THE BANK OF KHYBER BALANCE SHEET AS AT DECEMBER 31, 2006 Note 2006 2005 Rupees in '000 (Restated) 1,574,531

3,755,151 2,493,430 8,565,483 9,219,391 142,002 96,288 1,364,984 27,211,260 1,618,521 2,510,190 1,552,190 7,698,406 10,589,737 140,206 73,342 891,345 25,073,937

ASSETS Cash and balances with treasury banks Balances with other banks Lendings to financial institutions Investments Advances Operating fixed assets Deferred tax assets Other assets

7 8 9 10 11 12 13 14

LIABILITIES Bills payable Borrowings Deposits and other accounts Sub-ordinated loans Liabilities against assets subject to finance lease Deferred tax liabilities Other liabilities NET ASSETS REPRESENTED BY Share capital Reserves Unappropriated profit Surplus on revaluation of securities

15 16 17

18

150,435 4,325,809 19,076,564 629,496 24,182,304 3,028,956

119,308 4,374,154 17,452,170 631,533 22,577,165 2,496,772

19

20

2,000,949 758,290 103,890 2,863,129 165,827 3,028,956

1,231,034 639,543 176,089 2,046,666 450,106 2,496,772

CONTINGENCIES AND COMMITMENTS

21

The annexed notes from 1 to 41 form an integral part of these financial statements.

Managing Director

Director

Director

Director

THE BANK OF KHYBER PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED DECEMBER 31, 2006 Note 2006 2005 Rupees in 000 (Restated) 1,943,335 1,304,742 638,593 346,655 10,000 356,655 281,938 1,416,322 908,085 508,237 232,357 (2,013) 230,344 277,893

Mark-up/Return/Interest Earned Mark-up/Return/Interest Expensed Net Mark-up/ Interest Income Provision against non-performing loans and advances Provision for doubtful placement with a financial institution Provision for diminution in the value of investments Bad debts written off directly Net Mark-up/ Interest Income after provisions NON MARK-UP/INTEREST INCOME Fee, Commission and Brokerage Income Dividend Income Income from dealing in foreign currencies Gain on sale of securities Unrealized gain / (loss) on revaluation of investments classified as held for trading Other Income Total non-markup/interest Income

22 23 11.4 9.4 10.3

24

67,883 120,743 12,572 65,079 382 40,018 306,677 588,615

74,977 94,917 12,964 183,580 (89,586) 24,903 301,755 579,648

25

NON MARK-UP/INTEREST EXPENSES Administrative expenses Other provisions/write offs Other charges Total non-markup/interest expenses Extra ordinary/unusual items Share in results of associate before taxation PROFIT BEFORE TAXATION Taxation Current Prior years Deferred PROFIT AFTER TAXATION Unappropriated profit brought forward Profit available for appropriation Basic and diluted earnings per share

26 27

10.6.1

372,129 3,828 375,957 212,658 212,658 12,207 224,865 20,025 3,250 23,275 201,590 201,590 #REF!

361,569 1,581 363,150 216,498 216,498 18,211 234,709 16,833 (775) 16,058 218,651 7,591 226,242 #REF!

28

29

The annexed notes from 1 to 41 form an integral part of these financial statements.

Managing Director

Director

Director

Director

THE BANK OF KHYBER STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2006 Reserves Share capital Note Capital Reserve for Share bonus premium issue Statutory reserve Revenue reserve Revenue Reserve for Reserve for consumer contingencfinancing ies* Total Unappropriated profit TOTAL

------------------------------------------------------------------- Rupees in '000' -------------------------------------------------------------------Balance as at January 01, 2005 Profit for the year Transfer from revenue reserve Transfer to statutory reserve Transfer to reserve against consumer financing Transfer to reserve for issue of bonus shares Balance as at December 31, 2005 Effect of prior period restatement on: Unappropriated profit Transfer to statutory reserve Effect of change in accounting policy on: Transfer from revenue reserve Transfer to reserve for issue of bonus shares Balance as at December 31, 2005 - Restated Transfer from revenue reserve Transfer to reserve for issue of bonus shares Issue of share capital Share premium Transfer to share capital Profit for the year Transfer to statutory reserve Transfer to reserve against consumer financing Balance as at December 31, 2006 5.1.1 1,231,034 409,915 360,000 360,000 (360,000) 204,958 328,939 40,318 183,000 (128,869) 27,604 100,000 639,543 (128,869) 360,000 204,958 (360,000) 40,318 176,089 128,869 (360,000) 201,590 (40,318) 2,046,666 409,915 204,958 201,590 (360,000) 128,869 128,869 (360,000) (128,869) 360,000 (13,760) (13,760) (68,802) 13,760 (68,802) -

1,231,034 -

285,208 57,491

183,000 (128,869) -

21,182 -

100,000 -

589,390 (128,869) 57,491

7,591 287,453 128,869 (57,491)

1,828,015 287,453 -

1,231,034

360,000 360,000

342,699

54,131

6,422

6,422 360,000 884,434

(6,422) (360,000) -

2,115,468

27,604

100,000

2,000,949

204,958

369,257

54,131

2,340 29,944

100,000

2,340 758,290

(2,340) 103,890

2,863,129

The annexed notes from 1 to 41 form an integral part of these financial statements.

Managing Director

Director

Director

Director

THE BANK OF KHYBER CASH FLOW STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2006 Note 2006 2005 Rupees in '000 (Restated) CASH FLOW FROM OPERATING ACTIVITIES Profit/(Loss) before taxation Less: Dividend income Adjustments: Depreciation Amortization Provision against non-performing advances Unrealized gain / (loss) on revaluation of investments classified as held for trading Provision against doubtful placement with financial institution Provision for Diminution in the value of investments/ other assets Loss/ (Gain) on sale of fixed assets Share in results of an associate Fixed assets adjustment 224,865 120,743 104,122 16,534 1,768 346,051 (382) 10,000 (634) (12,207) 361,130 465,252 (127,810) 1,024,295 (453,600) 442,885 31,127 (48,345) 1,624,394 (2,037) 1,605,139 2,513,276 (67,619) 2,445,657 234,709 94,917 139,792 18,353 2,201 232,357 89,586 (2,013) (1,155) (18,211) (147) 320,971 460,763 1,127,498 (1,715,415) 299,609 (288,308) (901,586) 193,901 1,620,858 (42,913) 870,260 1,042,715 (65,703) 977,012

(Increase)/ Decrease in operating assets Lendings to financial institutions Advances Others assets (excluding advance taxation) Increase/ (Decrease) in operating liabilities Bills Payable Borrowings Deposits and other accounts Other liabilities (excluding current taxation) Cash generated from operations Income tax paid Net cash flow from operating activities CASH FLOW FROM INVESTING ACTIVITIES Net investments in held for trading securities Net investments in available-for-sale securities Net investments in held-to-maturity securities Dividend income Investments in operating fixed assets Sale proceeds of property and equipment disposed-off Net cash used in investing activities CASH FLOW FROM FINANCING ACTIVITIES Issue of share capital Net cash flow from financing activities Increase/(Decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of the year The annexed notes from 1 to 41 form an integral part of these financial statements.

238,359 (1,862,114) 485,938 121,153 (21,122) 1,657 (1,036,129)

(338,593) (525,166) 67,237 95,117 (33,885) 1,956 (733,334)

614,873 614,873 2,024,401 5,488,711 7,513,112

243,678 5,245,033 5,488,711

29 29

Managing Director

Director

Director

Director

THE BANK OF KHYBER NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006 1. STATUS AND NATURE OF BUSINESS The Bank was established under The Bank of Khyber Act, 1991 (N.W.F.P. Act No. XIV of 1991) and is principally engaged in the business of commercial, investment and development Banking. The Bank acquired the status of a scheduled bank in 1994. The Bank is listed on the Karachi Stock Exchange (KSE). The registered office of the Bank is situated at 24 The Mall, Peshawar Cantt, Peshawar. The Bank was operating 29 branches as at December 31, 2006 (2005: 29 branches). 2. 2.1 BASIS OF PRESENTATION In accordance with the directives of the Federal Government regarding the shifting of the banking system to Islamic modes, the State Bank of Pakistan (SBP) has issued various circulars from time to time. One permissible form of trade related mode of financing comprises of purchase of goods by the banks from their customers and resale to them at appropriate mark-up in price on deferred payment basis. The purchases and sales arising under the respective arrangements (except for murabaha financings accounted for under Islamic Financial Accounting Standard - 1 "Murabaha") are not reflected in these financial statements as such but are restricted to the amount of facility actually utilized and the appropriate portion of rental/profit thereon. Following the setting up of the Islamic Banking Division the Bank also provides financing through Shariah compliant modes of financing. The financial results of the Islamic Banking Division have been consolidated in these financial statements for reporting purpose, after eliminating the effects of intra-bank transactions and balances. The bank is conducting Islamic Banking in five (2005: four) of its branches. Key financial figures of the Islamic Banking Division are disclosed in annexure "A" to these financial statements.

2.2

3. 3.1

STATEMENT OF COMPLIANCE These financial statements have been prepared in accordance with the requirements of the Banking Companies Ordinance, 1962, the Companies Ordinance, 1984, the directives issued by SBP including format for the financial statements of banks issued by SBP through BSD Circular No. 04 dated February 17, 2006, and the International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) and interpretations issued by the Standing Interpretation Committee of IASB (the interpretations), as adopted in Pakistan. However, the requirements of the Banking Companies Ordinance, 1962, the Companies Ordinance, 1984 and the directives of the SBP have been followed in case where their requirements are not consistent with the requirements of the IFRSs and the interpretations. The Securities and Exchange Commission of Pakistan (SECP) has approved the adoption of IAS 39 "Financial Instruments: Recognition and Measurement" and IAS 40 "Investment Property". However, SBP through its BSD Circular letter No.10 dated August 26, 2002 has deferred the implementation of these standards for banks in Pakistan till further instructions. Accordingly, the requirements of these standards have not been considered in preparation of these financial statements for the year ended December 31, 2006. However, investments have been classified in accordance with the requirements of various circulars issued by the State Bank of Pakistan.

3.2

4.

BASIS OF MEASUREMENT These financial statements have been prepared under the historical cost convention except for certain financial instruments which have been stated at fair value.

THE BANK OF KHYBER 5. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGMENTS The preparation of financial statements in conformity with approved accounting standards requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized 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.

The areas involving a higher degree of judgment, complexity or areas where assumptions and estimates are significant to the financial statements are disclosed below: 5.1 Classification of investments Investments are classified as disclosed in Note 6.3 to these financial statements. Impairment of available-for-sale equity investments The Bank determines that available-for-sale equity investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. This determination of what is significant or prolonged requires judgment. In making this judgment, the Bank evaluates among other factors, the normal volatility in share prices. In addition, impairment may be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows.

5.2

5.3

Held-to-maturity investments The Bank follows the guidance provided in State Bank of Pakistans circulars on classifying non-derivative financial assets with fixed or determinable payments and fixed maturity as held-to-maturity. In making this judgment, the Bank evaluates its intention and ability to hold such investments to maturity. Provision against non-performing loans and advances The Bank reviews its loan portfolio to assess amount of non performing loans and advances and provision required there against on a quarterly basis. While assessing this requirement various factors including the delinquency in the account, financial position of the borrower, the forced sale value of securities and requirements of the Prudential Regulations are considered. The estimates of forced sale values are supported by independent valuations of the assets mortgaged / pledged. The amount of provision against advances is determined in accordance with the relevant Prudential Regulations. Income taxes While making the estimates for income taxes currently payable by the Bank, the management looks at the current income tax law and the decisions of appellate authorities on certain issues in the past. There are various matters where banks view differs with the view taken by the income tax department and such amounts are shown as contingent liability. Defined benefit plan The cost of the defined benefit plan (gratuity) is determined using actuarial valuations. The actuarial valuation involves making assumptions about discount rates, expected rates of returns on assets, future salary increases and mortality rates. Due to the long term nature of these plans, such estimates are subject to significant uncertainty.

5.4

5.5

5.6

THE BANK OF KHYBER 6. 6.1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Change in accounting policy

6.1.1 During the year the Institute of Chartered Accountants of Pakistan (ICAP) issued a circular No. 06-2006 dated June 19, 2006 which requires that all declarations of dividends to holders of equity instruments including declaration of bonus issues and other appropriations except appropriations which are required by law after the balance sheet date, should not be recognized as liabilities or change in reserves at the balance sheet date. Previously all declarations of dividend to holders of equity instruments and transfers to reserves relating to profit for the year declared subsequent to year end, were accounted for in the year to which those related. This change has been accounted for as a change in accounting policy with retrospective effect in accordance with the treatment specified in International Accounting Standard - 8 "Accounting Policies, Changes in Accounting Estimates and Errors". The effect of this change has been disclosed in the Statement of Changes in Equity.

6.1.2 During the year, the Bank has adopted the Islamic Financial Accounting Standard 1 - "Murabaha" issued by the Institute of Chartered Accountants of Pakistan and notified for adoption by the Securities and Exchange Commission of Pakistan, vide SRO 865(I)/2005 dated August 24, 2005, by all financial insitutions for periods beginning on or after January 01, 2006. Pursuant to the requirements of the said standard, funds disbursed for puchase of goods are recorded as 'Advance against Murabaha'. On culmination of murabaha transaction, i.e. sale of goods to the customer, murabaha financing is recorded at the invoiced amount. Previously, murabaha financing were recorded at the cost of goods sold. Profit on murabaha transactions is recognized on accrual basis whereby profit is recognized over the period of the contract. This change in accounting policy has been applied retrospectively and does not have any impact on current or prior period's profit. Had there been no change in accounting policy, amounts in the following balance sheet line items would have been higher/(lower) by: 2006 2005 Rupees in '000' Loans, cash credits, running finances, etc. Other assets Other liabilities 6.2 (64,840) 22,691 (42,149) (97,367) 34,230 (63,137)

Standards, interpretations and amendments to published approved accounting standards that are not yet effective: The IAS / IFRS / IFRIC interpretations, which have been published and / or revised and are applicable to financial statements of the Bank covering accounting periods on or after January 01, 2007 or later periods are as follows:

a) IAS 1: Presentation of financial statements - Capital disclosures b) IFRIC 11, IFRS 2 Group Treasury Share Transactions c) IFRIC 12 Service Concession Arrangements

effective from January 01, 2007 effective from March 01, 2007 effective from January 01, 2009

Adoption of above amendments would result in an impact on the extent of disclosures presented in the future financial statements of the Bank.

