HBZ Bank Limited...HBZ Bank Limited ANNUAL REPORT 2006 (A SUBSIDIARY OF HABIB BANK AG ZURICH) We...

S O U T H A F R I C A

HBZ Bank Limited

ANNUAL REPORT 2006

(A SUBSIDIARY OF HABIB BANK AG ZURICH)

We dedicate ourselves always

to consider the customer

first, give full measure and to

deliver more than we promise.

“ “

Isle of Man

CanadaSwitzerland

Egypt

Kenya

South Africa

UAE

United Kingdom

strategy

Egypt

Kenya

South Africa

PakistanUAE

Hong KongBangladesh

Contents

OUR MISSION

To provide a specialized range of

banking services by understanding

and fulfilling the needs of our

niche market via knowledgeable,

experienced and professional staff

who offer personal, friendly, efficient

and secure service.

Seven year review 2

Profit Summary 3

Total Assets 3

Directorate 4

Executive management 5

Committees 6

Chairman’s review 8

Risk management review 9

Social investment 13

Corporate governance 14

Directors approval of the Annual Financial Statements 19

Company Secretary Certificate 20

Auditors Report 20

Report of the directors 21

Balance sheet 22

Income statement 23

Statement of changes in equity 24

Cash flow statement 25

Notes to the Annual Financial Statements 26

Capital adequacy statement 51

International network 52

List of services 53

2 | HBZ ANNUAL REPORT 2006

SEVEN YEAR REVIEW

2000 2001 2002 2003 2004 2005 2006

PROFITS (R millions)

Profit before taxation 4.3 8.0 15.9 26.6 22.9 29.6 34.2

BALANCE SHEET (R millions)

Advances 80.8 114.1 157.1 187.8 232.9 327.9 464.1

Advances growth % 43.3% 41.2% 37.7% 19.6% 24.0% 40.8% 41.5%

Client deposits 213.5 300.6 405.8 555.3 687.4 925.0 1,080.3

Deposit growth % 27.5% 40.8% 35.0% 36.9% 23.8% 34.6% 16.8%

Total assets 309.3 372.2 490.4 650.4 794.1 1,025.6 1,201.5

Total assets growth % 26.0% 20.3% 31.8% 32.6% 22.1% 29.1% 17.2%

PERSONNEL

Number of employees 53 57 56 62 71 81 80

Net contribution per employee (R 000’s) 81 278 283 429 322 365 428

For the year ended 31 December 2006

security

HBZ ANNUAL REPORT 2006 | 3

PROFIT SUMMARY

2000 2001 2003 2004 200620052002

Year

R M

illion

s

4.3

29.6

34.2

8.0

15.9

26.6

22.9

024681012141618202224262830323436

TOTAL ASSETS

2000 2001 2003 2004 2005 20062002

Year

R M

illion

s

309.3

1 025.6

1 201.5

372.2

490.4

650.4

794.1

100150200250300350400450500550600650700750800850900950100010501100115012001250


DIRECTORATE

NON EXECUTIVE

Muhammad H Habib (48)# - Chairman

Bus. Admin (USA)

Joint President, Habib Bank AG Zurich

Appointed to the board in 1995

M Yakoob Chowdhury (64)^ - Executive Director

Chief Executive Vice President, Habib Bank AG Zurich


Reza S Habib (43)**

B.Sc. (USA)



Ramsay L Daly (64)

B.A. LLB

Attorney


Pierre J Neethling (62)

B.Sc & MBA

Previously Managing Director, Smith & Nephew plc,

now retired


Hendrik F Leenstra (58)

Institute of Bankers SA C.A.I.B. (SA)

Previously Regional Executive – Nedcor Group, KZN

now retired


EXECUTIVE DIRECTORS

Zafar Alam Khan (54)* – Chief Executive Officer

and Executive Vice President

B.A.

Appointed to the board in October 2005

Chris Harvey (50) - Executive Director – Finance

and Senior Vice President

B.Com, Dip Acc

Appointed to the board in July 1998

* Pakistani ** Canadian

^ British # Swiss

focus


EXECUTIVE MANAGEMENT

EXECUTIVE MANAGEMENT

Zafar Alam Khan (54)

B.A.

Chief Executive Officer / General Manager

Chris Harvey (50)

B.Com, Dip Acc

Executive Director - Finance

CORPORATE

Sikandar HI Shaikh (60)

B.Sc (Honours)

Executive Vice President (Compliance)

John MCG Rebelo (61)

B.Econ

Treasury Manager

John Dix (41)

National Dip: Management

Credit Manager

S Rasheed Akhtar (58)

MSc

Senior Vice President

Head Islamic Banking

BRANCH NETWORK

KWA-ZULU NATAL DIVISION:

Syed AM Zaidi (43) (Durban)

B.Com

2-nd Vice President

Shujauddin Shaikh (50) (Islamic Banking)

B.Com, Dip IBP

2-nd Vice President

GAUTENG DIVISION

M Ali Chaudhry (38) (Johannesburg)

B.Com MBA (MIS)

Assistant Vice President

Nasir Abbas (53) (Lenasia)

B.Com

2-nd Vice President

Syed BH Zaidi (46) (Laudium)

MBA

Assistant Vice President


COMMITTEES

AUDIT COMMITTEE

Ramsay L Daly (64) - Chairman

Director of HBZ Bank Ltd

M Yakoob Chowdhury (64)

Chief Executive V-President, Habib Bank AG Zurich






Muhammad H Habib (48)*



Zafar Alam Khan (54)*

CEO/ General Manager of HBZ Bank Ltd

Chris Harvey (50)*

Executive Director - Finance of HBZ Bank Ltd

Jay Datadin (43)*

Partner of KPMG

* By invitation

DIRECTORS AFFAIRS COMMITTEE

Muhammad H Habib (48) - Chairman



Ramsay L Daly (64)


M Yakoob Chowdhury (64)








RISK COMMITTEE

M Yakoob Chowdhury (64) - Chairman



Zafar Alam Khan (54)

CEO/ General Manager of HBZ Bank Ltd

Chris Harvey (50)

Executive Director - Finance of HBZ Bank Ltd

Ramsay L Daly (64)






dexterity


CHAIRMANS REVIEW

It gives me great pleasure to present HBZ Bank Ltd’s

annual report for the year 2006. Our operation in South

Africa has, by the grace of God, continued to perform well.

INTERNATIONAL

Global economic growth for 2006 is around 5% compared

with 4.7% in 2005. The current growth phase of the global

economy has been the strongest since 1971/73. However,

it is entering into a mature phase and tighter monetary

policies in key economies such as the US, Euro zone,

Japan and China and high energy costs during 2006 are

expected to result in slower growth in 2007 and 2008.

An indication that the global economy is slowing down is

the recent decline in energy prices along with commodity

prices coming under pressure in recent months. This will

help to moderate global inflation, which is estimated to

have reached a high of 3.1% in 2006, but is expected to

decline to 3.0% in 2007 and 2.7% in 2008.

DOMESTIC

In line with the international trend South Africa had above-

average economic growth over the past three years, which

coincided with a significant strengthening of the Rand

against the currencies of its major trading partners. This,

along with household demand growing at a brisk pace,

household debt levels reaching record highs, oil and food

prices pushing inflation higher, and private sector credit

extension growing at a much higher rate than nominal GDP,

ensured that monetary policy had to be adjusted. It was

clear that the economic expansion would peak and that an

inevitable slowdown in economic growth would occur.

To ensure inflation and economic growth were controlled

the Monetary Policy Committee (MPC) of the South African

Reserve Bank effected three consecutive interest rate hikes

of 50 basis points each, bringing the total increase to 150

basis points by the beginning of the last quarter. The need

to increase interest rates was further emphasized when

the Rand depreciated during this time after international

investors became concerned about the rising current

account deficit and the country’s inability to attract

sufficient capital flows to finance it. Continued depreciation

of the Rand could negate the MPC’s attempts to control

inflation by adjusting interest rates up and pose a threat of

inflationary pressures.

OPERATING PERFORMANCE

HBZ Bank Ltd again concentrated on internal growth

taking advantage of the economic scenario noted above by

converting it into increased business activity and solid growth

in the balance sheet. By the grace of God the assets of the

bank grew by 17.1% to end at R 1.2 billion. The advances

grew by 41.5%, with a solid inflow of advances into the

Islamic Branch contributing significantly to the group growth.

The bank continued its integral philosophy of high liquidity

with deposit growth at 16.8%. All branches performed well

resulting in a profit of R 34.2 million.

OUTLOOK

Despite the inflationary pressures in the latter half of 2006

and the challenges of alleviating poverty and the huge cost

to the country of the AIDS epidemic I remain positive on

the growth outlook over the next few years and expect

South Africa to maintain above 4% growth in 2007 despite

the projected interest rate increases. South Africans have

enjoyed very strong growth for a number of years and the

tighter monetary policy is aimed at making sure that the

country lives within its means.

Barring any external shocks, especially the oil price and the

volatility of the Rand, I expect economic growth to continue

into 2008. This will be stimulated by interest rate cuts in the

later part of 2008 and the government’s projected R372

billion infrastructure spend, which is bound to create more

jobs and make the current economic expansion more

sustainable. Added to this is the buoyant mood within the

economy of the positive spin-off across all industries from

the 2010 Football World Cup to be held in South Africa.

The bank will continue to focus on its core business during

2007 and maintain its conservative approach to lending.


RISK MANAGEMENT REVIEW

RISK MANAGEMENT PHILOSOPHY

The risk philosophy of the bank is to keep risks to a

minimum through a clear policy of broad diversification in

terms of geography and product mix, and by spreading the

bank’s credit and trade financing activities over a wide

range of customers, with the emphasis on secured, short-

term, self liquidating lending.

Risk is anything that will cause a desired objective not to be

achieved. In fact all actions that the bank takes have an

element of risk and the bank recognises that it is an

unavoidable consequence of banking to take calculated

business risks with the objective of creating attractive

returns from these ventures. Thus HBZ does not seek to

avoid risk, but to manage it in a controlled manner and in

the context of the reward that is being earned.

The importance of the banks risk management process is

to ensure that all risks are identified, understood, evaluated

and quantified, and then manage them so as to achieve

the desired returns by eliminating, reducing and controlling

the impact of adverse occurrences on performance to

within acceptable parameters.

Risk management at HBZ is guided by

the following important principles:

• A strongly defined risk management structure;

• Independent review of the risk process;

• Continuous evaluation of the risk appetite of the bank

and its management through clearly defined limits; and

• Communication and coordination between the

committees, executive management and other

role-players in the risk management framework, without

compromising segregation of duties, controls or review.

