2006-2007 Annual Report - Bank Sepah Sepah Foreign Exchange Operations and International Relations Dept. Designed by Public Relations Dept. First Edition, Summer 2008 Public Relations

In the Name of God

Bank Sepah

Bank Sepah

Foreign Exchange Operations and International Relations Dept. Designed by Public Relations Dept.

First Edition, Summer 2008Public Relations Dept.

Imam Khomeini Sq, Tehran 1136953412, Iran Tel: +98 21 66743282

B a n k S e p a h

w w w . b a n k s e p a h . i r

Table of ContentsPerformance HighlightsCurrent FiguresChairman’s StatementBoard of DirectorsOrganizational StructureProfile Mission and ProspectsModern Banking Services and Improvement of Administrative MethodsAchievementsResource CollectionProjects FinancedBranches and Human ResourcesForeign Exchange Operations & ServicesRisk ManagementResearch and PlanningInformation TechnologyWebsiteBank Sepah Coin MuseumFinancial StatementsBalance SheetStatement of Profit and Loss Statement of Cash FlowsNotes to the Financial StatementsGlossaryNetwork and Correspondent RelationshipsBank Sepah International plcDomestic Offices Involved in International BankingSubsidiary and Branches Abroad

568

10121415161720262829303233343537404243445254555660

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Safe Deposit, 1953, Bank Sepah Coin Museum

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* 20 March 2005-20 March 2006 corresponding to Iranian year 1384** 21 March 2006-20 March 2007 corresponding to Iranian year 1385

Performance Highlights

5

9,000

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

2006-07 **2005-06 *

Total Income(Amounts in IRR billion) 8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

02006-072005-06

Total Expenses(Amounts in IRR billion)

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

02006-072005-06

Provisional Profit Paid to Deposit Holders(Amounts in IRR billion)

250,000

200,000

150,000

100,000

50,000

02006-072005-06

Total Assets(Amounts in IRR billion)

150,000

100,000

50,000

02006-072005-06

Deposits(Amounts in IRR billion)

150,000

100,000

50,000

02006-072005-06

Facilities(Amounts in IRR billion)

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Current FiguresBank Sepah

Registered with the Registry Office of Companies, Tehran, Iran, under No. 4293

Registered Office:Imam Khomeini Sq, Tehran, Iran

Year of Establishment:1925

Paid-in Capital:7,821,522,000,000 Iranian rials

Shareholder:Government of I. R. of Iran

Head Office:Imam Khomeini Sq, Tehran 1136953412, Iran

International Affairs Directorate:7 Africa Hwy, Argentina Sq,Tehran 1514947111, IranTel: +98 21 88647090-1Fax: +98 21 88647189SWIFT: SEPB IR THE-mail: [email protected]

Branch Network: 1716 domestic branches, three branches andone wholly-owned subsidiary abroad

Number of Employees:17,552

6

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Rasht Branch, 1953

7

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Chairman’s StatementIn the Name of God

Being grateful to Almighty God, I am honoured to present the significant performance of Bank Sepah for the year ended 20 March 2007 (Iranian year 1385), coinciding with the second year of the Fourth Economic, Social and Cultural Development Plan of I.R. of Iran.

In line with the impacts of international and regional changes on national economy and also in harmony with the government’s economic policies, having been launched mainly to increase employment and production and to improve macroeconomic variables, the country’s banking system has experienced development.

As the most important monetary and financial policies of the government and the Central Bank of Iran, reference could be made to:

• Decreasing the interest rate of banks facilities for participation contracts*.• Developing appropriate grounds and strategies for decreasing the interest rate for transaction contracts* with fixed yield.• Continuing the policies related to granting facilities to job-creating and quick-yield economic companies.

In the field of the Bank’s operation, in resources collection, total deposits of Bank Sepah reached IRR 148,306 billion with a growth of 58%, compared to previous year. Having the highest rate of growth during the Bank’s whole existence, Bank Sepah also ranked first among the local commercial banks in this regard. In resources allocation sector, the volume of the Bank’s facilities granted to various economic sectors, mainly productive and job-creating ones, reached IRR 125,285 billion with a growth of 73%, compared to previous year. During the year under review, 439 projects were introduced to the Bank among which 322 being reported economically, socially, financially and technically feasible, were accepted with due observance of the government’s macroeconomic policies pursuing balanced growth and harmonious development of different provinces and improvement of investment in less developed regions. For 255 projects, out of those already accepted, the conclusion of contracts amounting to USD 1,441 billion has been accomplished. The majority of these projects include strategic and important industries such as cement, steel, textile and food industries.In the field of foreign exchange activities, Bank Sepah having issued letters of credit amounting to worth of USD 7 billion and having a considerable share of international transactions, ranked as one of the top three local banks for the year ended 20 March 2007. It is to be mentioned that because of its significant role in foreign exchange activities and the favorable quality of services, Bank Sepah has always been appreciated by the clients and the corresponding banks as well.After about 2 years of my career in the influential and pioneering institution of Bank Sepah, I consider it as a duty to appreciate the honest and ceaseless efforts of all the managers and members of staff and also our valued clients' helpful viewpoints and proposals backing us. Bank Sepah owes the improvement of its status in the Iranian banking system and its valuable achievements to the blessings of God, as well as endeavors of the staff and the honorable Members of the Board of Directors.

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* See glossary

I am heartily hopeful that Bank Sepah, having 82 years of valuable experience in the field of banking, while benefiting its management experience, together with the great motive and high morale of its personnel will manage to achieve the economic goals of the government and gain the satisfaction of the clients more than before by improving its banking services and presenting new plans.

Ahmad DerakhshandehChairman of the Board andManaging Director

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Board of Directors

Mr. Ahmad DerakhshandehChairman of the Board and Managing Director

Mr. Mohammad Reza KhorsandiMember of the Board

Mr. Mohammadkazem ChaghazardiMember of the Board

Mr. Seyyed Javad Mirzadeh TabatabaeiDeputy Chairman and Member of the Board

Mr. Alireza HeidarabadipourMember of the Board

Mr. Mozaffareddin TaghaviMember of the Board

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Ahmadabad Branch, Mashhad

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Organizational Structure

Board MemberBoard Member

Managing Director

General Assemblyof Banks

Regions Affairs Directorateof District 1

Financial AffairsDirectorate


Advisers

Tehran Region 1

Tehran Region 2

Tehran Region 3

Tehran Region 4

Karaj Region

Commercial-IndustrialFree Zones

IndependentBranches

Board AdministrationDept.

Security Dept.

Selection Dept.

Personnel Dept.

Personnel WelfareDept.

Training Dept.

Personnel Club

General Inspection &Auditing Dept.

Organization &Methods Dept.

IT & CommunicationsDept.

ATM & SpecialServices Dept.

Risk & EconomicResearches Dept.

Comprehensive InformaticProject Plan Directorate

General Accounting,Statistics & Budgeting Dept.

Treasury & ClearingDept.

Ilam Region

Chaharmahal &Bakhtiari Region

HamedanRegion

KhoozestanRegion

Markazi Region

Lorestan Region

KermanshahRegion

Isfahan Region

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Board MemberBoard MemberBoard Member

International AffairsDirectorate




Foreign Exchange Operations& International Relations Dept.

Foreign Exchange Accounting& Treasury Dept.

Qazvin Region

Zanjan Region

Gilan Region

Kordestan Region

Ardabil Region

East AzarbayjanRegion

West AzarbayjanRegion

Special Inspector

LegalInspector

Overseas Branches

Khorasan Razavi Region

North Khorasan Region

South Khorasan Region

Golestan Region

MazandaranRegion

SemnanRegion

Qom Region

Procurement Dept.

Construction & UtilitiesDept.

Claims Collection Dept.

Legal Dept.

Public Relations Dept.

Fars Region

Booshehr Region

Kohkilooyeh &Boyerahmad Region

Kerman Region

HormozganRegion

Yazd Region

Sistan &Baloochestan Region

Facilities ProcessingDept.

Supervision & Clients’Information Dept.

Clients’ Affairs Dept.

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ProfileAs the first Iranian bank, Bank Sepah was established on 4 May 1925, with an initial capital of IRR 3,883,950 in a shopping centre in Tehran.

The Bank Articles of Association were fundamentally revised in 1926, thus enabling it to offer financial and banking services to develop its commercial, economic and productive activities.