THE BANK OF KHYBER In addition to the above, a new series of standards called International Financial Reporting Standards (IFRS) have been introduced and seven IFRSs have been issued by the IASB. Out of these following four IFRSs have been adopted by Securities and Exchange Commission of Pakistan (SECP) vide its S.R.O. (1) / 2006 dated December 06, 2006: a) IFRS 2 b) IFRS 3 c) IFRS 5 d) IFRS 6 Share-based payments Business combinations Non-current assets held for sale and discontinued operations Exploration for and evaluation of mineral resources

The Bank expects that the adoption of the above-mentioned pronouncements will have no significant impact on the financial statements in the period of initial application. 6.3 Investments

6.3.1 All investments acquired by the Bank are initially recognized at cost, being the fair value of consideration given including acquisition cost. In accordance with the directives of the SBP, quoted and government securities, excluding investments categorized as held to maturity securities, are stated at revalued amounts. Investment in unquoted securities (excluding investment in an associate) are stated at the lower of cost and break-up value. Break-up value is calculated on the basis of net assets of the investee companies according to their latest available audited financial statements. 6.3.2 The Bank classifies its investments as follows: Held to maturity These are securities acquired by the Bank with the intention and ability to hold them upto maturity. In accordance with BSD Circular No. 14 dated September 24, 2004 investments in securities categorized as held to maturity are carried at amortized cost. Held for trading These are investments acquired principally for the purpose of generating profit from short-term fluctuation in prices or dealers margins, or are securities included in a portfolio in which a pattern of short-term profit taking exists. These securities are not held for more than ninety (90) days. Surplus/(deficit) arising on revaluation of held for trading securities is credited / charged to the profit and loss account. Available for sale These are investments that do not fall under the held for trading or held to maturity categories. Surplus/(deficit) arising as a result of revaluation of securities categorized as available for sale is presented below the shareholders equity in the balance sheet. The surplus/(deficit) arising on these securities is taken to the profit and loss account when realized. Investment in associate is accounted for using the equity method of accounting wherein the company's share of underlying net assets of the investee is recognized as the carrying amount of such investment. Difference between the amounts previously recognized and the amount calculated at each year end is recognized in the profit and loss account as share of profits of associate. Distribution received out of such profits is credited to the carrying amount of investment in associated undertaking. Provision for diminution in the value of securities (except TFCs) is made for permanent impairment, if any, in their value. Provision against TFCs is made as per the aging criteria prescribed by Prudential Regulations.

THE BANK OF KHYBER 6.4 Repurchase and resale agreements Securities sold with a simultaneous commitment to repurchase at a specified future date (repos) continue to be recognised in the balance sheet and are measured in accordance with accounting policies for investment securities. The counterparty liability for amounts received under these agreements is included in borrowings from financial institutions. The difference between sale and repurchase price is treated as mark- up/return/interest expense and accrued over the term of the related repo agreement. Securities purchased with a corresponding commitment to resell at a specified future date (reverse repos) are not recognised in the balance sheet, as the bank does not obtain control over the assets. Amounts paid under these agreements are included in lendings to financial institutions. The difference between purchase and resale price is treated as mark-up/return/interest income and accrued over the term of the related reverse repo agreement.

6.5

Advances Advances are stated net of provisions for bad and doubtful debts and are based on the appraisal carried out, taking into consideration the Prudential Regulations issued by the State Bank of Pakistan and where such provision is considered necessary, it is charged to profit and loss account. The Bank also maintains general provision in line with the Banks prudent policies as precautionary provision to hedge against unforeseen contingencies. Advances are written-off when there are no realistic prospects of recovery.

6.5.1 Murabaha Funds disbursed for purchase of goods are recorded as 'Advance for Murabaha'. On culmination of murabaha i.e. sale of goods to customers, murabaha financings are recorded at the invoiced amount. Goods that have been purchased but remained unsold are recorded as inventories. Profit is recorded at the time of sale of goods under murabaha as deferred income and is included in the amount of murabaha financings. Profit is taken to the profit and loss account over the period of the murabaha. 6.5.2 Ijarah In case of ijarah financing, the present value of the ijarah rental is recognized as a receivable. The difference between the gross receivable and the present value of the receivable is recognized as unearned ijarah income. Ijarah income is recognized over the term of the ijarah using the net investment method (before tax), which reflects a constant periodic rate of return. 6.6 Inventories The Bank values its inventories at the lower of cost and net realizable value. Cost of inventories represent the actual purchase made by the customer as an agent on behalf of the Bank from the funds disbursed for the purposes of culmination of murabaha. The net realisable value is the estimated selling price in the ordinary course of business less the estimated cost necessary to make the sale. Operating fixed assets

6.7

6.7.1 Tangible fixed assets Property and equipment, except land and CWIP which are not depreciated, are stated at cost less accumulated depreciation and accumulated impairment, if any. Depreciation on fixed assets is charged to income over the useful life of the asset on a systematic basis by using the reducing balance method at the rates stated in Note 12.2. Depreciation charge commences from the month when the asset is available for use and continues till the month the asset is discontinued either through disposal or retirement. Minor renewals, replacements, maintenance, repairs and gains and losses on disposal of fixed assets are charged to the profit and loss account when incurred. Major renewals and improvements are capitalized.

THE BANK OF KHYBER The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. When the carrying amount of an asset is greater than its estimated recoverable amount it is written down immediately to its recoverable amount. Change in accounting estimate Pursuant to change in IAS-16 'Property, plant and equipment', the Bank has changed its estimate for charging depreciation on assets. Previously, full year's depreciation was charged in the year of addition while no depreciation was charged in the year of disposal. Now the Bank charges depreciation from the month the asset is available for use till the month the asset is derecognized either through disposal or retirement. This change has an immaterial impact on the profits and operating fixed assets reported in the financial statements. 6.7.2 Intangible fixed assets Intangible fixed assets comprise of cost of computer software, which are being amortized using the straight-line method over their useful lives but restricted to a maximum period of five years (Note 12.3). Costs associated with maintaining computer software are recognized as an expense when incurred. 6.7.3 Capital work in progress Capital work in progress is stated at cost. These are transferred to operating fixed assets as and when assets are available for use. 6.8 Taxation

6.8.1 Current Provision for current taxation is based on taxable income at the current rates after considering tax credits and rebates, if any. 6.8.2 Deferred Deferred income tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and any unused tax losses, to the extent that it is probable that taxable profits will be available against which the deductible temporary differences, carry forward of unused tax assets and unused tax losses can be utilised. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Income tax relating to the items recognized directly in equity are recognized in equity.

THE BANK OF KHYBER 6.9 Staff retirement benefits

6.9.1 Defined benefit plan The Bank operates a funded gratuity scheme for all its permanent employees. Contributions are made to the fund in accordance with the rules of the scheme by the Bank. Employees are entitled to the benefits under the scheme which comprise of 2 last drawn basic salaries for each completed year of service. Further, the profit earned through the investments of the fund shall also be credited to the account of each employee on proportionate basis at the end of each year. Contributions to the fund are made on the basis of actuarial recommendations. Actuarial valuation was carried as on December 31, 2006 using the projected unit credit actuarial cost method. Actuarial gains and losses, if any, arising during the year are fully charged to the profit and loss account. The principle actuarial assumptions used in the actuarial valuation comprised of discount rate at 10% per annum, salary increase at 9% per annum, expected return on plan assets at 10% per annum and average expected remaining working life of employees at 14 years. Change in accounting estimate During the year the Bank has changed its accounting estimate for determination of liability regarding defined benefit plan (gratuity). Previously, the liability was determined using the Bank's own estimates based on the lasr drawn salary of each employee at each year end. Now, the liability is determined using actuarial techniques as explained above. This change in accounting estimate has been prospectively applied. Had there been no change in this estimate, the profits for the year (before taxation) would have been higher by Rs. 21.952 million while receivable from gratuity fund would have been lower by the same amount. 6.9.2 Defined contribution plan The Bank operates a recognized contributory provident fund covering all its permanent employees. Equal monthly contributions are made by the Bank and the employees to the fund at a rate of fifteen percent of basic salary.

6.10 Revenue recognition Income on murabaha is accounted for on culmination of murabaha transaction. However, profit not due for payment in the current year is deferred by accounting for unearned murabaha income with a corresponding credit to deferred murabaha income which is recorded as a liability. The same is then recognized as revenue on a time proportionate basis. Return / markup on advances (other than murabaha) and investments is recognized on accrual basis, except the income which is required to be carried forward or taken to "mark-up in suspense account" in compliance with the Prudential Regulations of the SBP. The Bank follows the finance method in recognizing income on ijarah contracts. Under this method the unearned income i.e. the excess of aggregate ijarah rentals over the cost of the asset under ijarah facility is deferred and then amortized over the term of the ijarah, so as to produce a constant rate of return on net investment in the ijarah. Gains / losses on termination of ijarah contracts, documentation charge, front-end fees and other ijarah income are recognized as income on receipt basis. Purchase and sale of investments are recorded on the dates of contract. Gains and losses on sale of investment are also recorded on those dates. Dividends are recognized as income when the right to receive is established. Fee, commission, liquidated damages etc., are recorded on receipt basis except guarantee commission, which is recognized on time proportion basis.

THE BANK OF KHYBER 6.11 Foreign currencies The Bank's financial statements are presented in Pak Rupees (Rs.) which is the Bank's functional and presentation currency. Assets and liabilities in foreign currencies are translated into Pak Rupees at the rates of exchange approximating those prevailing at the balance sheet date except those covered by forward exchange contracts, which are translated at the contracted rates. Consistent with prior years, forward exchange contracts are valued at the rates applicable to the respective maturities of the relevant foreign exchange contracts. Gains or losses on forward exchange contracts outstanding as at the year end are recognized currently. Exchange gains or losses are included in income currently. 6.12 Cash and cash equivalents For purposes of the cash flow statement the cash and cash equivalents comprise of cash and balances with treasury banks, balances with other banks and call lendings and placements with financial institutions having maturities of three (3) months or less. 6.13 Provisions and contingent assets and liabilities Provisions are recognized when the Bank has a present legal or constructive obligation arising as a result of past events and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Contingent assets are not recognized, and are also not disclosed unless the realization of the asset is virtually certain and contingent liabilities are not recognized, and are disclosed unless the probability of outflow of resources embodying economic benefits is remote. 6.14 Financial instruments All the financial assets and financial liabilities are recognized at the time when the bank becomes a party to the contractual provisions of the instrument. Any gain or loss on derecognition of the financial assets and financial liabilities is taken to income currently. 6.15 Derivative financial instruments Derivative financial instruments are initially recognized at their fair value on the date on which the derivative contract is entered into and are subsequently remeasured at fair value. All derivative financial instruments are carried as asset when fair value is positive and liabilities when fair value is negative. Any change in the value of derivative financial instruments is taken to the profit and loss account. 6.16 Trade date accounting All regular way purchases/sales of investment are recognised on the trade date, i.e. the date the Bank commits to purchase/sell the investments. Regular way purchases of sales of investment require delivery of securities within three days after the transaction date as required by stock exchange regulations. 6.17 Off-Setting Financial assets and financial liabilities are only set off and the net amount is reported in the financial statements when there is a legally enforceable right to set off and the bank intends either to settle on a net basis, or to realize the assets and to settle the liabilities simultaneously.

THE BANK OF KHYBER

CASH AND BALANCES WITH TREASURY BANKS In hand Local currency Foreign currency With State Bank of Pakistan in Local currency current account Foreign currency current account Foreign currency deposit account With National Bank of Pakistan in Local currency current account National prize bonds

Note

2006 2005 Rupees in '000 147,461 30,305 177,766 161,558 17,623 179,181 868,450 7,166 21,928 897,544 541,663 133 1,618,521

7.1 & 7.2 7.2 7.2 & 7.3

1,256,789 12,204 33,805 1,302,798 93,067 900 1,574,531

7.1

The current account is maintained under the requirements of section 29 of the Banking Companies Ordinance, 1962 as amended from time to time by the State Bank of Pakistan. These include accounts maintained for mandatory reserve requirements and such balances are not available for use in the Bank's operations. The balance held in the foreign currency deposit account with the SBP represents the 20% (2005: 15%) reserve requirement for holding FE-25 deposits. The rate of return on this account is 4.32% (2005: 3.29%) per annum. BALANCES WITH OTHER BANKS In Pakistan On current account On deposit account Outside Pakistan On current account On deposit account Less: Provision for doubtful placement with a bank Note 2006 2005 Rupees in '000 576,224 2,951,075 181,716 56,164 3,765,179 10,028 3,755,151 514,436 1,901,510 74,415 29,857 2,520,218 10,028 2,510,190

7.2

7.3

8.

8.1

8.2 8.3

8.1

These represent short-term deposits with banks and carry mark-up at the rates ranging from 11.50% to 12.68% per annum (2005: 2.50% to 12.50% per annum) and having maturities upto June 28, 2007 (2005: March 31, 2006). These represent placements of funds with banks outside Pakistan, which have been generated through the foreign currency deposit scheme (FE-25). The placements had been made at the rates ranging from 3.5% to 5.22% per annum (2005: 4.25% per annum) and had maturities upto January 17, 2007 (2005: January 19, 2006).

8.2

THE BANK OF KHYBER

8.3

Provision for doubtful placement with a bank

Note

2006 2005 Rupees in '000 10,028 10,028 10,028 10,028

Balance as at January 01 Charge for the year Reversals Balance as at December 31 9. LENDINGS TO FINANCIAL INSTITUTIONS Repurchase agreement lendings (Reverse Repo) Placements with financial institutions Less: Provision for doubtful placements with financial institutions 9.2 & 9.5 9.3 9.4

310,000 2,194,430 2,504,430 11,000 2,493,430

192,190 1,361,000 1,553,190 1,000 1,552,190

9.1

Particulars of lending In local currency In foreign currencies

2,504,430 2,504,430

1,553,190 1,553,190

9.2

Repurchase agreement lendings (reverse repos) carry interest at the rates ranging from 9.40% to 15% (2005: 7.50% to 13.00%) per annum and had maturities upto June 28, 2007 (2005: January 16, 2006).