The board enforces a conservative culture with respect to

its overall appetite for risk and fully endorses and supports

efforts at the bank to attain international best practice in

risk management.

Our combination of skilled people, entrepreneurial spirit and

a strong culture will enable the bank to achieve its growth

strategies. The bank nevertheless continues to be driven by

the keen desire to consider the customer first and provide

a quality service.

APPRECIATION

Our business depends on good relationships with our

clients and their needs are the heart of our business

philosophy and actions. I thank them for their outstanding

support and patronage. Our staff has once again shown

their ongoing commitment, dedication and passion without

which the bank would not have been able to achieve its

objectives, goals and vision. On behalf of the Board I thank

you all for your contribution, vigor and determination. I also

extend my appreciation to the South African Reserve Bank

for its guidance and support and my fellow board members

for their continued loyalty and wisdom.

Muhammad H Habib

Chairman


RISK MANAGEMENT REVIEW (CONTINUED)

RISK MANAGEMENT FRAMEWORK

The board is ultimately responsible for any financial loss or

reduction in shareholder value suffered by the bank. It is

therefore responsible for the total process of risk

management, recognising all the risks to which the bank is

exposed and ensuring that the proper mandates, policies,

authority levels, risk frameworks, internal controls and

systems are in place and functioning effectively.

The nature and size of HBZ Bank’s operations allows for a

centralised in-depth co-ordinated risk framework that

includes direct senior management and board involvement to

determine quantitative and qualitative risk measurement,

policies and procedures, control structures, and compliance

with regulations. The executive and non-executive directors

are widely represented on the various risk management

committees and processes. At every board meeting, the risk

committee reports on the effectiveness of the bank’s risk

management and control framework.

In line with international best practice various board

committees oversee policy formulation and implementation,

and monitor the risk management processes and

exposures. The main committees are the Board itself, the

Risk Committee, the Assets and Liabilities Committee

(ALCO) the Directors Affairs Committee, the Audit

Committee, the Remuneration Committee and various

Credit Committees.

ASSETS AND LIABILITIES COMMITTEE

An integral element in managing risk is the overall

management of the assets and liabilities of the bank. The

board set up the ALCO, which is made up of suitable

competent persons, to oversee the arrangement of both

sides of the bank’s balance sheet to maintain profitability,

to minimise interest rate risk and to maintain adequate

liquidity. This committee presents a report at each board

meeting on the effectiveness of the management of the

risks it monitors.

The committee is made up of the General Manager,

Financial Director, Risk Manager, an Operations Manager

and the various individual risk managers and met as

required during 2006.

CREDIT RISK

Credit risk is the risk of financial loss arising from the

possibility that commitments by counterparties are not

honoured either in part or totally.

The board acknowledges that credit risk management is

critical to the bank and has appointed a Credit Risk Manager

to manage the group’s credit risk process. This manager

attends the holding company’s annual credit risk conference.

The fundamental principles that HBZ Bank applies in the

management of credit risk include:

• a clear definition and in-depth understanding of our

niche client base;

• detailed credit granting procedures including rigorous

assessment of the creditworthiness of all parties;

• detailed and documented account opening procedures,

know-your-customer and due diligence requirements;

• an emphasis on diversification of the banks client base

limiting exposures to certain industries;

• formation of various high level credit committees all

with clearly defined limits;

• detailed credit inspection, quality review and prompt

follow-up by high level management and the

independent external and internal auditors;

• the prudent assessment of advances into categories

that are in line with standard international practice;

• a high level of executive and non-executive involvement

in decision making and review;

• a clear policy on the appropriate provisioning in respect

of the estimated loss inherent in the advances book.

To augment the prudent assessment of advances and

determination of appropriate provisioning, the bank has

a credit risk classification system. The provisioning

policy is in line with the requirements of the

Accounting Standard IAS 39.


MARKET RISK

Market risk represents the danger of losses occurring due

to adverse changes in the value of financial instruments

caused by fluctuations in interest and foreign currency

rates. The major market risk areas that affect the bank are

elaborated as below.

Interest rate risk is the sensitivity of profit to adverse variations

in interest rates. The bank manages within laid down

parameters the difference between rate-sensitive assets less

rate-sensitive liabilities by effectively utilising capital and

continually matching rate-sensitive assets and liabilities

over various time horizons and various economic and

environmental scenarios. The focused range of products

offered by the bank facilitates the management of this risk.

Interest rate risk management is enhanced through the

ALCO and an ALM process.

Currency risk arises from movements in rates of exchange

between currencies. The bank has very little exposure to this

type of risk as it has a very conservative policy of prohibiting

foreign exchange speculation and never having any

uncovered forward positions. No long term open positions

may be maintained, while short term open positions are

only maintained on NOSTRO accounts within extremely

conservative limits stipulated by the board for each currency.

LIQUIDITY RISK

Liquidity risk results from being unable to meet

commitments, repayments and withdrawals timeously

and cost effectively.

The bank controls liquidity at source by having strong

internal controls at that point, ensuring a wide deposit

base, simplifying the product range and centralizing the

treasury function. The bank is extremely conservative, with

the size allowing for the direct matching of all major

deposits with inter-bank placements and by keeping a

large proportion of the funds short-term to buffer against

unexpected cash flow requirements. This is enhanced

through the ALCO and ALM process which addresses

liquidity risk proactively. As with the management of interest

rate risk, the focused range of products offered by the

bank facilitates the management of this risk.

OPERATIONAL RISK

Operational risk is inherent in running a business.

The major risks are internal and external fraud, error,

incompetence, systems breakdown and inadequate

internal control procedures.

The bank takes active measures to limit potential

operational losses by:

• Instilling in employees a sound culture, work ethic

and values ethos;

• Providing a healthy, safe and secure operating

environment for staff, data and information;

• Correct and meaningful staff training;

• The preparation and continual upgrading of clear

procedure manuals;

• Regularly rotating and motivating staff;

• Maintaining adequate and effective internal controls;

• Ensuring timeous and accurate processing of

transactions and monitoring unauthorised ones;

• Ensuring appropriate investment in computer

technology to support operations;

• Ensuring an adequate business continuity process

in the event of disruption;

• Internal and external independent audit checks

and internal control reviews;

• Ensuring as an additional counter to potential

operational risk that the bank has extensive insurance

cover for any material losses.

Significant loss events and incidences are reported

to the board immediately when they occur.

COUNTRY RISK

Country risk relates to the danger that the cross-border

movement of capital and/or interest could be restricted

or completely blocked by a country due to political

or economic reasons.


RISK MANAGEMENT REVIEW (CONTINUED)

HBZ Bank has very little exposure to this risk. However as

a proactive bank, HBZ has a strategy to minimise this risk

should this type of risk become of concern. A central

committee decides on the risk profiles of each country;

continually revises these profiles and determines their

provision ratings. In deciding risk profiles of the countries

the ratings of international credit rating agencies and others

and the opinions of local banks are sought.

COMPLIANCE RISK

Compliance risk is the risk that the bank fails to comply

with the letter and spirit of all statutes, regulations,

supervisory requirements and industry codes of conduct,

which apply to our businesses.

As the number of statutory regulations and directives from

Central Banks increase there is a continual need to monitor

the bank’s adherence to these laws. The bank identifies

compliance risk as a separate risk within its risk

management framework. Compliance risk consists of two

risk areas:

Regulatory risk arises when the bank does not comply with

applicable laws and regulations or supervisory requirements.

Reputational risk is the negative publicity the bank would

be exposed to if there were a contravention of applicable

statutory, regulatory and supervisory requirements or

providing a service that does not comply with proper

industry standards.

The bank has a compliance department appointed to

oversee this function. The mandate of the compliance

department includes the following:

• Co-ordinating the compliance process at the bank.

• Monitoring and reviewing this process.

• Providing a central point for advice, consultation

and non-compliance reporting.

• Facilitating compliance education and awareness

workshops and seminars to entrench a culture of

compliance at the bank.

• Setting entity wide policy and standards for compliance.

• Providing specific focus on regulatory and reputational

risk as defined above.

When new acts, regulatory requirements and codes of

conduct are introduced compliance addresses these by

providing training and advice on these issues, developing

policies and procedures affecting regulatory issues and

regularly monitoring adherence to these policies and

procedures. Education and practical workshops form an

important part of this process. With the continued local and

international focus on anti money laundering, compliance

at the bank continues with its extensive training program

for all employees to ensure that they were aware of their

regulatory obligations. As part of the continued training

within the compliance department the bank’s compliance

officer attends the annual compliance conference hosted

internationally by our holding company.

The compliance officer is a member of the

Compliance Institute of South Africa.


SOCIAL INVESTMENT

EMPLOYEE SUMMARYMALE FEMALE

Occupational Categories African Indian White Total African Indian White Total Total

Top management 3 1 4 4

Professionals & middle management 13 2 15 2 2 17

Junior management 2 3 5 1 6 7 12

Clerks 1 11 1 13 2 24 1 27 40

Service workers 3 3 5 5 8

Total 6 30 4 40 8 32 1 41 81

HBZ Bank recognises the need to provide support for

various external social causes while balancing this with a

focused internal staff development program.

EXTERNAL SOCIAL INVESTMENT

It is vital to ensure lasting employment and self-enrichment

that people are properly educated and have a cultural

heritage to provide substance to their lives. It is with this in

mind that HBZ has over the years invested in a wide range

of welfare initiatives. Principle amongst them has been

projects and programmes that have provided educational

and cultural development. Preschools, primary and high

schools have all benefited from regular contributions.

Cultural events are also well supported by the bank.

INTERNAL SOCIAL INVESTMENT

In the current environment it is paramount to the success

of any business that internal empowerment programmes

for staff are in place. The bank is conscious of this fact

and has implemented internal employment equity, training

and skills development initiatives. These initiatives focus

on providing all employees with an environment that is free

from any form of discrimination while ensuring opportunities

exist to obtain the necessary skills for career expansion.

SKILLS DEVELOPMENT

The bank has a Skills Development Facilitator who is

registered with the BANKSETA Training Authority. A

Workplace Forum comprising of equal numbers of staff

and management meets to monitor and enhance the

Bank’s Workplace Skills Plan.

The Plan monitored by the Forum commits the bank and

employees to various training projects that include:

• focused on-the-job training;

• external training; and

• providing access to tertiary, college

and university education.

All staff have access to this plan and are entitled to benefit

from the plan. During 2006 all the goals and objectives of

the plan were achieved. To encourage continuity of the

plan the bank has set aside a separate budget to give full

measure to the Workplace Skills Plan.