As one of the most influential Iranian financial institutions, the present Bank Sepah, with more than 80 years of experience, effectively contributes to the achievement of the country’s macroeconomic goals through consolidating the funds of depositors and directing them to productive sectors.

With a paid-in capital of IRR 7,822 billion, the Bank now plays a significant role in the economic development of the country, by providing services on both nationwide and international bases, within the framework of its three-year Strategic Plan, taking full advantage of its 1716 domestic branches, the three branches in Paris, Rome and Frankfurt am Main and one wholly-owned subsidiary, Bank Sepah International plc, in London.

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Mission and ProspectsMission

While operating in accordance with AML Laws & Regulations, the Bank's mission comprises the following points:

1. Rendering banking services all over the country;

2. Facilitating local and international commercial activities;

3. Collecting deposits and financial resources;

4. Granting facilities to various national economic sectors within the framework of the Usury-free Banking Law;

5. Operating in accordance with the economic goals, policies and plans of the Islamic Republic of Iran by means of monetary and credit tools.

Prospects

The Bank’s prospects are determined in accordance with the Bank’s mission statement, determinants of internal and external environment, and also the objectives of the beneficiaries.

In accordance with the framework of its Three-year Strategic Plan, Bank Sepah’s prospects comprise the following:

1. Pioneering banking services;

2. Increasing the Bank’s share of total deposits and effective deposits* as compared with other local commercial banks;

3. Increasing the Bank’s share of facilities granted as compared with other local commercial banks;

4. Ranking first among local commercial banks in terms of per capita deposits and facilities in proportion to the number of the staff and branches;

5. Increasing the share of the Bank’s received commissions.

* See glossary

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Modern Banking Services and Improvement of Administrative Methods1. Sepah Mobile Banking System

Holders of ATM current or savings accounts, who have mobile phones, may enjoy the benefits of this system.

2. Opening Governmental Golden Current Accounts

In order to develop and improve the e-banking services and to clarify and update the statistics of the governmental accounts, Bank Sepah launched the opening of the Governmental Golden Current Accounts.

3. Enhancing the Security of Golden Current Accounts Checks

4. Acting as the Agent for the Clients Subscribing for the Shares of Petrochemical and Cement Companies

5. Executing Suggestion System

In accordance with the Bank’s Strategic Plan, a committee named “Strategic Committee of Suggestion System” was formed for receiving the suggestions of the staff and clients in order to improve the methods, the products and the services of the Bank.

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AchievementsThe achievements of Bank Sepah during the year ended 20 March 2007 are briefly described hereunder:

1. Resources

• Increasing the Bank's total deposits and effective deposits by 58% and 56% respectively, compared to previous year

• Ranking first among local commercial banks in increasing effective deposits

• Ranking first among local commercial banks in increasing total deposits

Short-Term

Long-Term

Current & Sight

Gharzolhasaneh (Interest-Free)

Others

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2002-03 2003-04 2004-05 2005-06

Deposits

(IRR trillion)50

45

40

35

30

25

20

15

10

5

02006-07

17

• Increasing the Bank’s share of total deposits from 12.6 % to 15.1% as compared with other local commercial banks

• Increasing the Bank’s share of effective deposits from 13.6% to 15.8% as compared with other local commercial banks

• Ranking first among local commercial banks in terms of the increase of per-capita staff (63.5%) and branches (55.8%) in proportion to effective deposits

• Ranking first among local commercial banks in terms of the increase of per-capita staff (59.8%) and branches (53.6%) in proportion to total deposits

2. Allocation of Funds

• Increasing total facilities granted by 73% compared to previous year

• Ranking first among local commercial banks in terms of the increase of total facilities granted

• Ranking first among local commercial banks in terms of the increase of the share of per-capita staff and branches in proportion to the facilities granted

• Achieving a growth of 57% in agricultural sector

• Increasing the share of facilities granted from 13.1% to 17% as compared with other local commercial banks

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Facilities Granted to Economic Sectors in the Year

Ended 20 March 2007

38%Industry and Mining

2%Export

13%Housing andConstruction

42%Commerce &

Services

5%Agriculture

18

3. Improving Financial Structure

• Increasing the Bank's total income by 19% as compared to previous year

• Increasing the Bank's operational income by 24% as compared to previous year

• Increasing common incomes by 23%

• Increasing the volume of wire transfers by 70%

• Increasing the volume of documentary credits and collections

In addition, Bank Sepah was honoured with an appreciation letter by the Minister of Economic Affairs and Finance for the improvement of its banking operations.

4. Restructuring Human Resources

• Increasing the number of the staff with university degrees from 25.8% to 28.3%

• Increasing the staff performing specialised jobs by 11.1%

5. Measures Taken in Respect of Top Quality Customer Satisfaction Program (TQCS):

• Providing the clients with the necessary information through the Bank’s website, direct phone lines, and information stands.

• Elaborating the Bank’s services through brochures, annual reports, banners, T.V. and radio teasers, publications and billboards.

• Publishing a book titled “5 S Methodology” and forming 5 S committees in the branch network in order to execute the Bank’s Strategic Plan.

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Resource Collection The volume of resources collected by banks significantly affects all banking operations and services. The collection of financial resources is, therefore, a key determinant to the success of banks, especially commercial banks.

Bank Sepah ranked first among local commercial banks in terms of total deposits collection, showing the annual growth rate of 31% for the five consecutive years ended 20 March 2007 and the growth rate of 58% for the year under report compared to previous year.

The Bank also managed to rank first among local commercial banks in the collection of effective deposits, showing the annual average growth rate of 36.1% for the five consecutive years ended 20 March 2007 and the growth rate of 56% for the year under report compared to previous year.

Long-Term: 24%

Deposits 2006-07

Short-Term: 33%

Gharzolhasaneh(Interest-Free): 3%

Others: 7%Current & Sight: 33%

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20

150,000

140,000

130,000

120,000

110,000

100,000

90,000

80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0

Total Deposits (IRR billion)

2002-03 2003-04 2004-05 2005-06 2006-07

120,000

110,000

100,000

90,000

80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0

Effective Deposits (IRR billion)

The figures show an average annual growth of 56%.2002-03 2003-04 2004-05 2005-06 2006-07

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Composition of Effective Deposits (Annual Comparison)

(IRR billion)

Interest-Free

(Gharzolhasaneh Savings and

Current)

Interest-Bearing

(Short-Term & Long-Term)

90,000

80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0

The figures show an average annual growth of 23% and 41% forthe year ended 20 March 2007 compared to previous year.

2002-03 2003-04 2004-05 2005-06 2006-07

The figures respectively show 41% and 62% growth comparedto previous year.

72%Interest-Bearing

28%Interest-Free

Composition of Effective Deposits (2006-07)

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13,000

12,000

11,000

10,000

9,000

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

Total Foreign Currency Deposits (IRR billion)

The figures show an average annual growth of 46%.2005-06 2006-072002-03 2003-04 2004-05

4,000

3,000

2,000

1,000

0

Foreign Currency Effective Deposits (IRR billion)

The figures show an average annual growth of 20%.2002-03 2003-04 2004-05 2005-06 2006-07

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Per-Capita Staff of Total Deposits (IRR billion)

The figures show an average annual growth of 32% and a growth of 63%for the year ended 20 March 2007 compared to previous year.

2002-03 2003-04 2004-05 2005-06

9

8

7

6

5

4

3

2

1

02006-07

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Composition of Foreign Currency Deposits (IRR billion)

Current

Savings

Term

2,400

2,100

1,800

1,500

1,200

900

600

300

0

2002-03 2003-04 2004-05 2005-06 2006-07

24

Per-Capita Branches of Total Deposits (IRR billion)

The figures show an average annual growth of 30% and a growth of 56%for the year ended 20 March 2007 compared to previous year.

2002-03 2003-04 2004-05 2005-06

90

80

70

60

50

40

30

20

10

02006-07

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Projects Financed A number of projects financed by Bank Sepah over the year ended 20 March 2007 included the following fields as pictured:

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Industrial Carbon

Steel

Wheat StoreWheat Store

Industrial Carbon

Steel

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SteelSteel

TextileTextile

Industrial CarbonIndustrial Carbon

Branches and Human Resources On 20 March 2007, Bank Sepah had 1716 domestic and three overseas branches.

