1- Activity

- Bank of Alexandria (S.A.E) was established as a state-owned commercial bank on 17/4/1957 and remained as such until the Italian Gruppo Sanpaolo IMI acquired on 31/10/2006 an 80% stake therein. The Bank operates currently under The Central Bank, The Banking Sector and Money Law No.88 of 2003 and provides a wide range of banking services via its Head Office in Cairo and its 188 units.

-The Bank's Extraordinary Meeting decided on June 12, 2007 to change the Bank's financial year end date from June 30^th to December 31^st.

2- Accounting Policies Applied

a- Bases of Preparing the Financial Statements

The financial statements are prepared according to Rules for Preparing Bank Financial Statements issued by the Central Bank of Egypt on June 27^th 2002 and the amendments thereto.

b- Foreign Currency Transactions

The Bank keeps its accounts in Egyptian pound. Transactions in foreign currencies are recorded during the financial year based on the exchange rates prevailing at the date of transaction. Assets and liabilities in foreign currencies are valued at the end of the financial year using the exchange rates prevailing on that date. Differences arising from valuation are recorded in the income statement under the item “profit (loss) on foreign currency transactions”.

The outstanding forward contracts are valued, at the end of the financial year, at the fair value on that date; using the forward rates for the remaining periods till these contracts mature. The valuation differences are listed in the income statement under the item “profit (loss) on foreign currency transactions”.

Currency swaps are recorded on the commitment date under the item ’’contingent liabilities and commitments’’. The spread between the bid and ask prices is recorded under the item ’’ debit balances and other assets’’ and under the item ’’credit balances and other liabilities’’, as the spread is considered unrealized profit/loss on the commitment date. The above-mentioned balances are amortized over the swap duration, to be credited to or debited on the item’’ interest on loans and due from banks’’ in the income statement. However, the profit (loss) resulting from executing the swaps is recorded in the income statement under the item ’’ profit (loss) on foreign currency transactions ’’.

c-  Income Recognition

Income is recorded on the accrual basis, with the exception of interest on non - performing loans, which are not recorded as income when it is doubtful to redeem the interest or the principal. Shares and investment certificates’ dividends are recorded after the announcement of their distribution.

d- Treasury Bills and Other Bills Discountable at the CBE

1- Treasury bills

Treasury bills are recorded at their nominal value and the related unearned income is registered under the item "credit balances and other liabilities". Treasury bills appear in the balance sheet excluding the balance of unearned income.

2- CBE's Bonds and Certificates of Deposit:

Purchases are recorded at the nominal value and the related unearned income is registered in the balance sheet under the item "credit balances and other liabilities". CBE's bonds appear in the balance sheet excluding the balance of unearned income.

e- Valuation of Trading Investments

* Trading investments (including investment portfolios managed by a third party and the mutual funds certificates held for trading which are not issued by banks or insurance companies) are valued at the end of the financial year at the fair market value. The valuation differences are recorded in the income statement.

* Trading investments, which are no longer classified as securities held for trading, are valued at their book value and written down in case of any reduction in their market value. This should be made after carrying out a comprehensive reasonable study of the latest financial statements of the company which issued such a security. The valuation differences are recorded in the income statement.

* The mutual funds certificates, issued by banks and insurance companies, are valued at the fair value which represents the redemption value of such certificates on the valuation date. The valuation differences are recorded in the income statement.

f- Valuation of Available for Sale Investments

Available for sale investments are valued separately at the lower of cost, taking into consideration changes in exchange rate, or fair value. The valuation differences are charged to the income statement under the item “valuation differences of other investments’’, except for differences before 30/6/2003, as they are shown as special reserve within shareholders’ equity. In case the value of an investment decreases, the special reserve made for such investment is used to cover the decrease in value then the balance, if any, is charged to the income statement. When the investment is sold, the special reserve is to be credited to the income statement.

g- Valuation of Held to Maturity Investments

* The bonds purchased from the primary market are valued at the adjusted cost which represents the nominal value plus a premium or minus a discount, as the case might be. The premium / discount is amortized using the fixed installment system. The amortized amount is recorded in the income statement under the item ’’ interest on treasury bills and bonds’’.