EMPLOYMENT EQUITY

The Bank’s Employment Equity Plan submitted to the

Department of Labour is continually monitored and

updated to ensure it meets the changing needs of the bank

and its employees.

As a member of an international bank group, HBZ is

proactive and has for a number of years had a sound

employment equity process. The bank is currently training

and recruiting staff from the previously disadvantaged

groups to ensure employment equity at the bank remains

ahead of the plan.


CORPORATE GOVERNANCE

In essence corporate governance is the formal maintenance

of the necessary balance between entrepreneurial thrust

and prudential restraint, within the boundaries of good

business practices and regulation. HBZ considers this formal

maintenance of the balance to be fundamental to the

sound operation of the bank. Corporate Governance is

implicit in our values, culture, processes and organisational

structure and the structures designed to ensure they

remain embedded in all functions and processes.

The board endorse the South African King II “Code of

Corporate Practices and Conduct” and are satisfied that

the bank has in all material aspects consistently been in

conformance with the provisions and spirit of King II during

the period under review. In supporting the code, the directors

recognise the need for themselves and all employees to

conduct themselves with integrity and in accordance with

generally accepted corporate practices. The directors

realize that while compliance with form is important, greater

emphasis is placed on the substance of governance.

The corporate governance framework at the bank ensures

that the board plays a leading role in the strategic guidance

of the bank and the effective monitoring of management

in discharging their accountability to our shareholder and

responsibilities to stakeholders through meaningful and

effective disclosure.

The salient features of the bank’s corporate governance

policy are built on the following characteristics:

• Accountability,

• Discipline,

• Fairness,

• Independence,

• Responsibility,

• Transparency, and

• Social integrity.

The banks’ good corporate governance revolves around

the following significant practices and processes.

BOARD OF DIRECTORS

The board is responsible for reviewing and guiding

company strategy, approving the main policies and

objectives, understanding the key risks, and determining

the risk tolerance and approving and reviewing the

processes in operation to mitigate these risks.

In fulfilling its responsibilities, the board is supported by

management, who are required to implement the plans

and strategies approved by the board. The board monitors

management’s progress on an ongoing basis.

During 2006 the HBZ board comprised eight directors,

six of whom are non-executive directors and two

executive directors. Non-executive directors comprise

individuals of high caliber with diverse international and

local backgrounds and expertise that enable them to

bring objectivity and independent judgement to the board

deliberations and decisions. All board members have a

clear understanding of their role in corporate governance

and are not subject to undue influence from management

or outside concerns. Both the Chairman and Vice

Chairman are non-executive members. The roles of the

Chairman and the CEO are separate with responsibilities

clearly defined.

The board meets regularly with director’s attendance

in accordance with requirements. Additional board

meetings, apart from those planned, are convened as

circumstances dictate. Where directors are unable to

attend a meeting personally, teleconferencing is made

available to include them in the proceedings and allow

them to participate in the decisions and conclusions

reached. The board is supplied with full and timely

information with a typical board agenda including:

• A report from the CEO.

• A discussion on the management accounts.

• Reports from the audit committee.

• Reports from the risk committee.

• Reports from the directors affairs committee.

• Reports from the compliance officer.

• Reports on large exposures.

• Reports on industry concentrations.

• Reports on significant regulatory issues.


The board annually meets with management for a number

of days to debate and agree on the proposed strategy

and to consider long-term issues facing the bank, prior to

formulation of the annual financial budgets. All directors are

regularly kept abreast of statutory, regulatory, accounting,

non-financial and industry developments that may affect

the bank. Furthermore all directors have full access to

the advice of management, the company secretary and

independent professionals as well as unrestricted access

to all relevant documentation required to discharge their

duties. One-third of directors retire by rotation annually. The

board does not believe that any director has served on the

board for a period, which could materially interfere with the

director’s ability to act in the best interests of the bank.

The board is supported by various internal committees and

functions in executing its responsibilities. These are elaborated

on below. Details of the directorate are listed on page 4 of

this annual report.

DIRECTORS’ AFFAIRS COMMITTEE

The directors’ affairs committee, established by the board

has a written charter that clearly sets out its responsibility,

authority and functions. The committee including the

Chairman consists of non-executive directors. At least

two meetings are held annually with the CEO and financial

director invited to attend when necessary.

The committee’s primary responsibilities are:

• To assist the board in its determination and evaluation

of the adequacy, efficiency and appropriateness of the

corporate governance structure and practices of the bank;

• To establish and maintain a board directorship continuity

program including planning for successors, regularly

reviewing the skills and experience of the board, and an

annual self-assessment of the board as a whole and of

the contribution of each individual director;

• To assist the board in the nomination of successors to

key management positions and ensure that a

management succession plan is in place;

• To assist the board in determining whether the services

of any director should be terminated; and

• Assist the board in ensuring that the bank is at all

times in compliance with all applicable laws, regulation

and codes of conduct and practices.

Details of the directors affairs committee are listed on

page 6 of this annual report.

COMPANY SECRETARY

The company secretary of HBZ is suitably qualified

and experienced and was appointed by the board.

The company secretary is responsible for the duties as

stipulated in section 268G of the Companies Act. The

board recognizes the pivotal role the secretary plays in the

corporate governance process and is thus empowered by

them to ensure these duties are properly fulfilled.

In addition to his statutory duties the company

secretary is required to:

• Provide the directors with guidance on how their

responsibilities should be properly discharged in the

best interests of the bank.

• Induct new directors appointed to the board.

• Assist the Chairman and Vice Chairman in determining

the annual board plan.

• Ensure that the directors are aware of legislation

relevant to the bank.

All directors have access to the advice and services of

the company secretary whose appointment is a matter for

the board as a whole. The contact details of the company

secretary are provided in the director’s report.

RISK COMMITTEE

The board is responsible for the total process of risk

management and the system of internal control.

Management is accountable for designing, implementing

and monitoring the process of risk management and

integrating it with the day-to-day activities of the bank.

The board established the risk committee with a written

charter that clearly sets out its responsibility, authority and

functions. The committee is made up of both


CORPORATE GOVERNANCE (CONTINUED)

non-executive and executive directors with the Chairman

always a non-executive director. At least three meetings

are held annually.


• To assist the board in its evaluation of the adequacy

and efficiency of the risk policies, procedures, practices

and controls;

• To assist in the identification of concentration risks to

which the bank is exposed;

• To assist in developing a risk mitigation strategy;

• To assist in ensuring that a formal risk assessment is

undertaken at least annually;

• To assist in identifying and regularly monitoring all key

risks and key performance indicators;

• To ensure the establishment of an independent risk

management function including the training of

members of the board in the different risk areas; and

• To introduce measures that will enhance the adequacy

and efficiency of the risk management policies,

procedures, practices and controls applied

A comprehensive risk management framework is in

place that formalises the management of risk. This and

the application and reporting on risk are detailed in the

separate risk management section of this annual report.

Details of the risk committee are listed on page 7 of this

annual report.

AUDIT COMMITTEE

The audit committee, established by the board has a

written charter that clearly sets out its responsibility,

authority and functions. The committee including the

Chairman consists of non-executive directors. At least

three meetings are held annually with the CEO, financial

director, compliance officer, internal and external auditors

invited to attend when necessary. The compliance officer,

internal and external auditors of the bank and the banking

supervision department of the South African Reserve Bank

have unrestricted access to this committee. In addition the

Chairman has the right to call in any other employee who is

able to assist the committee on an ad hoc basis.


• To review and assess the internal controls of the bank.

• To ensure that the necessary respect for the internal

control structure is demonstrated by management.

• To ensure that the internal audit process of the bank is

effective and in terms of the committees requirements.

• To oversee the bank’s external audit process including

the scope, fees and audit findings.

Details of the audit committee are listed on page 6 of this

annual report.

CREDIT COMMITTEES

Credit committees comprising senior management as

well as executive and non-executive directors operate

at various levels within the bank. These committees,

operating within clearly defined exposure limits and rules

stipulated by the board, review and approve all exposures

to clients and potential clients.

One of the primary risks in the management of credit is

concentration risk. A large concentrated exposure to a single

party or closely related group of borrowers could place the

profitability of the bank in jeopardy should recoverability

of the exposure become doubtful. The board realizing

the importance of this has itself taken the responsibility of

approving and reviewing all large exposures.

REMUNERATION COMMITTEE

The bank’s remuneration committee comprises non-

executive directors and members of the holding company’s

executive management. They meet annually to determine

salary structures and staff policies that ensure the directors,

executive management and staff are rewarded fairly for their

individual contributions to the bank’s overall performance.

COMPLIANCE

Compliance risk is the risk that the bank fails to comply

with the letter and spirit of all statutes, regulations,

supervisory requirements and industry codes of conduct,

which apply to our businesses. The bank has an


independent compliance function responsible for assisting

management in this regard. The compliance department

has implemented and developed effective processes

to address compliance issues within the bank and has

unrestricted access to the Chairman of the audit committee

and Chairman of the board. The role of the compliance

department is elaborated on in the risk management

section of this annual report.

INTERNAL CONTROL

The directors of the bank are responsible for ensuring that

the bank maintains accounting records and implements

effective systems of control. Management is responsible for

the implementation and maintenance of these controls.

The directors report that the bank’s internal controls are

designed to provide assurance regarding the:

• integrity, accuracy and reliability of the accounting records,

• accountability for the safeguarding and

verification of assets,

• detection and prevention of risks associated with

fraud, potential liability, loss and material misstatement,

• effectiveness and efficiency of operations,

• compliance with applicable laws and regulations.

The internal controls within the bank concentrate on critical

risk areas. These risk areas are identified by operational

management, confirmed and monitored by the board

of directors, reviewed annually by the external auditors,

and closely monitored and subject to independent and

unimpaired review by the internal auditors.

Internal controls are based on established policies and

procedures, implemented by appropriately trained and

skilled personnel whose functions have been properly

segregated. In this process internal controls are designed

to ensure the cost does not exceed the benefit.

Processes are in place to monitor the effectiveness of

internal controls, to identify material breakdowns and to

ensure that corrective action is taken. These ongoing

processes were in place throughout the year under review.

INTERNAL AUDIT

The bank’s independent internal audit function exists to

assist management in discharging their responsibility

effectively. This department has senior suitably qualified

and experienced staff whose functions comply with

international standards.

The scope of the internal audit function is to review the:

• reliability and integrity of financial and

operating information,

• systems of internal controls,

• means of safeguarding assets,

• efficient management of the bank’s resources,

• compliance with applicable laws and regulations and

• effective conduct of its operations.