9.3

These unsecured placements carry interest at rates ranging from 11.20% to 14% per annum (2005: 10.90% to 14.00% per annum) and have maturities upto March 27, 2007 (2005: March 27, 2006). Provision for doubtful placements with financial institutions Note 2006 2005 Rupees in '000 1,000 10,000 11,000 1,000 1,000

9.4

Balance as at January 01 Charge for the year Reversals Balance as at December 31

THE BANK OF KHYBER

9.5

Securities held as collateral against lending to financial institutions

Held by bank

2006 Further given as collateral -

Total

Held by bank Rupees in '000

2005 Further given as collateral -

Total

Market Treasury Bills Pakistan Investment Bonds Others - Listed securities 9.6 9.6

115,000 195,000 310,000

115,000 195,000 310,000

92,190 100,000 192,190

92,190 100,000 192,190

Aggregate market value of securities held as collateral is Rs.412.462 million as on December 31, 2006 (2005: Rs.. 238.766 million). 2006 Further given as collateral 2005 Further given as collateral

10. 10.1

INVESTMENTS Investments by types Held for trading securities Dawood Money Market fund Fully paid ordinary shares in listed companies

Held by bank

Total

Held by bank Rupees in '000

Total

50,000 50,000

50,000 50,000 3,769,114 1,860,210 243,476 340,039 20,000 15,000 5,000 4,500 30,000 68,673 50,000 50,000 5,000 551,039 80,487 7,092,538 1,033,651 200,010 75,000 1,308,661 78,229 78,229 8,529,428 38,754 8,490,674 74,427 382 8,565,483

338,593 338,593 1,095,081 287,780 243,476 354,899 5,000 4,500 30,000 5,000 172,149 80,487 2,278,372 548,232 200,010 748,242 69,083 69,083 3,434,290 38,754 3,395,536 556,433 (89,586) 3,862,383

338,593 338,593 2,961,940 1,382,119 243,476 354,899 5,000 4,500 30,000 5,000 172,149 80,487 5,239,570 1,594,589 200,010 1,794,599 69,083 69,083 7,441,845 38,754 7,403,091 384,901 (89,586) 7,698,406

Available-for-sale securities Treasury Bills 1,934,359 Pakistan Investment Bonds 10.1.1 145,210 National Investment Trust Units 243,476 Term Finance Certificates 340,039 UTP AAA Fund 20,000 UTP Islamic Fund 15,000 Meezan Balanced Growth Fund 5,000 Pakistan Strategic Allocation Fund 4,500 Pakistan International Element Islamic Fund 30,000 ABAMCO Composite Fund NAMCO Fund 68,673 AMZ Income Fund 50,000 Askari Income Fund 50,000 Alfalah GHP Value Fund 5,000 Fully paid ordinary shares Ordinary shares in listed companies 551,039 Ordinary shares in unlisted companies 80,487 3,542,783 Held-to-maturity securities Pakistan Investment Bonds Wapda Bonds Wapda Sukuk Bonds Associates Ordinary shares in unlisted companies 0.6 1 Investment at cost Less: Provision for diminution in value of investments Investments (Net of Provisions) Surplus/(deficit) on revaluation of Available-for-sale securities Surplus/(deficit) on revaluation of held for trading securities Total investments at market value 1,033,651 200,010 75,000 1,308,661 78,229 78,229 4,979,673 10.3 38,754 4,940,919 334,728 382 5,276,029

1,834,755 1,715,000 3,549,755 3,549,755 3,549,755 (260,301) 3,289,454

1,866,859 1,094,339 2,961,198 1,046,357 1,046,357 4,007,555 4,007,555 (171,532) 3,836,023

23.2

10.1.1 Pursuant to the requirements of BSD Circular no 7, dated May 30, 2006, which allowed a one time reclassification of securities between the three catagories, the bank reclassified Pakistan Investment Bonds amounting to Rs. 537 million from "Held to Maturity" to "Availale for Sale" catagory.

THE BANK OF KHYBER

10.2

Investments by segments Federal Government Securities: Market Treasury Bills Pakistan Investment Bonds Fully Paid up Ordinary Shares: Listed Companies Unlisted Companies Term Finance Certificates: Listed TFCs Unlisted TFCs Other Investments National Investment Trust Units WAPDA Bonds WAPDA Sukuk Bonds UTP Islamic Fund UTP AAA FUND Meezan Balanced Growth Fund Pakistan Strategic Allocation Fund Pakistan International Element Islamic Fund Alfalah GHP Value Fund Dawood Money Market Fund NAMCO Fund AMZ Income Fund Askari Income Fund ABAMCO Composite Fund

Note

2006 2005 Rupees in '000 3,769,114 2,893,861 6,662,975 551,039 158,716 709,755 216,185 123,855 340,040 2,961,940 2,976,708 5,938,648 510,742 149,570 660,312 203,485 151,414 354,899 243,476 200,010 5,000 4,500 5,000 30,000 487,986 7,441,845 38,754 7,403,091 384,901 (89,586) 7,698,406

10.2.2 10.2.3

10.5 10.2.4 10.2.5

10.2.6 Total investment at cost Less: Provision for diminution in value of investment 10.3 Investments (Net of Provisions) Surplus on revaluation of Available-forsale securities 23.2 Deficit on revaluation of held for trading securities Total investments at market value

243,476 200,010 75,000 15,000 20,000 5,000 4,500 30,000 5,000 50,000 68,672 50,000 50,000 816,658 8,529,428 38,754 8,490,674 74,427 382 8,565,483

Federal Government Securities and NIT units, other than those further offerred as collateral, are 10.2.1 held by the Bank to meet Statutory Liquidity Requirements (SLR) of the SBP calculated on the basis of time and demand liabilities. 10.2.2 Market Treasury Bills have a market value of Rs. 3,764.489 million (2005: Rs. 2,955.941 million). These carry returns ranging from 8.49% to 9% per annum (2005: 5.85% to 8.79% per annum) and have maturity periods ranging between Jan 2007 to December 2007 (2005: March 2006 to December 2006). These are held with the SBP and are eligible for rediscounting.

THE BANK OF KHYBER

10.2.3 PIBs under 'available for sale' category have a market value of Rs. 1,603.691 million (2005: Rs. 1,209.346 million). These PIBs carry returns ranging from 7% to14% per annum (2005: 6% to13% per annum) and have maturity periods ranging between October 2008 to October 2013 (2005: October 2006 to October 2013). These are held with the SBP and are eligible for rediscounting. 10.2.4 The WAPDA bonds carry a return of 8.75% per annum (2005: 8.75% per annum) and are maturing in March 2008 (2005: March 2008). WAPDA Sukuk Bonds carry return of 10.89% per annum (2005: Nil) and are maturing in October 10.2.5 2012 (2005: Nil) 10.2.6 The market value of these open ended mutual fund units aggregated to Rs. 1,012.94 million (2005: Rs. 831.992 million) as at December 31, 2006. 10.3 Particulars of provision Note 2006 2005 Rupees in '000 38,754 38,754 40,767 (2,013) 38,754

Opening balance Charge for the year Reversals Closing Balance

10.3.1

10.3.1 Particulars of provision in respect of type and segment Available-for-sale securities Ordinary shares in listed companies Ordinary shares in unlisted companies

8,267 30,487 38,754

8,267 30,487 38,754

THE BANK OF KHYBER

10.4

Information relating to investment in ordinary shares / certificates of listed and unlisted companies / mutual funds, term finance certificates and bonds, which is required to be disclosed as part of the financial statements under State Bank of Pakistan's BSD Circular No. 4 dated February 17, 2006, is disclosed in Annexure "C" to these financial statements. Information relating to quality of available for sale securities is given in annexure "D"

10.5

The cost of investment in 16,055,670 units of National Investment Trust (NIT) as of December 31, 2006 aggregates to Rs. 243.476 million (2005: 243.476 million). The Government of Pakistan through a letter of comfort (LOC) dated August 8, 2001 has undertaken to facilitate NIT in redeeming these units at Rs. 13.70 per unit on the condition that the Bank shall continue to hold all the units for a minimum period of five years from the date of the letter of comfort. An amount of Rs. 476.621 million is included in surplus on revaluation of securities as at December 31, 2006 (2005: Rs. 414.806 million) which represents the difference between the repurchase price of NIT units and their cost. The Government of Pakistan (Ministry of Privitisation) through its letter ref. 2(10)Bkg/PC/97 dated November 27, 2005 had given options to the LOC holders to either acquire proportionate management rights and manage its portion of funds as a separate split fund or to continue with the existing arrangement wherein the funds continue to be managed by National Investment Trust Limited (NITL). In response, the Bank's management has requested the Government of Pakistan (Ministry of Privitisation) to waive off the LOC status on its NIT units and conveyed that accordingly its holding may be split and privatised in accordance with the terms mentioned in the aforementioned instructions for Non-LOC holders. A response from the Government of Pakistan (Ministry of Privitisation) is awaited. However, Government of Pakistan vide its letter dated December 22, 2006 has extended the LOC status upto June 30, 2007. Subsequent to year end, NIT through its letter dated February 23, 2007 has given following options to LOC holders:

Option (a): LOC holders may exercise their option of acquiring the right to manage their funds at same terms as determined by a competitive bidding process for auction of the non-LOC management rights with no discount. Option (b): In the event the above option is not acceptable the LOC holders may either choose: (i) to enter into an agreement with NIT for a stagged redemption spread over period of several years with an initial payment from proceeds of sale of PICIC and PSO shares. (ii) to excerise the redemption option before the expiry of current LOC date with immediate payment at a discount of 10% over and above the normal procedure. The bank has not yet conveyed its concurrance to any of the above referred options as the matter is under consideration by the management.

10.6

Investment in associate Taurus Securities Limited Number of shares held - number Value of investment - rupees in thousands Percentage of investment - percentage Break-up value per share - rupees Latest available financial statements Name of Chief Executive

Note

2006

2005

4,500,001 78,229 33.33 17.38 December 31, 2006 Mr. Zia Hussain

4,500,001 69,083 33.33 15.35 December 31, 2005 Mr. Zia Hussain

THE BANK OF KHYBER

10.6.1 Carrying value of associate under equity method of accounting

Note

2006 (Rupees in '000)

2005

Carrying value of investment as at January 01 Share in profit before taxation of the associate for the year ended December 31 Share in charge for taxation Carrying value of investment as at December 31 10.6.2 Associate key information Assets Liabilities Revenue for the year Profit before taxation for the year Profit after taxation for the year 10.7 27

69,083 12,207 (3,061) 78,229 -

54,777 18,211 (3,905) 69,083

674,212 439,502 109,975 37,855 28,672

1,048,720 842,682 132,955 51,500 41,691

During the year ended December 31, 2005 and during the period upto September 30, 2006, the bank has been carrying out investment trading transactions in respect of a portfolio which was owned by the bank but classified and treated as Advances under Continuous Funding System (CFS) in the year ended December 31, 2005 and during the period from January 2006 to September 30, 2006 as Advances under CFS and partially as Other Assets. Upon identification of the above matter by the management in September 2006, the bank carried out a review of its treasury transactions, investment portfolio and advances under CFS and as a result transferred an aggregate portfolio of Rs 132.12 million, having a market value amounting to Rs.107.52 million to Investments Account from Advances under CFS and Other assets. Consequently, the unrealized loss amounting to Rs.24.6 million relating to the above portfolio has also been recognized in the Profit and Loss Account for the current year. Further, the financial statements for the year ended December 31, 2005 have also been restated to adjust the misclassification of investments which were previously classified as Advances under CFS.

Similarly a portfolio of investments costing Rs. 218.856 million having market value of Rs.173.224 million was misclassified as Available for sale instead of Held for Trading as on December 31, 2005 which resulted in overstatement of profit and loss for the year then ended by Rs. 45.6 million.

In addition to this CFS income and income on securities purchased under resale agreements (Reverse Repo) was overstated by 37.62 million and Rs.2.49 million in 2005 while capital gains and dividend income was understated by 31.74 million and 8.4 million respectively. The same has been reclassified accordingly. The effects of the said restatements on the prior year financial statements are tabulated below: (Rupees in '000) 119,736 75,782 45,632 89,586 37,619 2,485 31,739 8,365

Decrease in advances under CFS Increase in investments Decrease in deficit on revaluation on securities Decrease in profit Decrease in CFS income

Decrease in income on Reverse Repo

Increase in Capital gains Increase in Dividend income

Considering the above, the bank has appointed an independent firm of Chartered Accountants to carry out special audit of its Treasury and Investment Division for the period from January 01, 2005 to September 30, 2006. Pending completion of the special audit, further misclassification/adjustment, if any, would be accounted for in the subsequent year. However, the management believes that with the aforesaid adjustment and restatements, it is not probable that a material misstatement relating to prior or current financial statements would have remained unidentified and unadjusted.

THE BANK OF KHYBER

11.