The same method of valuation is used for the bonds purchased from the stock market at a premium or a discount on its nominal value. The cost of such bonds is reduced by the amount of interests paid before the purchase date.

If the fair value of each bond falls below its book value, the book value is adjusted by the difference which is charged to the income statement under the item "valuation differences of other investments". In case the fair value exceeds the book value, the difference is credited to the income statement under the same item within the limits charged to the previous income statements.

The book value of the foreign currency bonds is adjusted according to the exchange rate prevailing on the valuation date. The valuation differences are recorded in the income statement under the item “profit (loss) on foreign currency transactions”.

* The mutual fund certificates held to maturity of the fund are valued at cost. If the redemption value of these certificates falls below their cost, the difference is charged to the income statement under the item “valuation differences of other investments”. In case the redemption value exceeds the cost, the difference is credited to the same item, within the limits charged to the previous income statements.

h- Valuation of Investments in Associates

Investments in associates are valued at cost. If the fair value falls below the book value, the book value is adjusted by the difference which is charged to the income statement under the item “valuation differences of other investments ’’. In case the fair value exceeds the book value, the difference is credited to the same item within the limits charged to the previous income statements.

i- Impairment of non-financial assets

The carrying amount of non-financial assets held by the Bank is reviewed at the balance sheet date to determine whether there is any indication that those assets are impaired. If such indication exists, the carrying amount is decreased to the recoverable amount and such decrease is charged to the income statement. Annual depreciation of immovable assets for the following years is calculated based on the adjusted value.

Non-financial assets that have previously suffered impairment are reviewed for possible reversal of the impairment provided that the carrying value of such does not exceed the original carrying value prior to impairment.

j- Valuation of Assets Transferred to the Bank in Settlement of Customers’ Debts

Such assets are recorded in the Bank’s balance sheet under the item” debit balances and other assets” at their transfer value. If the fair value of such assets falls below the transfer value on the date of the balance sheet, the differences are charged to the income statement. In case the fair value exceeds the transfer value, the difference is credited to the income statement within the limits charged to the previous income statements.

k- Employee Benefits

The Bank provides medical insurance system for employees and retirees. The Bank's liabilities under this system are the present value of the liabilities as the date of the balance sheet minus the present value of the system assets including settlements resulting from actuarial loss/profit and cost of the previous service. The liabilities are assessed annually by an independent actuarial expert who will use the expected debt unit. This unit is identified by the estimated future cash outflows and by using interest rate on government bonds with similar maturities of these obligations and included under other credit balances.

Actuarial profits/losses arising from settlements out of experience are credited/debited to income statement. The change in actuarial assumptions and amendments to medical services are calculated based on the average of the remaining service. The Bank, in the previous years, calculated employee benefits of medical insurance provided to in-service employees and retirees on the basis of payments and actual costs as they occur.

l- Loans and Contingent Liabilities Provisions

* A provision is made for specific loans and contingent liabilities in addition to a percentage varying from 1% to 5% of the total thereof in accordance with the rules issued by the CBE on 6/6/2005 governing customers' creditworthiness.

