TIBC - The International Banking Corporation

On behalf of the Board of Directors, I am pleased to present the consolidated financial statements of The International Banking Corporation B.S.C. (c) (TIBC or the Bank) for the year ended 31 December 2008.

Against the backdrop of the global economic turmoil, 2008 proved to be one of the most difficult years for the financial services industry in decades. However, we are pleased to inform you that TIBC was not only able to maintain its overall income levels for 2008 in line with those of 2007 but has shown noticeable growth in operating profits from its core business activities. Both recurring interest and fee & commission income reflect the strong commercial banking business of TIBC during the year in review.

The year 2008 was unique in many other ways as commodity prices showed an unprecedented rise with oil prices nearing US$ 150 per barrel in the first half of the year and then falling back to nearly US$ 40 per barrel towards the end of the year. Similarly equity prices that were at their peak at the beginning of the year showed a steep decline during 2008, resulting in the reduction in market capitalization of many companies by almost half at the year end. This significant volatility in various markets was a clear reflection of shaken investors’ confidence in response to the historical financial crisis that we are currently facing.

Reflecting the sentiments of the global equity markets, the Saudi Arabian market also saw an unprecedented decline during 2008. However, the main reason for the decline was the adoption of a wait and see attitude by most investors due to the current uncertainties in the international business environment.

The equity market in Saudi Arabia is expected to recover once investor confidence returns. As part of a strategic holding by the Algosaibi Group, TIBC holds equity shares in some of the leading banks in Saudi Arabia. The underlying value of the banks in which TIBC holds shares is not in question and the performance of these banks, as disclosed in the published results of the respective institutions, remains well above that of financial institutions in other international markets.

During 2008, oil exports from Saudi Arabia reached US$ 259 billion and non-oil exports US$ 30 billion. At year end, SAMA’s net foreign reserves stood at US$ 442 billion. Overall growth for the Saudi Arabian economy is projected to be 5.1% and the budget surplus is projected to be 4.9% of GDP in 2009.

As a result, TIBC remains committed to its core strategy of lending mainly in Saudi Arabia and we are confident that this is a prudent strategy that will yield positive results for the Bank in 2009 and beyond.

Total net cash from operations for the Bank in 2008 before accounting adjustments was US$ 201.7 million which compares to US$ 174.3 million in 2007. Reported income at year end was affected by the change in accounting methodology on our share portfolio which was adopted early in the second quarter of 2008.

As the Bank does not trade in shares and the share portfolio we currently hold is part of the Group’s core holdings, it was agreed that the share portfolio should be accounted for as “financial assets available-for-sale” – a practice that IFRS supports for such an investment. This change in accounting treatment will smooth our earnings report going forward and provide a better presentation of the Bank’s core business results.

Taking these changes into account, the Bank remains strongly capitalized with a capital adequacy ratio of 33.4% as at 31 December 2008 compared to the regulatory requirement of 12%.

TIBC has now expanded its profile in the international markets through the opening of a fully owned subsidiary in Malta (2008) and also through the opening of Representative Offices in London (2007) and Singapore (2008). The Malta subsidiary is expected to establish banking relationships with targeted clients in Europe and North Africa while both representative offices will enhance client and counterparty relationship activities in the European and Australasian markets. This strategy of expanding our international presence will further ensure the diversification of our core income and will enhance our fee & commission earnings.

In 2008, TIBC continued to develop its core business of commercial banking and treasury activities. This was reflected in a modest growth in the loan book of 13% to US$ 2.3 billion compared to US$ 2 billion at the end of 2007 and an increase in earnings on our FX trading to US$ 10.4 million compared to US$ 0.1 million in 2007. TIBC was able to secure additional facilities from banks within the region and overseas. Borrowing from banks and other financial institutions increased by 13% to US$ 2 billion compared to US$ 1.8 billion at the end of 2007.

Both net interest income and net fee & commission income are reflective of the strong commercial banking activities of TIBC. Net interest income increased to US$ 122.7 million compared to US$ 112.7 million during 2007 showing a growth of 8.9% over 2007. Net fee & commission income increased to US$ 50.4 million compared to US$ 37.4 million showing a growth of 34.8% in 2008.

Due to the exceptional prevailing market conditions we are not projecting any significant growth in income in 2009. We, however, anticipate to be able to maintain net income levels at the current level during 2009.

In the end, and for all the success that TIBC has achieved to-date, I would like to express my appreciation to the Central Bank of Bahrain, our shareholders, correspondents, customers and employees for their support and collective contributions for this period of successful operations and I look forward to their continued support in the times ahead..