ADVANCES

Note

2006 Rupees in '000

2005

Loans, cash credits, running finances, etc. In Pakistan 11.8 Outside Pakistan Net investment in ijarah In Pakistan Outside Pakistan

10,140,190 10,140,190 386,600 386,600 94,100 485,803 579,903 2,022 11,108,715 1,889,324 9,219,391

10,460,232 10,460,232 316,597 316,597 191,551 472,212 663,763 691,814 12,132,406 1,542,669 10,589,737

11.2

Bills discounted and purchased (excluding treasury bills) Payable in Pakistan Payable outside Pakistan Financing in respect of continuous funding system Advances - gross 1 Less: Provision for non-performing advances 1.4 Advances - net of provision 11.1 Particulars of advances - net of provision

11.1.1 In local currency In foreign currencies

9,219,391 9,219,391 3,564,233 5,655,158 9,219,391

10,589,737 10,589,737 3,564,233 7,025,504 10,589,737

11.1.2 Short Term ( for upto one year) Long Term ( for over one year)

THE BANK OF KHYBER

11.2

Net investment in Ijarah

Ijarah rentals receivable Residual value Minimum ijarah rentals Profit for future periods Net investment in ijarah 11.3

2006 2005 Not later Not later Total Later than Over Total Later than Over than one one and less five than one five one and less year year years than five years years than five years -----------------------------------------------------------Rupees in '000----------------------------------------------------------------161,519 224,287 2,636 388,442 117,798 203,678 2,595 324,071 153 52,287 52,440 295 39,808 40,103 161,672 276,574 2,636 440,882 118,093 243,486 2,595 364,174 23,524 30,039 719 54,282 24,048 23,459 70 47,577 138,148 246,535 1,917 386,600 94,045 220,027 2,525 316,597

Advances include amounts aggregating to Rs.3,187.646 million ( 2005: Rs.. 2,869.446 million) which have been placed under non-performing status as detailed below:2006 (Rupees in '000) Provision Required Domestic Overseas Total 17,184 27,080 1,845,060 1,889,324 17,184 27,080 1,845,060 1,889,324

Category of Classification Substandard Doubtful Loss

Classified Advances Domestic Overseas Total 293,387 284,451 2,609,808 3,187,646 293,387 284,451 2,609,808 3,187,646

Domestic 17,184 27,080 1,845,060 1,889,324

Provision Held* Overseas -

Total 17,184 27,080 1,845,060 1,889,324

Category of Classification Substandard Doubtful Loss

Domestic

Classified Advances Overseas -

Total 41,886 96,244 2,731,316 2,869,446

2005 (Rupees in '000) Provision Required Domestic Overseas 3,533 26,057 1,513,079 1,542,669 -

Total 3,533 26,057 1,513,079 1,542,669

Domestic 3,533 26,057 1,513,079 1,542,669

Provision Held* Overseas -

Total 3,533 26,057 1,513,079 1,542,669

41,886 96,244 2,731,316 2,869,446

* Adjusted for any amount of liquid assets realizable without recourse to a court of law and the forced sale value of any mortgaged/pledged securities as valued by professional valuers. 11.3.1 The loss category includes balances aggregating Rs. 793.707 million (2005: Rs. 1,075.613 million) forwarded to the National Accountability Bureau for settlement and recovery against which a provision of Rs. 631.556 million (2005: Rs. 677.869 million) is held in accordance with the Prudential Regulations of SBP. Particulars of provision against non-performing advances Specific Opening balance Charge for the year Reversals Closing balance 11.4.1 Particulars of provisions against non-performing advances In local currency In foreign currencies 1,889,324 1,889,324 1,889,324 1,889,324 1,542,669 1,542,669 1,542,669 1,542,669 1,542,669 414,138 (67,483) 1,889,324 2006 General 2005 General -

11.4

Total Specific Rupees in '000 1,542,669 414,138 (67,483) 1,889,324 1,310,312 269,166 (36,809) 1,542,669

Total 1,310,312 269,166 (36,809) 1,542,669

11.4.2

As of December 31, 2006 the Bank has modified the method of computing provision against non-performing advances pursuant to the changes in the Prudential Regulations issued by SBP. In accordance with the revisions in the regulations, the criteria has been amended as follows: - provision required under the substandard category has been raised to 25% from 10% previously - the benefit of forced sales value is allowed for financing facilities of Rs. 10 million and above as compared to Rs. 5 million and above previously, for all facilities other than housing finance facilities under consumer financing. The incremental provision resulting from the aforementioned revisions amounts to Rs. 65.685 million. Had the effect of the aforementioned revisions not been recognized, advances (net of provisions) would have been higher by Rs. 65.685 million whereas the profit for the year would have been higher by Rs.65.685 million and the amount of contingent liabilities as mentioned in Note 20.6 would have been lower by Rs. 22.332 million.

11.5

Details of loans amounting to Rs 500,000 and above written off: In terms of sub-section (3) of section 33A of the Banking Companies Ordinance, 1962 a statement in respect of write off of loans or any other financial relief of Rs 500,000 or above allowed to a person(s) in Pakistan during the year ended December 31, 2006 is enclosed as annexure 'B' to the notes to these financial statements.

THE BANK OF KHYBER

11.6

Particulars of loans and advances to directors, associated companies, etc.

Note

2006 (Rupees in '000)

2005

Debts due by directors, executives or officers of the bank or any of them either severally or jointly with any other persons Balance at beginning of year Loans granted during the year Repayments Balance at end of year 12. OPERATING FIXED ASSETS Capital work-in-progress Property and equipment Intangible assets 12.1 Capital work-in-progress Civil works Office equipments Advances to suppliers and contractors 12.1 12.2 12.3

303,072 55,000 (4,755) 353,317

265,145 43,560 (5,633) 303,072

5,919 133,850 2,233 142,002

6,069 130,135 4,002 140,206

1,237 1,182 3,500 5,919

895 5,174 6,069

THE BANK OF KHYBER

12.2

Property and equipment COST As at January 01, 2006 Additions / (Deletions) As at December 31, 2006 DEPRECIATION As at Charge for the January 01, year / 2006 (Adjustment) Rupees in '000 Free hold land Building on free hold land Building on other land Furniture and fixture Office equipment Vehicles Library books 41,558 11,620 1,964 65,811 88,861 41,108 460 251,382 5,593 (1,095) 13,880 (71) 1,712 (4,349) 87 21,272 (5,515) COST As at January 01, 2005 Additions / (Deletions) As at December 31, 2005 As at January 01, 2005 Rupees in '000 Free hold land Building on free hold land Building on other land Furniture and fixture Office equipment Vehicles Library books 41,558 11,620 1,964 54,829 75,016 36,497 453 221,937 11,464 (482) 14,359 (514) 7,914 (3,303) 7 33,744 (4,299) 41,558 11,620 1,964 65,811 88,861 41,108 460 251,382 7,102 1,401 29,947 43,966 23,401 225 106,042 452 56 4,647 (307) 9,057 (163) 4,117 (2,678) 24 18,353 (3,148) 7,554 1,457 34,287 52,860 24,840 249 121,247 41,558 4,066 507 31,524 36,001 16,268 211 130,135 10 10 10 - 20 10 - 20 20 10 41,558 11,620 1,964 70,309 102,670 38,471 547 267,139 7,554 1,457 34,287 52,860 24,840 249 121,247 406 51 4,585 (861) 8,198 (65) 3,271 (3,566) 23 16,534 (4,492) DEPRECIATION Charge for the year / (Adjustment) 7,960 1,508 38,011 60,993 24,545 272 133,289 41,558 3,660 456 32,298 41,677 13,926 275 133,850 10 10 10 - 20 10 - 20 20 10 As at December 31, 2006 Book Value Depreciation Rate (%)

As at December 31, 2005

Book Value

Depreciation Rate (%)

THE BANK OF KHYBER

12.2.1 Reconciliation of net book values Free hold land Building on free hold land Building on other land Furniture and fixture Office equipment Vehicles Library books Total

---------------------------------------------------------------------Rupees in '000-------------------------------------------------------------Net book value as at January 01, 2005 Additions - Cost Deletions Cost Depreciation Depreciation charge Net book value as at December 31, 2005 Additions - Cost Deletions Cost Depreciation Depreciation charge Net book value as at December 31, 2006

41,558 -

4,518 -

563 -

24,882 11,464

31,050 14,359

13,096 7,914

228 7

115,895 33,744

(452)

(56)

(482) 307 (4,647)

(514) 163 (9,057)

(3,303) 2,678 (4,117)

(24)

(4,299) 3,148 (18,353)

41,558 -

4,066 -

507 -

31,524 5,593

36,001 13,880

16,268 1,712

211 87

130,135 21,272

(406)

(51)

(1,095) 861 (4,585)

(71) 65 (8,198)

(4,349) 3,566 (3,271)

(23)

(5,515) 4,492 (16,534)

41,558

3,660

456

32,298

41,677

13,926

275

133,850

12.2.2 None of the operating fixed assets having original cost of Rs. 1 million or book value of Rs. 0.250 million which ever is less, were disposed off during the year 12.2.3 Building on other land represents the cost of building constructed on a plot of land which is owned by the Government of N.W.F.P. 12.2.4 The fair values of operating fixed assets according to estimates of the management are not materially different from their carrying amounts. 12.3 Intangible assets COST As at January 01, 2006 Additions / (Deletions) As at December 31, 2006 AMORTIZATION As at As at Charge for the January 01, December year 2006 31, 2006 Rupees in '000 Computer software 11,759 11,759 COST As at January 01, 2005 Additions / (Deletions) As at December 31, 2005 As at January 01, 2005 Rupees in '000 Computer software 11,759 11,759 12.3.1 Reconciliation of net book values Net book value as at January 01, 2005 Amortization charge Net book value as at December 31, 2005 Rupees in '000 Computer Software 6,203 (2,201) 4,002 (1,768) 2,234 Amortizatio n charge Net book value as at December 31, 2006 11,759 11,759 5,556 5,556 2,201 2,201 7,757 7,757 4,002 4,002 20 11,759 11,759 7,757 7,757 1,768 1,768 AMORTIZATION Charge for the year As at December 31, 2005 Book Value Amortization Rate (%) 9,525 9,525 2,234 2,234 20

Book Value

Amortization Rate (%)

12.3.2 The cost of computer software includes the cost of fully amortized software amounting to Rs. 2.920 million (2005: Rs. 2.920 million) which is still in use.

THE BANK OF KHYBER

13.

DEFERRED TAX ASSETS

Note

2006 2005 Rupees in '000 (7,486) (11,630) (19,116) 3,510 350 3,500 10,670 91,400 4,367 1,607 115,404 96,288 (2,704) (8,429) (11,133) 3,510 350 10,670 65,205 4,367 373 84,475 73,342

Taxable temporary differences Accelerated depreciation for tax purposes Deferred tax in respect of investment in associate Deductible temporary differences Provision for balances with other banks Provision for placements with financial institutions Provision for lendings to financial institutions Provision for investments Revaluation of investment Provision for other assets Taxable losses Stabilization reserve Net deferred tax asset as at December 31 14. OTHER ASSETS

Income/ Mark-up accrued 393,597 In local currency In foreign currency Advances, deposits, advance rent and other prepayments 14.1 313,417 619,288 Advance taxation (payments less provisions) Receivable on account of sale of securities 32.2 21,952 Receivable from gratuity fund Prepaid exchange risk fee 14.2 41 Stationery and stamps on hand 4,529 Inventories 14.3 7,101 17,537 Others 1,377,462 Less: Provision held against other assets14.4 12,478 1,364,984 14.1

266,948 46,057 568,633 7,214 857 40 4,861 9,213 903,823 12,478 891,345

14.2

The amount includes Rs. 200.002 million (2005: Rs. 2.000 million) on account of funds disbursed under agency agreements for purchase of goods to be sold under murabaha arrangements. Exchange Risk Fee is being amortized over the terms of the respective forward exchange contracts. According to the SBPs Foreign Exchange (FE) Circular No. 7 dated March 18, 2002, effective April 1, 2002 no fresh forward covers or their rollovers will be provided for foreign currency deposits under FE Circular No. 31. The amount represents the cost of goods purchased by the agents of the bank under agency agreements to be sold under murabaha arrangements. Provision held against other assets Note 2006 2005 Rupees in '000 12,478 12,478 12,478 12,478

14.3

14.4

Opening balance Charge for the period Reversal for the period Closing balance

THE BANK OF KHYBER

15.

BILLS PAYABLE

Note

2006 2005 Rupees in '000 150,435 150,435 119,308 119,308

In Pakistan Outside Pakistan

16.

BORROWINGS In Pakistan Outside Pakistan

4,280,227 45,582 4,325,809

4,313,378 60,776 4,374,154

16.1

Particulars of borrowings with respect to Currencies In local currency 4,325,809 In foreign currencies 4,325,809 Details of borrowings Secured / Unsecured Secured Borrowings from State Bank of Pakistan Under export refinance scheme 16.2.1 Repurchase agreement borrowings 16.2.2 Unsecured Call borrowings Foreign credit lines

4,374,154 4,374,154

16.2

380,472 3,549,755 3,930,227 350,000 45,582 395,582 4,325,809

239,615 3,731,573 3,971,188 342,190 60,776 402,966 4,374,154

16.3 16.4

16.2.1 The Bank has entered into agreements for financing carrying markup ranging from 6.5% to 7.5% (2005: 3.5% to 7.5%) with the State Bank of Pakistan for extending export finance to customers. According to the terms of the respective agreements, the SBP has the right to receive the outstanding amount from the Bank at the date of maturity of the finances by directly debiting the current account maintained by the Bank with the SBP. A limit of Rs 400 million was allocated to the Bank by the SBP for 16.2.2 Repurchase agreements with financial institutions carry interest at rates ranging from 8.60% to 9.00% per annum (2005: 8.00% to 8.55% per annum) and having maturities upto March 14, 2007 (2005: March 28, 2006). 16.3 These borrowings from a bank carry interest at the rate of 11.70 % per annum (2005: 10.90% per annum) and have maturities upto March 30, 2007 (2005: March 27, 2006). Foreign credit lines Note 2006 2005 Rupees in '000 60,776 (15,194) 45,582 70,906 (10,130) 60,776

16.4

Opening balance Repaid during the year Closing balance

16.3.1

16.4.1 The amount of facility granted by Kreditanstalt fur Wiederaufbau (KfW) is DM 5 million which was fully availed upto December 31, 1999. The facility from KfW has been received through the Government of N.W.F.P., at an annual interest rate of 11% in accordance with the Subsidiary Loan Agreement dated August 20, 1996 entered into between the Bank and the Government of N.W.F.P.The principal shall be repaid in Pakistan rupees to the Government of N.W.F.P., over a period not exceeding

THE BANK OF KHYBER

17.