The relationship and interaction between an organization and its staff are the important factors for its development and promotion, and Bank Sepah believes that the skillful and motivated human resources represent its real capital. The Bank has, therefore, fundamentally revised its organizational structure to provide services in a more satisfactory manner.

As at 20 March 2007, and resulting from the recruitment of 82 and the retirement of 505 employees, the Bank's staff totaled 17,552 compared to 18,072 as at the end of previous year. Moreover, the number of temporarily recruited staff increased from 46 to 54 in the year ended 20 March 2007. Over the year under review, 23% of the staff was employed in back-office and 77% in front-office units.

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Foreign Exchange Operations and Services Documentary Credits and Collections

The number of documentary credits and collections (avalized and not avalized) transacted over the year ended 20 March 2007, was 20,320 amounting to worth of USD 6,932 million which shows a growth of 34.5% compared to that of previous year.

Letters of Guarantee

The letters of guarantee issued against counter guarantees (inward L/Gs) and letters of guarantee issued against collaterals (outward L/Gs) amounted to USD 114 million and USD 92 million which show growth of 23% and 99% compared to that of previous year.

Transfers in Foreign Currency

The inward and outward transfers amounted to USD 1935 million and USD 925.7 million which show 65% and 75.4% growth respectively.

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Risk ManagementBanks in their operations, whether in financial brokerage or services they render, always face various types of risks. Consequently, risk management concepts are among the most significant issues internationally raised by the commercial banks.

Fully recognizing the necessity of identification, measurement and management of risks, Bank Sepah became the first Iranian bank to run a unit independently designated for the purpose. The Bank's Risk Department has taken firm steps to consolidate risk management, resulting in customizing new risk management tools and increasing the Bank's decision-making ability and competency. The application of the methods of duration and value at risk, as well as the analyzing of the gaps and financial statements are the steps so far taken in this respect.

Interest Rate Risk

Commercial banks such as Bank Sepah have always been subject to the risk of potential loss arising from interest rate fluctuations, and lack of control over the risk will intensify the loss. As a tool for the measurement of interest rate risk, duration expresses price changes in view of interest rate changes. Using the tool, Bank Sepah has calculated the risk and applied appropriate management strategies to cover it.

The calculation of Bank Sepah duration of assets and liabilities as at 20 March 2007 reflects relative excess in duration of assets over that of liabilities. With respect to the general agreement between national monetary authorities and economic decision makers on the reduction of interest rates over forthcoming years, the said excess may result in an increase in the current value of the Bank's net assets.

Ratio of interest rate-sensitive assets to interest rate-sensitive liabilities, and the weighted average of the provisional interest rate on investment deposits are utilized to measure and control the risk.

The previously mentioned ratios enjoy a more favorable standing in the year under study compared to previous years.

Foreign Currency Rate Risk

Value at risk quantitatively reflects maximum probable portfolio risk over a specified period. Among the Iranian banks, Bank Sepah is the first that calculated foreign currency rate risk and value at risk and also ameliorated its foreign currency portfolio, thus taking advantage of a foreign currency portfolio based on an efficient curve. In order to prevent the increase in the risk of foreign exchange rate fluctuations, supervisory regulations set by the national banking system require the banks' conformity with the designated limits. In this regard, the maximum foreign currency open position that the commercial banks are allowed to retain equals 30% of their basic capital.

Liquidity Risk

Bank Sepah liquidity risk is calculated with the gap analysis method whereby the inflows and outflows have been verified and necessary measures have

B a n k S e p a h


30

been taken to provide liquidity when the Bank faces a negative gap. Furthermore, in order to manage the liquidity risk, various ratios in the field are utilized, among which ratios of liquidity to effective deposits, liquidity to total deposits and facilities to deposits are to be highlighted.

Credit Risk

Credit risk is among the most significant risks the banks face. The first step to take in the establishment of a credit risk management system is the collection of the clients' data including financial statements, the calculation of financial ratios and so forth. The next step is the classification and grouping of the clients according to specified criteria. Bank Sepah has programmed special software for the clients' credit rating and the determination of the clients' credit risk degree that has turned into the Banks' most important credit risk management tool.

Operational Risk

Operational risk is defined as the direct or indirect loss incurred as a result of clerical errors, computer and software errors, mistakes made in the process of decision-making and even as the loss incurred by embezzlement of various types. Operational risk as the premier non-financial risk covers so wide a scope that makes it difficult to quantify. In this connection and with a view to the significance of studying the risk, Bank Sepah has also started identification, assessment and controlling the operational risk, in parallel with other risk types, which will increase its efficiency and decrease operational risk.

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Research and Planning* Analizing the clients satisfaction program

* Studying the optimum structure of I.T. unit in banking

* Designing a modality for the payment of the staff bonus

* Preparing reports on economic effects of interest rate decrease

* Studying the situation of resource & consumption of Sepah Credit Deposits (SEPAS)

* Studying the latest status of core banking in the neighboring countries

* Preparing reports on foreign investment laws and regulations in Iran

* Studying the situation of facilities granted to 600 of top clients

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Information Technology* Expanding telephonebank system

* Putting into operation a satellite telecommunications system

* Equipping more branches with turn-taking system

* Increasing the number of information stands

* Expanding real-time debit-credit system up to 1100 branches

* Putting into operation the administrative automation system and supervising its performance

* Preparing a system for buying and selling foreign currencies in branches

* Training the new staff for software used in branches

* Expanding the site of MICR

* Preparing a system for e-payment of the bills

* Supporting and upgrading the systems and sub-systems including the software of the branches and departments

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Website The Bank Sepah website and its Internet Service Provider (ISP) were constructed and established in 2003 and 2004 respectively for the purpose of information dissemination via the internet and offering e-banking services. Visitors now have access to comprehensive information on usury-free banking and major commercial banks all over the world; ordinances, laws and relevant holy verses and narratives; as well as various essays on banking.

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Bank Sepah Coin MuseumIn 1963, Bank Sepah started to collect coins belonging to various ages of the history of Iran and its neighboring areas, to establish one of the richest coin museums in the Middle East. As a significant safeguard of Iranian cultural heritage, the museum takes advantage of expertise of prominent numismatists as well as careful and systematic surveys to enrich and maintain its priceless treasure under highest standards.

As a member of International Council of Museums (ICOM), Bank Sepah Coin Museum preserves a rare, distinguished and invaluable treasure. Included among its fine collection, there are a number of the first-ever standardized made coins from the Lydian period dating back to circa 643-630 B.C.

Reflecting a history of over 2500 years, the coins testify to many facts, revealing the culture of Iranian multiethnic communities, from immemorial past to present, while indicating their economic, social and cultural developments. They also attest to peoples' scripts, artistic trends, decorations and designs of costumes, as well as to various formal and religious ceremonies of their time.

Taking into consideration the history of Iran, its ruling elites and its foreign relations over the ages, the museum also features crucial treasures of Roman, Byzantine, Greek, Cypriot, Lydian, Arab, Indian, Bactrian, and Mongolian civilizations as well as those of their offshoots.

The museum also prides itself in holding priceless gifts, in addition to its main treasure of coin, including a number of documents and decrees of national significance.

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Financial StatementsFinancial statements and notes thereof, appearing in this report, are quoted from the report dated 5 September 2007 prepared by Audit Organization-Ministry of Economic Affairs and Finance, and approved by the General Assembly of Banks on 29 September 2007.

It is to be mentioned that the decrease of the Bank’s profit is mainly due to increase of bad debts expenses and modification in classification of debts and the rate of received reserves over the year ended 20 March 2007.

Basis of Preparation

Financial statements have been prepared based on historical cost convention and with the application of current values when necessary.

Basis for the Determination of the Depositors’ Share from Common Profit

As required by the Usury-free Banking Law of 30 August 1983 and the administrative guidelines thereof, and with a view to the Central Bank of Iran (CBI) directives, income earned out of operations related to granting financial facilities and the investment in stock market and bonds is recognized within the framework of accounting policies approved by the Bank. The income is regarded as common with that of the deposit holders whose shares will be determined in proportion to the utilization of their resources in the afore-mentioned operations.

Significant Accounting Policies

1. Income Recognition Method

Profit from the current and long-term investments is recognized when ratified by the general assembly of the shareholders of the company invested in (by the Balance Sheet date).

