BOARD DIRECTORS AND SENIOR MANAGEMENT · nasser ahmed khalifa al suweidi michael h. tomalin board...

BOARD DIRECTORS

AND SENIOR MANAGEMENT

Board of Directors:Chairman H.E. MOHAMMED BIN HABROUSH AL SUWEIDI

Deputy Chairman H.E. KHALAF BIN AHMED AL OTAIBAMembers Dr. JAUAN SALEM AL DHAHIRI

RAHMA AL MASAOODH.E. OBAID SAIF AL NASSERISULTAN BIN RASHID AL DHAHIRISHEIKH AHMED BIN MOHAMMED BIN SULTAN AL DHAHIRIMOHAMMED JOAAN AL BADIMOHAMMED BIN BROOKMOHAMMED KHALIFA AL YOUSSIF AL SUWEIDIAHMED BIN ATIQ AL MAZROUIMOHAMMED OMAR ABDULLANASSER AHMED KHALIFA AL SUWEIDI

Executive Committee:Chairman Dr. JAUAN SALEM AL DHAHIRI

Deputy Chairman H.E. OBAID SAIF AL NASSERIMembers MOHAMMED KHALIFA AL YOUSSIF AL SUWEIDI

SULTAN BIN RASHID AL DHAHIRISHEIKH AHMED BIN MOHAMMED BIN SULTAN AL DHAHIRIAHMED BIN ATIQ AL MAZROUINASSER AHMED KHALIFA AL SUWEIDIMICHAEL H. TOMALIN

Board Management Committee:Chairman H.E. OBAID SAIF AL NASSERIMembers MOHAMMED KHALIFA AL YOUSSIF AL SUWEIDI

Dr. JAUAN SALEM AL DHAHIRISULTAN BIN RASHID AL DHAHIRIAHMED BIN ATIQ AL MAZROUIMOHAMMED OMAR ABDULLANASSER AHMED KHALIFA AL SUWEIDIMICHAEL H. TOMALIN

Audit Committee:Chairman H.E. OBAID SAIF AL NASSERIMembers MOHAMMED KHALIFA AL YOUSSIF AL SUWEIDI

Dr. JAUAN SALEM AL DHAHIRISULTAN BIN RASHID AL DHAHIRIAHMED BIN ATIQ AL MAZROUINASSER AHMED KHALIFA AL SUWEIDIMOHAMMED OMAR ABDULLASAIF ALI MOHAMED MUNAKHAS AL SHEHHI

Senior Management:Chief Executive MICHAEL H. TOMALIN

Chief Operating Officer ABDULLA MOHAMMED SALEH ABDULRAHEEMHead of Domestic Banking KHAMIS MOHAMMED BUHAROON AL SHAMSI

Head of International Banking QAMBER ALI AL MULLAHead of Risk Management SAKET MOUSA AL JUNDI

Head of Investment Banking TERENCE D. ALLEN

Head of Audit and Compliance SAIF ALI MOHAMED MUNAKHAS AL SHEHHI

On behal f o f the Board o f Di rec tors o f Nat iona l

Bank o f Abu Dhabi , I have the honour o f p resent ing

you the Annual Repor t fo r the year 2003.

F o r t h e f i n a n c i a l y e a r e n d e d 3 1 D e c e m b e r 2 0 0 3 ,

t h e B a n k r e p o r t e d r e c o r d n e t p r o f i t s o f A E D 8 0 5 . 2

m i l l i o n , 2 3 % a b o v e 2 0 0 2 . A c c o r d i n g l y , t h e B o a r d

o f D i r e c t o r s h a s r e c o m m e n d e d t h e d i s t r i b u t i o n o f

a 3 5 % c a s h d i v i d e n d t o s h a r e h o l d e r s . A E D 4 7 5

m i l l i o n o f a v a i l a b l e p r o f i t s ( a f t e r d i v i d e n d s a n d

d i r e c t o r s ' r e m u n e r a t i o n ) w i l l b e t r a n s f e r r e d t o

g e n e r a l r e s e r v e .

The cons ide rab le g rowth in the Bank ' s p ro f i t s f o r

the yea r 2003 can be a t t r ibu ted to the AED 100

mi l l ion o r 26% inc rease in commis s ions and o the r

income. Expenses , on the o the r hand , inc reased by

AED 36 mi l l ion o r 10% to f inance the g rowth in

the Bank ' s ne twork , IT sy s t ems and s t a f f member s .

To t a l a s se t s s t ood a t AED 43 .6 b i l l i on , 12% above

2002 l eve l s , ma in l y a s a r e su l t o f h i ghe r l oans and

advances wh ich i nc rea sed by AED 4 .3 b i l l i on and

h ighe r cu s tomer ' s depos i t s by AED 1 .8 b i l l i on .

A l l b u s i n e s s u n i t s p e r f o r m e d w e l l w i t h D o m e s t i c

B a n k i n g p r o f i t s u p 1 9 % , I n t e r n a t i o n a l B a n k i n g u p

3 0 % a n d I n v e s t m e n t B a n k i n g b u s i n e s s u p 2 4 %

y e a r o n y e a r .

D e s p i t e t h e m o d e s t i n c r e a s e i n e x p e n d i t u r e , t h e

B a n k h a s c o n t i n u e d t o i m p l e m e n t i n n o v a t i v e

t e c h n o l o g y s o l u t i o n s a n d u p g r a d e I T s y s t e m s a n d

d e l i v e r y c h a n n e l s .

The exce l l en t pe r fo rmance ha s r e su l t ed f r om the

e f f o r t s exe r t ed by t he boa rd commi t t ee s and the

ded i ca t i on o f t he Bank ' s managemen t and s t a f f

t owa rd s ach iev ing t he Bank ' s ob j ec t i ve s . I shou ld

a l so l i ke t o exp re s s my app rec i a t i on t o ou r l oya l

cu s tomer s f o r t he i r v a lued bus ine s s w i th t he Bank .

F i n a l l y , o n b e h a l f o f t h e s h a r e h o l d e r s , t h e

m e m b e r s o f t h e B o a r d o f D i r e c t o r s a n d t h e

m a n a g e m e n t a n d s t a f f o f t h e B a n k , I w i s h t o

e x t e n d o u r m o s t s i n c e r e a p p r e c i a t i o n a n d

g r a t i t u d e t o H i s H i g h n e s s S h e i k h Z a y e d B i n

S u l t a n A l N a h y a n , P r e s i d e n t o f t h e U A E a n d R u l e r

o f A b u D h a b i , t o H i s H i g h n e s s S h e i k h M a k t o u m

B i n R a s h e d A l M a k t o u m , V i c e P r e s i d e n t a n d R u l e r

o f D u b a i , t o H i s H i g h n e s s S h e i k h K h a l i f a B i n

Z a y e d A l N a h y a n , C r o w n P r i n c e a n d D e p u t y

S u p r e m e C o m m a n d e r o f t h e U A E A r m e d F o r c e s f o r

t h e i r c o n t i n u e d s u p p o r t a n d i n t e r e s t i n t h e B a n k ' s

a c t i v i t i e s .

M o h a m m e d B i n H a b r o u s h A l S u w e i d i

C h a i r m a n

Page 9

CHAIRMAN’S REPORT TO THE SHAREHOLDERSFOR THE FINANCIAL YEAR 2003

NBAD VISION, MISSION, VALUES ANDCORPORATE SOCIAL RESPONSIBILITY POLICY

Vis ion

To be the UAE’ s l ead ing f inanc ia l in s t i tu t ion a t

the cu t t ing edge o f f inanc ia l innova t ion in the

Gul f .

Mi s s ion

To o f fe r p roac t ive ly innova t ive f inanc ia l

so lu t ions wi th in UAE and our in te rna t iona l marke t

p lace v ia dep loyment o f p ruden t po l i c ie s and

s t ra teg ies , wi th a re in fo rced commi tment to

employees , cus tomers and soc ie ty , the reby

enhanc ing sha reho lder expec ta t ions and

pro f i t ab i l i t y and be recogn ized as the Number

One Bank .

Corporate Social Responsibility Policy

NBAD wi l l ac t a s a ro le mode l in the soc ia l and

env i ronmenta l deve lopment o f UAE.

Va lues

• To unders tand cus tomer and marke t needs and

of fe r the r i gh t so lu t ions .

• To nur tu re , recogn ize and reward innova t ion by

our peop le .

• To dep loy p ruden t po l i c ie s and s t ra teg ies , bes t

p rac t i ces and in te rna t iona l exce l lence

s tandards .

• To be t r ansparen t and dep loy e th ica l bus iness

s tandards .

• To be the employer o f cho ice in the UAE

f inanc ia l sec to r .

• To empower our peop le and recogn ize them to

be the Bank ’ s mos t impor tan t a s se t s .

• To a t t r ac t , re ta in and va lue UAE na t iona l s a s a

g rowing pa r t o f our t eam.

• To encourage teamwork , l ea rn ing and

co l labora t ion , in te rna l ly and ex te rna l ly .

• To pu t the cus tomer a t the hea r t o f our

bus iness .