Internal audit operates independently from executive

management and has unrestricted access to the chairman

of the audit committee, all other staff and information

needed by them in the execution of their duties.

CODE OF ETHICS

HBZ Bank has a strong culture of entrenched values that

commit it to the highest standards of integrity, behavior

and ethics in dealing with all its stakeholders. These values

apply to all personnel at the bank, with personnel expected

at all times to observe their ethical obligation in such a

way as to carry on business through fair commercial

competitive practices.

In particular staff are expected:

• not to place themselves in a position where their

personal interests conflict with their duties to the

bank and to their clients;

• to carry out their duties with due care and skill;

• to exhibit loyalty and dedication in all matters

pertaining to the bank;

• to be prudent in the use of information acquired

in the course of their duties and to respect the

confidentiality of client information; and

• not to discriminate on the basis of race, religion or gender.


CORPORATE GOVERNANCE (CONTINUED)

REGULATION AND SUPERVISION

The bank is subject to external regulation and supervision

by various statutory bodies and regulators. The bank

strives to achieve open and active communication with

these bodies specifically the Supervision and Exchange

Control Departments of the South African Reserve Bank.

Where appropriate the bank participates in discussion

groups with the various regulators to ensure that

knowledge and insight is gained to maintain sound internal

controls to operate within the regulatory framework.

EMPLOYEE PARTICIPATION AND SKILLS

The bank recognizes the importance of employee

participation in the maintenance of standards and

general well being of the company as ultimately our

success depends on our employees working together

in the interests of our clients.

The following principles underlie the bank’s employment

equity and skills enhancement policy:

• HBZ is committed to nurturing the employee

relationship by continued development of innovative

reward and incentive programs that focus on long- and

short-term operational and strategic goals.

• The empowerment of employees is enhanced through

emphasis on teamwork, training and a philosophy of

internal promotion.

• A policy of open, honest two-way communication has

been adopted allowing for a free exchange of positive

ideas within the work place.

• HBZ maintains a policy of non-discrimination towards

all employees, and is committed to providing employment

in an equitable manner to members of all communities.

• The bank endorses the philosophy of affirmative action

as an integral part of its business plan with a number of

initiatives within the bank currently in process.

• HBZ has an ongoing workplace forum comprising

employees and management of the bank that

continually monitors and upgrades its Workplace Skills

Plan and Employment Equity Plan, which focuses and

commits the bank to skills development and continued

equity in the workplace.

precision


DIRECTORS APPROVAL OF THE ANNUAL FINANCIAL STATEMENTS

RESPONSIBILITY FOR THE

ANNUAL FINANCIAL STATEMENTS

The board of directors is responsible for monitoring the

preparation and the reliability of the financial statements,

comprising the balance sheet at the 31 December 2006,

the income statement, the statement of changes in

equity and cash flow statement for the year ended

31 December 2006, and the notes to the financial

statements, which include a summary of significant

accounting policies and other explanatory notes, and the

directors’ report. The independent auditors are required to

report whether the annual financial statements fairly

present the operations and financial position of the company.

The financial statements set out in this report have

been prepared in accordance with the provisions of

the Companies Act and the Banks Act of South Africa

and comply with South African Statements of Generally

Accepted Accounting Practice and practices prevailing in

the banking industry.

In discharging their responsibility to ensure the financial

statements fairly present the state of the affairs of the

company, the directors are supported by an ongoing

process for identifying, evaluating and managing the

significant risks faced by the bank and rely on the

systems of internal controls, the risk management

procedures adopted and information supplied by the

internal and external auditors.

The directors are of the opinion that:

• Appropriate accounting policies have been

consistently applied;

• Adequate accounting records have been maintained;

• Internal control systems are adequate to the extent that

no material breakdown in the operation of these

systems occurred during the year under review; and

• The financial statements fairly present the financial

position of the company as at the 31 December 2006.

GOING CONCERN

The financial statements in this report are prepared on the

going concern basis. Based on enquiries made and their

knowledge of the bank the directors are of the opinion that

adequate resources exist to support the bank on the going

concern basis over the next year.

FINANCIAL STATEMENTS

The financial statements and the directors’ report

appearing on pages 21 to 50 were approved by the board

of directors on the 13th March 2007 and are signed on its

behalf by:

Muhammad H. Habib

Chairman

Ramsay L. Daly

Vice-chairman


COMPANY SECRETARY CERTIFICATE

In terms of Section 268G(d) of the Companies Act of 1973, as amended, I hereby certify to the best of my knowledge and

belief, that the company has lodged with the Registrar of Companies all such returns as are required of the company in

terms of the Act and that all such returns are true, correct and up to date.

Chris Harvey

Company Secretary

Durban

13 March 2007

We have audited the annual financial statements of HBZ Bank Limited, which comprise the balance sheet at 31 December 2006, and the income statement, the statement of changes in equity and cash flow statement for the year then ended, and the notes to the financial statements, which include a summary of significant accounting policies and other explanatory notes, and the directors’ report as set out on pages 21 to 50. Directors’ Responsibility for the Financial Statements The company’s directors are responsible for the preparation and fair presentation of these financial statements in accordance with South African Statements of Generally Accepted Accounting Practice and in the manner required by the Companies Act of South Africa. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those

risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of HBZ Bank Limited at 31 December 2006, and its financial performance and cash flows for the year then ended in accordance with South African Statements of Generally Accepted Accounting Practice and in the manner required by the Banks Act and the Companies Act of South Africa.

KPMG Inc Registered Auditors

per J Datadin Chartered Accountant (SA) Registered Auditor Director 13 March 2007 20 Kingsmead Boulevard Marriott Building Kingsmead Office Park Durban, 4001

AUDITORS REPORT


REPORT OF THE DIRECTORS

GENERAL RESERVE 2007 2006

Transfer proposed 2007 / 2006 R 6 600 000 R 8 000 000

DIVIDEND

Proposed dividend for distribution in 2007 / 2006 R 11 300 000 R 9 300 000

Secondary taxation on companies R 1 412 500 R 1 162 500

Ramsay L. Daly

Vice-chairman

13 March 2007

Muhammad H. Habib

Chairman

13 March 2007

The Board of Directors takes pleasure in presenting the

Annual Financial Statements of the bank for the year ended

31 December 2006.

HOLDING COMPANY

HBZ Bank Limited is a wholly owned subsidiary of Habib

Bank AG Zurich, which is incorporated in Switzerland.

NATURE OF BUSINESS

HBZ Bank Limited is a registered bank, which in line with

its holding company, Habib Bank AG Zurich’s business

strategy, specialises in trade finance and retail banking.

AUTHORISED AND ISSUED SHARE CAPITAL

No additional shares were authorised or issued

during the year.

FINANCIAL RESULTS

The results of the company are set out in the

accompanying financial statements and notes.

DIVIDENDS AND GENERAL RESERVE

The Directors have proposed that the following

appropriations be made in 2006/2007:

POST BALANCE SHEET EVENTS

There were no material post balance sheet events.

DIRECTORS AND SECRETARY

Details of the directors are reflected on page 4

of this report.

In accordance with the Company’s articles of

association, Section 85, Messrs PJ Neethling,

RS Habib and C Harvey retired by rotation, but

being eligible, offer themselves for re-election at the

forthcoming annual general meeting. The secretary

of the company is Mr C Harvey whose business and

postal address is 135 Jan Hofmeyr Road, Westville,

3630, P O Box 1536, Wandsbeck, 3631.

DIRECTORS’ EMOLUMENTS

Directors’ emoluments in respect of the company’s

directors are disclosed in note 27 to the annual

financial statements.


Notes 2006 2005

R R

ASSETS

Cash and short-term funds 1 588 462 546 492 523 536

Investment securities 2 121 775 027 187 006 289

Other assets 3 8 506 382 2 129 569

Derivative assets held for risk management 4 5 111 141 2 206 518

Deferred tax 5 574 867 309 826

Advances 6 464 126 299 327 926 356

Property and equipment 8 12 943 473 13 499 349

1 201 499 735 1 025 601 443

EQUITY AND LIABILITIES

Capital and reserves

Ordinary share capital 9 10 000 000 10 000 000

Share premium 40 000 000 40 000 000

Regulatory reserve 10 7 908 294 6 029 982

General reserve 25 000 000 17 000 000

Retained earnings 17 913 023 17 895 439

Total shareholders’ funds 100 821 317 90 925 421

LIABILITIES

Deposits and other accounts 11 1080 257 671 924 974 346

Provision 12 1 360 700 996 700

Other liabilities 13 13 948 906 6 498 458

Derivative liabilities held for risk management 14 5 111 141 2 206 518

1 201 499 735 1 025 601 443


BALANCE SHEET


Notes 2006 2005

R R

Interest received 6 89 882 517 72 305 230

Interest paid 11 (40 781 864) (28 405 547)

Net interest income 49 100 653 43 899 683

Impairment of advances 7.3 ( 510 666) ( 170 183)

48 589 987 43 729 500

Other income 15 28 516 662 25 237 078

77 106 649 68 966 578

Operating expenses 16 (42 908 449) (39 402 103)

Profit before taxation 34 198 200 29 564 475

Taxation 17.1 (15 002 304) (10 105 856)

Net income attributable to shareholders 19 195 896 19 458 619

Dividends per share (cents) 18 93.00 57.00

Earnings per share (cents) 19 191.96 194.59

Diluted earnings per share (cents) 19 191.96 194.59


INCOME STATEMENT


Notes Ordinary

share capital

Share

premium

Regulatory

reserve

General

reserve

Retained

earnings

Total

R R R R R R

Balance at 31 Dec 2004 10 000 000 40 000 000 4 461 506 10 000 000 12 705 296 77 166 802

Net profit for the year 0 0 0 0 19 458 619 19 458 619

Transfer to regulatory reserve 0 0 1 568 476 0 (1 568 476) 0

Ordinary dividends 18 0 0 0 0 (5 700 000) (5 700 000)

Transfer to general reserve 0 0 0 7 000 000 (7 000 000) 0

Balance at 31 Dec 2005 10 000 000 40 000 000 6 029 982 17 000 000 17 895 439 90 925 421

Net profit for the year 0 0 0 0 19 195 896 19 195 896

Transfer to regulatory reserve 0 0 1 878 312 0 (1 878 312) 0

Ordinary dividends 18 0 0 0 0 (9 300 000) (9 300 000)

Transfer to general reserve 0 0 0 8 000 000 (8 000 000) 0

Balance at 31 Dec 2006 10 000 000 40 000 000 7 908 294 25 000 000 17 913 023 100 821 317


STATEMENT OF CHANGES IN EQUITY


Notes 2006 2005

R R

CASH RETAINED FROM OPERATING ACTIVITIES TOTAL TOTAL

Cash receipts from customers 20.1 118 399 179 97 542 308

Cash paid to customers, employees and suppliers 20.2 (82 109 991) (67 504 668)

Cash available from operating activities 20.3 36 289 188 30 037 640

Taxation paid 20.4 (15 289 116) (10 109 005)

Dividends paid (9 300 000) (5 700 000)

Net cash inflow from operating activities 11 700 072 14 228 635

Changes in operating activities

Increase in income-earning funds and other assets 20.5 (80 716 357) (178 242 163)

Increase in deposits and other creditors 20.6 166 002 396 217 693 596

Net increase in operating funds 85 286 039 39 451 433

Cash utilised in investing activities

Capital expenditure on property and equipment (1 137 230) (4 623 521)

Proceeds on disposal of property and equipment 90 129 16 891

Cash utilised in investing activities (1 047 101) (4 606 630)

Increase in cash and cash equivalents 95 939 010 49 073 438

Cash and short-term assets at the beginning of year 492 523 536 443 450 098

Cash and short-term assets at end of year 588 462 546 492 523 536


CASH FLOW STATEMENT



NOTES TO THE ANNUAL FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES

1. REPORTING ENTITY

HBZ Bank Limited is a company domiciled in the Republic

of South Africa. The financial statements were authorised

for issue by the Directors on 13th March 2007.