2. Tangible Fixed Assets

2.1. Tangible fixed assets (except lands and buildings) are recorded at cost. Costs of major repairs and improvements, which considerably increase the useful life of the fixed assets, or substantially improve the rate of return thereto, are considered as capital expenditure and depreciate over the remaining useful life of the assets. When realized, the costs of maintenance carried out to retain the economic benefits expected from the originally assessed performance standards of the asset, are regarded as current expenditure and recorded in the statement of profit and loss.

2.2. Lands and buildings of the Bank have been recorded in the books for IRR 8,180 billion, at the revaluation price. The resulting surplus from the said revaluation was IRR 6,602 billion, which is recorded in the Government Capital Increase account with the Bank.

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37

2.3. Depreciation of the Bank’s tangible fixed assets is calculated in accordance with the depreciation table ratified by the Money and Credit Council, based on the rates and methods mentioned hereunder:

Asset� � Rate/ Term� MethodBuildings & Utilities� 7 %� DescendingMotor Vehicles� 25 %� DescendingFurniture & Hardware ofComputer Systems� 10 years� Straight-LineHardware of P.Cs� 3 years� Straight-Line

Depreciation of the buildings which were revalued on 20 March 2005 has been calculated with a rate of 3.5 % and based on the descending method from that time.

3. Provision for Bad Debts

Provisions for bad debts are calculated based on the following criteria:

3.1. General Provision: 1.5 %, as of the beginning of the Iranian year 1385* (2 % until the end of the Iranian year 1384**), of the balance of total facilities and dues except for the balance of facilities and dues for which specific provision has been considered.

3.2. Specific Provision: In proportion to the balance of facilities as categorized hereinafter,

Category� Percentage of ProvisionOverdue facilities � � 10 %Outstanding facilities � � 20 %Doubtful facilities with due attention tothe borrowers' affordability � � 50-100 %Facilities the payment of principal and theaccrued interest of which has fallen overduefor 5 years or more� � 100 %� � �

4. Assets Categorization

The Bank’s granted facilities are evaluated and characterized according to one of the below-mentioned categories and in terms of factors such as tenor of delay, affordability of the borrowers and the nature of their business:

• Current category• Overdue category• Outstanding category• Doubtful category

5. Liabilities in Respect of Staff Retirement Benefits

The current value of liabilities in respect of staff retirement benefits is calculated based on actuary theory.

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* Iranian year 1385 (21 March 2006-20 March 2007)** Iranian year 1384 (20 March 2005-20 March 2006)

38

6. Branches Abroad

6.1. The fiscal year of the Bank's branches in Rome and Paris is based on Gregorian calendar (ended 31 December 2006), and that of our branch in Frankfurt am Main is based on the Iranian calendar (ended 20 March 2007 for the year under review). The aforesaid branches are subject to annual audit by their independent auditors.

6.2. The balances of assets, liabilities, income and expenses of branches abroad are calculated at the rates determined by the Central Bank of Iran (CBI).

6.3. The profit of the branches abroad before the tax deduction shows IRR 111,611 million compared to IRR 85,383 million for previous year.

7. Annual Adjustments

(Amounts in IRR million)� 2006-07� 2005-06Accumulated depreciation of land &goodwill� 307,855� 307,855Bad debts expenses of the yearended 20 March 2006� (203,444)� 0Tax adjustment of previous years� (178,300)� (161,677)Accumulated effects of changing thecash basis into accrual (previousyears)� 126,882� 4,798,171Suggested profit related to sharesexchange over the year ended 20March 2006� 69,860� 69,860Article (S) of Note 2 to Budget Law� (17,970)� (17,970)Advertisement expenses over theyear ended 20 March 2006� (5,145)� 0Price amendment of Somayeh bldg.revaluation� (4,774)� (4,774)Drought Compensation Law� (3,656)� (3,656)Payment of debts related tooperation tax over the year ended20 March 2003� (1,694)� (1,694)Differential of fees for the year ended20 March 2005� 0� 234,876Provisions� 0� 49,583Other adjustments� 13,069� 13,069Total� 102,683� 5,283,643

B a n k S e p a h


39

Balance SheetAssets(Amounts in IRR million)� Note*� 2006-07**� 2005-06*** � � � �

(restated)Cash� 1� 727,640� 705,183Due from central banks� 2� 23,536,757� 14,466,604Due from banks and creditinstitutions� 3� 11,935,668� 15,139,007Due from Government� � 5,702,397� 5,342,281Facilities granted and due frompublic sector� 4� 5,777,906� 5,428,506Facilities granted and due fromnon-public sector� 5� 125,248,501� 72,736,450Debtors in respect of deferred-payment L/Cs and documentarycollections� 6� 20,252,345� 22,518,778Participation bonds and other similarpapers� 7� 1,369,437� 749,155Investments and participations� 8� 4,358,632� 3,199,526Fixed assets� � 8,745,077� 8,379,191Other assets� 9� 3,103,611� 2,503,467Items in transit� � 3,554,138� 2,047,570

Total Assets� 214,312,109� 153,215,718Customers' commitments in respect of L/Cs� 33,560,222� 19,379,330Customers' commitments in respect of L/Gs� 15,351,049� 12,184,035Counter account of other commitments� 18,072,004� 16,725,127Managed funds and similar items� 946,677� 908,745Total� 67,929,952� 49,197,237

B a n k S e p a h


* Accompanying notes 1-32 form an integral part of the present statements.** Iranian year 1385 (21 March 2006-20 March 2007)*** Iranian year 1384 (20 March 2005-20 March 2006)

40

Liabilities and Shareholders’ Equity (Amounts in IRR million)� Note� 2006-07� 2005-06 � � �

(restated)Due to Central Bank of Iran (CBI)� 10� 8,451,061� 2,674,663Due to banks and credit institutions� 11� 6,702,344� 5,175,716Sight deposits� 12� 49,343,056� 32,598,620Savings deposits and similar items� 13� 4,659,121� 3,364,037Term investment deposits� 14� 83,178,171� 51,420,622Other deposits� 15� 10,740,916� 6,417,152Bank's liabilities in respect of deferred-payment L/Cs and documentary collections� 16� 23,959,722� 25,964,552Provisions and other liabilities� 17� 12,100,617� 10,852,514Provision for staff retirement bonus� 18� 919,500� 778,465Total Liabilities � � 200,054,508� 139,246,341Shareholders’ equity:Capital� 19� 7,821,522� 7,821,522Reserves� 20� 559,678� 521,356Outcome of the adjustments made resultingfrom exchange rate unification� 21� 748,526� 747,101Profit resulting from translation of foreigncurrency assets and liabilities� 22� 444,452� 255,863Accumulated profit (loss)� � 4,683,423� 4,623,535Total shareholders’ equity� � 14,257,601� 13,969,377Total liabilities and shareholders’ equity� � 214,312,109� 153,215,718Bank’s commitments in respect of L/Cs� � 33,560,222� 19,379,330Bank’s commitments in respect of L/Gs� � 15,351,049� 12,184,035Other commitments� � 18,072,004� 16,725,127Counter account of managed funds andsimilar items� � 946,677� 908,745Total� � 67,929,952� 49,197,237

B a n k S e p a h


41


(Amounts in IRR million)� Note*� 2006-07**� 2005-06*** � � �(restated)

I. Bank’s Income from Common Activities1. Profit and late payment charges received on facilities� 23� 12,066,155� 9,818,1912. Other incomes� 24� 161,151� 109,082Common incomes� � 12,227,306� 9,927,273Less:

Provisional profit paid to deposit holders� � (7,096,985)� (4,960,620)

Net common income� � 5,130,321� 4,966,653

II. Non-Common Incomes1. Profit and late payment charges received on facilities � 25� 1,395,230� 760,8892. Commissions received � 26� 853,989� 717,6263. Other incomes� 27� 760,987� 703,6814. Total non-common income� � 3,010,206� 2,182,196Bank’s total income� � 8,140,527� 7,148,849

III. Expenses1. Profit paid (except for deposit holders’profit )� 28� 951,128� 412,1172. Commissions paid � 29� 201,019� 78,3353. General expenses � 30� 6,410,939� 4,590,8854. Other expenses � 31� 141,875� 187,333Total expenses � � (7,704,961)� (5,268,670)Bank's profit (before deduction of depositholders’ profit share)� � 435,566� 1,880,179Fees of utilizing investment deposits� � 793,214� 1,395,625Share of profit payable to deposit holders� � (973,298)� (1,395,625)Bank’s profit before tax deduction� � 255,482� 1,880,179Tax� � (55,079)� (1,858,285)Net profit � � 200,403� 21,894