• To honour our commi tment to soc ie ty and ac t

a s a re spons ib le corpora te c i t i zen .

• To be pa r tne r s in the deve lopment o f the UAE.

• To p rov ide va lue to our sha reho lder s .

Page 10

Looking back to July 1999, when we started the 5 year strategy,

the potential to change and grow the Bank was great but

challenges were even greater. In the fourth year of our strategy,

we made good progress and maintained our position as the

Number One financial services provider in the UAE. The corner

stones of this strategy remain:

• To focus on the customer

• To develp our people and

• To reward our shareholders

GROUP OVERVIEW

We achieved a double digit growth with a record net profit of

AED 805M, an increase of 23.1% over 2002. Operating income

rose 14.1% and in line with our strategy to focus on fee income,

non-interest income rose 25.6% during the year. Expenses rose

9.6%. Earnings per share increased from AED 6.95 to AED 8.55.

Our market share of domestic business increased despite tough

competition. Our delivery channels were realigned and our

product range expanded to meet the diverse requirements of

different customers.

Relationships remain the focus of our international strategy.

Investment Banking Division continued its active role in local

capital markets and extended its services to provide trust

management to high net worth individuals.

Our new 34 floor headquarters building in Abu Dhabi, One

NBAD Tower, was completed as planned and occupied in the

first half of 2003.

TECHNOLOGY

We continued to focus on technological innovation to add value

to customers, increase efficiency and reliability, and reduce

operating costs. Our communication infrastructure and network

were upgraded utilizing laser beam technology.

In 2003, the Bank began replacing its core and branch banking

systems with one integrated and secure customer-centric system.

The Bank implemented the SMS Card Alert System through which

customers are notified on their mobile phones of any transaction.

Our two fully automated, state of the art, self service branches in

Abu Dhabi proved to be a success.

Steps towards creating the paperless office were taken. We

introduced an Electronic Document Management to replace the

aging Microfilming machines and introduced an automated workflow

system for Loans and Credit Card applications from our branches.

COMMITMENT TO OUR COMMUNITIES

We are committed to the communities where we work and live.

We support Emiratisation by training and sponsoring students in

local universities and colleges.

We took new measures to affirm the Bank's long-standing

commitment to Society, by formalising a Corporate Social

Responsibility policy.

OUR PEOPLE

We value our people and encourage them to think and act like

owners, taking care of the Bank and its customers.

We remain focused on attracting, developing and retaining the

best, most talented and committed employees who wish to work

in our demanding yet rewarding environment. We motivate and

reward top performers.

Page 11

CHIEF EXECUTIVE REVIEWFOR THE YEAR 2003

NET PROFIT1,000,000

800,000

600,000

400,000

200,0001999

AED

'000

2000 2001 2002 2003

Our commitment to increasing the proportion of our staff who are

UAE nationals was demonstrated by hiring 87 UAE nationals

during 2003 bringing the proportion of our staff in the UAE who

are nationals to 24.3% at the year end. Sadly we lost many UAE

hires this year especially to employers working a 5 day week.

Overall staff numbers increased over the year from 1774 to 1870.

A new state of the art Human Resources Information System was

implemented to manage all HR areas, including payroll,

recruitment, training and development.

BUSINESS EXCELLENCE

Business excellence is at the heart of what we do, and was

demonstrated in 2003 by:

• The formation of a Business Excellence Committee to identify

and lead all internal improvement initiatives.

• The introduction of the NBAD Quality Model.

• The appointment of Quality Improvement Teams to propose

improvements in internal processes.

• The establishment of a new Suggestion Scheme Committee.

• The launch of a Customer Care Program.

• The integration of Key Performance Indicators in the strategic

planning process.

• New Service Level Agreements within the Bank.

• Initiating a Benchmarking forum, the first in the UAE to share

and develop best practices in the service industry.

• Participation in Quality Awards and Business Excellence Schemes.

FOCUSING ON THE CUSTOMER

We are customer centric Bank aiming to provide innovative

solutions to client needs and friendly service.

Customers remain at the heart of the business and we aim to

surprise and delight them.

GROUP RESULTS AND BALANCE SHEET

Thanks to the loyalty of our customers and the dedication and

hard work of our 1870 employees, strong earnings in core

businesses in 2003 were recorded despite global political

uncertainities, and low interest rates.

• With net profits increasing by 23.1% to AED 805M, the highest

in the Bank's history, we are in line with the targets set out in

our Strategic Plan 2000 - 2005.

• Operating income increased by 14.1% to AED 1.3 Billion with

all business segments contributing to this growth.

• The cost income ratio in 2003 was 32.8%, down from 34.1%

in 2002. We keep a close watch on our costs while at the same

time we invest prudently in our infrastructure.

• Net interest income increased during the year despite

prevailing low interest rates which reduce the value of capital

and free balances.

• Capital resources at the end of 2003 reached AED 4.4 billion,

13.8% up on 2002.

• Total year end assets increased by 11.7% from AED 39 billion

to AED 43.6 billion.

• The AED 4.3 billion increase in loans and advances to AED 29.1

billion reflects primarily our relationship led credit strategy to

support our corporate customers both in the UAE and abroad.

• Non-trading investments increased by 51.4% or AED 1.8 billion.

Head OfficeSupport Functions

DIVISIONS OPERATING INCOME

26%

50% 9%

15%InvestmentBanking Division

InternationalBanking Division

DomesticBanking Division

45.0%

35.0%

25.0%1999 2000 2001 2002 2003

Perc

ent

COST - INCOME RATIO

TOTAL ASSETS

30%

25%

20%

15%

10%

24%

14%

1999 2000 2001 2002 2003

UAE NATIONALS

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 1.8 billion.

• The Bank remained a net 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 68.5 billion from

AED 67.1 billion in 2002. The weighted risk of these contingent

liabilities however, decreased from AED 9.3 billion in 2002 to

AED 9.1 billion in 2003.

• The Bank remains well capitalised with a 16.38% ratio on UAE

Central Bank formula, and 11.26% 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

94.3% cover against impaired loans in 2003 compared to

95.8% in 2002. Lower charge and higher release of provisions

reflect improvement in the corporate portfolio.

DOMESTIC BANKING DIVISION

Domestic banking profits increased by 18.6% from AED 380M in

2002 to AED 451M in 2003.

The Domestic Banking Division with its three segments, Retail

Banking Group (RBG), Corporate Banking Group (CBG) and

Private and Elite Banking (PEB), delivers a complete range of

banking and financial services to every segment of the UAE market.

During 2003 RBG continued to focus on improving customer

service and introduced competitive new products with special

emphasis on key segments of UAE society, culminating in the

launch of two new banking programs designed for the Ladies and

Student markets. These initiatives represent a critical step in the

implementation of RBG customer segmentation strategy.

The branch network continued to play its role as the primary

channel for retail business with new branches being added to the

network including a state-of-the-art automated branch located at the

Marina Mall, Abu Dhabi and NBAD's new flagship Branch, Main

Branch, opened at the Abu Dhabi Head Office, One NBAD Tower.

NBAD continued to develop new channels and with 114 ATMs

NBAD has the largest network of ATMs in the UAE. ATM service

enhancements included utility and credit card bill payments

offered through all ATMs and deposit facilities being extended to

an increasing proportion of the network.

During 2003 nbadOnline, already established as one of the

UAE's leading internet banking services, continued to witness

impressive growth with the number of online users rising 44%

from 8,475 to 12,242.

The Bank's state-of-the-art 24/7 call centre experienced similar

growth.

2003 saw the deployment of our Direct Sales Force team serving

all of the UAE. The team is equipped to provide the highest levels

of convenience and service direct to retail customers.

We invested in our card business during 2003 to ensure a strong

and stable platform for long term growth. The card business

performed well this year contributing AED 53M to profit, the

highest level since inception.

The Corporate Banking Group had another successful year and

we retained our position as the Number One bank for business in

the UAE. We were recognized by the “Banker Middle East” as the

“Best Corporate Bank in the UAE” following a poll of its readers.

During 2003, we established a new, wholly owned subsidiary

"Abu Dhabi National Leasing LLC" to provide alternative

financial solutions for our clients with leases tailored to meet their

individual requirements.

We maintained our position as the leading Project Finance bank in

the UAE and have advised, underwritten and lead managed most

of the major infrastructure projects in the UAE during the year.

Private and Elite Banking provides comprehensive tailor made

products and services to High Net Worth Individuals including

asset management execution, fiduciary and banking services.

INTERNATIONAL BANKING DIVISION

The operating profits of the International Banking Division (IBD),

rose 30.3% to AED 172 million.

The increase was driven by the emerging market and syndication

business based in Abu Dhabi and good performances in the UK,

Egypt, Sudan and Oman.

The floatation of the Egyptian Pound in February 2003 and its

subsequent devaluation, has adversely affected the performance

and prospects for most of the banks in Egypt. Our branches

however, have continued to do well with net profit increasing by

43% to AED 24M benefiting from our focus strategy to

concentrate our business in specific market segments. Network

expansion continued by adding 2 new cash offices in Alexandria

and Maadi City Center Malls.

