HABIB BANK LIMITED AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET AS AT DECEMBER 31, 2002 2002 2001 (US

$ in '000) ASSETS 470,748 460,826 171,516 2,450,316 2,872,977 311,060 123,214 50,893 6,911,550 474,520 430,244 391,765 991,122 2,867,868 364,543 100,745 102,921 5,723,728 Cash and balances with treasury banks Balances with other banks Lendings to financial institutions Investments Advances Other assets Operating fixed assets Deferred tax asset - net LIABILITIES 100,063 652,470 5,628,229 192,820 6,573,582 337,968 92,939 402,046 4,860,996 147,988 5,503,969 219,759 Bills payable Borrowings from financial institutions Deposits and other accounts Sub-ordinated loans Liabilities against assets subject to finance lease Other liabilities Deferred tax liabilities 13 14 15 5,834,673 38,045,541 328,182,054 11,243,342 383,305,610 19,706,925 5,419,260 23,443,322 283,444,680 8,629,175 320,936,437 12,814,168 5 6 7 8 9 10 11 12 27,449,292 26,870,767 10,001,123 142,877,930 167,523,299 18,137,931 7,184,623 2,967,570 403,012,535 27,669,276 25,087,525 22,843,841 57,792,325 167,225,401 21,256,518 5,874,422 6,001,297 333,750,605 Note 2002 2001 (Rupees in '000)

16

NET ASSETS REPRESENTED BY:

3,579

3,490

Minority interest Shareholders' equity Share capital Other tier 1 capital Capital reserves Accumulated loss and other reserves

208,675

203,520

208,858 137,198 17,618 (153,175) 210,499

208,858 137,198 16,908 (200,003) 162,961

17 18

12,178,495 8,000,000 1,027,348 (8,931,643) 12,274,200

12,178,495 8,000,000 985,942 (11,662,155) 9,502,282

123,890 337,968

53,308 219,759

Surplus on revaluation of assets - net of tax

19

7,224,050 19,706,925

3,108,366 12,814,168

CONTINGENCIES AND COMMITMENTS

20

The annexed notes and annexures form an integral part of these accounts.

President and Chief Executive

Director

Director

Director

HABIB BANK LIMITED AND SUBSIDIARY COMPANIES CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED DECEMBER 31, 2002 2002 2001 (US $ in '000) 410,841 198,601 212,240 45,556 (2,472) 43,084 169,156 458,557 264,698 193,859 45,155 64 45,219 148,640 Mark-up / return / interest earned Mark-up / return / interest expensed Net mark-up / interest income Provision against non-performing loans and advances - net Provision against diminution in 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 Income / gain on investments Income from dealing in foreign currencies Other income Total non-mark-up / interest income Non mark-up / interest expense Administrative expenses Other provisions / write offs - net Other charges Total non mark-up / interest expenses Staff welfare fund PROFIT BEFORE TAXATION Taxation - current Taxation - deferred 27 PROFIT AFTER TAXATION Share of loss attributable to minority interest PROFIT ATTRIBUTABLE TO SHAREHOLDERS Basic earnings per share Diluted earnings per share 28 29 Note 2002 2001 (Rupees in '000) 23,956,114 11,580,431 12,375,683 2,656,361 (144,154) 2,512,207 9,863,476 26,738,446 15,434,544 11,303,902 2,632,960 3,747 2,636,707 8,667,195

21 22 9.5 8.6

35,961 30,790 19,625 19,752 106,128 275,284 202,489 (1,073) 70 201,486 73,798 (3,690) 70,108 14,451 20,776 35,227 34,881 163 35,044 0.029 0.017

31,344 18,864 24,927 18,913 94,048 242,688 201,071 1,250 212 202,533 40,155 (2,011) 38,144 19,068 1 19,069 19,075 59 19,134 0.016 0.009

23 24

2,096,871 1,795,385 1,144,350 1,151,751 6,188,357 16,051,833 11,807,129 (62,542) 4,061 11,748,648 4,303,185 (215,159) 4,088,026 842,631 1,211,435 2,054,066 2,033,960 9,449 2,043,409 1.68 1.01

1,827,685 1,099,947 1,453,522 1,102,845 5,483,999 14,151,194 11,724,443 72,896 12,381 11,809,720 2,341,474 (117,244) 2,224,230 1,111,826 62 1,111,888 1,112,342 3,410 1,115,752 0.92 0.55

25 26

The annexed notes and annexures form an integral part of these accounts.

HABIB BANK LIMITED AND SUBSIDIARY COMPANIES CONSOLIDATED PROFIT AND LOSS ACCOUNT (continued) FOR THE YEAR ENDED DECEMBER 31, 2002 2002 2001 (US $ in '000) 35,044 (292,540) (257,496) 19,134 (306,569) (287,435) PROFIT ATTRIBUTABLE TO SHAREHOLDERS Accumulated loss brought forward APPROPRIATIONS AND TRANSFERS: Transferred from : Surplus on revaluation of fixed assets Prior years Current year - net of tax Transferred to: Statutory reserve Capital reserve Revenue reserve Reserves set aside as per regulatory requirements of overseas joint ventures Accumulated loss carried forward 11.3 678,086 59,885 737,971 (408,682) (50,868) (459,550) (14,736,177) (223,150) (74,540) (297,690) (17,058,007) Note 2002 2001 (Rupees in '000) 2,043,409 (17,058,007) (15,014,598) 1,115,752 (17,876,069) (16,760,317)

11,629 1,027 12,656 (7,009) (872) (7,881) (252,721)

(3,827) (1,278) (5,105) (292,540)

The annexed notes and annexures form an integral part of these accounts.