Statement of Profit & Loss

B a n k S e p a h


42


(Amounts in IRR million)� Note*� 2006-07 **� 2005-06 ***� � �(restated)

Operational Activities:Net cash inflow (outflow) resulting fromoperational activities� � (4,581,878)� 1,297,693Yield of Investments and Profit Paid onFinancing Activities:Profit on participation bonds � � 112,425� � 78,575Cost of profit paid on facilities receivedfrom banks� � (363,870)� � (155,282)Net cash inflow resulting from yield ofcapital � � (251,445)� (76,707)Investments and profit paid for financingactivitiesIncome Tax:Income tax paid � � (1,026,964)� (1,005,202)Investment Activities:Funds paid for direct investment and legalpartnerships� � (365,167)� (589,056)Funds received from direct investment andlegal partnerships� � 169,825 � 6,397Funds paid for purchase of tangible fixedassets � � (572,945)� (423,785)Funds received from sale of tangible fixedassets � � 21,991� 165,796Net cash outflow resulting from investmentactivities � � (746,296)� (840,648)Net cash inflow (outflow) prior to financingactivities� � (6,606,583)� (624,864)Financing Activities:Facilities received from banks � � 7,628,000� 2,150,000Repayment of facilities received from banks � � (7,028,000)� (1,950,000)Facilities received from the Central Bank ofIran (CBI) � � 3,708,514� 380,453Repayment of facilities received from CBI� � (43,366)� (269,433) � � 4,265,148� 311,020Net cash inflow (outflow) � � (2,341,435)� (313,844)Profit from foreign currency cash translation � 83,399� 120,963Net increase (decrease) in cash balance � � (2,258,036)� (192,881)Cash balance at the beginning of the year � � 4,364,363� 4,557,244Cash balance at the end of the year � 32� 2,106,327� 4,364,363

Statement of Cash Flows

B a n k S e p a h


43

Notes to the Financial Statements1. Cash(Amounts in IRR million)� 2006-07*� 2005-06**IRR notes and coins� 641,650� 560,303Notes and coins in foreign currency� 85,990� 144,880Total � 727,640� 705,183

2. Due from Central Banks(Amounts in IRR million) � 2006-07� 2005-06Statutory deposit � 22,457,647� 13,844,940Statutory deposits of branches abroad with othercountries’ central banks � 44,321� 39,616Current accounts of branches abroad with othercountries’ central banks � 121,890� 48,094Advance payment to the Central Bank of Iran (CBI)to purchase foreign currency� 19,489� 57,308Sight deposits with Central Bank of Iran (CBI)� 655,653� 0Current account with central banks � 0� 320,515Fee for maintenance of governmental accounts� 27,466� 26,831Reward for statutory deposit � 161,151� 109,082Other due from CBI� 49,140� 20,218Total� 23,536,757� 14,466,604

3. Due from Banks & Credit Institutions(Amounts in IRR million)� 2006-07� 2005-06Balance with other local banks after clearing � 59,266� 464,008Foreign currency sight deposits with other localbanks (after clearing)� 219,901� 77,814Foreign currency sight deposits with foreign banks� 1,167,493� 2,030,830Sight deposits of branches abroad with foreignbanks and financial institutions� 247,745� 820,490Foreign currency term deposits with foreign banks� 2,611,577� 5,233,862Term deposits with foreign branches of Iranianbanks� 430,115� 0Term deposits of branches abroad with foreignbanks� 1,233,844� 1,092,994Facilities granted to banks� 653,640� 658,789Loans and credits granted to Iranian banks bybranches abroad� 1,204,763� 389,535Payment of checks issued by other banks� 3,445,553� 3,811,111Profit receivable from loans granted to banks� 107,191� 11,174Foreign currency loans and credits granted toforeign banks (subordinated loan to Bank SepahInternational plc)� 554,580� 548,400Total� 11,935,668� 15,139,007

B a n k S e p a h


* Iranian year 1385 (21 March 2006-20 March 2007)** Iranian year 1384 (20 March 2005-20 March 2006)

44

4. Facilities Granted and Due from Public (Governmental) Sector(Amounts in IRR million)� 2006-07� 2005-064.1.Due from the Government� 8,822,210� 7,749,510Profit of future years for granted facilitiessuggested by the Government� (3,032,974)� (2,325,875)Provision for bad debts� (86,839)� (81,354)Total� 5,702,397� 5,342,2814.2. Facilities granted under Islamic contracts/ public sectorFacilities granted in IRR� 5,651,090� 5,236,454Facilities granted in foreign currency� 0� 1,380Debtors in respect of L/Cs paid� 239,722� 192,080Debtors in respect of L/Gs paid� 1,636� 0Profit receivable� 70,565� 31,457Other� 67,441� 80,049Provision for bad debts � (252,548)� (112,914)Total� 5,777,906� 5,428,506� �

5. Facilities Granted and Due from Non-Public Sector(Amounts in IRR million)� 2006-07� 2005-06Facilities granted in IRR� 100,058,840� 54,916,244Facilities granted in foreign currency� 5,553,147� 2,257,523Facilities granted from Oil Stabilization Fund� 9,148,729� 6,860,628Facilities granted by branches abroad� 1,934,505� 2,209,514Debtors in respect of L/Cs paid� 9,102,969� 6,131,510Debtors in respect of L/Gs paid� 381,732� 345,217Loans granted on behalf of other banks� 31,201� 0Profit receivable� 4,734,397� 2,698,360Other � 413,845� 491,473Provision for bad debts � (6,110,864)� (3,174,019)Total� 125,248,501� 72,736,450

6. Debtors in Respect of Deferred-Payment L/Cs and Documentary Collections(Amounts in IRR million)� 2006-07� 2005-06Public � 1,530,323� 1,647,576Non-public� 19,030,434� 21,311,738Oil Stabilization Fund� (308,412)� (440,536)Total� 20,252,345� 22,518,778� �

7. Participation Bonds and Other SimilarPapers(Amounts in IRR million)� 2006-07� 2005-06Government securities /branches abroad� 4� 34,143Foreign currency government securities � 63,764� 23,585Provision for value reduction of foreign currencygovernment securities � (2,319)� 0Participation bonds /public sector� 1,307,988� 691,427Total� 1,369,437� 749,155

B a n k S e p a h


45

8. Investments and Participations(Amounts in IRR million)� 2006-07� 2005-06 Long-Term Investments:Direct investment (in Omid InvestmentManagement Co.)� 2,921,693� 1,977,693Foreign stocks and participations(Bank Sepah International plc)� 1,065,059� 757,213Total Long-Term Investments� 3,986,752� 2,734,906Short-Term Investments:Listed companies� 555,960� 587,369Provision for stocks depreciation� (184,080)� (122,749)Total Short-Term Investments� 371,880� 464,620Total Investments� 4,358,632� 3,199,526

9. Other Assets (Amounts in IRR million)� 2006-07� 2005-06Taxation stamp� 41,773� 54,661Gold and silver� 512� 567Goods subject to salaf* contracts � 1,115� 460Inventory� 90,583� 87,359Acquired collaterals� 115,458� 106,163Provisional debtors /IRR� 1,250,821� 1,797,836Provisional debtors /foreign currency� 1,576,186� 428,943Provisional debtors /branches abroad� 11,252� 9,176Profit and commissions receivable/branchesabroad� 15,911� 18,302Total� 3,103,611� 2,503,467

10. Due to Central Bank of Iran (CBI) (Amounts in IRR million)� 2006-07� 2005-06Revolving funds for government balances (CBI)� 1,005,598� 803,326Foreign currency term deposit of CBI� 4,439,714� 731,200Due to CBI- current account� 207,889� 0Due to CBI for differential of foreign exchangerates adjustment—non-exempt items� 120,210� 123,203Due to CBI for differential of foreign exchangerates adjustment— financing items� 362,161� 385,934Facilities received from CBI� 253,900� 270,500Due to CBI (for profit of Chadormaloo Mining Co.facilities)� 155,164� 155,164Adjustment of facilities received from CBI forChadormaloo Mining Co. contract� 68,317� 68,317Selling CBI’s participation bonds � 12,107� 0Foreign exchange rate difference of finance L/Csat dispute with CBI � 66,156� 66,156Due to CBI for usance L/Cs costs� 91� 2,130Differential between export and reference rates offoreign exchange for Polyethylene Tech of SirjanPetrochemical Co.� 72,038� 63,334Provision for overdraft fines� 184,056� 5,399Adjustment of statutory deposit� 1,503,660� 0Total� 8,451,061� 2,674,663