As part of our International business strategy in Egypt,

restructuring and centralization of various activities continued in

2003 to streamline processes, eliminate duplication and provide

better service to our clients.

We maintained our leading position in arranging and

underwriting syndicated facilities for borrowers within the GCC.

Our businesses in London and Washington achieved a net profit

of AED 12.7M and AED 5.3M respectively, focusing on supporting

customers involved in investment and trade from the UAE to the

US and Europe and vice versa.

Our emerging markets business enjoyed a sparkling 2003, and

was actively involved in the credit default business.

The UAE hosted the IMF meeting in September 2003. The Bank

arranged 2 major receptions in Dubai and Abu Dhabi to mark

the event. It was a good opportunity to thank our many

correspondent banking friends round the world, and to explore

new avenues of business with them.

Post provision profits rose from AED 138M in 2002 to AED 197M

in 2003 notwithstanding us providing 80% of our Euro 5 million

Parmalat exposure.

INVESTMENT BANKING DIVISION

The Division performed well in 2003 increasing its contribution

to overall Bank earnings from AED 119M to AED 147M.

Impacted by low interest rates and lower volatility, concentration

was on generating fee income. Structured bond deals and option

based foreign exchange products for clients made up the bulk of

the income generated from the changed strategy.

Trust services were introduced during 2003 through the newly

formed "NBAD Trust Company (Jersey) Limited", to offer

managed trust services for clients wishing to manage their assets

through the generations. The first year of operations of this new

business has been successful, with original expectations exceeded.

Investment Banking Division continued to be the lead manager of

bond issues in the UAE during 2003. A particularly important

issue was the Government of Dubai bond which was successfully

launched in June 2003. It is anticipated that there will be several

new issues in 2004, as the UAE capital markets become more mature.

Despite fierce competition from international banks there were

several new advisory mandates signed during the year.

The local shares markets made significant gains in 2003 in terms of

volumes and capital appreciation. The local NBAD Index showed

an increase of approximately 31% for the year. The Bank's

proprietary portfolio of trading in local shares made an impressive

47% increase - outstripping the Index by some 17%. The mutual

fund UGF had a 28% net return to investors during 2003, making

it a particularly attractive investment for our customers.

The Division through its subsidiary company - Abu Dhabi

Financial Services, increased its volumes and market share to

maintain its position as the country's leading stockbroker.

SUPPORTING THE BUSINESSES

We manage Head Office as a business with its customers, the three

line businesses - Domestic, Investment and International Banking.

Head Office is also responsible for the management of the Bank's

free capital. We employed our capital in cash and bond markets

earning AED 94M in 2003 compared with AED 105M in 2002,

despite lower interest rates.

The restructuring of Head Office is progressing on plan with

considerable cost savings achieved so far.

INCREASING SHAREHOLDER VALUE

In 1999 when our strategy was set to expand the Bank and

enhance shareholder value, the net return on average equity was

12.1%. In 2003 the net return on equity was 21.1%, ahead of

our medium term target return of 20%. With low interest rates,

the value added return on equity was 19%, ahead of the 15%

value added return set as a target in the 5 year plan.

The proposed dividend has been increased to 35% from 30% in

2002. The dividend cover of 2.4 times strikes a balance between

rewarding shareholders now and building the Bank's capital base

to sustain future growth.

Focus for 2004

In 2004 we will continue to develop the Bank along the lines

clearly set out in our long term plan. We anticipate tough market

conditions but we are well placed to continue to grow the

business prudently and substantially.

Michael H. Tomalin

RETURN ON EQUITY

We h a v e a u d i t e d t h e a c c o m p a n y i n g c o n s o l i d a t e d b a l a n c e s h e e t o f N a t i o n a l B a n k o f A b u D h a b i -

P u b l i c J o i n t S t o c k C o m p a n y a s o f 3 1 D e c e m b e r 2 0 0 3 , a n d t h e r e l a t e d c o n s o l i d a t e d s t a t e m e n t s o f

i n c o m e , c a s h f l o w s a n d c h a n g e s i n e q u i t y f o r t h e y e a r t h e n e n d e d . T h e s e c o n s o l i d a t e d f i n a n c i a l

s t a t e m e n t s a r e t h e r e s p o n s i b i l i t y o f t h e B a n k ' s m a n a g e m e n t . O u r r e s p o n s i b i l i t y i s t o e x p r e s s a n

o p i n i o n o n t h e s e c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s b a s e d o n o u r a u d i t .

W e c o n d u c t e d o u r a u d i t i n a c c o r d a n c e w i t h I n t e r n a t i o n a l S t a n d a r d s o n A u d i t i n g . T h o s e S t a n d a r d s

r e q u i r e t h a t w e p l a n a n d p e r f o r m t h e a u d i t t o o b t a i n r e a s o n a b l e a s s u r a n c e a b o u t w h e t h e r t h e

c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s a r e f r e e o f m a t e r i a l m i s s t a t e m e n t . A n a u d i t i n c l u d e s e x a m i n i n g , o n

a t e s t b a s i s , e v i d e n c e s u p p o r t i n g t h e a m o u n t s a n d d i s c l o s u r e s i n t h e c o n s o l i d a t e d f i n a n c i a l

s t a t e m e n t s . A n a u d i t a l s o i n c l u d e s a s s e s s i n g t h e a c c o u n t i n g p r i n c i p l e s u s e d a n d s i g n i f i c a n t e s t i m a t e s

m a d e b y m a n a g e m e n t , a s w e l l a s e v a l u a t i n g t h e o v e r a l l c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t

p r e s e n t a t i o n . W e b e l i e v e t h a t o u r a u d i t p r o v i d e s a r e a s o n a b l e b a s i s f o r o u r o p i n i o n .

I n o u r o p i n i o n , t h e c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s p r e s e n t f a i r l y , i n a l l m a t e r i a l r e s p e c t s , t h e

f i n a n c i a l p o s i t i o n o f t h e B a n k a s o f 3 1 D e c e m b e r 2 0 0 3 a n d t h e r e s u l t s o f i t s o p e r a t i o n s a n d i t s c a s h

f l o w s f o r t h e y e a r t h e n e n d e d i n a c c o r d a n c e w i t h I n t e r n a t i o n a l F i n a n c i a l R e p o r t i n g S t a n d a r d s .

W e a l s o c o n f i r m t h a t i n o u r o p i n i o n p r o p e r b o o k s o f a c c o u n t h a v e b e e n k e p t b y t h e B a n k , a n d t h e

c o n t e n t s o f t h e C h a i r m a n ' s R e p o r t w h i c h r e l a t e t o t h e s e c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s a r e i n

a g r e e m e n t w i t h t h e b o o k s o f a c c o u n t . W e h a v e o b t a i n e d a l l t h e i n f o r m a t i o n a n d e x p l a n a t i o n s w e

r e q u i r e d f o r t h e p u r p o s e o f o u r a u d i t , a n d t o t h e b e s t o f o u r k n o w l e d g e a n d b e l i e f n o v i o l a t i o n s o f

t h e U . A . E . C o m m e r c i a l C o m p a n i e s L a w N o . 8 o f 1 9 8 4 ( a s a m e n d e d ) o r t h e a r t i c l e s o f a s s o c i a t i o n o f

t h e B a n k h a v e o c c u r r e d d u r i n g t h e y e a r w h i c h w o u l d h a v e h a d a m a t e r i a l e f f e c t o n t h e b u s i n e s s o f

t h e B a n k o r o n i t s f i n a n c i a l p o s i t i o n .

E r n s t & Y o u n g

S i g n e d b y :

B a s s a m E H a g e

P a r t n e r

R e g i s t r a t i o n N o . 2 5 8

2 9 F e b r u a r y 2 0 0 4

A b u D h a b i

A M e m b e r o f E r n s t & Y o u n g G l o b a l

AUDITORS' REPORT TO THE SHAREHOLDERS OF

NATIONAL BANK OF ABU DHABI - PUBLIC JOINT STOCK COMPANY

Page 16

Nat ional Bank of Abu Dhabi - Publ ic Jo in t S tock Company

CONSOLIDATED BALANCE SHEETYear Ended 31 December 2003

2003 2003 2002US$ Equivalent 000 Note AED 000 AED 000

ASSETS

612,486 Cash and balances with central banks 3 2,249,661 2,302,262 444,394 Trading investments 4 1,632,260 1,572,464

1,193,756 Due from banks 5 4,384,665 5,870,103 7,921,043 Loans and advances to customers 6 29,093,993 24,823,471 1,475,456 Non-trading investments 7 5,419,349 3,579,362

130,493 Other assets 8 479,300 525,657 98,952 Premises and equipment 9 363,451 372,825

11,876,580 TOTAL ASSETS 43,622,679 39,046,144

LIABILITIES

879,888 Due to banks 3,231,828 3,173,377 951,286 Repurchase agreements with banks 3,494,076 1,281,890

8,556,459 Customers' deposits 10 31,427,874 29,593,740 295,363 Other liabilities 11 1,084,868 1,144,204