2. BASIS OF PREPARATION

(a) STATEMENT OF COMPLIANCE

The financial statements have been prepared in accordance

with Statements of Generally Accepted Accounting

Standards (SA GAAP) and its interpretations adopted by

the International Accounting Standards Board (IASB).

(b) USE OF ESTIMATES AND JUDGEMENTS

The preparation of financial statements requires management

to make judgements, estimates and assumptions that

affect the application of accounting policies and reported

amounts of assets and liabilities, income and expenses.

Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on

an ongoing basis. Revisions to accounting estimates are

recognised in the period in which the estimate is revised if

the revision affects only that period, or in the period of the

revision and future periods if the revision affects both

current and future periods.

(c) BASIS OF MEASUREMENT

The financial statements have been prepared on the

historical cost basis except for derivative financial

instruments are measured at fair value.

3. SIGNIFICANT ACCOUNTING POLICIES

The accounting policies set out below have been

applied consistently to all periods presented in these

financial statements.

(a) FOREIGN CURRENCY TRANSACTIONS

Transactions in foreign currencies are translated to the

respective functional currency of the Bank at exchange rates

at the date of the transactions. Monetary assets and liabilities

denominated in foreign currencies at the reporting date are

retranslated to the functional currency at the exchange rate at

that date. Foreign currency differences arising on

retranslation are recognised in the income statement.

(b) INTEREST

Interest income and expense are recognised in the income

statement using the effective interest method. The effective

interest rate is the rate that exactly discounts the estimated

future cash payments and receipts through the expected

life of the financial asset or liability (or, where appropriate, a

shorter period) to the carrying amount of the financial asset

or liability. The effective interest rate is established on initial

recognition of the financial asset and liability and is not

revised subsequently.

The calculation of the effective interest rate includes all fees

and points paid or received, transaction costs and

discounts or premiums that are an integral part of the

effective interest rate. Transaction costs are incremental

costs that are directly attributable to the acquisition, issue

or disposal of a financial asset or liability.

Interest income and expense presented in the income

statement include interest on financial assets and liabilities

at amortised cost on an effective interest rate basis.

(c) OTHER INCOME

Fees and commission income are recognised as the

related services are performed.


(d) FINANCIAL ASSETS AND LIABILITIES

(i) RECOGNITION

The bank initially recognises loans and advances and

deposits on the date they are originated. Financial

instruments comprise investments in equity and debt

securities, other receivables, cash and cash

equivalents, borrowings and other payables.

Non-derivative financial instruments are recognised

initially at fair value plus, for instruments not at fair value

through profit or loss, any directly attributable

transaction costs, except as described below.

Subsequent to initial recognition non-derivative financial

instruments are measured as described below.

A financial instrument is recognised if the bank

becomes a party to the contractual provisions of the

instrument. Financial assets are derecognised if the

bank’s contractual rights to the cash flows from the

financial assets expire or if the bank transfers the

financial asset to another party without retaining control

or substantially all risks and rewards of the asset.

Regular purchases and sales of financial assets are

accounted for at trade date, i.e. the date that the bank

commits itself to purchase or sell the asset. Financial

liabilities are derecognised if the bank’s obligation

specified in the contract expire or are discharged

or cancelled.

(ii) DERECOGNITION

The bank derecognises a financial asset when the

contractual rights to the cash flows from the asset

expire, or it transfers the rights to receive the

contractual cash flows on the financial asset in a

transaction in which substantially all the risks and

rewards of ownership of the financial asset are

transferred. Any interest in transferred financial assets

that is created or retained by the bank is recognised as

a separate asset or liability.

(iii) OFFSETTING

Financial assets and liabilities are set off and the net

amount presented in the balance sheet when, and only

when, the bank has a legal right to set off the amounts

and intends either to settle on a net basis or to realise

the asset and settle the liability simultaneously.

Income and expenses are presented on a net basis

only when permitted by the accounting standards, or

for gains and losses arising from a group of similar

transactions such as in the bank’s trading activity.

(iv) AMORTISED COST MEASUREMENT

The amortised cost for trade financial asset or liability is

the amount at which the financial asset or liability is

measured at initial recognition, minus principal

repayments, plus or minus the cumulative amortisation

using the effective interest method of any difference

between the initial amount recognised and the maturity

amount, minus any reduction for impairment.

(v) OTHER RECEIVABLES

Other receivables are stated at their cost less

impairment losses.

(vi) OTHER PAYABLES

Other payables are stated at cost.

(vii) IDENTIFICATION AND MEASUREMENT OF IMPAIRMENT

At each balance sheet date the bank assesses

whether there is objective evidence that financial assets

not carried at fair value through profit or loss are impaired.

Financial assets are impaired when objective evidence

demonstrates that a loss event has occurred after the

initial recognition of the asset, and that the loss event

has an impact on the future cash flows on the asset

that can be estimated reliably.

The bank considers evidence of impairment at both a

specific asset and collective level. All individually



NOTES TO THE ANNUAL FINANCIAL STATEMENTS (CONTINUED)

significant financial assets are assessed for specific

impairment. All significant assets found not to be

specifically impaired are then collectively assessed for

any impairment that has been incurred but not yet

identified. Assets that are not individually significant are

then collectively assessed for impairment by grouping

together financial assets (carried at amortised cost)

with similar risk characteristics.

Objective evidence that financial assets are impaired

can include default or delinquency by a borrower,

restructuring of a loan or advance by the bank on

terms that the bank would not otherwise consider,

indications that a borrower or issuer will enter

bankruptcy, the disappearance of an active market for a

security, or other observable data relating to a group of

assets such as adverse changes in the payment status of

borrowers or issuers in the bank, or economic

conditions that correlate with defaults in the bank.

In assessing collective impairment the bank uses

statistical modelling of historical trends of the

probability of default, timing of recoveries and the

amount of loss incurred, adjusted for management’s

judgement as to whether current economic and credit

conditions are such that the actual losses are likely to

be greater or less than suggested by historical

modelling. Default rates, loss rates and the expected

timing of future recoveries are regularly benchmarked

against actual outcomes to ensure that they

remain appropriate.

Impairment losses on assets carried at amortised cost

are measured as the difference between the carrying

amount of the financial assets and the present value of

estimated cash flows discounted at the assets’ original

effective interest rate. Losses are recognised in profit or

loss and reflected in an allowance account against

loans and advances. Interest on the impaired asset

continues to be recognised through the unwinding of

the discount.

When a subsequent event causes the amount of

impairment loss to decrease, the impairment loss is

reversed through profit or loss.

Impairment losses on available-for-sale investment

securities are recognised by transferring the difference

between the amortised acquisition cost and current fair

value out of equity to profit or loss. When a subsequent

event causes the amount of impairment loss on an

available-for-sale debt security to decrease, the

impairment loss is reversed through profit or loss.

Specific impairment

The bank creates a specific impairment against

advances when there is objective evidence that it will

not be able to collect all amounts due. The amount of

such impairment is the difference between the carrying

amount and the recoverable amount, calculated as the

present value of expected future cash flows, including

amounts recoverable from guarantees and collateral,

discounted at the effective interest rate at the inception

of the advance.

Portfolio impairment

The bank creates portfolio impairment against

advances where there is objective evidence that the

advances portfolio contains probable losses at the

balance sheet date, which will only be identified in the

future, or where there is insufficient data to reliably

determine whether such losses exist. The estimated

probable losses are based on historical information and

take into account historical patterns of losses and

the current economic climate in which the

borrowers operate.

(viii) DERIVATIVE FINANCIAL INSTRUMENTS

The bank uses derivative financial instruments to

hedge its exposure to foreign currency risk arising

from operational activities.


Derivative financial instruments are recognised

initially at cost. Subsequent to initial recognition,

derivative financial instruments are stated at fair

value. The gain or loss on re-measurement to

fair value is recognised immediately in the

income statement.

(ix) SHARE CAPITAL

Ordinary Shares

Incremental costs directly attributable to issue of

ordinary shares are recognised as a deduction

from equity.

(e) CASH AND CASH EQUIVALENTS

Cash and cash equivalents include notes and coins on

hand, unrestricted balances held with central banks and

highly liquid financial assets with original maturities of less

than three months, which are subject to insignificant risk of

changes in their fair value, and are used by the bank in the

management of its short-term commitments.

Cash and cash equivalents are carried at amortised cost

in the balance sheet.

(f) LOANS AND ADVANCES

Loans and advances are non-derivative financial assets

with fixed or determinable payments that are not quoted in

an active market and that the bank does not intend to sell

immediately or in the near term.

Loans and advances are initially measured at fair value

plus incremental direct transaction costs, and subsequently

measured at their amortised cost using the effective

interest method.

(g) INVESTMENT SECURITIES

Investment securities are initially measured at fair

value plus incremental direct transaction costs and

subsequently accounted for depending on their

classification as held-to-maturity.

(h) HELD-TO-MATURITY

Held-to-maturity investments are non-derivative assets with

fixed or determinable payments and fixed maturity that the

bank has the positive intent and ability to hold to maturity,

and which are not designated at fair value through profit or

loss or available-for-sale.