B a n k S e p a h


* See glossary

46

11. Due to Banks and Credit Institutions (Amounts in IRR million)� 2006-07� 2005-06Gharzolhasaneh* current account of non-bankcredit institutions � 385,043� 137,090Banks’ Gharzolhasaneh current deposits (vostroaccounts after clearing)� 93,741� 48,798Sight deposits by Iranian banks with our branchesabroad (after clearing)� 14,601� 6,247Sight deposits of foreign banks� 0� 174Term deposits of Iranian banks with our branchesabroad� 948,683� 529,273Foreign currency sight deposits of Iranian banks� 8,490� 0Foreign currency sight deposits of foreign banks� 173,673� 0Foreign currency term deposits of foreign banks� 3,473,245� 3,454,006Facilities received from banks� 1,600,000� 1,000,000Due to Bank Melli Iran � 4,868� 128Total� 6,702,344� 5,175,716

12. Sight Deposits (Amounts in IRR million)� 2006-07� 2005-06IRR Gharzolhasaneh current accounts � 25,646,446� 17,688,666Foreign currency Gharzolhasaneh currentaccounts� 2,080,435� 1,973,767Customers’ current account with branches abroadand Bank Sepah International plc� 103,987� 184,279Unutilized managed funds� 57,947� 47,888Net balance of sold bank checks� 19,777,078� 11,396,669Transfers undertaken by us in foreign currency� 5,343� 6,001Unclaimed balances in IRR� 166,739� 144,538Unclaimed balances in foreign currency� 4,528� 4,526Unclaimed balances/ branches abroad� 659� 190Staff savings fund� 75� 300Civil Partnership joint account� 52,289� 46,794Provisional creditors in IRR� 817,628� 649,479Provisional creditors in foreign currency � 498,219� 355,754Provisional creditors/ branches abroad� 111,180� 90,362Profit and commissions payable/ branches abroad� 20,503� 9,407Total� 49,343,056� 32,598,620

13. Savings Deposits and Similar Items (Amounts in IRR million)� 2006-07� 2005-06Gharzolhasaneh savings deposits in IRR� 4,103,438� 2,838,236Gharzolhasaneh savings deposits in foreigncurrency� 547,858� 517,190Customers’ savings/ branches abroad � 4,980� 4,314Other� 2,845� 4,297Total� 4,659,121� 3,364,037

B a n k S e p a h


* See glossary

47

14. Term Investment Deposits (Amounts in IRR million)� 2006-07� 2005-06Long-term investment deposits � 30,524,213� 24,154,280Short-term investment deposits � 48,048,562� 24,998,419Special short-term investment deposits � 1,421,209� 139,639State employees’ savings (employee’s share)� 1,607,201� 1,078,262State employees’ savings (state’s share)� 1,576,986� 1,050,022Total� 83,178,171� 51,420,622

15. Other Deposits (Amounts in IRR million)� 2006-07� 2005-06Term deposits in foreign currency � 360,771� 497,504Customers’ term deposits/ branches abroad� 763,024� 48,237Advance receipts from customers for L/Cs / publicsector� 30,110� 87,291Advance receipts from customers for L/Cs / non-public sector� 228,882� 22,231Advance receipts from customers for internalL/Cs / non-public sector� 131,977� 56,766Advance receipts in foreign currency fromcustomers for L/Cs / public sector� 5,172,443� 3,282,142Advance receipts in foreign currency fromcustomers for L/Cs / non-public sector� 2,949,913� 1,663,091Cash deposits for L/Gs� 1,101,749� 757,544Advance receipts from customers for otherfacilities / non-public sector � 2,047� 2,346Total� 10,740,916� 6,417,152

16. Bank's Liabilities for Deferred-Payment L/Csand Documentary Collections(Amounts in IRR million)� 2006-07� 2005-06Facilities received from foreign banks for usanceL/Cs� 6,969,620� 6,477,493Bank's liabilities for acceptance of documents ofdeferred-payment L/Cs and documentarycollections� 16,990,102� 19,487,059Total� 23,959,722� 25,964,552

17. Provisions and Other Liabilities (Amounts in IRR million)� 2006-07� 2005-06Transfers undertaken by branches/IRR� 112,744� 101,327Provision for performance tax � 1,170,633� 2,142,736Provision for deficit of profit paid� 180,084� 0Other Provisions/branches abroad andBank Sepah International plc (BSIP) � 162,577� 167,788Facilities received from Oil Stabilization Fund� 10,111,349� 7,467,235Provision for rewards of Gharzolhasaneh deposits� 78,373� 31,870Provision for outstanding expenses� 27,463� 8,314Profit of government’s shares� 102,193� 835,507Other Provisions� 155,201� 97,737Total� 12,100,617� 10,852,514

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48

18. Provision for Staff Retirement Bonus (Amounts in IRR million)� 2006-07� 2005-06Balance as of the beginning of the year� 778,465� 666,832Paid over the year� (73,312)� (15,861)Provision provided over the year� 214,347� 127,494Total� 919,500� 778,465

19. Paid-in Capital

The Bank's capital as at the Balance Sheet date was IRR 7,821,522 million belonging entirely to the Government of the Islamic Republic of Iran. The Bank's capital increase results from special bonds for capital increase in the year ended 21 March 2001, for the total value of IRR 652 million; revaluation of fixed assets in the year ended 21 March 2005, for the value of IRR 6,601,927 million; and IRR 167,595 million sourced from the provision for the translation of foreign currency assets and liabilities.

20. Reserves (Amounts in IRR million)� 2006-07� 2005-06Statutory reserve � 557,845� 519,523Other reserves � 1,833� 1,833Total � 559,678� 521,356

21. Outcome of the Adjustments Made Resulting from Foreign Exchange Rate Unification

As at the beginning of the year ended 21 March 2002, foreign currency assets and liabilities of the Bank were unified by the application of the reference rate, with the resultant difference reflected in the Balance Sheet, and classified under the heading “Shareholders’ equity.” It is to be mentioned that in the year ended 20 March 2005 the amount of IRR 168 billion of the above mentioned differential was added to the Bank’s capital further to the bill approved by Bank’s General Assembly dated 12.03.2005.

22. Profit (Loss) from the Translation of Foreign Currency Assets and Liabilities Outcome of the translation of foreign currency assets and liabilities is reflected under “Shareholders’ equity.”

B a n k S e p a h


49

220

200

180

160

140

120

100

80

60

40

20

0

Assets (IRR trillion)

2002-03 2003-04 2004-05 2005-06 2006-07

23. Profit and Late Payment Charges from Common Activities(Amounts in IRR million)� 2006-07� 2005-06Installment Sale*� 3,937,574� 3,327,609Credit in current account (Mozarebeh Motlagh*)� 1,444,654� 1,230,030Civil partnership*� 1,058,922� 797,849Profit received from legal partnership,direct investment and L/Cs� 439,186� 596,995Salaf transactions� 770,559� 679,976Mozarebeh*� 682,964� 654,785Jealeh*� 308,533� 215,600Jealeh for L/Cs� 244,806� 9,240Participation bonds’ profit � 128,181� 86,194Hire purchase*� 21,415� 16,646Debt purchase � 1,424� 0Late payment charges received from facilitiesgranted� 3,027,937� 2,203,267Total� 12,066,155� 9,818,191

24. Other Incomes from Common Activities (Amounts in IRR million)� 2006-07� 2005-06Reward for statutory deposit � 161,151� 109,082

25. Profit and Late Payment Charges Receivedfrom Non-Common Activities (Amounts in IRR million)� 2006-07� 2005-06Profit of special deposit with Central Bank of Iran� 393,300� 0Profit (old transactions) � 204,646� 116,875Profit (branches abroad)� 358,184� 223,890Late payment charges received from other claims � 165,666� 63,309Profit from interbank facilities � 81,869� 101,984Late payment charges received from facilitiesgranted in foreign currency/ non-public sector� 1,530� 1,268Profit received from facilities granted in foreigncurrency/ non-public sector� 71,300� 5,931Profit received from foreign currency deposits� 118,735� 247,632Total� 1,395,230� 760,889