10,682,996 TOTAL LIABILITIES 39,238,646 35,193,211

SHAREHOLDERS' EQUITY

256,357 Share capital 13 941,600 941,600 843,922 Reserves 13 3,099,726 2,624,726

(5,776) Cumulative changes in fair values 14 (21,214) (27,884)1,465 Foreign currency translation adjustment 5,379 674 7,891 Retained earnings 28,982 31,337

89,725 Proposed dividend 329,560 282,480

1,193,584 TOTAL SHAREHOLDERS' EQUITY 4,384,033 3,852,933

11,876,580 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 43,622,679 39,046,144

(US$1.0=3.673)

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

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

Page 17



OPERATING INCOME

386,155 Interest income 15 1,418,349 1,367,850 (176,329) Interest expense 16 (647,657) (653,289)

209,826 Net interest income 770,692 714,561

134,040 Other operating income 17 492,328 392,007

343,866 1,263,020 1,106,568

OPERATING EXPENSES

(112,739) General, administration and other operating expenses 18 (414,089) (377,693)

PROFIT FROM OPERATIONS BEFORE231,127 IMPAIRED ASSETS CHARGE AND TAXATION 848,931 728,875

(5,145) Impaired assets charge 19 (18,899) (68,380)

225,982 PROFIT FROM OPERATIONS BEFORE TAXATION 830,032 660,495

(6,754) Overseas income tax expense 12 (24,806) (6,305)

219,228 NET PROFIT FOR THE YEAR 805,226 654,190

2.33 Basic earnings per share (in AED) 33 8.55 6.95

(US$1.0=3.673)


CONSOLIDATED INCOME STATEMENTYear Ended 31 December 2003

Page 18


CONSOLIDATED STATEMENT OF CASH FLOWSYear Ended 31 December 2003

Page 19



OPERATING ACTIVITIES

225,982 Profit from operations before taxation 830,032 660,495 Adjustments for :

11,361 Depreciation 9 41,728 36,913 3,254 Write-off/provisions for impaired loans and advances 19 11,951 54,693 3,156 Write-off/provisions for impaired non-trading investments 19 11,591 20,236

Write back of provisions for non-trading investments, bank(290) placements and floating rate certificates of deposit 19 (1,064) (845)

Operating profit before changes in operating assets 243,463 and liabilities 894,238 771,492 (16,095) Trading investments (59,115) 224,341 351,833 Due from banks and central banks 1,292,282 591,162

(1,169,366) Loans and advances to customers (4,295,083) (4,484,517)7,321 Other assets 26,892 (30,087)

15,914 Due to banks 58,451 (1,778,186)602,283 Repurchase agreements with banks 2,212,186 57,368 499,170 Customers' deposits 1,833,453 8,029,245

(1,299) Other liabilities (4,772) (23,873)

533,224 Cash from operating activities 1,958,532 3,356,945 (2,488) Overseas income tax paid 12 (9,139) (28,176)1,281 Foreign currency translation adjustment 4,705 3,434

532,017 Net cash generated from operating activities 1,954,098 3,332,203

INVESTING ACTIVITIES

(1,450,046) Purchase of non-trading investments (5,326,020) (1,215,489)936,546 Proceeds from sale or maturity of non-trading investments 3,439,934 704,929

(8,809) Purchase of premises and equipment, net of disposals (32,354) (164,547)

(522,309) Net cash used in investing activities (1,918,440) (675,107)

FINANCING ACTIVITIES

(76,907) Dividend paid (282,480) (282,480)

(76,907) Cash used in financing activities (282,480) (282,480)

(DECREASE)/INCREASE IN CASH AND CASH(67,199) EQUIVALENTS (246,822) 2,374,616

1,551,382 Cash and cash equivalents at 1 January 20 5,698,227 3,323,611

1,484,183 CASH AND CASH EQUIVALENTS AT 31 DECEMBER 20 5,451,405 5,698,227

(US$1.0=3.673)


CONSOLIDATED STATEMENT OF CHANGESIN SHAREHOLDERS’ EQUITYYear Ended 31 December 2003

Page 20

ForeignCumulative currency

Share Statutory Special General changes in translation Retained Proposed2003 capital reserve reserve reserve fair values adjustment earnings dividend Total

US$ Equivalent 000 Note AED 000 AED 000 AED 000 AED 000 AED 000 AED 000 AED 000 AED 000 AED 000

956,321 Opening balance at 1 January 2002 941,600 715,400 407,721 1,138,526 4,243 (2,760) 25,357 282,480 3,512,567

(76,907) 2001 dividend paid 0 0 0 0 0 0 0 (282,480) (282,480)

178,108 Net profit for 2002 0 0 0 0 0 0 654,190 0 654,190

Portion of realised (losses) on sale of available for

(15) sale investments 0 0 0 0 0 0 (56) 0 (56)

935 Foreign currency translation adjustment 0 0 0 0 0 3,434 0 0 3,434

(707) Directors' remuneration 0 0 0 0 0 0 (2,595) 0 (2,595)

0 Transfer to special reserve 0 0 63,079 0 0 0 (63,079) 0 0

0 Transfer to general reserve 0 0 0 300,000 0 0 (300,000) 0 0

(8,747) Net movement in cumulative changes in fair values 14 0 0 0 0 (32,127) 0 0 0 (32,127)

0 2002 proposed dividend 0 0 0 0 0 0 (282,480) 282,480 0

1,048,988 Balance at 31 December 2002 941,600 715,400 470,800 1,438,526 (27,884) 674 31,337 282,480 3,852,933

(76,907) 2002 dividend paid 0 0 0 0 0 0 0 (282,480) (282,480)

219,228 Net profit for 2003 0 0 0 0 0 0 805,226 0 805,226

Portion of realised (losses) on sale of available for

(43) sale investments 0 0 0 0 0 0 (159) 0 (159)

(1,281) Foreign currency translation adjustment 0 0 0 0 0 4,705 0 0 4,705

(779) Directors' remuneration 0 0 0 0 0 0 (2,862) 0 (2,862)

0 Transfer to general reserve 0 0 0 475,000 0 0 (475,000) 0 0

1816 Net movement in cumulative changes in fair values 14 0 0 0 0 6,670 0 0 0 6,670

0 2003 proposed dividend 0 0 0 0 0 0 (329,560) 329,560 0

1,193,584 Balance at 31 December 2003 941,600 715,400 470,800 1,913,526 (21,214) 5,379 28,982 329,560 4,384,033

(US$1.0=3.673)

The proposed dividend in 2002 of AED 3 per ordinary share, totaling AED 282,480,000, was approved at the Annual General Meeting in 2003 and subsequently paid.

For 2003, a dividend of AED 3.5 per ordinary share, totaling AED 329,560,000, has been proposed and will be submitted for approval at the Annual General Meeting in 2004.



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS31 December 2003

Page 21

1- ACTIVITIES

The Bank was established in Abu Dhabi in 1968 with limited liability and is registered as a public joint stock company in accordance with theUnited 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, the United Kingdom and the United States of America.

The consolidated financial statements of the Bank are prepared in United Arab Emirates Dirhams (AED).

The consolidated financial statements were authorised for issue in accordance with a resolution of the Board of Directors on 29 February 2004.

2- SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies adopted are as follows:

Basis of preparation

The consolidated financial statements have been prepared in accordance with Standards issued, or adopted by the International AccountingStandards Board (IASB), interpretations issued by the International Financial Reporting Interpretations Committee of the IASB, and applicablerequirements of UAE law.

The consolidated financial statements are prepared under the historical cost convention as modified for the measurement at fair value ofderivatives, trading and available for sale investments. Assets and liabilities that are hedged are carried at fair value to the extent of the risk beinghedged.

The accounting policies are consistent with those used in the previous year.

Consolidation

The consolidated financial statements comprise the financial statements of the Bank and of the following subsidiary companies which are fully-owned:

Subsidiaries Country of incorporationAbu Dhabi International Bank Inc. Curacao, Netherlands Antilles Abu Dhabi Financial Services LLC. Abu Dhabi, United Arab Emirates Abu Dhabi National Leasing LLC. Abu Dhabi, United Arab Emirates

All significant inter-company balances, income and expense items are eliminated on consolidation. The financial statements of subsidiaries areprepared using similar accounting policies as those used by the Bank.

Trading investments

These are initially recognised at cost and subsequently remeasured at fair value. All related realised and unrealised gains or losses are includedin net income from trading investments. Interest earned or dividends received are included in interest and dividend income respectively.

Non-trading investments

These are classified as:Available for saleHeld to maturityOriginated by the Bank

All non-trading investments are initially recognised at cost, being the fair value of the consideration given including acquisition charges associatedwith these investments. Premiums and discounts on acquisition are amortised on a systematic basis to maturity using the effective interest ratemethod and taken to interest income.

2- SIGNIFICANT ACCOUNTING POLICIES (Continued)

Non-trading investments (Continued)

Available for saleAfter 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 investmentis determined to be impaired, at which time the cumulative gain or loss previously recognised in shareholders' equity, along with any transitionadjustment to retained earnings arising from the adoption of IAS 39, is included in the income statement for the period. For investments whichare part of an effective hedge relationship, any unrealised gain or loss arising from a change in fair value is recognised directly in the incomestatement 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 sale, the profit or loss on sale is recognised in the income statement for the period.