DEPOSITS AND OTHER ACCOUNTS Customers Fixed deposits Savings deposits Current accounts - Non-remunerative Call deposits Margin and sundry deposits Financial Institutions Remunerative deposits Non-remunerative deposits

Note

2006 Rupees in '000 7,874,269 7,474,100 3,073,370 178,739 471,454 19,071,932 3,783 849 4,632 19,076,564

2005

6,574,778 6,824,504 3,558,289 110,121 375,372 17,443,064 7,087 2,019 9,106 17,452,170

17.1 Particulars of deposits In local currency In foreign currencies

18,884,238 192,326 19,076,564

17,304,731 147,509 17,452,240

18.

OTHER LIABILITIES Mark-up/ Return/ Interest payable In local currency In foreign currency Unearned commission and income on bills discounted Accrued expenses Branch adjustment account Share subscription money refund Mark-up in suspense Deferred income on murabaha Security deposits against ijarah Charity payable Others

18.1

350,471 261 16,144 9,438 42,937 1,358 105,049 42,149 52,440 126 9,123 629,496

324,016 126 12,322 32,739 35,988 105,678 63,137 40,103 70 17,354 631,533

18.1 This balance is stated net of mark-up accrued aggregating Rs. 940.505 million (2005: Rs. 946.214 million) against non-performing loans.

THE BANK OF KHYBER

19

SHARE CAPITAL

19.1 Authorized Capital 2006 2005 Number of shares 800,000,000 250,000,000 Ordinary shares of Rs.10 each Note 2006 2005 Rupees in '000 8,000,000 2,500,000

19.2 Issued, subscribed and paid up Ordinary shares Fully paid in cash Opening balance Issued during the year Issued as fully paid bonus shares Opening balance Issued during the year 19.3 & 19.4

75,000,000 40,991,500 115,991,500 48,103,448 36,000,000 84,103,448 200,094,948

75,000,000 75,000,000 48,103,448 48,103,448 123,103,448

750,000 409,915 1,159,915 481,034 360,000 841,034 2,000,949

750,000 750,000 481,034 481,034 1,231,034

19.3 At December 31, 2006 the Government of N.W.F.P., held 130,580,604 (2005: 107,100,000) ordinary shares of Rs. 10 each.

19.4 The Bank is in the process of raising its paid up capital to Rs. 4 billion as according to BSD Circular No. 06 dated October 28, 2005 the Bank is required to raise its share capital to Rs 3 billion by December 31, 2006 and Rs. 4 billion by December 31, 2007. The Bank through its letter BOK/FD/06/439 dated November 18, 2006 applied to the SBP for relaxation of the requirement as it intends to offer 100 percent right shares. The SBP vide its letter BSD/SU-1/608/722/2006 dated December 16, 2006 accepted the Banks request and extended the period of compliance with the aforementioned requirement till January 15, 2007. Subsequently, the SBP has granted further extension upto March 30, 2007 vide its letter BSD/SU1/608/271/2007 dated February 06, 2007 in response to the Bank's letter dated December 26, 2006 for further extension. The Bank has issued letter of rights on February 26, 2007 to the shareholders for payment by March 30, 2007.This right issue will raise the paid-up capital of the Bank to over Rs. 4 billion which, in addition to meeting the minimum capital requirements for the year ended December 31, 2006, will also meet the minimum capital requirements for the year ending December 31, 2007. 20. SURPLUS/(DEFICIT) ON REVALUATION OF SECURITIES Surplus on revaluation of available-for-sale securities Surplus/(deficit) on revaluation of: Federal government securities Fully paid up ordinary shares - quoted Other investments 10.1 Deferred tax asset Note 2006 2005 Rupees in '000

(261,144) (139,271) 474,842 74,427 91,400 165,827

(178,771) (26,089) 589,761 384,901 65,205 450,106

THE BANK OF KHYBER

21.

CONTINGENCIES AND COMMITMENTS

Note

2006 2005 Rupees in '000

21.1

Direct Credit Substitutes Government Banks Others

49,204 73,749 66,704 189,657

49,204 73,749 89,104 212,057

21.2

Transaction-related Contingent Liabilities Guarantees favouring: Government Banks Others 21.2.1

1,878,065 1,323,221 3,201,286

1,966,507 82,062 1,063,489 3,112,058

21.2.1 The above amounts include expired letters of guarantee aggregating to Rs. 497.389 million as at December 31, 2006 (2005: Rs. 500.976 million) for which the formalities relating to return of the original documents are in process. 21.3 Trade-related Contingent Liabilities Letters of credit Sight Usance Acceptances 2006 2005 Rupees in '000 444,436 267,160 711,596 64,849 776,445 612,149 325,604 937,753 49,666 987,419

21.4

Commitments in respect of forward exchange contracts Purchase Sale

26,812 127,256

4,819 -

21.4.1 All forward exchange contracts are backed by trade related transactions to meet the needs of the Bank's clients to generate trading revenues and, as part of its asset and liability management activity, to hedge its own exposure to currency risk. At the year end, all foreign exchange contracts have a remaining maturity of less than one year. 21.5 Other commitments Sale of mutual funds Bills for collection Inland bills Foreign bills

51,061 27,073 47,226 74,299 125,360

48,610 42,456 91,066 91,066

21.6

Commitments to extend credit The Bank makes commitments to extend credit in the normal course of its business but these being revocable commitments do not attract any significant penalty if the facility is unilaterally withdrawn.

THE BANK OF KHYBER

21.7 21.7.1

Taxation Bank

21.7.1.1 Assessments of the Bank have been finalized upto and including the assessment year 2002-2003 (accounting year ended December 31, 2001). While finalizing the assessments for the assessment years 1994-95 to 2002-2003 the Deputy Commissioner of Income Tax (DCIT) has made additions to income on account of mark-up taken to reserve in accordance with the requirements of Prudential Regulations amounting to Rs. 167.886 million and on account of provisions against nonperforming advances charged to income amounting to Rs. 577.863 million resulting in additional tax demands of Rs. 98.069 million and Rs. 329.464 million respectively. Further, additional tax demands aggregating Rs. 507.799 million may arise in respect of disallowance of provisions against nonperforming advances for the tax years 2003, 2004, 2005 and 2006 [accounting years ended December 31, 2002, 2003, 2004, 2005 and 2006.

The management of the Bank, based on the advice of its tax consultant, is confident that the appeals filed in respect of the aforementioned assessment years will be decided in the Banks favour. Accordingly, no provision has been made in the financial statements of the Bank in respect of the aggregate amount of Rs 957.113 million referred above. 21.7.1.2 The Bank had established The Bank of Khyber Employees Gratuity Fund (the fund) through a trust deed dated January 1, 2001. The CIT has granted approval to the fund in accordance with the requirements of the Sixth Schedule to the Income Tax Ordinance, 2001 with effect from June 6, 2003. The Bank while calculating the tax provisions for the years ended December 31, 1999 and 2000 has claimed the gratuity expenditure aggregating Rs 19.684 million as an allowable deduction having an aggregate tax impact of Rs 11.417 million which was disallowed. However, while finalizing the assessment for the accounting year ended December 31, 2001 the amount claimed as gratuity expenditure was allowed by the assessing authorities. The management of the Bank, based on the advice of its tax consultant, is confident that based on the aforementioned assessment for the accounting year ended December 31, 2001 the amounts claimed for the years ended December 1999 and 2000 will be allowed by the assessing authorities and therefore, no provision has been made for the aforementioned tax effect of the gratuity expenditure claimed. 21.8 There are a number of legal proceedings outstanding against the Bank which include counter claims and counter suits filed by the borrowers as at December 31, 2006. No provision has been made in respect of these as the management of the Bank is confident that it is unlikely that any significant loss will arise. The State Bank of Pakistans Committee for Resolution of Cases (CRC) and Committee for Revival of Sick Industrial Units (CRSIU) have finalised the settlement of certain non performing loans of the Bank having principal amounting to Rs. 340.015 million and overdue markup amounting to Rs. 191.662 million for an aggregate amount of Rs. 137.156. The decision of the CRC in two of the aforementioned cases have been upheld by the Peshawar High Court (Original Banking Jurisdiction). The Bank has filed writ petitions against three cases in the Division Bench of the Peshawar High Court and against one case in the Lahore High Court, Rawalpindi Bench. The Bank is in the process of filing a writ petition in one of the cases in the Sindh High Court and in another case the Peshawar High Court has already considered the CRSIU decision in the normal legal proceeding undertaken by the Bank against the customer. Based on the advise of its respective legal counsels the management of the Bank is confident that the aforementioned cases shall be decided in its favour and therefore no further provision has been made for an aggregate amount of Rs. 33.819 million.

21.9

THE BANK OF KHYBER

22.

MARK-UP/RETURN/INTEREST EARNED On Loans and advances to Customers Profit on murabaha financing Mark-up/Return/Interest Earned on other facilities Financial Institutions On Investments in Available for sale Securities Held to Maturity Securities On Deposits with financial institutions On Securities purchased under resale agreements

Note

2006 Rupees in '000

2005

22.1

55,219 859,208 914,427 74,947 989,374 439,428 96,919 536,347 395,863 21,751 1,943,335

43,376 595,298 638,674 77,036 715,710 306,441 133,348 439,789 212,321 48,502 1,416,322

22.1

Profit on murabaha financing Murabaha sale price Less: purchase price Less: deferred murabaha income

22.3

553,597 486,912 66,685 11,466 55,219

1,982,448 1,884,605 97,843 54,467 43,376

22.3

Purchase price Opening stock Purchase price Less: Closing stock

494,013 7,101 486,912

1,884,605 1,884,605

23.

MARK-UP/RETURN/INTEREST EXPENSED Deposits Securities sold under repurchase agreements Other short term borrowings Long term borrowings Others

1,019,502 243,314 35,845 5,850 231 1,304,742

594,270 236,710 69,713 6,964 428 908,085

24.

GAIN / (LOSS) ON SALE OF SECURITIES Federal Govt. Securities - Pakistan Investment Bonds Shares - Listed Term Finance Certificates Mutual Funds (6,113) 58,607 25 12,560 65,079 8,018 157,072 18,490 183,580

THE BANK OF KHYBER

Note 25. OTHER INCOME Net profit on sale of property and equipment Fixed assets adjustment Others

2006 Rupees in '000 634 39,384 40,018

2005

1,155 147 23,601 24,903

26.

ADMINISTRATIVE EXPENSES Salaries, allowances, etc. Charge for defined benefit plan - Gratuity Fund Contribution to defined contribution plan - Provident Fund Rent, taxes, insurance, electricity, etc. Legal and professional charges Communications Repairs and maintenance Stationery and printing Advertisement and publicity Donations Auditors' remuneration Depreciation Amortization Public offer expenses Brokerage and commission Entertainment Traveling, boarding and lodging Vehicle expenses Newspapers and periodicals Training Sports Others

26.1 26.2 12.2

173,455 8,271 33,873 5,584 22,171 4,922 9,042 9,297 70 2,714 16,534 1,768 18,879 2,367 5,506 9,830 21,856 572 2,804 157 22,457 372,129

177,311 13,633 7,589 31,714 14,443 16,754 4,667 8,253 7,560 1,000 3,772 18,353 2,201 2,431 4,326 8,517 17,013 521 3,781 556 17,174 361,569

26.1

During the year ended December 31, 2005 donation of Rs. 1 million was paid to Chief Minister's relief fund for earth quake victims. No directors or his spouse had any interest in donee funds. Auditors' remuneration Audit fee Fee for half-yearly review Fee for half-yearly audit Special certifications and sundry advisory services Out-of-pocket expenses

26.2

750 325 1,385 254 2,714

750 675 1,905 442 3,772

27.

The amount represents the penalties imposed by the State Bank of Pakistan.

THE BANK OF KHYBER

2006 Rupees in '000 28. TAXATION Current - for the year Bank Associate Deferred Bank Associate

2005

16,964 3,061 20,025 27 3,223 3,250 23,275 16,964 27 16,991

13,036 3,797 16,833 (883) 108 (775) 16,058 13,036 (883) 12,153

28.1

Current tax charge Deferred tax charge

28.2

Relationship between tax expense and accounting profit Profit before taxation and share of associate Share in associate's profit (net of associate's tax charge)

212,658 9,146 221,804 75,413 (35,015) 2 (24,335) 926 16,991

216,498 14,306 230,804 87,706 (765) (28,562) 991 (35,158) (3,362) (8,697) 12,153

Tax at the applicable rate of 34% (2005: 38%) Tax effect of reversal of provision (net) for diminution in value of quoted investments Tax effect of dividend income taxed at different rate Effect of different tax rates used for current and deferred taxation Tax effect of exempt capital gain Tax effect of exempt capital gain on Govt securities current year Others

29.

BASIC AND DILUTED EARNINGS PER SHARE Profit for the year Weighted average number of ordinary shares Basic and diluted earnings per share - rupees

201,590 #REF! #REF!

218,651 #REF! #REF!

29.1 30.

Basic and diluted earnings per share are the same. CASH AND CASH EQUIVALENTS Cash and Balance with Treasury Banks Balance with other banks Lendings to financial institutions

1,574,531 3,755,151 2,183,430 7,513,112

1,618,521 2,510,190 1,360,000 5,488,711

31.

STAFF STRENGTH Permanent Temporary/on contractual basis Daily wagers

---------Numbers---------341 122 157 620

370 79 142 591

THE BANK OF KHYBER

32. 32.1

DEFINED BENEFIT PLAN General description of the type of defined benefit plan and the accounting policy for recognizing actuarial gains and losses are disclosed in Note 6.9.1 to these financial statements. Reconciliation of payable to defined benefit plan Note 2006 Rupees in '000 (129,951) 151,903 21,952

32.2

Present value of defined benefit obligations Fair value of any plan assets Net actuarial gains or losses not recognized Past service cost not yet recognized Any amount not recognized as an asset

32.3

32.3

Movement in payable to defined benefit plan Opening balance Current service cost Interest cost Actuarial gains/ losses Benefits paid during the year Closing balance Amount charges to profit and loss Current service cost Interest on obligation Expected return on plan assets Actuarial gains/(losses) recognized in the year Transitional surplus

(124,716) (7,294) (6,560) 4,624 3,994 (129,952)

32.4

(7,294) (6,560) 12,722 3,578 1,645 4,091

32.5

Movement in net asset Net asset at the start of year Net expense recognized in the financial statement Contribution during the period Net asset at the close of year Actual return on plan assets

857 1,645 4,624 7,126 16,300

32.6 33.