Held-to-maturity investments are carried at amortised cost

using the effective interest method.

(i) PROPERTY AND EQUIPMENT

(i) RECOGNITION AND MEASUREMENT

Items of property and equipment are stated at cost

less accumulated depreciation and impairment losses.

Where parts of an item of property and equipment

have different useful lives, they are accounted for as

separate items of property and equipment.

(ii) SUBSEQUENT COSTS

The bank recognises in the carrying amount of an item

of property and equipment the cost of replacing part of

such an item when that cost is incurred if it is probable

that the future economic benefits embodied in the item

will flow to the bank and the cost of the item can be

measured reliably. All other costs are recognised in the

income statement as an expense as incurred.

(iii) DEPRECIATION

Depreciation is charged to the income statement on a

straight-line basis over the estimated useful lives of

each part of an item of property and equipment. Land

is not depreciated. The depreciation rates are as follows:

• Leasehold improvements 20% per annum

• Furniture 15% per annum

• Computer and office machines 25% per annum

• Motor vehicles 20% per annum

Depreciation methods, useful lives and residual values,

if not insignificant, are reassessed annually at the

reporting date.




The bank has estimated residual value on buildings

and found that it is greater than cost. Depreciation has

therefore not been raised on these assets.

(j) LEASED ASSETS

The bank’s leases are operating leases and the leased

assets are not recognised on the balance sheet.

(k) IMPAIRMENT OF NON-FINANCIAL ASSETS

The carrying amounts of the bank’s non-financial assets are

reviewed at each reporting date to determine whether there

is any indication of impairment. If any such indication

exists, the asset’s recoverable amount is estimated.

An impairment loss is recognised whenever the carrying

amount of an asset or its cash-generating unit exceeds its

recoverable amount. A cash-generating unit is the smallest

identifiable asset group that generates cash flows that

largely are independent from other assets and groups.

Impairment losses are recognised in the income statement.

Impairment losses are recognised in respect of cash-

generating units to reduce the carrying amount of other

assets in the unit on a pro rata basis.

Calculation of recoverable amount

The recoverable amount of the bank’s investments in held-

to-maturity securities is calculated as the present value of

estimated future cash flows, discounted at the original

effective interest rate (i.e. the effective interest rate

computed at initial recognition of these financial assets).

Receivables with a short duration are not discounted.

The recoverable amount of other assets is the greater of

their net selling price and value in use. In assessing value in

use, the estimated future cash flows are discounted to their

present value using a pre-tax discount rate that reflects

current market assessments of the time value of money

and the risks specific to the asset. For an asset that does

not generate largely independent cash inflows, the

recoverable amount is determined for the cash-generating

unit to which the asset belongs.

Reversals of impairment

In respect of other assets, impairment losses recognised in

prior periods are assessed at each reporting date for any

indications that the loss has decreased or no longer exists.

An impairment loss is reversed if there has been a change

in the estimates used to determine the recoverable amount.

An impairment loss is reversed only to the extent that the

asset’s carrying amount does not exceed the carrying

amount that would have been determined, net of

depreciation or amortisation, if no impairment loss

had been recognised.

(l) DEPOSITS AND BORROWINGS

Deposits and borrowings are the bank’s sources of debt

funding. Deposits and borrowings are measured at fair

value plus transaction costs, and subsequently measured

at their amortised cost using the effective interest method.

(m) PROVISIONS

A provision is recognised in the balance sheet when the

bank has a present legal or constructive obligation as a

result of a past event, and it is probable that an outflow of

economic benefits will be required to settle the obligation.

(n) FINANCIAL GUARANTEES

Financial guarantees are contracts that require the bank to

make specified payments to reimburse the holder for a loss

it incurs because a specified debtor fails to make payment

when due in accordance with the debt instrument.

Financial guarantee liabilities are initially recognised at their

fair value, and the initial fair value is amortised over the life

of the financial guarantee. The guarantee liability is

subsequently carried at the higher of this amortised cost

and the present value of any expected payment (when a

payment under the guarantee has become probable).


(o) EMPLOYEE BENEFITS

(i) DEFINED CONTRIBUTION PLANS

Obligations for contributions to defined contribution

pension plans are recognised as an expense in the

income statement as incurred.

(ii) SHORT-TERM BENEFITS

Short-term employee benefit obligations are measured

on an undiscounted basis and are expensed as the

related service is provided. A provision for accrued

leave is raised for leave, which has accrued to staff,

and for which the company is liable.

(p) EXPENSES

OPERATING LEASE PAYMENTS

Payments made under operating leases are

recognised in the income statement on a straight-

line basis over the term of the lease. Lease

incentives received are recognised in the income

statement as an integral part of the total

lease expense.

(q) INCOME TAX

Income tax expense comprises current and deferred tax.

Income tax is recognised in the income statement except

to the extent that it relates to items recognised directly in

equity, in which case it is recognised in equity.

Current tax is the expected tax payable on the taxable

income for the year, using tax rates enacted or

substantively enacted at the reporting date, and any

adjustment to tax payable in respect of previous years.

Deferred tax is recognised using the balance sheet

method, providing for temporary differences between the

carrying amounts of assets and liabilities for financial

reporting purposes and the amounts used for taxation

purposes. Deferred tax is not recognised for the following

temporary differences: the initial recognition of assets or

liabilities that affect neither accounting nor taxable profit.

Deferred tax is measured at the tax rates applied to the

temporary differences when they reverse, based on the

laws that have been enacted or substantively enacted at

the reporting date.

A deferred tax asset is recognised to the extent that it is

probable that future taxable profits will be available against

which the temporary difference can be utilised. Deferred

tax assets are reviewed at each reporting date and are

reduced to the extent that it is no longer probable that the

related tax benefit will be realised.

Additional income taxes that arise from the distribution of

dividends are recognised at the same time as the liability to

pay the related dividend.

(r) EARNINGS PER SHARE

The bank presents basic and diluted earnings per share

(EPS) data for its ordinary shares. Basic EPS is

calculated by dividing the profit or loss attributable to

ordinary shareholders of the bank by the weighted

average number of ordinary shares outstanding during

the period. Diluted EPS is determined by adjusting the

profit or loss attributable to ordinary shareholders and

the weighted average number of ordinary shares

outstanding for the effect of all diluted potential ordinary

shares, which comprise convertible notes and share

options granted to employees.

(s) CONTINGENCIES AND COMMITMENTS

Transactions are classified as contingencies where the

bank’s obligations depend on uncertain future events

and principally consist of third party obligations

underwritten by banking operations.

Items are classified as commitments where the bank

commits itself to future transactions or if the items will

result in the acquisition of assets.




2006 2005

R R

1. CASH AND SHORT-TERM FUNDS

Balances with other Banks and cash on hand 588 462 546 492 523 536

Maturity analysis

On demand to one month 484 012 546 447 948 536

One month to six months 102 900 000 44 425 000

Six months to one year 1 550 000 150 000

Greater than one year 0 0

588 462 546 492 523 536

2. INVESTMENT SECURITIES

Interest bearing Government bonds 121 775 027 187 006 289

Treasury bills 0 0

121 775 027 187 006 289

Maturity analysis

On demand to one month 0 0

One month to six months 0 89 980 247

Six months to one year 0 0

Greater than one year 121 775 027 97 026 042

121 775 027 89 980 247

3. OTHER ASSETS

Taxation overpaid 257 586 235 815

Other assets 8 248 796 1 893 754

8 506 382 2 129 569

4. DERIVATIVE ASSETS HELD FOR RISK MANAGEMENT

Forward exchange contracts 5 111 141 2 206 518

5 111 141 2 206 518


2006 2005

R R

5. DEFERRED TAXATION

Tax effect of timing differences between tax and book values of

-provisions for doubtful advances ( 92 251) ( 102 981)

-other accruals and provisions 698 020 429 120

-fixed asset allowances ( 30 902) ( 16 313)

Deferred taxation asset 574 867 309 826

Deferred taxation reconciliation

Balance at beginning of year 309 826 422 455

Reduction in tax rate 0 ( 14 082)

Income statement charge 265 041 ( 98 547)

Balance at end of year 574 867 309 826

6. ADVANCES

Overdrafts 288 363 270 189 468 315

Loans 153 779 029 122 380 842

Staff loans 748 682 741 860

Commercial loans 135 714 397 90 826 598

Trust receipts 17 315 950 30 812 384

Bills receivable 438 436 3 500 000

Foreign bills purchased 24 248 164 14 791 788

466 828 899 330 140 945

Specific impairment (See note 7.1) (2 595 113) (1 446 503)

Portfolio impairment (See note 7.2) ( 107 487) ( 768 086)

464 126 299 327 926 356

Maturity analysis



Six months to one year 16 544 436 24 072 155

Greater than one year 90 410 682 31 393 660

464 126 299 327 926 356

Interest rates charged on clients advances range between 8.5% and 13.5%

Islamic Banking advances are included in advances.




2006 2005

R R

7. IMPAIRMENT OF ADVANCES

7.1 Specific impairment

Balance at beginning of year 1 446 503 1 724 752

Amounts written off, net of recoveries and other transfers (see note 7.3) 1 824 731 100 043

Write-offs (676,121) ( 378 292)

Balance at end of year 2 595 113 1 446 503

7.2 Portfolio impairment


Amounts written off, net of recoveries and other transfers (see note 7.3) ( 637 944) 71 655

Write-offs (22,655) ( 7 756)

Balance at end of year 107 487 768 086

7.3 Income statement charge

Provisions raised during the year

-Specific Impairment 1 824 731 100 043

-Portfolio Impairment ( 637 944) 71 655

1 186 787 171 698

-Write-offs 0 0

-Recoveries ( 676 121) ( 1 515)

510 666 170 183


8. PROPERTY AND EQUIPMENT

Accumulated Net carrying

Cost depreciation value

R R R

2006

Buildings 8 619 201 0 8 619 201

Furniture & fittings 4 510 898 (3 034 069) 1 476 829

Office equipment 2 533 396 (1 697 589) 835 807

Motor vehicles 1 546 486 ( 796 914) 749 572

Computers 4 791 332 (3 529 268) 1 262 064

22 001 313 (9 057 840) 12 943 473

Accumulated Net carrying

Cost depreciation value

R R R

2005

Buildings 8 408 751 0 8 408 751

Furniture & fittings 4 383 981 (2 747 864) 1 636 117

Office equipment 2 400 252 (1 367 357) 1 032 895

Motor vehicles 1 386 032 ( 708 749) 677 283

Computers 4 710 875 (2 966 572) 1 744 303

21 289 891 (7 790 542) 13 499 349

Opening Closing

carrying carrying

value Additions Disposals Depreciation value

R R R R R

2006 movements

Buildings 8 408 751 210 450 0 0 8,619,201

Furniture & Fittings 1 636 117 253 698 ( 19 358) ( 393 629) 1,476,828

Office equipment 1 032 895 163 736 ( 19 043) ( 341 781) 835,807

Motor vehicles 677 283 378 641 ( 21 116) ( 285 236) 749,572

Computers 1 744 303 130 705 ( 1 762) ( 611 181) 1,262,065

13 499 349 1 137 230 ( 61 279) (1 631 827) 12 943 473




Opening Closing

carrying carrying

value Additions Disposals Depreciation value

R R R R R

2005 movements

Buildings 6 357 863 1 504 156 546 732 8 408 751

Furniture & Fittings 1 262 800 694 118 ( 320 801) 1 636 117

Office equipment 402 312 805 834 ( 175 251) 1 032 895

Motor vehicles 783 699 132 003 ( 238 419) 677 283

Computers 773 560 1 487 410 ( 16 144) ( 500 523) 1 744 303

9 580 234 4 623 521 (16 144) (688 262) 13 499 349

Buildings comprise the following:

1. Erf no. 1246, Jan Hofmeyr Road, Westville.

2. 39 Rooikoppies, 23 Leander Crescent, Westville.