Held to maturityInvestments with fixed or determinable payments which are intended to be held to maturity are carried at amortised cost less provision forimpairment.

Originated by the BankInvestments in debt securities where the Bank provides funds directly to the issuer are stated at amortised cost, adjusted for effective fair valuehedges, less provision for impairment.

Due from banks

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

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 isconsidered to be remote.

Impairment and uncollectibility of financial assets

Periodic assessments are made to determine whether there is objective evidence that a specific financial asset may be impaired. If such evidenceexists, the estimated recoverable amount of that asset is determined and any impairment loss, based on the net present value of future anticipatedcash flows is recognised in the income statement.

The provision for impairment of loans and advances to customers also covers impairment which, although not specifically identified, is deemedto be present in the loans and advances portfolio at the balance sheet date. This is estimated based on historical patterns of losses in eachcomponent, the credit rating allocated to the borrowers and the current economic environment in which the borrower operates.

Fair values

For financial instruments traded in organised financial markets, fair value is determined by reference to quoted market prices. Bid prices are usedfor assets and offer prices are used for liabilities. The fair value of interest-bearing financial instruments is estimated based on discounted cashflows using interest rates for instruments with similar terms and risk characteristics. For unquoted investments, a reasonable estimate of the fairvalue is determined by reference to the current market value of similar instruments or is based on the expected discounted cash flows. The fairvalue of unquoted derivatives is determined either by discounted cash flows or by reference to brokers' quotes.

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 livesof all premises and equipment, other than freehold land which is deemed to have an indefinite life. The carrying amounts are reviewed at eachbalance sheet date for impairment to assess whether they are recorded in excess of their recoverable amounts. Where carrying values exceed theirrecoverable amounts, assets are written down. Capital projects in progress are initially recorded at cost, and upon completion are transferred tothe appropriate category of premises and equipment and thereafter depreciated.


Revenue and expense recognition

Interest income and expense, and loan commitment and management fees are recognised on a time proportion basis, taking account of theprincipal outstanding and the effective yield applicable. The recognition of interest income is suspended when the loans become impaired. Otherfees and commissions receivable or payable are recognised when earned or incurred. Dividend income is recognised when the right to receivepayment is established.

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/by thecounterparty. Regular way purchases or sales of financial assets are those that require delivery of assets within the time frame generally establishedby 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 foreigncurrencies, other than those relating to subsidiaries and branches based outside the UAE, are translated to UAE Dirhams at rates of exchange rulingat 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 head office. The assets and liabilities of the subsidiaries andbranches are translated into UAE Dirhams at rates of exchange ruling at the balance sheet date. Income and expense items are translated atapplicable exchange rates during the year. Exchange differences (including those on transactions which hedge such investments) arising fromretranslating the opening net assets, are taken directly to foreign currency translation adjustment under shareholders' equity.

Due to banks and customer deposits

Amounts due to banks and customer deposits are carried at amortised cost, less amounts repaid and adjustments for effective fair value 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 includedin 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 assetsand 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 onlaws that have been enacted at the balance sheet date. The carrying amount of deferred income tax assets is reviewed at each balance sheet dateand 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 incometax asset to be utilised.

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 thederivative using prevailing market rates. Derivatives with positive market values (unrealised gains) are included in other assets and derivativeswith negative market values (unrealised losses) are included in other liabilities.

For the purpose of hedge accounting, hedges are classified into two categories: (a) fair value hedges which hedge the exposure to changes in thefair value of a recognised asset or liability; and (b) cash flow hedges which hedge exposure to variability in cash flows that is either attributableto a particular risk associated with a recognised asset or liability or a forecasted transaction.

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 fairvalue of the item being hedged, are recognised immediately in the income statement.


Derivative financial instruments (Continued)In relation to effective cash flow hedges, the gain or loss on the hedging instrument is recognised initially in shareholders' equity and eithertransferred to the income statement in the period in which the hedged transaction impacts the income statement, or included as part of the costof the related asset or liability.

For hedges which do not qualify for hedge accounting, any gain or loss arising from changes in the fair value of the hedging instrument is takendirectly 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 hedgeaccounting. For fair value hedges of financial instruments with fixed maturities, any adjustment arising from hedge accounting is amortised overthe remaining term to maturity. For cash flow hedges, any cumulative gain or loss on the hedging instrument recognised in equity remains inequity until the hedged transaction occurs. If the hedged transaction is no longer expected to occur, the net cumulative gain or loss recognisedin equity is transferred to the income statement.

Cash and cash equivalents

Cash and cash equivalents comprise cash, balances with central banks and due from banks which mature within three months of the dateof 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 theobligation 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' lengthof service and the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment.

With respect to its UAE national employees, the Bank makes contributions to the relevant government pension scheme calculated as a percentageof 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 rightto set off the recognised amounts and the Bank intends to settle either on a net basis, or to realise the asset and settle the liability simultaneously.

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 financialstatements.

Repurchase and resale agreements

Assets sold with a simultaneous commitment to repurchase at a specified future date (repos) continue to be recognised in the balance sheet andare measured in accordance with the accounting policies for trading or non-trading investments. The counterparty liability for amounts receivedunder these agreements is shown as repurchase agreements with banks in the balance sheet. The difference between sale and repurchase price istreated as interest expense and accrued over the life of the repo agreement using the effective yield method. Assets purchased with acorresponding commitment to resell at a specified future date (reverse repos) are not recognised in the balance sheet, as the Bank does not obtaincontrol over the assets. Amounts paid under these agreements are included in due from banks. The difference between purchase and resale priceis treated as interest income and accrued over the life of the reverse repo agreement.

3- CASH AND BALANCES WITH CENTRAL BANKS

2003 2002AED 000 AED 000

Cash balances 307,853 280,147 Balances with the UAE Central Bank 1,565,884 1,761,032 Balances with other central banks 375,924 261,083

2,249,661 2,302,262

4- TRADING INVESTMENTS

2003 2002AED 000 AED 000

Managed portfolios 70,794 92,143 Equity securities 44,335 28,730 Debt instruments 1,517,131 1,451,591

1,632,260 1,572,464

Debt instruments under repo agreements at 31 December 2003 amounted to AED 1,160,247,000 (2002: AED 1,289,713,000).

5- DUE FROM BANKS

2003 2002AED 000 AED 000

Current, call and notice deposits 224,619 277,460 Fixed deposits 3,782,852 5,573,561 Fixed rate certificates of deposit 377,194 19,082

4,384,665 5,870,103

6- LOANS AND ADVANCES TO CUSTOMERS

2003 2002AED 000 AED 000

Government 6,451,444 5,770,354 Public sector 4,113,909 3,074,180 Banks 540,451 768,392 Corporate / Private sector 13,781,594 11,385,602 Retail sector 4,876,500 4,517,874

29,763,898 25,516,402

Less : Provision for impaired loans and advances (669,905) (692,931)

29,093,993 24,823,471

6- LOANS AND ADVANCES TO CUSTOMERS (Continued)

2003 2002AED 000 AED 000

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

At 1 January 692,931 689,215 Charge for the year (Note 19) 8,222 51,120 Recoveries (Note 19) (3,579) (5,446)Amounts written off during the year (27,669) (41,958)

At 31 December 669,905 692,931

At 31 December 2003, loans and advances to customers on which interest is suspended amounted to:

2003 2002AED 000 AED 000

Impaired loans and advances to customers 2,355,877 2,184,981 Suspended interest (1,552,683) (1,403,159)

803,194 781,822

7- NON-TRADING INVESTMENTS

2003 2002AED 000 AED 000

Available For Sale

Unquoted investments (Note below) 38,865 35,314 Less : Provision for impaired unquoted investments 0 (239)

38,865 35,075

Quoted investments 4,384,731 2,375,174 Less : Provision for impaired quoted investments (16,529) (16,529)

4,368,202 2,358,645

4,407,067 2,393,720

Held To Maturity

Debt instruments 203,436 392,148 Less : Provision for impaired held to maturity investments (18,301) 0

(Fair value - 2003: AED 180,696,000, 2002: AED 392,974,000) 185,135 392,148

Originated by the Bank

Debt instruments 839,117 814,749 Less : Provision for impaired originated investments (11,970) (21,255)

(Fair value - 2003: AED 830,981,000, 2002: AED 814,241,000) 827,147 793,494

5,419,349 3,579,362

7- NON-TRADING INVESTMENTS (Continued)

Included under available for sale investments is an equity investment amounting to AED 10,000,000 (2002: AED 10,000,000), which is carriedat 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 assetvalue of the investment based on the latest available audited financial statements amounted to AED 17,485,000 (2002: AED 17,164,000).

Debt instruments under repurchase agreements included in quoted available for sale investments at 31 December 2003 amounted to AED2,480,495,000 (2002: AED NIL).

