Annual Report 2006 English

Annual Report 2006

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The theme of this year’s annual report of the Saudi Investment Bank is ALASALAH Islamic Banking. In keeping with our traditions, the ALASALAH program embodies the Bank’s long history of providing superior products and services that are forward-looking, innovative and Sharia-compliant.

The Saudi Investment Bank The Saudi Investment Bank (SAIB) is a Saudi Arabian Joint stock company established by Royal Decree no. M/31 dated June 23, 1976 with its headquarters in Riyadh. The Bank began operations in April 1977.

Saudi Shareholders

90%

Non-Saudi Shareholders:

J. P. Morgan International Finance Limited 7.5% Mizuho Corporate Bank Limited

2.5%

SAIB provides a full range of personalised and professional banking services to financial institutions, corporations, and individuals.

• • • • • • • • • • • • • • •

Current and deposit accounts Treasury services Remittances Cash management Letters of credit Letters of guarantee Trade finance Loan syndications Bridging finance Short and medium-term lending SIDF co-finance Local and international shareholding Personal banking Fiduciary placements Advisory services

The Bank offers traditional wholesale, retail and commercial banking products and services in addition to investment banking. In particular, it arranges financing of the parastatal and private industrial sectors and trade finance products for imports, and increasingly, Saudi exports.

The Bank is wholly committed to the promotion of private sector industry and is actively supporting several major projects.

On the retail side, the Bank is the lead player in providing brokerage services in the Saudi equities market with attractive and efficient customer lounges in several branch locations dedicated to this investment activity.

SAIB also acts for its private banking clients as an international brokerage intermediary including options, foreign exchange, precious metals and other Treasury products. SAIB has established an identity for itself in competitive market as a quality alternative to the larger institutions, with products and services specifically tailored for sophisticated corporate and private banking clients.

The Bank also offers an excellent bouquet of Sharia-compliant products and services under the ALASALAH Islamic Banking program, comprising Murabaha-based personal finance, letter of credit, short-term investment and Sharia-compliant mutual investment funds.

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Custodian of the Two Holy Mosques

King Abdullah bin Abdul Aziz Al-Saud

The Crown Prince, Deputy Premier and Minister of Defense & Aviation and Inspector General

HRH Prince Sultan bin Abdul Aziz Al-Saud

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SAIB Locations Head Office and Main Branch P.O. Box 3533, Riyadh 11481 KSA Telephone: +966 1 4778433 Fax: +966 1 4776781 Treasury Telephone: +966 1 4761580 / +966 1 4792851 Fax: +966 1 47619761 SWIFT: SIBCSARI Sulaimania Branch Telephone: +966 1 4608989 Fax: +966 1 4605997 Takhassussi Branch Telephone: +966 1 2930506 Fax: +966 1 4632745 Suwaidi Branch Telephone: +966 1 2676016 Fax: +966 1 4250849 Malaz Branch Telephone: +966 1 4771860 Fax: +966 1 2917657 Shifa Branch Telephone: +966 1 2984500 Fax: +966 1 2983254 Rawabi Branch Telephone: +966 1 4921685 Fax: +966 1 2080978 Badi’ah Branch Telephone: +966 1 4182652 Fax: +966 1 4181539 Rawdah Branch Telephone: +966 1 2084670 Fax: +966 1 2084636

Nuzha Branch Telephone: +966 1 4532345 Fax: +966 1 4541708 Rayyan Branch Telephone: +966 1 2087580 Fax: +966 1 4932504 Ghurnatah Branch Telephone: +966 1 2494511 Fax: +966 1 2494630 Ghadeer Branch Telephone: +966 1 2759172 Fax: +966 1 2753628

-----------------------------------Al-Qaseem Region

Buraidah Branch P.O. Box 533, Buriyadah 51421 KSA Telephone: +966 6 3271777 Fax: +966 6 3698752

-----------------------------------Western Region Western Regional and Jeddah Branch P.O. Box 5577, Jeddah 21432 KSA Telephone: +966 2 6531010 Fax: +966 2 6532333

-----------------------------------Malik Road Branch Telephone: +966 2 6078500 Fax: +966 2 6595944 Makkah Branch P.O. Box 18632, Makkah KSA Telephone: +966 2 5497321 Fax: +966 2 5497323 Aziziyah Branch Telephone: +966 2 5594477 Fax: +966 2 5272213