26. Commissions Received from Non-Common Activities(Amounts in IRR million)� 2006-07� 2005-06Documentary collections� 2,242� 2,297Transfers � 16,807� 16,454Letters of guarantee� 218,479� 162,791Granted Gharzolhasaneh� 62,948� 63,401Loans granted to the Bank staff� 16,869� 12,460Foreign exchange transactions� 12,179� 13,021Correspondents and branches abroad� 75,665� 76,197Managed funds (in trust loans and participations)� 4,338� 5,602Letters of credit� 251,892� 222,096Governmental accounts(public goods andservices expenses)� 27,466� 26,831Commissions (branches abroad)� 72,095� 64,774Other� 93,009� 51,702Total� 853,989� 717,626

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* See glossary

50

27. Other Incomes from Non-Common Activities (Amounts in IRR million)� 2006-07� 2005-06Outcome of foreign exchange transactions � 83,398� 120,964Mail, telegraph and telephone� 51,910� 50,144Selling real estate collaterals and other propertiesand assets� 18,622� 46,131Valuating and evaluating� 62,063� 20,040Deferred-payment L/Cs� 352,936� 311,020Sundry income (branches abroad)� 52,590� 26,437Other incomes� 139,468� 128,945Total� 760,987� 703,681

28. Profit Paid (Amounts in IRR million)� 2006-07� 2005-06Profit paid (except for deposit holders’ profit )� 756,558� 315,689Profit paid by branches abroad and Bank SepahInternational plc � 194,570� 96,428Total� 951,128� 412,117

29. Commissions Paid (Amounts in IRR million)� 2006-07� 2005-06Commissions paid� 192,216� 71,235Commissions paid (branches abroad)� 8,782� 7,085Fees paid for valuation of immovable units� 21� 15Total� 201,019� 78,335

30. General Expenses(Amounts in IRR million)� 2006-07� 2005-06Staff expenses� 2,575,536� 2,131,229General administrative expenses� 672,776� 569,394Bad debts expenses� 2,996,255� 1,570,846Depreciation of movable & immovable propertiesand goodwill expenses� 166,372� 319,416Total� 6,410,939� 4,590,885

31. Other Expenses (Amounts in IRR million)� 2006-07� 2005-06Cost of rewards for Gharzolhasaneh deposits� 78,223� 64,583Cost of depreciation of investments� 63,652� 122,750Total� 141,875� 187,333

32. Net Increase (Decrease) of CashReflected in Statement of Cash Flows� 2006-07� 2005-06� Changes over (Amounts in IRR million)� � � the yearNotes, coins and precious metals � 646,578� 565,836� 80,742Balance with local banks after clearing � 279,168� 541,822� (262,654)Foreign currency cash and balanceswith foreign banks � 1,496,812� 2,991,234� (1,494,422)Local banks' balance with us after clearing �(108,342)� (55,044)� (53,298)Balance with CBI after clearing � (207,889)� 320,515� (528,404)Total� 2,106,327� 4,364,363� (2,258,036)

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51

Glossary • Effective Deposits

In the present report, effective deposits refer to the combination of the Bank’s Gharzolhasaneh deposits, which are interest-free, as well as sight and term deposits, which are interest-bearing.

• Islamic Contracts Mentioned in the Report

Gharzolhasaneh Syllabified as Ghar.zol.ha.sa.neh according to its Persian pronunciation, and alternatively spelt out as Qard-al-hassanah, Ghardhulhassanah, etc., Gharzolhasaneh according to the Islamic banking system of Iran is:

1. In terms of resource collection, a) an interest-free savings account, the holder of which may gain rewards as a result of the bank prize draws in cases where the minimum balance exceeds IRR 50,000 over the contractual period. Throughout this report, savings accounts refer to Gharzolhasaneh savings accounts; and b) the interest-free current account. Throughout the report, current accounts refer to Gharzolhasaneh current accounts.

2. In terms of the allocation of funds, an obligatory contract whereby the bank, (as lender) lends a specified amount to the applicant (the borrower) under specified terms. The contract covers the costs of marriage, house repair, housing, medical treatment and education.

Participation Contracts

Under this type of contracts, the bank provides the whole or a part of the funding required by its customer for a specific economic activity. The profit gained from such economic activity is shared between the bank and the customer according to the terms of related contract. These contracts consist of:

a- Civil Partnership

Introduced for the first time by the Islamic banking system of Iran, Civil Partnership is defined as the mixing of the capital--in cash or kind--of a partner or partners, with the capital--in cash or kind--of the bank, on a joint-ownership basis, for the performance of a specific job in the field of production, trade and services, for a limited duration, and with the intention of making a profit on the basis of an agreement.

b- Mozarebeh

Syllabified as Mo.za.re.beh according to its Persian pronunciation, and alternatively spelt out as Modharabah, Mudharabah, etc., Mozarebeh is a contract whereby one of the parties (the bank) provides funds in cash, indicating that the other party (the applicant, also known as the agent) is to conduct business with the funds, with both parties sharing the profit.

c- Mozarebeh Motlagh (Absolute Mozarebeh)

This kind of contract shall be concluded between the bank (the owner) and the client (the agent). The agent is granted a power of attorney by the bank

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to perform commercial activities on its behalf and the bank undertakes to credit the agent’s current account with the amount of the contract wholly or partially as required. Dividends of the profit resulting from the execution of the contract will be agreed upon between the parties as common parts of the total profit, in form of certain percentages.

Transaction Contracts (Constant Profit Contracts)

Under this type of contracts, the bank provides the whole or a part of the funding required by its customer for a specific economic activity. As opposed to participation contracts, the bank’s profit is fixed at the time of entry into the contract. As such, the bank’s profit has to be paid by the customer irrespective of the actual profit or loss derived from the economic activity.

a- Hire Purchase (Leasing Conditional on Ownership)

A hiring agreement incorporating a condition that at the end of the hire period, the hiring party will take up ownership of the exact hired article. The agreement involves three stages: 1. purchase, 2. hire, 3. sale and/or transfer.

b- Installment Sale (Raw Materials, Machinery and Housing)

Installment Sale is a contract, which transfers the ownership of an item to another party, at a known price, in such a manner that all or part of the price of the said item shall be received in equal or unequal installments at fixed maturity, or maturity dates.

c- Jealeh

Syllabified as Je.a.leh according to its Persian pronunciation, and alternatively spelt out as Jo’aalah, Ju’alah, etc., Jealeh in general refers to the undertaking of one party (the contracting party) to pay a specified amount to the other party for rendering a specific service in accordance with the terms and conditions of the contract.

Acting as an agent, or as the contracting party if required, banks may conclude a Jealeh contract, which is one of the short term facilities granted for the expansion of production, commercial and services activities for the purpose of providing facilities to develop business in the fields of production, commerce and services.

d- Salaf

Syllabified as sa.laf according to its Persian pronunciation, with letters a pronounced as a in act, Salaf or forward deals are advance cash purchase of products (industrial and mining as well as agricultural) at a predetermined price, when, during the process of production, the producer feels a financial constraint on the part of his working capital needs. Banks are authorized to sign such deals only at the request of a producer.

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Network and Correspondent RelationshipsHaving adopted a customer-oriented approach, Bank Sepah, with three overseas branches and one wholly-owned subsidiary, maintains expanding correspondent relationships with hundreds of foreign banks worldwide. This enables the Bank to provide a variety of services for its customers, and makes it a reliable correspondent for many first-class banks as well.

Frankfurt Branch

Rome Branch

Bank Sepah International plcLondon

Paris Branch

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Bank Sepah International plcEstablished on 1 January 2002, Bank Sepah International plc (BSIP) is the wholly- owned subsidiary of Bank Sepah that independently from its parent company started operations with an initial capital of USD 60 million as dividends and USD 60 million as long-term liabilities. BSIP focuses on rendering bankingand financial services to the Iranian and Middle-Eastern clients.

Goals of Establishment

1. Developing and enhancing of banking operations in every relevant field

2. Developing banking operations throughout international markets

3. Enhancing the accumulation of resources through diversification of the operations and accordingly absorption of new clients

4. Decreasing the risk of foreign exchange transactions

5. Active engagement in the stock markets and discounting operations

6. Rendering facilities under financing, refinancing and overdraft schemes

7. Improving operations in various fields such as deposit-making, investment, facilities, guarantees and foreign exchange

8. Participating in syndicated projects

9. Receiving loans and deposits from money markets in order to provide parts of resources required to develop banking operations.