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

2003 2002AED 000 AED 000

At 1 January 38,023 18,971 Charge for the year (Note 19) 11,407 19,052 Net amounts written off during the year (2,630) 0

At 31 December 46,800 38,023

8- OTHER ASSETS

2003 2002AED 000 AED 000

Interest receivable 226,265 218,687 Sundry debtors, prepayments and other assets 196,333 243,296 Deferred tax asset 23,810 20,008 Positive fair value of derivatives (Note 22) 32,892 43,666

479,300 525,657

9- PREMISES AND EQUIPMENT

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

Buildings 20 yearsAlterations to premises 4 yearsComputer systems and equipment 3 to 7 yearsOffice furniture and equipment 1 to 5 yearsSafes 10 to 20 yearsVehicles 3 years

OfficeLand and Computer furniture, Capitalbuildings, systems equipment, projectsincluding and safes and in

alterations equipment vehicles progress TotalAED 000 AED 000 AED 000 AED 000 AED 000

Cost:At 31 December 2002 233,263 111,274 82,841 216,924 644,302Additions 6,709 13,203 10,887 1,617 32,416Transfers 198,112 7,152 6,138 (211,402) 0 Disposals (176) (3,325) (9,705) 0 (13,206)At 31 December 2003 437,908 128,304 90,161 7,139 663,512Depreciation:At 31 December 2002 126,553 79,148 65,776 0 271,477 Charge for the year 19,668 12,643 9,417 0 41,728On disposals (152) (3,287) (9,705) 0 (13,144)At 31 December 2003 146,069 88,504 65,488 0 300,061

Net book value:At 31 December 2003 291,839 39,800 24,673 7,139 363,451

At 31 December 2002 106,710 32,126 17,065 216,924 372,825

10- CUSTOMERS' DEPOSITS

2003 2002AED 000 AED 000

Account type:Current accounts 5,611,165 4,953,501 Savings accounts 1,256,227 1,119,749 Notice and time deposits 24,373,543 23,385,717 Certificates of deposit 186,939 134,773

31,427,874 29,593,740

Customer type:Government 14,370,044 15,629,784 Public sector 4,179,054 3,063,635 Corporate / Private sector 3,654,362 2,953,923 Retail 9,224,414 7,946,398

31,427,874 29,593,740

Tharwa Bond deposits amounting to AED 78,690,352 (2002: AED 133,529,546) are included in notice and time deposits. These bonds arestructured and capital guaranteed on maturity by the Bank which has entered into back to back deals with an external party.

11- OTHER LIABILITIES

2003 2002AED 000 AED 000

Interest payable 89,935 98,861 Provision for employees' end of service benefits (see below) 186,148 170,007 Accounts payable, sundry creditors and other liabilities 534,471 548,792 Negative fair value of derivatives (Note 22) 205,533 276,833 Overseas income tax (Note 12) 68,781 49,711

1,084,868 1,144,204

The negative fair value in respect of derivatives held for hedging certain loans and advances and non-trading investments is not indicative of anycurrent or future losses, as a similar positive amount has been adjusted to the carrying value of the hedged loans and advances and non-tradinginvestments.

The Bank provides for employees' end of service benefits in accordance with the employees' contracts of employment. The movement in theprovision was as follows:

2003 2002AED 000 AED 000

Balance at 1 January 170,007 177,231 Provided during the year 24,890 22,150 Paid during the year (8,749) (8,871)Released to Abu Dhabi Retirement Pension and Benefits Fund 0 (20,503)

Balance at 31 December 186,148 170,007

12- 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 appropriatetaxation authorities in accordance with management's estimate of the total amount payable. Where appropriate the Bank has made payments oftax 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 ratesof tax applicable in certain overseas locations.

The charge to the income statement for the year was as follows:2003 2002

AED 000 AED 000Income statementCharge for the year 28,209 12,120 Adjustments relating to prior years 0 (3,815)Adjustments relating to deferred taxation (3,403) (2,000)

24,806 6,305

LiabilityAt 1 January 49,711 66,446 Additions during the year 28,209 12,120 Payments/adjustments during the year net of recoveries (9,139) (28,176)Adjustments relating to prior years 0 (679)

At 31 December 68,781 49,711

13- SHAREHOLDERS' EQUITY

Share capital: The issued and fully paid share capital at 31 December 2003 comprises 94,160,000 ordinary shares of AED 10 each (2002: 94,160,000ordinary shares of AED 10 each). Abu Dhabi Investment Authority holds 72.96% (2002: 72.96%) of the issued and fully paid share capital. Theauthorised share capital comprises 100,000,000 ordinary shares of AED 10 each (2002: 100,000,000 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 associationrequire 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 statutoryreserve 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 ofassociation 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 theshareholders.

14- CUMULATIVE CHANGES IN FAIR VALUES

2003 2002AED 000 AED 000

Balance at 1 January (27,884) 4,243 Net unrealised gains/(losses) during the year 10,386 (37,545)Net realised (gains)/losses during the year (3,900) 4,234 Transfer to income statement for impairment (Note 19) 184 1,184

Balance at 31 December (21,214) (27,884)

15- INTEREST INCOME

2003 2002AED 000 AED 000

Loans and advances to customers 1,117,072 1,007,446 Due from banks 118,744 179,731 Trading and non-trading investments 182,533 180,673

1,418,349 1,367,850

16- INTEREST EXPENSE

2003 2002AED 000 AED 000

Customers' deposits 387,754 435,959 Due to banks 223,705 189,734 Repurchase agreements with banks 27,451 27,157 Certificates of deposit 8,747 439

647,657 653,289

17- OTHER OPERATING INCOME

2003 2002AED 000 AED 000

Fees and commission income 346,188 278,194 Fees and commission expense (18,278) (16,404)

Net fees and commission income 327,910 261,790

Net income from trading investments and derivatives 45,509 8,489 Net gains from sale of non-trading investments 34,349 54,017 Net gains from dealing in foreign currencies 64,816 52,346 Dividend income 2,251 2,483 Other operating income 17,493 12,882

492,328 392,007

18- GENERAL, ADMINISTRATION AND OTHER OPERATING EXPENSES

2003 2002AED 000 AED 000

Staff costs 249,586 225,667 Other general and administration expenses 120,060 111,519 Depreciation 41,728 36,913 Donations and charity 2,715 3,594

414,089 377,693

The number of employees as of 31 December 2003 was 1,870 (2002 : 1,774).

19- IMPAIRED ASSETS CHARGE

2003 2002AED 000 AED 000

Provision for impaired loans and advances (Note 6) 8,222 51,120 Provision for impaired non-trading investments (Note 7) 11,407 19,052 Write-off of impaired loans and advances to income statement 3,729 3,573 Write-off of impaired non-trading investments to income statement (Note 14) 184 1,184 Recovery of loan loss provisions (Note 6) (3,579) (5,446)Recovery of loans previously written off 0 (258)Write back of provisions for non-trading investments, bank

placements and floating rate certificates of deposit (1,064) (845)

18,899 68,380

20- CASH AND CASH EQUIVALENTS

Cash and cash equivalents included in the consolidated statement of cash flows comprise the following consolidated balance sheet amounts:

2003 2002AED 000 AED 000

Cash and balances with central banks maturing within three months of placement 1,729,661 1,433,728 Due from banks maturing within three months of placement 3,721,744 4,264,499

Cash and cash equivalents 5,451,405 5,698,227

21- CONTINGENT LIABILITIES AND COMMITMENTS

2003 2002AED 000 AED 000

Contingent liabilities:Letters of credit 22,810,836 27,070,246 Acceptances 491,836 199,827 Letters of guarantee 20,566,781 19,843,473 Other contingent liabilities 1,901,581 2,767,388

45,771,034 49,880,934

Commitments: (see note below)Undrawn loan commitments to extend credit 2,964,071 3,728,562 Commitments for future capital expenditure 25,727 9,194 Commitments for future operating lease payments for premises 37,187 42,066

3,026,985 3,779,822

Total 48,798,019 53,660,756

Credit-related financial instruments include commitments to extend credit, standby letters of credit, guarantees and acceptances which aredesigned 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 thecustomer to perform under the terms of the contract.

Commitments to extend credit represent contractual commitments to make loans and revolving credits. Commitments generally have fixedexpiration 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 1,204,423,000 (2002: AED 2,190,745,000). Commitments for operatinglease payments falling due in more than one year amounted to AED 27,363,000 (2002: AED 31,516,000).

22- DERIVATIVE FINANCIAL INSTRUMENTS

In the ordinary course of business the Bank enters into various types of transactions that involve derivative financial instruments. A derivativefinancial instrument is a financial contract between two parties where payments are dependent upon movements in price of one or moreunderlying financial instrument, reference rate or index. Derivative financial instruments include forwards, futures, swaps and options.

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 volumeof transactions outstanding at year end and are neither indicative of the market risk nor credit risk.