-----------------------------------Eastern Region Eastern Regional and Khobar Branch P.O. Box 1581, Khobar 31952 KSA Telephone: +966 3 8827999 Fax: +966 3 8822803 Dammam Branch Telephone: +966 3 8342020 Fax: +966 3 8349111 Dammam Al-Rayyan Branch Telephone: +966 3 8423811 Fax: +966 3 8416021 Jubail Branch P.O. Box 11231, Jubail Industrial City 31951 KSA Telephone: +966 3 3477992 Fax: +966 3 3477984 Ahsa Branch P.O. Box 10813, Mubarras Al-Ahsa 31982 KSA Telephone: +966 3 5824999 Fax: +966 3 5826999

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Board of Directors

Dr. Abdulaziz O’Hali

Dr. Abdulaziz Al Nowaiser

Fouad A. Kattan

Abdullah S. Al-Dabaan

Yukio Otaka

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Mohamad M. Al-Rashid

Ghaith G. Al-Barakati

Hussein B. Al-Okby

Gordon Rennoldson

Faysal M. Al-Bassam

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Chairman's Statement

It is with great satisfaction that I can again report a record year of achievement for The Saudi Investment Bank. Net Income reached SR 2.0 billion, compared to SR 1.1 billion last year. During the past ten years the Bank has posted a compound annual earnings growth rate of 32.7%, and we have again exceeded our past performance in virtually every line of business.

The global economy continued to perform well during 2006 and the local economic expansion also continued with record oil revenues, and record trade and budget surpluses.

Against this favorable backdrop, the local stock market reached record highs early in the year, but has since declined markedly.

In spite of the stock market decline, the Bank made significant progress in a number of areas. Major contributors were corporate and consumer banking, treasury and investments, institutional banking, brokerage services, and the expanding branch network.

Significant highlights for the year included completion of ten new branches bringing our total network to twenty-three branches, and continued expansion of the ATM network. We also launched the new Alasalah Islamic Banking Program, which operates ten Shariah compliant branches, and launched two new mutual funds bringing our total number of funds to thirteen. At year-end 2006 SAIB had more than SR 6.3 billion in investment assets under management.

In addition to our two existing joint ventures, American Express and Saudi Orix Leasing, during the year the Bank received approval to launch our joint venture IPO for the Mediterranean and Gulf Insurance and Reinsurance Company. This is expected to be the largest insurer in the Saudi market. The Bank also announced plans to establish Amlak international real estate development and finance company with local and GCC partners.

Another significant achievement for 2006 was the successful completion of the first-ever ratings review process with Standard & Poor’s and Fitch Ratings, which resulted in the assignment of “A –“ investment grade ratings from both agencies.

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Although the Bank has continued to grow rapidly, our primary strength continues to be our knowledge of the local market and flexibility to meet the needs of a sophisticated customer base, as well as the outstanding quality of our staff.

The Bank remains committed to attracting and retaining first-class Saudi nationals across the range of business activities and professions. During the year our Saudi staff increased to 80% of the total SAIB workforce.

The Bank continues to face new challenges from a combination of regional events, increased international competition, and worldwide economic conditions. However we remain positive on future prospects and remain fully committed to meeting and exceeding the needs of our clients.

Finally, I am pleased to announce that the Board of Directors has recommended a bonus share dividend of 1.0 share for each 1.6 shares outstanding. This will raise total Share Capital to in excess of SR 3.9 billion, and total Shareholders’ Equity to SR 6.0 billion.

I again congratulate the members of our Board as well as management and staff for their loyalty, integrity, and professionalism, which is the cornerstone to our success.

On behalf of the Board of Directors, I wish to express our gratitude to the Ministry of Finance, the Saudi Arabian Monetary Agency, the Capital Market Authority, and to our clients for their continued support and loyalty.

Dr. Abdulaziz O’Hali Chairman

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Board of Directors’ Report OVERVIEW The Saudi Investment Bank is a Saudi Arabian joint stock company formed pursuant to a Royal Decree issued in 1976. The bank operates twenty-three branches located throughout the Kingdom of Saudi Arabia. The Bank’s website address is www.saib.com.sa.