3. Section numbers 15 and 28, Cedar Ridge, Jan Hofmeyr Road, Westville.

4. Section 11, Arbor Glade, Musgrave, Durban

5. Section 22, Berkley Close, Houghton, Johannesburg

6. Section 4, The Patio, Linden Road, Sandton.

2006 2005

R R

9. ORDINARY SHARE CAPITAL

Authorised

10 000 000 Ordinary shares of R1 each 10 000 000 10 000 000

Issued

10 000 000 Ordinary shares of R1 each 10 000 000 10 000 000

Acquisition date:

13 December 2004

11 October 2004

16 January 1996

21 July 1997

14 March 2001

31 December 2000


2006 2005

R R

10. NON-DISTRIBUTABLE RESERVES

Regulatory reserve 7 908 294 6 029 982

Due to the requirements of Regulation 28 of the Banks Act of 1990, that specifies the minimum general and

specific provisions to be held, a Regulatory Reserve has been created, by re-allocating distributable reserves to

non-distributable reserves.

General reserve 25 000 000 17 000 000

The reserve has been created specifically for the retention of capital.

11. DEPOSITS AND OTHER ACCOUNTS

Deposits and loans from banks 123 265 527 56 522 245

Demand deposits 416 827 611 361 369 733

Savings deposits 22 298 595 60 858 513

Fixed deposits 207 246 169 144 586 545

Notice deposits 310 619 769 301 637 310

1080 257 671 924 974 346

Maturity analysis



Six months to one year 4 906 450 4 283 576

Greater than one year 0 0

1080 257 671 924 974 346

Islamic Banking deposits are included in deposits and other accounts.




2006 2005

R R

12. PROVISION


Provisions made during the period 364 000 324 300

Balance at end of year 1 360 700 996 700

The provision is solely made up of the provision for leave pay. This provision is raised for leave which has

accrued to employees and for which the company is liable.

13. OTHER LIABILITIES

Creditors and other accounts payable 13 948 906 6 498 458

13 948 906 6 498 458

14. DERIVATIVE LIABILITIES HELD FOR RISK MANAGEMENT

Forward exchange contracts 5 111 141 2 206 518

5 111 141 2 206 518

15. OTHER INCOME

Commissions and fees 28 516 662 25 237 078

28 516 662 25 237 078


2006 2005

R R

16. OPERATING EXPENSES

Operating expenses include :

Directors emoluments (see note 27) 2 596 534 2 437 132

-for services as directors 864 000 853 500

-for other services 1 732 534 1 583 632

Auditors remuneration 479 400 407 950

-audit 440 000 382 940

-for other services 0 23 410

-underprovision prior year 39 400 1 600

Depreciation 1 631 827 688 262

Retirement benefit costs 1 943 762 1 384 842

Operating leases 1 943 762 1 633 186

-premises 1 520 971 1 350 323

-equipment 422 791 282 863

Staff costs 13 066 388 12 645 500

The management fee is paid to Habib Bank AG Zurich, the bank’s holding company.




2006 2005

R R

17. TAXATION

17.1 South African normal taxation

Current 8 397 200 8 162 573

Deferred ( 265 041) 112 629

Secondary taxation on companies 1 162 500 712 500

9 294 659 8 987 702

Other taxation

-unclaimable value added tax 5 520 218 922 635

-skills development levy 87 668 31 275

-regional services council levy 99 759 164 244

5 707 645 1 118 154

Total taxation 15 002 304 10 105 856

17.2 Reconciliation of tax charge

SA Normal taxation 29.00% 29.00%

Standard rate affected by :

- non-deductable expenses (5.22%) (1.00%)

- secondary taxation on companies 3.40% 2.40%

Effective rate - taxation on income 27.18% 30.40%

Effective rate - total taxation 43.87% 34.18%

17.3 Secondary tax on companies

A contingent liability exists for the payment of STC on future distributions of retained earnings to shareholders of

R 1 990 336 (2005: R 1 988 382). This has been calculated based on the reserves at the end of the year at the

current rate of STC taxation of 12.5%.


2006 2005

R R

18. ORDINARY DIVIDENDS

Final dividend of 93 cents per share

(2005: 57 cents per share) 9 300 000 5 700 000

19. EARNINGS AND HEADLINE EARNINGS PER SHARE

The calculation of earnings per ordinary share is based on net income attributable to ordinary shareholders of

R19 195 896 (2005 : R19 458 619) and a weighted average of 10 000 000 (2005 : 10 000 000) ordinary shares

outstanding. The calculation of diluted earnings per ordinary share is based on net income attributable to ordinary

shareholders of R19 195 896 (2005 : R19 458 619) and a weighted average number of 10 000 000

(2005 : 10 000 000) ordinary shares outstanding after any adjustments for the effects of all dilutive potential

ordinary shares.

20. CASH FLOW INFORMATION

20.1 Cash receipts from customers

Interest income 89 882 517 72 305 230

Other income 28 516 662 25 237 078

118 399 179 97 542 308

20.2 Cash paid to customers, employees and suppliers

Interest expenses (40 781 864) (28 405 547)

Other payments (41 328 127) (39 099 121)

(82 109 991) (67 504 668)

20.3 Cash available from operating activities

Net income before tax 34 198 200 29 564 475

Adjusted for non-cash items

-Specific debt provision 1 148 610 ( 278 249)

-General debt provision ( 660 599) 63 899

-Depreciation 1 631 827 688 262

-Profit on disposal of property and equipment ( 28 850) ( 747)

36 289 188 30 037 640




2006 2005

R R

20.4 Taxation paid

Amounts over / (unpaid) at beginning of year 235 815 120 037

Income statement charge (15 267 345) (9 993 227)

Amounts (over)/ unpaid at end of year (257 586) ( 235 815)

(15 289 116) (10 109 005)

20.5 Increase in income-earning funds and other assets

Loans and advances (136 687 954) (94 817 118)

Government securities and money market assets 65 231 262 (94 739 888)

Other assets (9 259 665) 11 314 843

(80 716 357) (178 242 163)

20.6 Increase in deposits and other liabilities

Deposits 155 283 325 237 587 197

Creditors and other liabilities 10 719 071 (19 893 601)

166 002 396 217 693 596

21. CONTINGENT LIABILITIES

Letters of credit 69 971 762 86 978 034

Guarantees issued on behalf of customers 57 010 660 79 731 847

126 982 422 166 709 881

22. PRINCIPAL FOREIGN CURRENCY CONVERSION RATES

One South African rand equals

Swiss franc 0.174 0.208

United States dollar 0.142 0.158

Pound sterling 0.072 0.092


2006 2005

R R

23. FINANCIAL INSTRUMENTS

23.1 Credit risk management

Significant credit exposures at 31 December 2006 are:

Advances 464 126 299 327 926 356

Contingent liabilities 126 982 422 166 709 881

591 108 721 494 636 237

Credit risk is managed by the bank by ensuring that advances are made to reputable customers and exposures

are reviewed on a regular basis by management.

23.2 Currency risk management

The bank did not have any significant foreign currency exposure at 31 December 2006.

23.3 Derivative instruments

Nominal value of forward exchange

contracts sold to customers 131 758 034 131 412 110

Nominal value of forward exchange

contracts sold to banks 0 475 645

Nominal value of forward exchange contracts

purchased from customers 0 475 250

Nominal value of forward exchange contracts

purchased from banks 131 437 890 131 091 357




Greater than

On demand 1-6 months 6-12 months 12 months Total

R R R R R

23.4 Liquidity risk management

Assets

Investment securities 0 0 0 121 775 027 121 775 027

Advances 326 931 153 30 240 028 16 544 436 90 410 682 464 126 299

Other assets 13 343 248 0 0 274 275 13 617 523

Cash and short term funds 484 012 546 102 900 000 1 550 000 0 588 462 546

824 286 947 133 140 028 18 094 436 212 459 984 1 187 981 395

Liabilities

Deposits and other accounts (985 727 971) (89 623 250) (4 906 450) 0 (1 080 257 671)

Other liabilities (18 005 052) (1 054 995) 0 0 (19 060 047)

Provisions 0 0 0 (1 360 700) (1 360 700)

(1 003 733 023) (90 678 245) (4 906 450) (1 360 700) (1 100 678 418)

Net liquidity gap (179 446 076) 42 461 783 13 187 986 211 099 284 87 302 977

23.5 Interest rate risk management

The bank is exposed to interest rate cash flow risk on its cash and short-term funds, investment securities,

advances and deposits and other accounts. The bank is exposed to floating and fixed rates as follows:

Total book

value

Short-

term

Medium-term Long-term

0 - 31

days

32 - 91

days

92 - 181

days

182 - 365

days

Other Total

R’000 R’000 R’000 R’000 R’000 R’000

Fixed rate items

Assets 384 774 198 112 53 950 8 950 1 987 121 775 384 774

Liabilities (212 805) (145 076) (61 321) (5 555) (853) 0 (212 805)

171 969 53 036 7 371 3 395 1 134 121 775 171 969

Variable items

Assets 770 332 770 332 770 332

Liabilities (555 999) (555 999) (555 999)

214 333 214 333 214 333

Net repricing gap 386 302 267 369 7 371 3 395 1 134 121 775 386 302


23.6 Sensitivity analysis

In managing interest rate risk the bank aims to reduce the impact of short-term fluctuations on the bank’s

earnings. Over the longer term however, permanent changes in interest rates would have an impact on earnings.