DEFINED CONTRIBUTION PLAN During the year the Bank has contributed Rs. 8.271 million (2005: Rs. 7.589 million) to the provident fund.

THE BANK OF KHYBER

34.

COMPENSATION OF DIRECTORS AND EXECUTIVES Managing Director 2006 2005 Fees Managerial remuneration Charge for defined benefit plan Contribution to defined contribution plan Rent and house maintenance Utilities Medical Bonus Conveyance Others (to be specified, if material) Directors 2006 2005 Rupees in '000 300 300 1 300 300 1 Executives 2006 2005

2,289 43 902 122 55 36 401 3,848 2

800

412 141 52 35 87 1,527 2

Number of persons 34.1

In addition of the above, the Managing Director and the Acting Managing Director were provided with the free use of Bank's maintained car in accordance with their terms of employment. The figures for remuneration of the managing director include remuneration of the Acting Managing Director till September 20, 2006. FAIR VALUE OF FINANCIAL INSTRUMENTS Book value On-balance sheet financial instruments Assets Cash balances with treasury banks Balances with other banks Lending to financial institutions Investments Advances Other assets 2006 Fair value Book value Rupees in '000 1,574,531 3,755,151 2,493,430 8,565,483 9,219,391 440,187 26,048,173 1,618,521 2,510,190 1,552,190 7,698,406 10,589,737 284,232 24,253,276 2005 Fair value

34.2 35. 35.1

1,574,531 3,755,151 2,493,430 8,565,483 9,219,391 440,187 26,048,173

1,618,521 2,510,190 1,552,190 7,698,406 10,589,737 284,232 24,253,276

Liabilities Bills payable Borrowings Deposits and other accounts Sub-ordinated loans Liabilities against assets subject to finance lease Other liabilities

150,435 4,325,809 19,076,564 524,681 24,077,489

150,435 4,325,809 19,076,564 524,681 24,077,489

119,308 4,374,154 17,452,170 522,703 22,468,335

119,308 4,374,154 17,452,170 522,703 22,468,335

35.2

Off-balance sheet financial instruments Forward purchase of foreign exchange Forward agreements for borrowing Forward sale of foreign exchange Forward sale agreements of mutual funds 26,812 127,256 51,061 26,812 127,256 51,061 4,819 4,819 -

35.3

Derivative financial instruments The Bank does not offer structured derivatives. However, the Banks treasury buys/sells foreign exchange financial instruments namely forward foreign exchange contracts and swaps with the principle view of hedging the risks arising from its trade business. As per the Banks policy, these contracts are reported on their fair value at the balance sheet date. The gains and losses from revaluation of these contracts are included under income from dealing in foreign currencies. Unrealized gain and losses on these contracts are recorded on the balance sheet under Other Assets/Other Liabilities. These products are offered to the Banks customers to protect from unfavorable movements in foreign currencies. Such contracts are entered with only those obligors whose credit worthiness has been assessed as per the banks credit/risk assessment framework. The Bank effectively hedges such exposures in the inter-bank foreign exchange market. In the above contracts, both parties must fulfill their contractual obligations at the time of settlement. These contracts are primarily based on the imports/exports, market expectations, economic/political circumstances and the Banks inflow/outflow position. These positions are reviewed on a regular basis by the Banks Asset and Liability Committee (ALCO).

THE BANK OF KHYBER

36.

Segment Details with Respect to Business Activities The segment analysis with respect to business activity is as follows: 2006 Corporate Finance Trading & Retail Sales Banking (Rupees in '000) 549,617 531,389 18,228 2,220,667 13,947 10,370 7,716,346 1% 7% 121,588 22,079 99,509 1,245,923 18,465 10,634 945,408 8% 2% Commercial Banking Corporate Finance 2005 Trading & Retail Banking Sales (Rupees in '000) 433,108 294,766 138,342 2,402,485 12,744 801 3,731,573 6% 8% 85,441 38,653 46,788 1,245,923 14,057 4636 952,052 4% 4% Commercial Banking

Total Income Total Expenses Net Income (Loss) Segment Assets (Gross) Segment Non Performing Loans Segment Provision Required Segment Liabilities Segment return on Net Assets (ROA) (%) Segment cost of Funds (%) 37. 37.1 RELATED PARTY TRANSACTIONS

786,460 452,464 333,996 14,576,998 7,998,550 2% 6%

792,347 674,767 117,580 9,175,789 3,155,234 1,868,320 7,533,011 1% 9%

651,460 485,234 166,226 14,576,998 6,566,837 1% 7%

548,068 452,582 95,486 9,152,248 2,842,248 1,537,232 11,326,703 1% 1%

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions and include the Government of NWFP, an associated company, retirement funds, directors and key management personnel. The details of transactions with related parties during the year other than those which have been disclosed elsewhere in these financial statements are as follows: 2006 Directors and key management personnel Associated company Other related parties Directors and key management personnel Associated company 2005 Other related parties

37.2

Total

Total

Rupees in '000 Advances At January 1, Disbursed during the Quarter Repaid during the Quarter At December 31, Deposits At January 1, Deposited during the Quarter Repaid during the Quarter At December 31, 5,907 5,711 (949) 10,669 5,907 5,711 (949) 10,669 3,936 2,082 (111) 5,907

Rupees in '000 3,936 2,082 (111) 5,907

39 14,417 (14,412) 44

7,214 1,405,756 (1,394,794) 18,176 2006

21,557 161,783 (179,098) 4,242

28,810 1,581,956 (1,588,304) 22,462

605 7,930 (8,496) 39

79,898 7,832,711 (7,905,395) 7,214 2005

29,352 420,866 (428,661) 21,557

109,855 8,261,507 (8,342,552) 28,810

Directors and key management personnel

Associated company

Other related parties

Total

Directors and key management personnel

Associated company

Other related parties

Total

Rupees in '000 Transactions, income and expenditure Profit earned on Financings Return on deposits expensed

Rupees in '000

44 3

93

1,642

44 1,738

15 895

137

1,526

15 2,558

THE BANK OF KHYBER

38.

CAPITAL ADEQUACY The risk weighted assets to capital ratio, calculated in accordance with the State Bank's guidelines on capital adequacy was as follows:2006 Rupees in '000 Regulatory Capital Base Tier I Capital Shareholders capital/Assigned capital Reserves Unappropriated profits Less: Adjustments Tier II Capital Subordinated debt (upto 50% of total Tier I Capital) General provisions subject to 1.25% of Total Risk Weighted Assets Revaluation reserve (upto 50%) Eligible Tier III Capital Total Regulatory Capital (a) Risk-Weighted Exposures 2005

2,000,949 628,346 103,890 2,733,185 426,226 2,306,959 129,944 80,947 210,891 2,517,850 2006 Rupees in '000 Book Value Risk Adjusted Value

1,231,034 511,939 176,089 1,919,062 1,919,062 127,604 127,604 2,046,666 2005 Rupees in '000 Book Value Risk Adjusted Value

Credit risk-weighted exposures Balance Sheet Items: Cash and other liquid Assets Money at call Investments Loans and advances Fixed Assets Other Assets Off Balance Sheet items: Loan repayment guarantees Purchase and resale agreements Performance bonds etc Revolving underwriting commitments Stand by letters of credit Outstanding foreign exchange contracts -Purchase -Sale

5,329,682 7,468,776 9,219,391 142,002 1,364,984 23,524,835 87,423 2,707,055 670,720 26,812 127,256 3,619,266

751,030 3,295,054 5,963,632 142,002 575,761 10,727,479 87,423 1,194,234 302,858 509 1,585,024 12,312,503 29,758 29,758 12,342,261 20.40%

4,128,711 5,519,023 10,589,737 140,206 891,345 21,269,022 141,883 2,684,023 1,002,511 4,819 3,833,236

502,038 3,015,176 5,787,287 140,206 308,615 9,753,322 141,883 1,207,045 438,411 1,787,339 11,540,661 8,173 8,173 11,548,834 17.72%

Market risk-weighted exposures General market risk Specific market risk Total Risk-Weighted exposures (b) Capital Adequacy Ratio [ (a) / (b) x 100 ]

THE BANK OF KHYBER

39.

RISK MANAGEMENT The Bank's risk management infrastructure is designed to provide sound management principles and practices to maintain appropriate asset quality across the Bank. In accordance with the guidance from SBP, the bank has established a separate Risk Management Division (RMD) to identify and monitor the potential risks and establish mitigating policies against these risks along with advising the relevant divisions and ensuring the implementation of these policies by other divisions of the bank. The scope of RMD also includes coordination and monitoring of activities under taken by other divisions of the bank for risk mitigation. The bank is primarily subject to credit risk, market risk, liquidity risk and operational risk as mentioned below: Credit Risk Credit risk is the risk that arises from the potential that the obligor is either unwilling to perform on an obligation or its ability to perform such obligation is impaired resulting in economic loss to the Bank. The Bank attempts to control risk by monitoring credit exposure, limiting transaction with specific counter parties and continually assessing the credit worthiness of the borrowers. Credit risk is managed through the bank's lending policy approved by its board of directors and other laid down procedures outlined in the credit manual and related circulars. The Head Office Credit Committee is responsible for the effective operation and implementation of these policies including the establishment of credit limits for all counter-parties after evaluation of their credit worthiness, pre-sanction evaluations of credit proposals, adequacy of security documents, pre-disbursement examination of charge documents and security of advances through adequate collaterals with an acceptable security margin. This multi tiered credit approving system, at branch and head office level, ensures at each stage that each transaction is analyzed keeping in view the risk factors as well as the stipulation of the Prudential Regulations. The bank has also established a separate recovery division (RRMC) to monitor stuck-up facilities along with negotiations with borrowers as well as undertaking legal actions against the delinquent borrowers. Further, to strengthen the portfolio and as a matter of prudence, adequate provision against non-performing loans is maintained in compliance with the prudential regulations. Investments and other assets, doubtful of recovery are also adequately provided. Out of the total financial assets of Rs. 26,963.694 million (2005: Rs. 24,860.967 million), the financial assets which were subject to credit risk amounted to Rs. 11,713.425 million (2005: Rs. 12,141.927 million). The major credit risk in respect of advances is concentrated in the fisheries sector and some other sectors such as manufacturing, services, trading and micro finance.

39.1

39.1.1

SEGMENTAL INFORMATION 2006 Advances (Gross) Rupees Percent in '000 65,840 0.71% 600,791 6.52% 0.00% 2,074,424 22.50% 866,197 9.40% 1,102,010 11.95% 74,159 0.80% 4,435,970 48.12% 9,219,391 100% Deposits Rupees Percent in '000 434,928 2.28% 0.00% 1,022,179 5.36% 2,179,780 11.43% 3,534,606 18.53% 0.00% 1,637 0.01% 11,903,434 62.40% 19,076,564 100% 2005 Advances (Gross) Rupees Percent in '000 1,274,854 12.04% 0.00% 0.00% 1,307,495 12.35% 0.00% 373,289 3.53% 0.00% 7,634,099 72.09% 10,589,737 100% Deposits Rupees Percent in '000 290,472 1.66% 441,520 2.53% 780,564 4.47% 281,024 1.61% 2,436,450 13.96% 0.00% 39,632 0.23% 13,182,508 75.54% 17,452,170 100% Contingencies and Commitments Rupees Percent in '000 0.00% 498,049 11.30% 0.00% 2,209,470 50.13% 0.00% 0.00% 0.00% 1,699,900 38.57% 4,407,419 100% Contingencies and Commitments Rupees Percent in '000 0.00% 1,081,488 24.32% 0.00% 1,867,351 41.99% 0.00% 0.00% 0.00% 1,497,977 33.69% 4,446,816 100%

39.1.1.1 Segments by class of business

Agriculture, Forestry, Hunting and Fishing Automobile and transportation equipment Financial Services Individuals Fisheries Education and health Others

Agriculture, Forestry, Hunting and Fishing Automobile and transportation equipment Financial Services Individuals Fisheries Education and health Others

THE BANK OF KHYBER

39.1.1.2 Segment by sector Advances Rupees Percent in '000 Public/ Government Private 464,681 8,754,710 9,219,391 5.04% 94.96% 100.00%

2006 Deposits Rupees Percent in '000 8,291,535 10,785,029 19,076,564 2005 Advances Rupees Percent in '000 Deposits Rupees in '000 8,291,535 9,160,635 17,452,170 Percent Contingencies and Commitments Rupees Percent in '000 397,369 4,010,050 4,407,419 9.02% 90.98% 100.00% 43.46% 56.54% 100.00% Contingencies and Commitments Rupees Percent in '000 383,592 4,063,224 4,446,816 8.63% 91.37% 100.00%

Public/ Government Private

1,549,081 9,040,656 10,589,737

14.63% 85.37% 100.00%

47.51% 52.49% 100.00%

39.1.1.3 Details of non-performing advances and specific provisions by class of business segment 2006 Classified Advances Specific Classified Provisions Advances Held Rupees in '000 7,139 44,403 70,388 138,440 2,230 151,069 40,000 65,573 10,161 871,228 488,693 1,889,324 7,887 128,452 117,955 150,203 5,614 312,484 40,000 175,737 10,678 1,087,991 832,445 2,869,446 2005 Specific Provisions Held

Agriculture, Forestry, Hunting and Fishing Textile Chemical and Pharmaceuticals Footwear and Leather garments Automobile and transportation equipment Wholesale and Retail Trade Financial Services Individuals Fisheries Others

7,815 128,452 121,985 144,587 3,169 292,279 40,000 348,567 14,750 1,087,991 998,051 3,187,646

7,384 86,309 51,145 131,211 4,626 71,605 40,000 49,382 8,567 732,387 360,053 1,542,669

39.1.1.4 Details of non-performing advances and specific provisions by sector Public/ Government Private 3,187,646 3,187,646 1,889,324 1,889,324 2,869,446 2,869,446 1,542,669 1,542,669

THE BANK OF KHYBER

39.1.1.5 Geographical segment analysis 2006 Profit before taxation Total assets employed Net assets employed Contingencies and commitments 4,446,816 4,446,816

Pakistan Asia Pacific (including South Asia) Europe United States of America and Canada Middle East Others

103,890 103,890

Rupees in '000 27,211,260 3,028,956 27,211,260 3,028,956 2005

Profit before taxation

Total assets employed

Net assets employed

Contingencies and commitments 4,407,419 4,407,419

Pakistan Asia Pacific (including South Asia) Europe United States of America and Canada Middle East Others

176,089 176,089

Rupees in '000 25,073,937 2,496,772 25,073,937 2,496,772

THE BANK OF KHYBER

39.3

Market Risk Market Risk is the risk that the value of on and off balance sheet positions of the group will be adversely affected by the movements in interest rate, foreign exchange rates and equity prices resulting in the loss of earnings and capital. Assets and Liabilities Committee (ALCO) of the bank monitors and manages the interest rate with objective of limiting the potential adverse effect on the profitability of the Bank. Each Branch and Credit Division evaluates market risk at the time of sanction of facilities. The bank distinguishes three types of market risks i.e. foreign exchange risk, equity position risk and interest rate risk.