SAIB offers traditional wholesale, retail and commercial banking products and services, in addition to a full range of asset management services. In particular, it arranges financing of quasi-government and private industrial sectors and trade finance products for both imports and exports. SAIB is wholly committed to the promotion of the private industrial and commercial sectors and is actively supporting several major projects. On the retail side, SAIB is a leading participant in providing brokerage services in the Saudi and international equity markets, as well as offering a wide range of investment management and mutual fund products and services.

The Saudi Investment Bank’s activities are organized into three major business segments: Retail Banking, Corporate Banking, and Treasury & Capital Markets. SAIB has two joint venture companies in Saudi Arabia. The first is Amex (Saudi Arabia) Ltd. - (ASAL), a limited liability joint venture company with Amex (Middle East), Bahrain. ASAL is incorporated in Saudi Arabia and SAIB owns 50%. The principal activities of ASAL are to offer American Express products in Saudi Arabia.

SAIB also owns 28% of Saudi Orix Leasing Company, a Saudi Arabian closed joint stock company formed with Orix Corporation (Japan), with the primary purpose to provide lease financing services in Saudi Arabia.

The Bank is also in process of establishing two additional joint venture companies. One will be a Riyadh-based real estate finance company with local and GCC partners, and the other will be an insurance joint venture with The Mediterranean & Gulf Insurance and Reinsurance Company.

The Bank has no subsidiaries or other business activities outside Saudi Arabia.

The Bank is subject to all laws and regulations of the Kingdom of Saudi Arabia and is regulated by the Saudi Arabian Monetary Agency. The bank also follows regulations issued by the Ministry of Commerce and the Capital Market Authority.

The Bank reported net income of SR 2,006.3 million in 2006, compared to the SR 1,064.2 million reported in 2005. This represents an increase of 88.5% over the prior year. Earnings per share were SR 8.34 in 2006, compared with SR 4.42 in 2005. The earnings per share calculations are based on 240,625 thousand shares outstanding for both 2006 and 2005.

Results for the year were characterized by continued strong earnings growth across the full range of products and services offered by the Bank. Return on average assets (ROA) improved from 3.12% to 4.99% in 2006, while the return on average equity (ROE) increased to 35.5%, up from 24.14% a year earlier. The Bank continued its record of steadily improving returns and increases in Net Income. Over the past ten years the Bank has recorded a compound annual earnings growth rate of 32.7%.

Highlights for the year included a continued strengthening of the Bank’s core business and financial ratios, as well as improved service quality, expansion of our consumer lending program and ATM network, further automation of the retail banking business, and the completion of ten new branches. As part of our ongoing retail expansion, SAIB launched a new Islamic Banking Program – Alasalah. Under this program the Bank now operates ten Shariah- compliant branches within the Kingdom. In addition,

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the Bank launched two new mutual funds in an effort to increase our range of investment products to retail clients, and continued to expand our equity brokerage services, which now include all GCC markets plus Egypt, Jordan and Lebanon. Finally, the Bank completed an extensive credit rating review process with Standard & Poor’s and Fitch Ratings and received investment grade ratings of ‘A-‘ / ‘A-2’ and ‘A-‘ / ‘F2’, respectively.

In recognition of the Bank’s highly successful year, the Board of Directors has recommended a bonus share distribution of 1.0 share for each 1.6 shares outstanding. This bonus share will significantly enhance the Bank’s already high levels of capitalization.

OPERATING RESULTS Reported net income for 2006 was SR 2,006.3 million, an increase of SR 942.1 million over 2005. This increase resulted from higher profits in most income categories and a continued focus on control over operating expenses. The Bank’s profit for 2006 also included a one-time gain of SR 672.6 million on the sale of investment securities. The reported net income is SR 1,333.7 million net of this extraordinary item, or an increase of 25.3% over 2005.

Net special commission income, which includes special commission income from placements, investments, and loans, less special commission expenses from deposits and other borrowings, increased to SR 1,030.5 million compared with the SR 785.7 million recorded a year earlier. This improvement is due to higher average earning assets and improved net commission margins. This category also reflects continued business development in the corporate lending and relationship banking sectors, growth and increased diversification of our funding base, strong asset-liability management, and a disciplined use of the Bank’s capital.

Fees from banking services totaled SR 783.9 million for 2006, an increase of 19.6% over the SR 655.7 million figure reported for 2005. This increase was driven primarily by higher volumes of transactions from loan fees and local and international brokerage services. These gains were augmented by higher exchange revenues and dividend income.