It is estimated that as at 31 December 2006, a general increase of 1% in the interest rate would increase the

bank’s profit by R120 000 (2005: R39 000) and a general decrease of 1% in the interest rate would decrease the

bank’s profit by R223 000 (2005: R137 000).

23.7 Fair values

The fair values together with the carrying amounts shown in the balance sheet are as follows:

Government bonds

Carrying Carrying

value Fair value value Fair value

2006 2006 2005 2005

R R R R

121 775 027 120 557 275 187 006 289 188 443 102

Net gain / (loss) (1 217 752) 1 436 813

Effective interest rates vary between 7.1% and 8.9%.

Advances and deposits

The fair value of these financial instruments cannot be reliably measured as they are unquoted.

24. RETIREMENT BENEFIT COSTS

All full-time permanent employees are members of the Old Mutual Orion Provident Fund, which is a defined

contribution fund, and is governed by the Pension Funds Act of 1956. Membership of this fund has been

compulsory since the incorporation of the bank in November 1995.




25. OPERATING LEASE COMMITMENTS

Buildings Equipment Total

R R R

2006

Not later than 1 year 1 413 735 373 533 1 787 268

Between 1 and 5 years 5 180 883 1 245 965 6 426 848

Later than 5 years 0

6 594 618 1 619 498 8 214 116

2005

Not later than 1 year 961 017 316 282 1 277 299

Between 1 and 5 years 2 264 679 1 546 559 3 811 238

Later than 5 years 892 223 892 223

4 117 919 1 862 841 5 980 760

The bank leases office buildings and office equipment under operating leases. The leases on the various buildings

run for a period of 3 to 8 years with an annual escalation of 10%. The leases on office equipment run for a period

of 5 years with an annual escalation of 15%.

26. RELATED PARTIES

26.1 Identity of related parties

The holding company of HBZ Bank Limited is Habib Bank AG Zurich, incorporated in Switzerland which holds

100% (2005 : 100%) of the company’s ordinary shares.

Fellow subsidiaries include Habib European Bank Ltd and Habib Canadian Bank. Fellow associates include

HBZ Finance Ltd.

The directors of HBZ Bank Limited are listed under the section entitled Directorate.

All related party transactions were made on terms equivalent to those that prevail in an arm’s length transaction.


2006 2005

R R

26.2 Material related party transactions

Material transactions with the company

Dividends paid to the holding company - see the directors’ report

Directors’ emoluments - see note 27

Material transactions with the group

Receivables due from group companies:

- Habib Bank AG Zurich, Zurich 2 375 747

- Habib Bank AG Zurich, London 5 738 218 297 447

- HBZ Finance Ltd, Hong Kong 3 219 3 382

- Habib Canadian Bank, Canada 4 664 4 211

5 748 476 305 787

These receivables all relate to short-term receivables with no fixed terms of repayments.

Payables due to group companies:

- Habib Bank AG Zurich, Zurich ( 340 904) ( 358 088)

- Habib Bank AG Zurich, London (100 553 586) (55 836 333)

- Habib Bank AG Zurich, Nairobi ( 55 883) ( 100 123)

- Habib European Bank Ltd, Isle of Man (22 231 240) ( 1 415)

(123 181 613) (56 295 959)

These payables balances related to short-term payables with no fixed terms of repayment. The time accounts

attract an interest charge linked to the overnight libor rate and the nostro accounts an interest charge based on the

daily call rate.

The highest outstanding balance for these borrowings during the current financial year were:

- Habib Bank AG Zurich, Zurich (1 858 088)

- Habib Bank AG Zurich, London (161 178 494)

- Habib Bank AG Zurich, Nairobi (1 009 329)

- Habib European Bank Ltd, Isle of Man (39 292 378)




27. DIRECTORS’ REMUNERATION

Executive Non-executive Total

2006 2005 2006 2005 2006 2005

R R R R R R

Directors’ emoluments 1 816 534 1 657 132 780 000 780 000 2 596 534 2 437 132

- For services as directors of

the company 84 000 73 500 780 000 780 000 864 000 853 500

- For other services 1 732 534 1 583 632 0 0 1 732 534 1 583 632

Pensions to directors 0 0 0 0 0 0

- For services as directors of

the company

0 0 0 0

Total directors’ remuneration

(see note 16) 1 816 534 1 657 132 780 000 780 000 2 596 534 2 437 132

The directors do not have service contracts with HBZ Bank.

2006 2005

R R

Interest and charges received from group companies:

- Habib Bank AG Zurich, London 0 661

Interest and charges paid to group companies:

- Habib Bank AG Zurich, Zurich 308 32 913

- Habib Bank AG Zurich, London 5 425 072 3 294 645

- Habib Bank AG Zurich, Nairobi 637 4 465

- Habib European Bank Ltd, Isle of Man 1 044 213 56

- Habib Canadian Bank, Canada 70 0

6 470 300 3 332 079


28. LOANS TO DIRECTORS

Staff Loan

C Harvey

(Financial Director)

Balance 1 January 2006 61 928

Advance 0

Interest charged 2 753

Repayment (37 200)

Balance 31 December 2006 27 481

ob

servation


29. EFFECT OF STANDARDS ISSUED BUT NOT YET EFFECTIVE

IFRS 7 - Financial instruments

The disclosures provided in respect of financial instruments in the financial statements of the bank for the period

ending 31 December 2007, as well as comparative information, will be compliant with IFRS 7. The disclosure

requirements of IFRS 7 require additional disclosure compared to that required in terms of existing IFRS in respect

of the following:

· Credit risk;

· Market risk;

· Liquidity risk; and

· Capital objecties and policies.

The adoption of IFRS 7 will not have an impact on the accounting policies adopted for financial instruments.

30. STANDARDS EFFECTIVE FOR DECEMBER 2006 YEAR ENDS

Standards effective for December 2006 year ends include IAS 39, Amendments to financial guarantees

and fair value options.




Relocation of

assets

secured Risk

Risk Off-balance by pledge of weighted Credit risk

weightings Assets items deposits assets Credit risk exposure

2006 2006 2006 2006 2006 2005

R’000 R’000 R’000 R’000 R’000 R’000

0% 138 082 69 745 130 488 338 315 0 0

5% 0 0 0

10% 0 0 0

20% 498 096 0 4 993 503 089 100 618 70 059

50% 0 0 73 120

100% 506 554 57 295 ( 135 481) 428 368 428 368 406 867

0 0 0

1 142 732 127 040 0 1 269 772 528 986 550 046

Counterparty risk exposure 1 158 365

Large exposure risk 8 168 0

538 312 550 411

Risk weighted capital requirement - 10% 53 831 55 041

Qualifying share capital and unimpaired reserve funds 81 173 72 193

Qualifying share capital and unimpaired reserve funds as a

percentage of risk weighted assets 15% 13%

Note: The assets and off balance sheet items indicated in this statement are the average for the quarter ended

31 Decemebr 2006, as per regulation 23 of the Banks Act of 1990.


CAPITAL ADEQUACY STATEMENT


INTERNATIONAL NETWORK

1. UNITED ARAB EMIRATES Habib Bank AG Zurich 8 Branches 5 in Dubai,

2 in AbuDhabi, Sharjah

2. UNITED KINGDOM Habib Bank AG Zurich 10 Branches 6 in London,

Manchester, Glasgow,

Leicester, Birmingham

3. KENYA Habib Bank AG Zurich 4 Branches 3 in Nairobi, Mombasa

4. SWITZERLAND Habib Bank AG Zurich 1 Branch Zurich

5. PAKISTAN Habib Metropolitan Bank 82 Branches Various

6. SOUTH AFRICA HBZ Bank Limited 5 Branches 2 in Durban, Johannesburg,

Lenasia, Laudium

7. ISLE OF MAN Habib European Bank Ltd 1 Branch Douglas

8. CANADA Habib Canadian Bank 2 Branches Mississauga, Scarborough

(both in Toronto Area)

9. HONG KONG HBZ Finance Ltd Representative Office Hong Kong

10. EGYPT Habib Bank AG Zurich Representative Office Cairo

11. BANGLADESH Habib Bank AG Zurich Representative Office Dhaka


LIST OF SERVICES

THE RANGE OF SERVICES PRESENTLY AVAILABLE

IN SOUTH AFRICA INCLUDE:

• Savings Accounts

• Current Accounts

• Term Deposit Accounts

• Overdraft Facilities

• Commercial Loans

• Bill Discounting

• Letters of Guarantee

• Foreign Exchange

• Foreign Drafts

• Import and Export Letter of Credit

• Documentary Collections

• Trade Finance

• Travellers Cheques

THE RANGE OF SERVICES PRESENTLY AVAILABLE

IN THE SOUTH AFRICAN ISLAMIC BANKING DIVISION INCLUDE:

• Savings Accounts

• Current Accounts

• Investment Certificate Accounts

• Murabaha Facilities (Trade Finance)

• Ijarah (Leasing)

• Diminishing Musharaka (Property Finance)

• Letters of Guarantee

• Foreign Exchange

• Import Letter of Credit

• Documentary Collections


OTHER SERVICES AVAILABLE THROUGH

THE GLOBAL NETWORK INCLUDE:

Personal and Private Banking Services:

• International Portfolio Management

• Financial Advisory Services

• Trustee Services

• Credit Cards


• Safe Deposit Lockers and Custodial Services

Corporate Banking Services:

• Overdraft Facilities

• Commercial Loans

• Foreign Exchange Dealings

• Trade Finance

• Import and Export Letter of Credit

• Bills Discounting

• Global Remittances

• Bullion and Silver Dealing

• Dealings in Securities, Bonds and Stocks

• Treasury Services

With the benefit of decades of experience in understanding and satisfying the varied financial needs of customers

spread across the globe, the Group has developed a wide spectrum of quality products and services throughout

its global network of branches, subsidiaries and affiliates.

6733 Photography by Dave Dancer, Design by www.growgraphics.co.za

purpose

HBZ Bank Limited...HBZ Bank Limited ANNUAL REPORT 2006 (A SUBSIDIARY OF HABIB BANK AG ZURICH) We...

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Transcript of HBZ Bank Limited...HBZ Bank Limited ANNUAL REPORT 2006 (A SUBSIDIARY OF HABIB BANK AG ZURICH) We...