* Loans which deemed irrecoverable are written off against the provision. Amounts collected from loans previously written off are added back to the provision.

m- Contingent Liabilities and Commitments

Off- balance sheet items including contingent liabilities, in which the Bank is involved, in addition to commitments to forward contracts, currency and interest rate swaps as well as to other contracts are shown under the item “contingent liabilities and commitments“, as they are not considered actual assets or liabilities on the balance sheet date .

n- Cash and Cash Equivalents

For the purpose of preparing the cash flow statement, “cash and cash equivalents” item includes cash balances and balances with CBE as well as current accounts balances with banks, in addition to balances of treasury bills and other government stocks discountable at CBE and maturing within three months.

o- Depreciation

* Fixed assets are recorded at the historical cost and are depreciated on a straight line method, using suitable depreciation rates on the basis of the estimated productive life of each asset according to the following rates:

* Redecoration and renovation expenses of the Bank’s leased premises are depreciated in the shorter of 4 years (25% annually) or the lease period.

p- Income Tax

* Income tax on the profits made during the year includes taxes relating to the year and deferred taxes and are recorded in the "income statement", except for the income tax relating to owners' equity items which are contained directly in owners' equity. Income tax on the taxable net profit is recorded using the tax rates applicable on the date of preparing the balance sheet in addition to tax differences relating to the preceding years.

* The deferred tax resulting from temporary time differences, between the book value of assets and liabilities, is recognized according to the accounting principle, while its value is recognized according to the tax principle. The value of the deferred tax is determined according to the expected means of settling the values of assets and liabilities as per the tax rates applicable on the date of preparing the balance sheet.

* The Bank's deferred-tax assets are recognized if taxable profits, are expected in the future and the value of the deferred-tax assets is reduced by the value of the part which may not be used, as expected, during the coming years.

3- Financial Instruments and the Management of their Related Risks

3/1 Financial Instruments

(a)   The Bank’s financial instruments are represented in the financial assets and liabilities. The financial assets include cash, current accounts and due from banks, investments, loans and advances to banks and customers in addition to third party's rights and pledges registered under the items "contingent liabilities". As for the financial liabilities, they include customers’ deposits and due to banks in addition to the third party's rights and pledges registered under the item “contingent liabilities and commitments“.

Note No.(2) includes the accounting policies adopted to record and measure the main financial instruments and their related income and expenses.

(b) The Fair Value of Financial Instruments

According to the bases of valuing the Bank’s assets and liabilities, which are included in the notes on financial statements, the fair value of financial instruments is not significantly different from their book value on the balance sheet date. As for investments, other than trading investments, note No. (5) reflects their fair value on the balance sheet date.

(c) Forward Contracts

According to the Central Bank of Egypt’s instructions, the Bank shall enter into forward transactions only as much as is required to meet its own or its customers’ foreign currency needs, to cover their transactions through the Bank and hedge against risks of exchange and interest rates on the Bank's balances and operations. Such transactions are all of short term.

3/2 The Management of Risks Related to Financial Instruments

(a) Interest Rate Risk

The value of some financial instruments is subject to interest-rate risk. The Bank takes the necessary measures for minimizing this risk. These measures include the following:

- Setting the rate on borrowing in relation to that on lending.

- Regarding the discount rates of various currencies as a benchmark in setting the interest rate.

(b) Credit Risk

The financial assets vulnerable to credit risk include loans to customers and banks, investments in the form of bonds, current accounts and due from banks, in addition to indemnities from others. Credit risk means that a party will not pay "wholly or partially" back a loan on due date.

The Bank takes the necessary measures for minimizing this risk. These measures include the following:

- Preparing credit studies on customers and banks before dealing with them, in addition to determining the related credit risks.

- Obtaining the adequate guarantees for reducing the risks of default by customers or banks.

- Conducting following-up and periodical studies of customers and banks in order to evaluate their financial and credit positions and estimate the necessary provisions for non - performing loans.

- Distributing the loan portfolio and balances with banks among various sectors so as to avoid risk concentration.

(c) Foreign Exchange Risk

Given that the Bank deals in foreign currencies according to the nature of its activities; it is exposed to the risk of fluctuations in foreign exchange rates. In order to minimize this risk, the Bank cares for realizing balance in foreign currency positions according to the Central Bank of Egypt’s instructions.

4- Financial Investments for Trading

(In EGP thousand)

5- Financial Investments Available for Sale

(In EGP thousand)