Operating expenses, net of the provision for possible credit losses, were SR 453.5 million compared to SR 351.8 million in 2005. The level of operating expenses in 2006 resulted in an Efficiency Ratio of 17.7% for the full year. Excluding the one-time gain on the sale of investments, the Efficiency Ratio was 24.0% compared to 23.2% a year earlier. The Efficiency Ratio, defined as operating expenses excluding loan loss provisions, divided by net special commission income plus fee and other income, is a key indicator of how well resources are controlled and managed. A ratio of below 50% is considered outstanding by most institutions and SAIB’s ratio places it among the best expense controlled financial institutions in the world.

Operating profit before the provision for possible credit losses was SR 2,102.8 million, compared to SR 1,164.2 million in 2005, an improvement of 80.6%. The provision for loan losses was SR 96.5 million, as compared to the previous year’s provision of SR 100 million. The 2006 provision continues the Bank’s conservative policy of maintaining loan loss reserves at levels consistent with the size of the loan portfolio and able to absorb any likely loss scenario.

Net income of SR 2,006.3 million was the highest result for the Bank since its inception in 1976 and represents the continuation of our strong earnings improvement record. In the ten years since 1997,

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SAIB has reported a compound annual earnings growth of 32.7%. This is an impressive result, particularly when compared with our growth in assets, which grew at a compound rate of only 16.1% during the same period.

STATEMENT OF FINANCIAL POSITION Total assets were SR 40,845 million at year-end 2006 compared to the SR 39,581 million at December 31, 2005.

The due from banks category declined marginally by SR 499 million to SR 6,299 million, while investments increased by SR 501 million to SR 11,777 million at year-end. Loans and advances on a gross basis increased by SR 987 million to SR 21,469 million at December 31, 2006. Loans and advances, net of the reserve for possible credit losses, were SR 20,691 million at year-end, an increase of 4.53% over 2005.

On the liability side of the balance sheet, the customer deposit base improved slightly by SR 73 million to SR 27,931 million at year-end 2006. These strong levels of customer funding reflect our market share in the Saudi banking system and are a tribute to the quality of the Bank’s customer service.

In order to diversify funding sources and maturities, the Bank closed on a $ 380 million international syndicated loan in 2005. The loan has a three year final maturity and floating rate coupon based on LIBOR. The Bank has the option to prepay any portion of this loan prior to final maturity.

CAPITAL ACCOUNTS At year-end 2006, total shareholders’ equity stood at SR 6,001 million compared with SR 5,307 million in 2005. Following last year’s one for two-and-a-half bonus share and the CMA mandated five-for-one share split, the Bank now has 240,625 thousand shares outstanding, each with a par value of SR 10 per share.

At December 31, 2006 SAIB’s capital to total assets ratio was 14.7%. This level is among the highest of any competitor institution in the region and well in excess of accepted international standards. At the same time, SAIB’s Risk Based Capital (BIS) Ratio was 25% compared with the minimum requirement of 8%.

RISK MANAGEMENT Risk is an inherent part of the Bank’s business activities. Control of this risk is done within the Bank’s overall risk management structure. As a part of its risk management structure, the Bank monitors and manages risks inherent to the banking business such as credit, liquidity, commission rate, currency, market and operational risks.

Moreover, in accordance with the directives and guidance of the Saudi Arabian Monetary Agency, the Bank is in the process of implementing the new Basel II Capital Standards, which are expected to be fully implemented in 2008.

The Basel Committee on Banking on Supervision published the new Basel II Framework in 2004 in an effort to update the original international bank capital accord (“Basel I”), in effect since 1988. The goal of the Basel II Framework is to improve the consistency of capital requirements internationally, make regulatory capital more risk sensitive, and promote enhanced risk management practices in banking organizations.

Implementation of the Basel II Accord is expected to enhance the Bank’s risk management policies and procedures.

BUSINESS SEGMENTS The Bank is managed on a line-of-business basis. Transactions between business segments are conducted on normal commercial terms and conditions through the use of transfer pricing and expense allocation methodologies. The Bank has three major business segments each of which is described below.

Retail Banking SAIB offers a wide range of retail services through its head office and a network of branches in the central, western and eastern regions of Saudi Arabia. Services include current accounts, savings and time deposit accounts, local and international share brokerage activities, and Islamic Murabaha.

The Bank also offers a full range of Islamic products through its Shariah compliant branches. SAIB has a vast network of ATM’s that cover the three major regions of the Kingdom.