As from 19 May 2006, and with the approval of Bank Sepah Board of Directors, BSIP paid-in capital has increased to USD 150 million in order to have an effective presence in banking market.

Financial statements of Bank Sepah International plc over its fiscal year ended 31 March 2007 indicates the following achievements:

1. A forty-two percent increase in profit before tax from USD 21.7 million to USD 30.7 million;

2. Increase in the yield of assets from 1.6% as at 31 March 2006 to 3% as at 31 March 2007.

The figures show an average annual growth of 148% and a growth of 42% for the year ended 20 March 2007 compared to previous year.

33,000

30,000

27,000

24,000

21,000

18,000

15,000

12,000

9,000

6,000

3,000

0

BSIP Profit (USD thousand)

2004-05 2005-06 2006-07

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Domestic Offices Involved in International BankingInternational Affairs Directorate6th Floor, 7 Africa Hwy, Argentina Sq., Tehran 1514947111, IranTel: + 98 21 88647090-1Fax: + 98 21 88647189SWIFT: SEPB IR THE-mail: [email protected]

Branches in Tehran

1. Azadi Branch 191 Azadi Ave., Tehran 1458745981, IranTel: + 98 21 66021338-9Fax: + 98 21 66021337

2. Bazar Branch399 Panzdah Khordad Sharghi St., Tehran 1117714913, IranTel: + 98 21 33900230; 33909975; 33908972Fax: + 98 21 33908573

3. Beyhaghi Branch 7 Argentina Sq., Tehran 1514947111, IranTel: + 98 21 88647146; 88647155Fax: + 98 21 88647147

4. Central BranchImam Khomeini Sq., Tehran 1136953412, IranTel: + 98 21 66740653; 66749277Fax: + 98 21 66742755

5. Chaharahe College Branch 501 Hafez Ave., Tehran 1599613315, IranTel: + 98 21 88898274; 88802979Fax: + 98 21 88898238

6. Chamran BranchNowbonyad Sq., Tehran 1957975998, IranTel: + 98 21 20101673-4 Fax: + 98 21 20101709

7. Daneshgah BranchNorth-East of Enghelab Sq., Tehran 1417913617, IranTel: + 98 21 66418300; 66418556Fax: + 98 21 66418928

8. Enghelab BranchEnghelab Ave., Tehran 1581818614, IranTel: + 98 21 88829382; 88825805Fax: + 98 21 88834988

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9. Jahad Sq. Branch48 Jahad Sq., Tehran 1415794863, IranTel: + 98 21 88971681-3Fax: + 98 21 88971684

10. Khaled Slamboli Branch1 Khaled Slamboli Ave., Tehran 1513613513, IranTel: + 98 21 88723264; 88723557Fax: + 98 21 88716540

11. Khayam Branch809 Khayam St., Tehran 1161935911, IranTel: + 98 21 55629443; 55819107Fax: + 98 21 55622460

12. Milad Branch146 Valiasr St., Tehran 1517813415, IranTel: + 98 21 88792908; 88792906Fax: + 98 21 88792907

13. Mirdamad Sharghi Branch88 Mirdamad Blvd., Tehran 1547933915, IranTel: + 98 21 22258590; 22273637Fax: + 98 21 22259256

14. Motahari-Modares Branch213 Ostad Motahari Ave., Tehran 1587636814, IranTel: + 98 21 88515213-5Fax: + 98 21 88740985

15. Ostad Motahari Gharbi Branch448 Ostad Motahari, Tehran 1473884881, IranTel: + 98 21 88905037; 88802150Fax: + 98 21 88903416

16. Saipa BranchKm 15 Karaj Special Rd., Tehran 1396114511, IranTel: + 98 21 44195561-2; 44196486Fax: + 98 21 44196985

17. Sepand Branch61 Ostad Nejatollahi Ave., Tehran 1598993531, IranTel: + 98 21 88801576; 88802174Fax: + 98 21 88908784

18. Seyed Khandan Branch1090 Dr. Shariati Ave., Tehran 1543617113, IranTel: + 98 21 22840302; 22852482Fax: + 98 21 22843404

19. Sie Tir Branch320 Siye Tir St., Tehran 1135716158, IranTel: + 98 21 66707486; 66726774Fax: + 98 21 66709952

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20. Soleyman Khater Branch1 Soleyman Khater Ave., Tehran 1575918151, IranTel: + 98 21 88325358-9Fax: + 98 21 88325357

21. Meydane Vanak Branch18 Vanak Sq., Tehran 1969913851, IranTel: + 98 21 88850063; 88675258-9Fax: + 98 21 88678870

Branches in Other Cities

1. Ahwaz BranchSalman Farsi Ave., Ahwaz 6193944346, IranTel: + 98 611 2921945Fax: + 98 611 2921945

2. Arak BranchPasdaran Ave., Arak 3814654753, IranTel: + 98 861 2224090; 2227059Fax: + 98 861 2224090

3. Isfahan BranchAzadi Sq., Isfahan 8168653595, IranTel: + 98 311 6692819; 6692822Fax: + 98 311 6692820

4. Qazvin Branch42 Azadi Sq., Qazvin 3413664338, IranTel: + 98 281 2222070; 2242161Fax: + 98 281 2234103

5. Qom BranchBazar Intersection, Qom 3714713619, Iran Tel: + 98 251 7720230Fax: + 98 251 7714524

6. Kerman BranchJomhoori Eslami Blvd., Kerman 7619633355, Iran Tel: + 98 341 2447032-3; 2460885Fax: + 98 341 2460857

7. Kermanshah BranchAzadi Sq., Kermanshah 6714616438, IranTel: + 98 831 8240160Fax: + 98 831 8240160

8. Kish BranchKish Trade Center, Sanaei St., Kish 7941895575, IranTel: + 98 764 4452267Fax: + 98 764 4452271

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9. Mashhad BranchAhmadabad Sq., Mashhad 9176753673, IranTel: + 98 511 8440263; 8414590Fax: + 98 511 8421384

10. Orumiyeh Branch54761-66 Kashani Ave., Orumiyeh 5715654763, IranTel: + 98 441 3471178-9Fax: + 98 441 3471180

11. Rasht BranchImam Khomeini Ave., Rasht 4139635999, IranTel: + 98 131 2250008Fax: + 98 131 2241370

12. Shiraz BranchZand Blvd., Shiraz 7134846968, IranTel:+ 98 711 2301190Fax: + 98 711 2301209

13. Tabriz BranchAbresan Crossroads, Tabriz 5154995376, IranTel: + 98 411 3354234; 3346319Fax: + 98 411 3346732

14. Yazd BranchJomhoori Eslami Blvd., Yazd 8917955195, IranTel: + 98 351 5227773Fax: + 98 351 5227776

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Subsidiary and Branches AbroadSubsidiary:

Bank Sepah International plcManaging Director: Mr. M. R. FatemiAddress: 5-7 Eastcheap, London EC3M 1JT, UKTel: + 44 207 6231371Fax: + 44 207 6231221Telex: 885343SWIFT: SEPB GB 2LE-mail: [email protected]

Branches Abroad:

Frankfurt BranchManagers: Messrs M. Kakavand and N. Kalweit Address: Hafenstrasse 54, D-60327 Frankfurt am Main, GermanyTel: +49 69 2739970Telefax: + 49 69 27399717Telex: 416154SWIFT: SEPB DE FFE-mail: [email protected]

Paris BranchManager: Mr. M. DarbaniAddress: 64 Rue Miromesnil 75008 Paris, FranceTel: +33 1 42603257Fax: + 33 1 42613664Telex: BANSEPAH 210674 FSWIFT: SEPB FR PPE-mail: [email protected]

Rome BranchAssistant: Mr. R. Dehghan NiriAddress: Via Barberini 50, 00187 Rome, Italy Tel: +39 06 4885675; 4959394Telefax: +39 06 4826010Telex: 625629 SEPARMISWIFT: SEPB IT RRE-mail: [email protected]

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EditorBank Sepah Foreign Exchange Operations and International Relations Department

DesignPublic Relations Department

2006-2007 Annual Report - Bank Sepah Sepah Foreign Exchange Operations and International Relations Dept. Designed by Public Relations Dept. First Edition, Summer 2008 Public Relations

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