuwait(1 Branch)

(1 Branch)

( 62 Branches)

(2 Branches)

(1 Branch)(1 Branch)

(1 Branch)

(1 Branch)

(17 Branches)

Overseas

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Vision, Mission and Values

OUR VISION:

To be ranked amongst the top 5 Arab banks

OUR MISSION:

To enrich our customers by assisting them to achieve their financial goals

OUR VALUES:

• To understand and fulfill customer needs, proactively

• To nurture, recognize and reward innovation

• To follow prudent and ethical policies

• To be the employer of choice in the UAE financial sector

• To empower our people and encourage teamwork,

learning and knowledge sharing

• To recognize UAE nationals as a vital growing part of our team

• To place the customer at the heart of our business

• To implement sustainable corporate social responsibility policies

• To be partners in the development of UAE

• To provide value to our shareholders

• To develop mutually value added partnerships with external stakeholders

• To value all stakeholders

• To strive constantly for organizational excellence

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www.nbad.ae

· Ghanem Al Suweidi Ahmed Bin Atiq Al Mazroui Mohammed Omar Abdulla Khalifa Sultan Al Suweidi Mohammed Bin Jauan Rashed Al Badi Al Dhaheri Mohammed ...

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