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Corporate Banking Corporate Banking focuses on providing tailor-made financial products and efficient customer services to corporate, government and public sector entities. It operates from three regional headquarters based in Riyadh, Jeddah and Al-Khobar to offer innovative financial solutions. The services and products offered include project finance, working capital finance, trade finance and services, import and export documentary credit, standby letters of credit, letters of guarantee, bill discounting, documentary and clean collections, and other trade related products, including standard and Shariah compliant products.

Treasury and Capital Markets This unit is responsible for foreign exchange trading, funding and liquidity management, as well as the Bank’s investment securities portfolio and derivative products. The Treasury Department also manages the Bank’s asset-liability structure, interest rate risk, and provides guidance for balance sheet volume and pricing parameters. This line-of-business also includes mutual funds and customer asset management activities.

A summary of the business segment results are presented in Note 24 to the financial statements.

BRANCH NETWORK During the year, the Bank completed construction on ten new branch locations, which included seven new branches and three relocations. An additional thirteen new branches are presently under construction. The Bank added 59 ATM locations during 2006 and currently operates a total network of 200 ATMs and 23 branches throughout Saudi Arabia.

ALASALAH ISLAMIC BANKING The Bank launched several Shariah-compliant products and services during the last six years. These products have been given special attention to ensure their compliance with Shariah Law and their suitability to the local market.

In recognition of the increasing demand for Islamic products and services, and the significance of Islamic Banking as a strategic direction for banks operating in the Kingdom and the region, the Bank launched the ALASALAH Islamic Banking brand in September 2006. The launch of this brand coincided with the opening of ten new Shariah-compliant branches supported by an aggressive media and advertising campaign.

NEW PRODUCTS The Bank has continued to improve its range of product offerings to both consumer and investment clients. During the year there was a further expansion of the consumer loan program with facilities now available for stock finance, car and other consumer product finance. On the investment side, the Bank launched two new mutual funds bringing our total mutual fund offerings to thirteen, as follows:

Trade Finance Fund (Sharia compliant)

Murabaha Fund (Sharia compliant)

Saudi Equity Fund

GCC Equity Fund

U.S. Equity Fund

Global Equity Fund

Gulf Companies Fund

Saudi Companies Fund

Gulf Industrial Companies Fund

Fund of Funds

Opportunities IPO Fund

Global Hemaya Fund

Gulf Hemaya Fund

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Total funds under management exceeded SR 6.3 billion as of December 31, 2006.

STRATEGIC PARTNERSHIPS The Saudi Investment Bank has previously developed two successful joint ventures, one with American Express to provide credit card services and another with Orix Corporation (Japan) to offer leasing products. With the issuance of insurance regulations in Saudi Arabia, the Bank has entered into a new strategic joint venture with The Mediterranean & Gulf Insurance and Reinsurance Company (Medgulf) to offer a full range of insurance products to the Saudi market. The new joint venture is compatible with SAIB’s long-term strategic objectives and will present attractive cross-selling opportunities to both parties. This insurance company is expected to be a major participant in the emerging insurance sector.

The Bank also announced a new joint venture initiative with local and GCC partners to offer real estate finance products and services in Saudi Arabia.

CREDIT RATING Credit ratings are an integral component for participation in the international financial markets. As the global economy becomes more integrated, credit ratings are necessary not only to ensure funding and obtain access to capital markets, but also to demonstrate a commitment to meeting a high level of internationally recognized credit and risk management standards.

During the year SAIB concluded extensive credit rating reviews with Standard & Poor’s Ratings Services (S&P) and Fitch Ratings. In May 2006 S&P assigned SAIB its ‘A-‘ / ‘A-2’ long-term and short-term counterparty credit ratings with a stable outlook. S&P defines these ratings as follows: Long-Term Issuer Credit Ratings – An obligor rated ‘A’ has strong capacity to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.

Short-Term Issuer Credit Ratings (less than 12 months) – An obligor rated ‘A-2’ has satisfactory capacity to meet its financial commitments. However, it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in the highest rating category.

The stable outlook means the ratings are not likely to change.

In June 2006 Fitch assigned SAIB ‘A-‘ / ‘F-2’ long-term and short-term ratings with a stable outlook.

Fitch defines these ratings as follows: Long-Term Issuer Credit Ratings – ‘A’ rating denotes a low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.