31 December 2003 Notional amounts by term to maturity

Positive Negative Notional Less than From three From onemarket market amount three months to year to Over

value value Total months one year five years five yearsAED 000 AED 000 AED 000 AED 000 AED 000 AED 000 AED 000

Held for trading:Interest rate swaps 23,950 22,579 4,097,332 55,095 55,095 3,987,142 0 Forward rate agreements 1,343 589 734,600 0 0 734,600 0 Currency options 195 0 77,134 77,134 0 0 0 Bond options 2,204 73 386,069 242,418 143,651 0 0 Bond Futures 0 24 8,223 8,223 0 0 0 Foreign exchange - spot / forward 635 7 11,272,551 10,731,705 540,846 0 0

Held as fair value hedges:Interest rate swaps 4,565 160,455 2,865,488 70,238 249,159 815,864 1,730,227 Cross currency interest rate swaps 0 18,989 219,351 12,011 19,081 188,259 0 Foreign exchange - spot / forward 0 2,817 47,867 47,867 0 0 0

32,892 205,533 19,708,615 11,244,691 1,007,832 5,725,865 1,730,227

22- DERIVATIVE FINANCIAL INSTRUMENTS (Continued)

31 December 2002 Notional amounts by term to maturity

Positive Negative Notional Less than From three From onemarket market amount three months to year to Over

value value Total months one year five years five yearsAED 000 AED 000 AED 000 AED 000 AED 000 AED 000 AED 000

Held for trading:Interest rate swaps 0 4,745 672,185 183,650 459,125 29,410 0 Forward rate agreements 12,961 12,191 734,600 734,600 0 0 0 Currency options 0 62 594,953 521,493 73,460 0 0 Bond options 0 1,078 337,916 3,673 334,243 0 0 Foreign exchange - spot / forward 3,272 0 6,456,953 5,693,715 624,717 138,521 0

Held as fair value hedges:Interest rate swaps 6,232 215,132 3,388,629 261,114 292,033 1,178,771 1,656,711 Interest rate collars 21,201 21,201 680,020 0 0 680,020 0 Cross currency interest rate swaps 0 22,424 278,640 13,834 9,452 200,642 54,712 Foreign exchange - spot / forward 0 0 262,171 262,171 0 0 0

43,666 276,833 13,406,067 7,674,250 1,793,030 2,227,364 1,711,423

Derivative product types

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

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

Options are contractual agreements that convey the right, but not the obligation, to either buy or sell a specific amount of a commodity orfinancial instrument at a fixed price either at a fixed future date 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 counterparty to default on its contractual obligations andis limited to the positive market value of instruments that are favorable to the Bank, which are included in other assets. The positive market valueis also referred to as the "replacement cost" since it is an estimate of what it would cost to replace transactions at prevailing market rates if acounterparty defaults. The majority of the Bank's derivative 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 involve offering products to customers atcompetitive prices in order to enable them to transfer, modify or reduce current and expected risks. Positioning involves managing market riskpositions with the expectation of making profit from favorable movements in prices, rates or indices. Arbitrage activities involve identifying andprofiting from price differentials between markets and products.

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22- DERIVATIVE FINANCIAL INSTRUMENTS (Continued)

Derivatives held or issued for hedging purposes

The Bank uses derivatives for hedging purposes as part of its asset and liability management activities. This is achieved by hedging specificfinancial instruments and forecasted transactions as well as strategic hedging against overall balance sheet exposures in order to manage andreduce its exposure to currency and interest rate risks to acceptable levels as determined by the Board of Directors. The Board of Directors hasestablished levels of currency risk by setting limits on counterparty and currency position exposures. Positions are monitored on a daily basis andhedging strategies used to ensure positions are maintained within established limits. The Board of Directors has established levels of interest raterisk by setting limits on the interest rate gaps for stipulated 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 limits established by the Board.

The Bank uses forward foreign exchange contracts and currency swaps to hedge against specifically identified currency risks. In addition, theBank uses interest rate swaps, forwards and interest rate futures to hedge against the changes in fair value arising from specifically identified fixedinterest rate assets. The Bank also uses interest rate swaps as cash flow hedges against the interest rate risks arising 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 documentedand the transactions are accounted for appropriately.

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

23- RELATED PARTY TRANSACTIONS

These represent transactions with certain related parties (major shareholders, directors and officers of the Bank and their related concerns) whowere customers of the Bank during the year. The terms of these transactions are approved by the Bank's management and are similar to othertransactions with third parties.

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

At 31 December 2003 2002AED 000 AED 000

Loans and advances 1,765,547 1,499,359 Less : Provision for impaired loans and advances (26,669) (43,064)

Net loans and advances 1,738,878 1,456,295

Trading investments 70,794 81,711

Customers' deposits 7,606,332 5,833,515

Contingent liabilities and commitments 389,594 301,951

At 31 December 2003, impaired loans and advances on which interest is suspended amounted to AED 59,424,000 (2002: AED 53,162,000).

For the year ended 31 December 2003 2002AED 000 AED 000

Interest income 116,272 104,491

Interest expense 64,007 41,138

24- SEGMENTAL INFORMATION

Primary segmental information:

The Bank is organised into the following four major segments, which form the basis on which the primary 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 betweenbranches within a segment, are conducted at estimated 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 replacement cost of funds.

Segmental information for the year ended 31 December 2003 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 632 334 188 109 1,263Profit from operations before taxation 451 197 147 35 830Overseas taxation (25)Net profit for the year 805

(b) Assets:

Segment total assets 17,074 23,166 25,274 10,706 76,220Inter segment balances (32,597)

43,623

Segment capital expenditure 5 10 0 17 32Segment depreciation 14 10 1 17 42

(c) Liabilities:

Segment liabilities 16,605 23,043 25,104 7,084 71,836Inter segment balances (32,597)

39,239

24- SEGMENTAL INFORMATION (Continued)

Segmental information for the year ended 31 December 2002 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 563 271 160 113 1,107Profit from operations before taxation 380 138 119 23 660 Overseas taxation (6)Net profit for the year 654

(b) Assets:

Segment total assets 14,249 21,605 24,350 8,596 68,800 Inter segment balances (29,754)

39,046

Segment capital expenditure 12 28 0 135 175 Segment depreciation 15 9 1 12 37

(c) Liabilities:

Segment liabilities 13,853 21,556 24,227 5,311 64,947 Inter segment balances (29,754)

35,193

Secondary segmental information:

Although the management of the Bank is based primarily on its business segments, the Bank operates in two geographical markets, the UnitedArab Emirates and Overseas. The geographical analysis has been based primarily upon the location of reporting branches and subsidiaries.

United Arab Emirates Overseas Total

2003 2002 2003 2002 2003 2002AED m AED m AED m AED m AED m AED m

Net profit for the year 755 629 50 25 805 654

Total assets 60,403 54,835 15,817 13,965 76,220 68,800Inter segment balances (32,597) (29,754)

43,623 39,046

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25- LIQUIDITY RISK

Liquidity risk is the risk that an institution will be unable to meet its net funding requirements. Liquidity risk can be caused by market disruptionsor credit downgrades which may cause certain sources of funding to dry up immediately. To guard against this risk, management has diversifiedfunding sources, monitors liquidity on a daily basis and maintains 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 the contractual repayment arrangements. Thecontractual maturities of assets and liabilities have been determined on the basis of the remaining period at the balance sheet date to thecontractual maturity date and do not take account of the effective maturities as indicated by the Bank’s deposit retention history and theavailability of liquid funds. The maturity profile is monitored by management to ensure adequate liquidity is maintained.

The maturity profile of assets, liabilities and shareholders' equity at 31 December 2003 was as follows:

Less than From three From onethree months to year to Over

Total months one year five years five yearsAED m AED m AED m AED m AED m

Assets

Cash and balances with central banks 2,250 1,732 300 200 18 Trading investments 1,632 1,632 0 0 0 Due from banks 4,385 4,091 294 0 0 Loans and advances to customers 29,094 9,996 1,665 7,473 9,960 Non-trading investments 5,419 326 419 1,546 3,128 Other assets 479 140 334 2 3 Premises and equipment 364 0 0 0 364

43,623 17,917 3,012 9,221 13,473

Liabilities and Shareholders' Equity

Due to banks 3,232 2,981 251 0 0 Repurchase agreements with banks 3,494 3,494 0 0 0 Customers' deposits 31,428 26,447 4,482 360 139 Other liabilities 1,085 252 674 62 97 Shareholders' Equity 4,384 0 330 0 4,054

43,623 33,174 5,737 422 4,290

25- LIQUIDITY RISK (Continued)

The maturity profile of assets, liabilities and shareholders' equity at 31 December 2002 was as follows:

Less than From three From onethree months to year to Over

Total months one year five years five yearsAED m AED m AED m AED m AED m

Assets

Cash and balances with central banks 2,302 1,533 760 0 9 Trading investments 1,572 1,572 0 0 0 Due from banks 5,870 4,912 663 295 0 Loans and advances to customers 24,824 8,866 1,756 6,944 7,258 Non-trading investments 3,579 232 222 2,020 1,105 Other assets 526 137 362 24 3 Premises and equipment 373 0 0 0 373

39,046 17,252 3,763 9,283 8,748

Liabilities and Shareholders' Equity

Due to banks 3,173 3,028 145 0 0 Repurchase agreements with banks 1,282 1,282 0 0 0 Customers' deposits 29,594 24,248 4,925 301 120 Other liabilities 1,144 248 675 112 109 Shareholders' Equity 3,853 0 282 0 3,571

39,046 28,806 6,027 413 3,800

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26- INTEREST RATE RISK

Interest rate risk arises from the possibility that changes in interest rates will affect future profitability 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 instrumentsthat mature or reprice in a given period. The Board of Directors has established acceptable levels of interest rate risk by setting limits on theinterest rate gaps for stipulated periods. The Bank manages interest rate risk by matching the repricing of assets and liabilities through riskmanagement 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 inthe carrying amount of the instrument, excluding non-interest bearing items. The rate is a historical rate for a fixed rate instrument carried atamortised 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 interestrate risk.