39.3.1

Foreign Exchange Risk The Bank's foreign exchange exposure comprises of forward contracts, purchases of foreign bills, foreign currency cash-in-hand, balances with banks abroad, foreign currency placements with SBP and foreign currency deposits. The Bank manages its foreign currency exposure by matching foreign currency assets and liabilities. The net open position and the nostro balances are managed within the statutory limit fixed by SBP.

2006 Assets Liabilities Off-balance sheet items (514,072) 390,487 9,406 55,055 59,124 Net foreign currency exposure 2,907,087 112,624 6,878 1,108 974 285 3,028,956

Pakistan rupee United States dollar Great Britain pound Japanese yen Euro Other currencies

26,897,064 249,501 18,035 1,111 45,264 285 27,211,260

Rupees in '000 23,989,977 136,877 11,157 3 44,290 24,182,304 2005

Assets

Liabilities

Off-balance sheet items (872,079) 663,269 217 163,239 45,354 -

Net foreign currency exposure 2,493,418 2,796 408 716 (1,014) 448 2,496,772

Pakistan rupee United States dollar Great Britain pound Japanese yen Euro Other currencies

24,922,948 101,228 8,201 716 40,396 448 25,073,937

Rupees in '000 22,429,530 98,432 7,793 41,410 22,577,165

39.3.2

Equity position Risk The risk that may result in potential losses for the financial institutions because of frequent changes in market value of its tradable assets due to adverse variation in the rate of equity investments. ALCO keeps a vigilant eye on the price fluctuation of the shares and takes corrective measures to reduce the losses.

39.3.3 Mismatch of Interest Rate Sensitive Assets and Liabilities Effective Yield/ Interest rate On-balance sheet financial instruments Assets Cash and balances with treasury banks Balances with other banks Lending to financial institutions Investments Advances Other assets Liabilities Bills payable Borrowings Deposits and other accounts Sub-ordinated loans Liabilities against assets subject to finance lease Other liabilities On-balance sheet gap Off-balance sheet financial instruments Forward Lending Forward borrowings Off-balance sheet gap Total Yield/Interest Risk Sensitivity Gap Cumulative Yield/Interest Risk Sensitivity Gap Total Upto 1 Month Over 1 to 3 Months Over 3 to 6 Months Rupees in '000 2006 Exposed to Yield/ Interest risk Over 6 Over 1 Months to 1 to 2 Year Years

THE BANK OF KHYBER

Over 2 to 3 Years

Over 3 to 5 Years

Over 5 to 10 Years

Above 10 Years

Non-interest bearing financial instruments

0.20% 10.50% 11.94% 10.79% 8.70% 0.00% 0.00% 7.46% 5.78% 0.00% 0.00% 0.00% -

1,574,531 3,755,151 2,493,430 8,565,483 9,219,391 1,364,984 26,972,970 150,435 4,325,809 19,076,564 629,496 24,182,304 2,790,666

843,341 2,529,076 2,293,430 279,717 1,985,386 7,930,950 2,083,937 3,116,689 5,200,626 2,730,324

900,000 200,000 57,390 305,678 1,463,068 1,485,118 1,054,268 2,539,386 (1,076,318)

462,372 885,219 1,347,591 331,245 7,049,550 7,380,795 (6,033,204)

3,260,378 441,828 3,702,206 5,064 1,600,255 1,605,319 2,096,887

475,676 2,128,219 2,603,895 16,530 612,409 628,939 1,974,956

745,646 361,815 1,107,461 38,722 1,205,709 1,244,431 (136,970)

636,667 1,957,023 2,593,690 15,193 1,053,899 1,069,092 1,524,598

1,033,651 1,061,715 2,095,366 9,499 9,499 2,085,867

92,508 92,508 92,508

731,190 326,075 1,613,986 1,364,984 4,036,235 150,435 3,724,286 629,496 4,504,217 (467,982)

2,730,324 2,730,324

(1,076,318) 1,654,006

(6,033,204) (4,379,198)

2,096,887 (2,282,311)

1,974,956 (307,355)

(136,970) (444,325)

1,524,598 1,080,273

2,085,867 3,166,140

92,508 3,258,648

Effective Yield/ Interest rate On-balance sheet financial instruments Assets Cash and balances with treasury banks Balances with other banks Lending to financial institutions Investments Advances Other assets Liabilities Bills payable Borrowings Deposits and other accounts Sub-ordinated loans Liabilities against assets subject to finance lease Other liabilities On-balance sheet gap Off-balance sheet financial instruments Forward Lendings Forward borrowings Off-balance sheet gap Total Yield/Interest Risk Sensitivity Gap Cumulative Yield/Interest Risk Sensitivity Gap

Total Upto 1 Month Over 1 to 3 Months Over 3 to 6 Months Rupees in '000

2005 Exposed to Yield/ Interest risk Over 6 Over 1 Months to 1 to 2 Year Years

Over 2 to 3 Years

Over 3 to 5 Years

Over 5 to 10 Years

Above 10 Years

Non-interest bearing financial instruments

0.14% 8.50% 11.59% 11.39% 6.74% 0.00% 0.00% 6.94% 4.02% 0.00% 0.00% 0.00% -

1,618,521 2,510,190 1,552,190 7,698,406 10,589,737 891,345 24,860,389 119,308 4,374,154 17,452,170 631,533 22,577,165 2,283,224

22,061 816,190 75,783 623,294 1,537,328 849,814 2,894,421 3,744,235 (2,206,907)

1,921,339 736,000 431,120 339,920 3,428,379 3,360,649 4,739,091 8,099,740 (4,671,361)

372,563 1,164,450 1,537,013 87,986 3,111,593 3,199,579 (1,662,566)

3,520,670 2,605,072 6,125,742 25,065 1,079,875 1,104,940 5,020,802

1,984,882 1,894,579 3,879,461 10,128 696,316 706,444 3,173,017

1,191,494 1,191,494 10,128 932,127 942,255 249,239

2,655,074 2,655,074 30,384 438,439 468,823 2,186,251

115,854 115,854 115,854

1,596,460 588,851 1,313,388 891,345 4,390,044 119,308 3,560,308 631,533 4,311,149 78,895

(2,206,907) (2,206,907)

(4,671,361) (6,878,268)

(1,662,566) (8,540,834)

5,020,802 (3,520,032)

3,173,017 (347,015)

249,239 (97,776)

2,186,251 2,088,475

115,854 2,204,329

2,204,329

39.3.4 Interest rate risk Interest sensitive assets, liabilities and off-balance sheet items-repricing analysis is done by ALCO. ALCO also monitors and manages the interest rate risk and takes on exposure to the effects of fluctuations in the prevailing levels of interest rates on Bank's financial position and cash flows. Interest margin may increase as a result of such changes but may reduce or create losses in the event of unexpected movements.

THE BANK OF KHYBER

39.4

Liquidity Risk Liquidity risk is the risk that the Bank is unable to meet its current and future financial obligations as they fall due at acceptable cost, and includes (a) the operational ability of the Bank to meet refinancing requirement, (b) concentration risk i.e. the ability of the Bank to diversify its funding sources to prevent undue reliance on a single or related counterparites, and (c) tenor risk i.e. the ability of the Bank to raise adequate longer term funds (maturity at issue in excess of 12 months). The Banks liquidity position is managed by ALCO. The Committee monitors the maintenance of Balance Sheet liquidity ratios on monthly basis using duration and convexity analysis at the Middle Office. The core object is to avoid undue reliance on individual deposits and extending advances for long periods. Thus on the whole the Bank manages liquidity and funding risk through a combination of prositive cash flow management, the maintenace of portfolio containing high quality liquid assets, maintenance of a prudent fundings strategy and diversification of its funding base.

39.4.1 Maturities of Assets and Liabilities Total Upto 1 Month Assets Cash and balances with treasury banks Balances with other banks Lending to financial institutions Investments Advances Operating fixed assets Deferred tax assets Other assets Liabilities Bills payable Borrowings Deposits and other accounts Sub-ordinated loans Liabilities against assets subject to finance lease Deferred tax liabilities Other liabilities Net assets Share capital Reserves Unappropriated Surplus on revaluation of assets Over 1 to 3 Months Over 3 to 6 Months Over 6 Months to 1 Year Rupees in '000 3,727,254 441,828 355,462 4,524,544 5,064 1,600,255 2,523 1,607,842 2,916,702 2006 Over 1 to 2 Years Over 2 to 3 Years Over 3 to 5 Years Over 5 to 10 Years

Above 10 Years

1,574,531 3,755,151 2,493,430 8,565,483 9,219,391 142,002 96,288 1,364,984 27,211,260 150,435 4,325,809 19,076,564 629,496 24,182,304 3,028,956 2,000,949 758,290 103,890 165,827 3,028,956

1,574,531 2,855,151 2,078,430 240,962 1,985,386 421,561 9,156,021 150,435 2,083,937 6,840,975 447,596 9,522,943 (366,922)

900,000 415,000 162,078 305,678 13,531 1,796,287 1,835,118 704,268 114,172 2,653,558 (857,271)

518,749 885,219 574,430 1,978,398 331,245 7,049,550 65,205 7,446,000 (5,467,602)

1,214,544 2,128,219 96,288 3,439,051 16,530 612,409 628,939 2,810,112

930,485 361,815 1,292,300 38,722 1,205,709 1,244,431 47,869

662,760 1,957,023 12,884 2,632,667 15,193 1,053,899 1,069,092 1,563,575

1,108,651 1,061,715 129,118 2,299,484 9,499 9,499 2,289,985

92,508 92,508 92,508

THE BANK OF KHYBER

Total Upto 1 Month Assets Cash and balances with treasury banks Balances with other banks Lending to financial institutions Investments Advances Operating fixed assets Deferred tax assets Other assets Liabilities Bills payable Borrowings Deposits and other accounts Sub-ordinated loans Liabilities against assets subject to finance lease Deferred tax liabilities Other liabilities Net assets Share capital Reserves Unappropriated Surplus on revaluation of assets Over 1 to 3 Months Over 3 to 6 Months Over 6 Months to 1 Year Rupees in '000 3,520,670 2,605,072 73,342 6,199,084 25,065 1,079,875 63,207 1,168,147 5,030,937

2005 Over 1 to 2 Years

Over 2 to 3 Years

Over 3 to 5 Years

Over 5 to 10 Years

Above 10 Years

1,618,521 2,510,190 1,552,190 7,698,406 10,589,737 140,206 73,342 891,345 25,073,937 119,308 4,374,154 17,452,170 631,533 22,577,165 2,496,772 1,231,034 639,543 176,089 450,106 2,496,772

1,618,521 110,190 816,190 75,373 623,294 253,997 3,497,565 119,308 849,814 6,454,729 324,142 7,747,993 (4,250,428)

2,400,000 736,000 431,120 339,920 223,071 4,130,111 3,360,649 4,739,091 86,082 8,185,822 (4,055,711)

372,563 1,164,450 414,277 1,951,290 87,986 3,111,593 117,999 3,317,578 (1,366,288)

244,313 1,894,579 2,138,892 10,128 696,316 40,103 746,547 1,392,345

244,312 1,191,494 1,435,806 10,128 932,127 942,255 493,551

1,123,858 2,655,074 3,778,932 30,384 438,439 468,823 3,310,109

1,686,197 115,854 140,206 1,942,257 1,942,257

THE BANK OF KHYBER

39.5

Operational Risk Operational risk has been defined as the potential of incurring losses in relation to employees project management, contractual specifications, documentation, technology, infrastructure failure and disaster, external influences and customer relationship. This includes legal and regulation but excludes business risk. Various reports are produced at management, Board Committee and Board level to assist with their oversight and monitoring obligations. This incorporates reporting of risk profiles, key operational risk events, as well as consideration of external events and their relevance to the Bank. This process generates visibility and understanding of the Bank's overall operational risk profile. The Operational Risk Framework is based on a set of core principles and defines the Bank's standards for operational risk management. Its design recognizes the importance of embedding operational risk into 'business-as-usual' activities. It has partiular focus on defining and implementing the right behaviours and incorporating risk considertions into the Bank's systems and processes. Non-adjusting post balance sheet event The Board of Directors of the bank in their meeting held on March 09, 2007 have approved the appropriation of reserve against contingencies amounting to Rs.100 million to general reserve. These financial statements do not reflect this appropriation as explained in Note 6.1. GENERAL These financial statements have been prepared using the revised format of financial statements prescribed in BSD Circular No. 4 dated February 17, 2006 issued by the State Bank of Pakistan. The revised format for presentation of financial statements is applicable for annual financial statements prepared by banks for periods commencing from January 01, 2006. The significant changes in the revised format for presentation of financial statements include the introduction of disclosures in respect of segment details with respect to business activities and capital adequacy and expended disclosures in respect of the Company's risk management. Captions as prescribed by the aforementioned circular, in respect of which there are no amounts, have not been reproduced in these financial statements except for balance sheet and the profit and loss account.

40.