Short-Term Issuer Credit Ratings (less than 12 months) – ‘F2’ ratings indicate good credit quality with a satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.

The stable outlook indicates the ratings are unlikely to change.

SAIB ratings are the result of our strong financial performance, good asset quality and good capitalization levels, supported by a conservative strategy and satisfactory liquidity profile. Our ratings take into consideration the fact that SAIB operates in one of the strongest banking sectors and best regulated markets both in the Middle East and among all emerging markets. The ratings also reflect the ‘A+’ sovereign credit ratings from S&P and Fitch, in addition to the strong country economic fundamentals and significant reforms undertaken in recent years including WTO membership, the foreign investment law, capital markets law, and insurance law.

SAIB is proud of these credit ratings from S&P and Fitch, both of which are considered “Investment Grade Ratings” in the international markets.

PROPOSED DIVIDEND The Bank’s dividend policy is based on profitability, desired payout ratios, and capital adequacy levels.

As a result of the Bank’s successful year, the Board of Directors has the pleasure of recommending a bonus share distribution of 1.0 share for each 1.6 shares outstanding.

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CHANGES IN THE BANK’S OWNERSHIP (BOARD OF DIRECTORS AND SENIOR EXECUTIVES) The Board of Directors is composed of legal entities and natural persons represented on the Board in their personal capacities. Below is the list of the overall ownership of Bank’s shares by the Board of Directors and senior executives who have an interest in such ownership.

Start of the Year Number of Shares

Ownership Percent (%)

1,075,070

0.45

During the Year Net Change in Number of Shares 298,066

End of the Year

Ownership Percent (%)

Total Ownership

0.12

1,373,136

Total Ownership Percent (%) 0.57

The increase in the number of shares at the end of 2006 is mainly due to the distribution of one bonus share for each 2.5 shares outstanding.

REGULATORY PAYMENTS Zakat attributable to the Saudi shareholders is deducted from their share of dividends and paid to Department of Zakat and Income Tax. SR 45.2 million in Zakat payments were made during the year ended December 31, 2006.

Income Tax payable by the non-Saudi shareholders on their share of profits is deducted from dividends.

During the year-ended December 31, 2006, SR 41.0 million was paid on account of income tax liability by the foreign shareholders.

SAUDIZATION AND TRAINING As a result of the Bank’s continuing Saudization efforts, the percentage of Saudi nationals to total staff at year-end 2006 increased to 80%. This significant increase is reflective of the Bank’s ongoing commitment to Saudization.

The Bank has granted a five-year scholarship program to 27 qualified Saudi high school graduates to complete their studies in the fields of finance, marketing and computer science at recognized universities.

For the full year, SAIB provided a total of 866 separate training courses that were attended by 700 Saudi employees.

EMPLOYEE BENEFITS Benefits payable to employees either at the end of their services or during the term of their employment are accrued in accordance with guidelines set by Saudi Arabian Labor Regulations and as per the Bank’s policies. The amount of provision made during the year ended 2006 in respect of these benefits was SR 40.9 million.

RELATED PARTY CONTRACTS There were no contracts with parties related to members of the Board of Directors, the General Manager, the Chief Financial Officer or any of their relatives.

COMPOSITION OF THE BOARD OF DIRECTORS 1. The Chairman and other members of the Board of Directors are not members of the board of any other Saudi joint stock company.

2. Members of the Board of Directors are classified as follows:

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Name Dr. Abdulaziz O’Hali Dr. Abdulaziz Al Nowaiser Mr. Mohamad M. Al Rashid Mr. Fouad A. Kattan Mr. Abdullah S. Al-Dabaan Mr. Hussein B. Al-Okby Mr.Ghaith G. Al-Barakati Mr. Faysal M. Al-Bassam Mr. Gordon Rennoldson

Position Chairman Board Member Board Member Board Member Board Member Board Member Board Member Board Member Board Member

Mr. Yukio Otaka

Board Member

Classification Independent and Non-Executive Independent and Non-Executive Independent and Non-Executive Independent and Non-Executive Independent and Non-Executive Independent and Non-Executive Independent and Non-Executive Independent and Non-Executive Non-independent and Non-Executive Non-independent and Non-Executive

3. The Board of Directors has the following committees:

Executive Committee composed of five members. This committee approves all loans and facilities.

Audit Committee composed of three members: two board members and one non-board member. The Audit Committee supervises Internal Audit and recommends the appointment of the external auditors.