The Bank's interest sensitivity position, based on the contractual repricing or maturity dates, whichever dates are earlier, as at 31 December2003 was as follows:

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 2,250 235 300 200 5 1,510 1 - 1.5%

Trading investments 1,632 1,480 0 0 0 152 2 - 2.5%Due from banks 4,385 4,042 275 19 0 49 1.25 - 1.75%Loans and advances to customers 29,094 21,660 3,528 2,303 1,291 312 3 - 4.5%Non-trading investments 5,419 3,462 426 1,068 425 38 2.5 - 4%Other assets 479 0 0 0 0 479 -Premises & equipment 364 0 0 0 0 364 -

Total Assets 43,623 30,879 4,529 3,590 1,721 2,904

Due to banks 3,232 2,865 251 0 0 116 1.25 - 1.75%Repurchase agreements with banks 3,494 3,494 0 0 0 0 1 - 1.5%Customers' deposits 31,428 25,660 1,499 225 6 4,038 0.5 - 2%Other liabilities 1,085 0 0 0 0 1,085 -Shareholders' Equity 4,384 0 0 0 0 4,384 -

Total Liabilities and Shareholders' Equity 43,623 32,019 1,750 225 6 9,623

On balance sheet gap 0 (1,140) 2,779 3,365 1,715 (6,719)Off balance sheet gap 0 2,788 130 (1,188) (1,730) 0

Total interest rate sensitivity gap 0 1,648 2,909 2,177 (15) (6,719)

Cumulative interest rate sensitivity gap 0 1,648 4,557 6,734 6,719 0

26- 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 December2002 was as follows:

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 2,302 276 760 0 5 1,261 1 -1.5%

Trading investments 1,572 1,452 0 0 0 120 3 - 5%Due from banks 5,870 4,878 663 294 0 35 1 - 2%Loans and advances to customers 24,824 18,473 3,052 1,628 1,231 440 3 - 5%Non-trading investments 3,579 1,069 467 1,340 668 35 3 - 5%Other assets 526 0 0 0 0 526 -Premises & equipment 373 0 0 0 0 373 -

Total Assets 39,046 26,148 4,942 3,262 1,904 2,790

Due to banks 3,173 2,933 145 0 0 95 1 - 2%Repurchase agreements with banks 1,282 1,282 0 0 0 0 1 - 2%Customers' deposits 29,594 25,045 1,004 314 0 3,231 1 - 3%Other liabilities 1,144 0 0 0 0 1,144 -Shareholders' Equity 3,853 0 0 0 0 3,853 -

Total Liabilities and Shareholders' Equity 39,046 29,260 1,149 314 0 8,323

On balance sheet gap 0 (3,112) 3,793 2,948 1,904 (5,533)Off balance sheet gap 0 3,612 (474) (1,427) (1,711) 0

Total interest rate sensitivity gap 0 500 3,319 1,521 193 (5,533)Cumulative interest rate sensitivity gap 0 500 3,819 5,340 5,533 0

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27- CREDIT RISK

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financialloss. The Bank manages credit risk by setting limits for individual borrowers, and groups of borrowers and for geographical and industry segmentsand obtaining security where appropriate. The Bank also monitors credit exposures by limiting transactions with specific counterparties, andcontinually assesses the creditworthiness of counterparties. In addition, the Bank manages the credit exposure relating to its trading activities byentering into master netting agreements and collateral arrangements with counterparties in appropriate circumstances, and limiting the durationof exposure. In certain cases, the Bank may also close out transactions or assign them to other counterparties to mitigate credit risk.

The Bank seeks to manage its credit risk exposure through diversification of lending activities to avoid undue concentrations of risks withindividuals or groups of customers in specific locations or businesses. It also obtains security when appropriate.

For details of the composition of the loans and advances portfolio refer to Note 6. For geographic and industry sector distribution of assets,liabilities and off balance sheet items refer to Note 28.

28- 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 geographicregion, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes ineconomic, political or other conditions. Concentrations of risk indicate the relative sensitivity of the Bank's performance to developmentsaffecting 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:

2003 2002Off balance Off balance

Assets Liabilities sheet items Assets Liabilities sheet itemsAED m AED m AED m AED m AED m AED m

Geographic region:

UAE 17,329 29,852 44,659 14,680 29,086 48,795 Other Arab / Middle East 3,921 4,010 889 3,936 2,842 923 Europe 18,719 4,829 18,900 16,548 2,980 13,267 Indian subcontinent & Asia 539 32 897 893 17 135 USA 2,488 152 2,809 2,576 259 3,404 Rest of the world 627 364 353 413 9 543

43,623 39,239 68,507 39,046 35,193 67,067

Industry sector:

Government 7,977 14,370 22,540 6,627 15,630 27,826 Banks 10,808 6,903 35,208 8,648 4,434 29,287 Others 24,838 17,966 10,759 23,771 15,129 9,954

43,623 39,239 68,507 39,046 35,193 67,067

29- MARKET RISK

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

30- 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 entitybased in the UAE and its functional currency is the UAE Dirham. The Board of Directors has set limits on positions by currency. Positionsare monitored on a daily basis and hedging strategies used to ensure positions are maintained within established limits. At 31 December, the Bankhad the following significant net exposures denominated in foreign currencies:

2003 2002AED 000 AED 000

equivalent equivalentLong (short) Long (short)

Euros 15,782 20,724 Japanese Yen 1,515 435 Omani Riyals 70,210 39,145 Saudi Riyals 1,178 1,377 Sterling Pounds 84,795 (4,647)Swiss Francs 140 187 US Dollars 4,415,965 4,060,224

31- FAIR VALUE OF FINANCIAL INSTRUMENTS

All assets and liabilities are measured at historical cost except for derivatives, trading and available for sale investments which are measured atfair value.

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable willing parties in an arm's lengthtransaction. Consequently, differences can arise between 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 materially curtail the scale of its operation or to undertakea transaction on adverse terms.

The fair values of due from banks, due to banks and customers' deposits, being predominantly short term in tenure and issued at market rates, arelargely considered to approximate their book value. Included in due from banks are floating rate certificates of deposit where fair values arearrived at with reference to secondary market prices.

As explained in Note 7, non-trading investments include an equity investment with a value of AED 10,000,000 (2002 : AED 10,000,000) for whichfair value cannot be reliably determined.

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

32- FIDUCIARY ACTIVITIES

The Bank held assets in trust or in a fiduciary capacity for its customers at 31 December 2003 amounting to AED 918 million (2002 : AED 1,070million). Furthermore, the Bank provides custodian services for certain of its customers.

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

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33- BASIC EARNINGS PER SHARE

Earnings per share is calculated by dividing the net profit for the year of AED 805,226,000 (2002: AED 654,190,000) by the weighted averagenumber of ordinary shares in issue during the year of 94,160,000 shares (2002 : 94,160,000 shares). No figure for diluted earnings per share hasbeen presented as the Bank has not issued any instruments which, when exercised, would have a dilutive impact on earnings per share.

34- CAPITAL ADEQUACY

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

2003 2002In accordance with guidelines issued by the UAE Central Bank (Minimum 10%) AED 000 AED 000

Capital base 4,050,947 3,566,284

Risk weighted assets:On balance sheet 16,445,636 14,532,961Off balance sheet 8,280,298 8,289,077

24,725,934 22,822,038

Risk asset ratio 16.38% 15.63%

In accordance with guidelines issued by the Basle Accord (Minimum 8%)Capital base 4,054,473 3,570,453

Risk weighted assets: On balance sheet 26,867,188 23,822,154Off balance sheet 9,143,816 9,331,160

36,011,004 33,153,314

Risk asset ratio 11.26% 10.77%

35- SPECIAL PURPOSE ENTITIES

The Bank has created Special Purpose Entities (SPEs) with defined objectives to carry on fund management and investment activities on behalf ofcustomers. 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 theseentities. 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 100NBAD Fund Managers (Guernsey) Limited Equity management Bailiwick of Guernsey 100NBAD Global Growth Fund PCC Limited Equity management Bailiwick of Guernsey 100NBAD Private Equity 1 Fund management Cayman Islands 58NBAD Trust Company (Jersey) Limited Trust Services Jersey, Channel Islands 100

36- COMPARATIVE AMOUNTS

Comparative amounts for 2002 have been reclassified to conform with the presentation for the current year. Such reclassifications do not affectpreviously reported net profit or shareholders’ equity.

BOARD DIRECTORS AND SENIOR MANAGEMENT · nasser ahmed khalifa al suweidi michael h. tomalin board...

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