41. 41.1

41.2 41.3

Figures have been rounded off to the nearest thousand of rupees, unless otherwise stated. Corresponding figures have been reclassified, wherever necessary. However, no significant re-classifications have been made except as stated in notes 6.1.1, 6.1.2, 6.9.1 and 10.7 in these financial statements.

42.

DATE OF AUTHORIZATION FOR ISSUE The financial statements were authorized for issue on March 28, 2007 by the Board of Directors of the Bank.

Managing Director

Director

Director

Director

THE BANK OF KHYBER ANNEXURE 'A' TO THE FINANCIAL STATEMENTS AS REFEREED TO IN NOTE 2.2 The bank is operating five (05) Islamic banking branches at the end of current year as compared to four (04) Islamic banking branches at the end of prior year. 2006 Rupees in '000 ASSETS Cash and balances with treasury banks Balances with and due from Financial Institutions Investments Financing and receivables Murahaba Ijarah Musharaka Diminishing musharaka Others Less: Provision against non-performing facilities Operating fixed assets Other assets LIABILITIES Bills payable Due to Financial Institutions Deposits and other accounts Current Accounts Saving Accounts Term Deposits Others Deposits from Financial Institutions - Non-Remunerative Due to Head Office Other liabilities NET ASSETS REPRESENTED BY Islamic Banking Fund Reserves Unappropriated profit Deficit on revaluation of assets 268,866 460,527 118,066 581,073 386,600 16,065 157,155 1,140,893 14,584 1,126,309 13,132 252,421 2,239,321 11,445 507,354 1,000,779 245,204 130,037 1,883,374 99,542 86,988 2,081,349 157,972 150,000 2,159 22,316 174,475 (16,503) 157,972 270 70 56 126 184,482 234,270 45,419 1,847,306 316,596 44,660 70,000 2,278,562 1,774 2,276,788 12,470 76,024 2,829,453 9,455 380,669 597,198 144,370 46,134 1,168,371 257 1,347,142 136,575 2,661,800 167,653 150,000 1,068 22,186 173,254 (5,601) 167,653 355 70 70 2005

REMUNERATION TO SHARIAH ADVISOR CHARITY FUND Opening Balance Additions during the period Closing Balance

THE BANK OF KHYBER ANNEXURE 'B' TO THE FINANCIAL STATEMENTS AS REFEREED TO IN NOTE 11.6 STATEMENT SHOWING WRITTEN-OFF LOANS OR ANY OTHER FINANCIAL RELIEF OF RS. 500,000 OR ABOVE PROVIDED DURING THE YEAR ENDED DECEMBER 31, 2006 Outstanding Liabilities at the beginning of the year Principal Interest/ Others Mark-up 5 6 7 2,000 559 Total Other financial Total relief (9+10+11) provided 11 12 559

Name and S. address of the No. borrower 1 2

Name of individuals/ partners/ directors (with NIC No.) 3 Pir Nazim Hussain Shah CNIC # 272-50-225045 Sayeda Tanhoor Shehzadi CNIC # 272-91-510829 Syed Arshad Ali Shah CNIC # 224-49-070692 Sayeda Memoona Perveen CNIC # 225-50-246227

Father's/ Husband's name 4 S/o Syed Shaukat Ali Shah W/o Syed Nazim Hussain Shah S/o Syed Yousaf Ali Shah W/o Syed Arshad Ali Shah S/o M. Zaman Khan Durrani S/o Aftab Hassan Late S/o Maghal Baz Khan Late S/o Muhammad Akbar Khan S/o Sultan Muhammad Khan S/o Khawaja Muhammad Khan S/o Khawaja Muhammad Khan

Principal Interest/ written- Mark-up off written-off 10 559

1. Sidra Rice Mills (Pvt.) Ltd. 5-km, Muridki Sheikhupura Road, Muridke.

8 9 Rupees in '000 2,559 -

2. Frontier Ceramics (Pvt.) Ltd. 29-Industrial Estate, Jamrud Road, Peshawar.

Shakir Ullah Durrani CNIC # 17101-0271163-3 Shamsul Hassan NIC # 517-39-014383 Maj. Gen. (R) Jehanzaib Khan (Late) NIC # 136-23-081778 M. Fayyaz Khan NIC # 139-50-090020

26,299

10,654

36,953

10,565

10,565

3. Khan Match Factory (Pvt.) Ltd. (Formerly Azeem Match) Plot# 100-101B, Industrial Estate, Jamrud Road, Peshawar

Khawaja Muhammad Khan CNIC # 17101-0295592-7 Jawad Khan CNIC # 17101-0295589-5 Fawad Khan CNIC # 17101-0295587-1

27,737

19,009

46,746

6,100

6,100

4. Gohar Rehman Altaf Gohar & Sons CNIC # 35202-3656321-1 269-Landa Bazar, Lahore.

S/o Mir Gohar Rehman

4,007

940

4,947

940

940

TOTAL:

60,043

31,162

91,205

18,164

18,164

THE BANK OF KHYBER ANNEXURE 'C' TO THE FINANCIAL STATEMENTS AS REFEREED TO IN NOTE 10.4 1) Particulars of investments held in shares of listed companies Note Investee Listed Companies ABAMCO Composite Fund Azam Textile Bank Alfalah Limited Business and Industrial Insurance Company Limited Caravan East Fabric Limited ICEPACK Limited Fauji Cement Company Limited Fauji Fertilizer Bin Qasim (FFC-Jorden) Company Limited ICI Pakistan Limited Kot Addu Power Company Meezan Balanced Fund National Bank of Pakistan National Refinery Limited Nishat Mill Limited Oil and Gas Development Company Limited Pakistan Petroleum Limited Pakistan State Oil Company Limited Pakistan Telecommunication Company Limited Pakistan Strategic Allocation Fund Sui Northern Gas Pipelines Limited Sui Southern Gas Company Limited *3,000,000 1,000 500,000 948,700 851,200 100,000 328,000 *500,000 87,500 100,000 200,000 369,500 239,200 594,800 *450000 550,000 209,500 30,000 8 5,000 9,487 55,759 4,010 21,289 5,000 37,444 11,350 23,600 86,388 105,599 38,900 4,500 44,915 6,924 490,173 2006 2005 Number of shares / *certificates held 2006 2005 Cost (Rupees in '000)

1,000 2,459,592 500,000 948,700 756,700 936,000 40,000 200,000 328,000 *500,000 80 87,500 220,000 200,000 232,500 314,200 569,800 *450,000 -

8 149,085 5,000 9,487 21,560 27,042 165 32,888 21,289 5,000 22 37,444 23,035 40,007 48,958 111,870 23,179 4,500 560,539

* The paid-up value of each share in listed companies was Rs.. 10 per share (2005: Rs.. 10 per share ). 2) Particulars of investments held in shares of unlisted companies (other than associates): Note Investee Al-Hamra Hills (private ) limited Asian Housing Finance Limited Mohib Textile Mills Limited Mohib Exports Limited Breakup value 10.7 2006 2005 Number of shares 5,000,000 500,000 1,190,500 25,300 5,000,000 500,000 1,190,500 25,300 2006 2005 Carrying amount (Rupees in '000) 50,000 5,000 25,000 487 80,487 Name of Chief Executive

50,000 Mr.Habib Ahmed 5,000 Mr. Junaid Khan Khakwani 25,000 Mr. M.Asif Saigol 487 Mr. M.Abid Saigol 80,487

* The paid-up value of each share in unlisted companies was Rs.. 10 per share (2005: Rs.. 10 per share). ** As at December 31, 2006, the aggregate market value of listed shares / certificates was Rs.. 423.88 million (2005:Rs. 312.443 million) and aggregate book value (break up value) of unlisted shares was Rs.. 52.364 million (2005: Rs.. 54.238 million). Provision for diminution in value of investments includes an aggregate amount of Rs.. 30.487 million representing provision against investments held in unlisted companies. THE BANK OF KHYBER ANNEXURE 'C' TO THE FINANCIAL STATEMENTS AS REFEREED TO IN NOTE 10.4

3) Particulars of investments held in listed term finance certificates (TFC) Note Investee Bank Al-Falah Limited Dawood Leasing Limited Gulistan Textile Mills Limited Orix Leasing Company Limited Pakistan Service Limited Shakaregunj Sugar Mills Limited Sitara Chemical Industries Telecard Limited United Bank Limited Jahangir Siddique and Company Limited 2006 2005 Number of shares / certificates held 11,877 512 880 6,560 13,989 10,000 11,889 2,000 5,000 2,000 897 2,000 880 7,000 14,000 2006 2005 Cost (Rupees in '000) 59,383 2,561 1,496 32,799 69,946 50,000 216,185 59,405 10,000 8,327 10,000 3,842 3,997 2,948 34,993 69,973 203,485

* The paid-up value of each TFC held was Rs.. 5,000 per certificate (2005: Rs.. 5,000 per certificate). ** The market value of these TFCs amounting to Rs.. 220.117 million (2005: Rs.. 210.440 million) as at December 31, 2006. The rate of return on these TFCs ranges from 10% to 14.4% (2005: 8.45% to 14%) per annum. 4) Particulars of investments held in unlisted term finance certificates (TFCs) Note Investee Al-Abbas Sugar Mills Limited Crescent Commercial Bank Limited Dewan Farooq Spinning Mills Limited 2006 2005 Number of certificates held 3,000 6,000 4,000 4,000 2006 2005 Carrying amount (Rupees in '000) 15,000 Name of Chief Executive

17,368 Mr.Shunaid Quraishi 9,996 Mr. Azmat Ashraf 20,000 Dewan Muhammad Yousaf Farooqi 11,250 Dewan Ghulam Mustafa Khalid 5,000 Mr. Anwar Moeen 30,000 Mr. Zohaib Abdul Khaliq 7,800 Mr. Tariq Kirmani 50,000 Mr. Fawad Ahmad Sheikh Mr. Badar Kazmi 151,414

Dewan Textile Mills Limited Orient Petroleum Inc. Pakistan Mobile Communication (Private) Limited Pakistan International Airlines Corporation Reliance Export (Private) Limited Union Bank Limited

750 4,800 1,480 5 4,741

6,000 3,000 6,000 1,600 5 -

3,750 24,000 7,400 50,000 23,705 123,855

THE BANK OF KHYBER ANNEXURE 'D' TO THE FINANCIAL STATEMENTS AS REFEREED TO IN NOTE 10.4 Quality of Available for Sale Securities 2006 Amount Rupees in '000 3,764,489 1,603,691 63,004 15,000 3,750 50,000 7,400 24,000 2,664 50,000 1,705 32,799 23,705 69,946 5,778 50,085 50,075 50,382 5,540 69,751 720,097 28,786 4,815 15,586 12,044 2 102,811 1,875 1,708 12,031 14,134 1,140 23,100 13,350 18 22,663 17,560 22,940 53,940 66,150 25,242 50,000 7,153,756 Rating Credit rating Agency Amount Rupees in '000 2,955,941 1,209,346 17,368 59,405 9,996 10,000 20,000 11,250 8,327 5,000 10,000 7,800 30,000 3,842 50,000 3,997 2,948 34,993 69,973 28,650 5,125 4,875 826,867 5,265 5 2,525 3,700 3,815 15,908 31,653 37,400 5,604 50,000 5,541,578 2005 Rating Credit rating Agency

Government Securities Treasury Bills Pakistan Investment Bonds Term Finance Certificates Al-Abbas Sugar Mills Limited Bank Al-Falah Limited Crescent Commercial Bank Limited Dawood Leasing Limited Dewan Farooq Spinning Mills Limited Dewan Textile Mills Limited Gulistan Textile Mills Jahangir Siddique and Company Orient Petroleum Inc. Orix Leasing Company Limited Pakistan International Airlines Corporation Pakistan Mobile Communication (Private) Limited Pakistan Service Limited Reliance Export (Private) Limited Shakaregunj Sugar Mills Limited Sitara Chemical Industries Telecard Limited Union Bank Limited United Bank Limited Mutual Funds ABAMCO Composite Fund Alfalah GHP Value Fund AMZ Income Fund Askari Income Fund Dawood Money Market Fund Meezan Balanced Growth Fund NAMCO Fund National Investment Trust Units Pakistan International Element Islamic Fund Pakistan Strategic Allocation Fund UTP AAA Fund UTP Islamic Fund Fully paid ordinary Shares Azam Textile Bank Alfalah Limited Business and Industrial Insurance company Limited Caravan east fabric Limited Icepack Limited Fauji Cement Company Limited Fauji Fertilizer Bin Qasim (FFC-Jorden) Company Limited ICI Pakistan Limited Kot Addu Power Company National Bank of Pakistan National Refinery Limited Nishat Mill Limited Oil and Gas Development Company Limited Pakistan Petroleum Limited Pakistan State Oil Company Limited Pakistan Telecommunication Company Limited Sui Northern Gas Pipelines Limited Sui Southern Gas Company Limited Ordinary shares in unlisted companies Al-Hamra Hills (private ) limited Total

Government Security-Unrated Government Security-Unrated N/A AAN/A N/A BBB+ Unrated N/A AA+ N/A N/A Unrated AAA Unrated N/A Unrated BBB AAAA 4 Star Unrated Unrated Unrated 5 Star Unrated Unrated Unrated Unrated 5 Star Unrated Unrated Unrated AA+ Unrated Unrated Unrated Unrated Unrated Unrated Unrated AAA Unrated A+ Unrated Unrated Unrated AAA N/A N/A Unrated

Government Security-Unrated Government Security-Unrated Unrated AAUnrated Unrated BBB+ Unrated Unrated N/A Unrated AA+ Unrated AAA Unrated Unrated Unrated BBB AA 4 Star Unrated N/A N/A N/A Unrated N/A Unrated Unrated N/A N/A N/A

PACRA

PACRA

PACRA

PACRA

PACRA

PACRA PACRA

PACRA PACRA

PACRA PACRA PACRA JCR-VIS

PACRA PACRA JCR-VIS

PACRA

PACRA

PACRA

N/A Unrated Unrated N/A N/A Unrated N/A Unrated N/A Unrated N/A N/A N/A N/A N/A AAUnrated Unrated