The composition of the two Board Committees is presented below: Executive Committee Dr. Abdulaziz O’Hali Mr. Fouad A. Kattan Mr. Abdullah S. Al-Dabaan Mr. Hussein B. Al-Okby Mr. Faysal M. Al-Bassam

Audit Committee Mr.Ghaith G. Al-Barakati Mr. Yukio Otaka Dr. Saleh Al-Humaidan

DIRECTORS’ REMUNERATION AND ATTENDANCE Directors’ fees and remuneration for 2006 and 2005 amounted to SR 1,381,000 and SR 1,422,000, respectively, broken down as follows: 2006 Directors’ Fees Attendance Fees Travel & Accommodation Expenses

1,260,000 99,000 22,000

2005 1,260,000 137,000 25,000

Two Board of Directors meetings were held during 2006. Each Director attended at least one of the Board meetings held during the year.

BOARD OF DIRECTORS’ DECLARATION The Board of Directors hereby declare that to the best of its knowledge and belief and in all material respects:

The Bank has maintained proper accounting records.

Effective internal controls have been established and applied.

The Bank has an Internal Audit department, which reports to the Audit Committee.

The Audit Committee establishes that the internal control policy in the Bank is in place and followed effectively. The Board of Directors ensures that the internal control procedures are appropriately followed.

The Board of Directors is not aware of any facts or events which could impact the going concern ability of the Bank.

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AUDITORS The ordinary General Assembly held on March 6, 2006 re-appointed Al Juraid & Company (a member firm of Price Waterhouse Coopers) and Ernst & Young as the Bank’s auditors for the financial year 2006.

CORPORATE GOVERNANCE IN THE KINGDOM OF SAUDI ARABIA The Bank complies with the majority of guidelines included in the Rules Governing the Companies in the Kingdom of Saudi Arabia issued by the Capital Market Authority on 21/10/1427 H corresponding to 31/11/2006 G. The Bank is currently studying and implementing the remaining guidelines.

CONCLUSION It is a pleasure, once again, for the Board of Directors to express its gratitude to the Government of the Custodian of the Two Holy Mosques, King Abdullah Bin Abdulaziz Al-Saud, and in particular to the Ministry of Finance and National Economy, as well as to Saudi Arabian Monetary Agency and the Capital Market Authority, for their continued and constructive support. The Board would also like to thank both its Saudi Arabian and international shareholders for their cooperation. The Board acknowledges with appreciation the confidence of SAIB’s clients, correspondents and Saudi Arabian public shareholders, and the dedication and loyalty of SAIB’s officers and staff.

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TEN-YEAR FINANCIAL HIGHLIGHTS

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

2,556

1,516

1,013

782

608

498

474

398

374

309

453

352

296

237

175

154

157

118

104

112

2,103

1,164

717

545

432

344

317

280

270

197

97

100

130

81

52

40

40

40

40

40

2,006

1,064

587

464

380

304

277

240

230

157

Loans and advances, net

20,691 19,794 13,031 10,232

8,891

7,527

7,493

7,063

6,394

5,171

Investments

11,777 11,276

6,454

5,822

4,289

4,204

3,197

2,882

Total assets

40,845 39,581 28,544 21,708 19,957 15,252 13,946 13,465 12,680 10,626

Customers’ deposits

27,931 27,858 20,285 14,404 14,065 10,950 10,359

Summary of Statement of Income (SAR Millions).

Operating income Operating expense Operating profit Provision for possible credit losses Net income Summary of Balance Sheet (SAR Millions).

8,502

7,261

9,532

8,572

7,360

6,001

5,307

3,607

2,632

2,160

2,041

1,868

1,698

1,516

1,370

35.48

24.14

19.12

19.36

18.11

15.56

15.54

14.96

15.96

11.87

Return on assets

4.99

3.12

2.34

2.23

2.16

2.11

2.02

1.84

1.98

1.53

Capital adequacy

24.71

22.56

22.79

21.63

23.94

25.69

22.76

21.60

21.49

23.58

Shareholders’ equity to total assets

14.69

13.41

12.3

12.12

10.82

13.38

13.39

12.61

11.95

12.90

Total shareholders’ equity RATIOS (%) Return on shareholders’ equity

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Financial Statements Notes & Auditors’ Report December 31, 2006 and 2005

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