President and Chief Executive

Director

Director

Director

HABIB BANK LIMITED AND SUBSIDIARY COMPANIES CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2002 2002 2001 (US $ in '000) 70,108 (12,983) (17,808) (30,791) 39,317 10,437 (2,472) 45,556 (950) (634) 8,128 60,065 99,382 (1,297,170) 220,249 (50,665) 6,879 (1,120,707) 767,233 250,424 7,124 36,955 1,061,736 40,411 29,755 70,166 38,145 (15,172) (506) (15,678) 22,467 9,699 64 39,583 (187) (1,918) 3,309 50,550 73,017 186,581 (187,623) 94,029 53,902 146,889 298,285 (135,915) 569 (83,490) 79,449 299,355 (20,892) 278,463 CASH FLOWS FROM OPERATING ACTIVITIES Profit before taxation Less: Dividend income and share of profit of subsidiaries / joint ventures Profit from investment securities Note 2002 (Rupees in '000) 4,088,026 (757,029) (1,038,356) (1,795,385) 2,292,641 608,597 (144,154) 2,656,361 (55,403) (36,956) 473,916 3,502,361 5,795,002 (75,637,989) 12,842,718 (2,954,259) 401,116 (65,348,414) 44,737,374 14,602,219 415,413 2,154,855 61,909,861 2,356,449 1,735,009 4,091,458 2,224,230 (884,663) (29,483) (914,146) 1,310,084 565,576 3,747 2,308,066 (10,919) (111,840) 192,973 2,947,603 4,257,687 10,879,553 (10,940,321) 5,482,833 3,143,049 8,565,114 17,392,991 (7,925,180) 33,194 (4,868,284) 4,632,721 17,455,522 (1,218,198) 16,237,324 2001

Adjustment for non-cash charges Depreciation Provision against diminution in the value of investments Provision against non-performing loans and advances - net of reversals Amortisation of premium on investments Profit on sale of fixed assets Miscellaneous provisions

(Increase) / decrease in operating assets Government securities Lendings to financial institutions Loans and advances Other assets - net Increase / (decrease) in operating liabilities Deposits and other accounts Borrowings from financial institutions Bills payable Other liabilities - net

Payments of provision against off-balance sheet obligations Income tax refund receieved / paid Net cash flows from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Net investments in available-for-sale securities and joint ventures Dividend income received Fixed capital expenditure Proceeds from sale of fixed assets Net cash flows from investing activities CASH FLOWS FROM FINANCING ACTIVITIES Contribution from minority shareholders Net cash flow from financing activities Exchange adjustment on translation of balances in foreign branches, subsidiaries and joint ventures Increase in cash and cash equivalents during the year Cash and cash equivalents at beginning of the year Effects of exchange rate changes on cash and cash equivalents

(41,898) 10,942 (14,882) 2,644 (43,194)

(12,928) 5,972 (10,472) 3,263 (14,165)

(2,443,076) 637,981 (867,764) 154,121 (2,518,738)

(753,811) 348,229 (610,629) 190,261 (825,950)

3,549 3,549

206,930 206,930

(162) 26,810 906,883 (2,121) 904,762 931,572

(6,590) 261,257 643,481 24 643,505 904,762

(9,462) 1,563,258 52,880,471 (123,670) 52,756,801 30 54,320,059

(384,281) 15,234,023 37,521,402 1,376 37,522,778 52,756,801

Cash and cash equivalents at end of the year The annexed notes and annexures form an integral part of these accounts.

President and Chief Executive

Director

Director

Director

HABIB BANK LIMITED AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2002

RESERVES Capital Other tier 1 Capital Exchange Translation Reserve Joint Ventures and Subsidiaries Other Reserves Accumulated loss

Share Capital

Statutory

General

Total

---------------------------------------------------------------------------- (Rupees in '000) ---------------------------------------------------------------------------Balance as at December 31, 2000 Profit for the year attributable to shareholders Share of statutory reserves of joint ventures Transferred to statutory reserves Effect of translation of net investment in foreign branches, subsidiaries and joint venture companies Balance as at December 31, 2001 Profit for the year attributable to shareholders Share of statutory reserves of joint ventures Transferred from surplus on revaluation of fixed assets to accumulated losses for: - Prior years - Current year - net of tax Transferred to statutory reserves Effect of translation of net investment in foreign branches, subsidiaries and joint venture companies Balance as at December 31, 2002 12,178,495 8,000,000 866,383 429,300 3,436,345 1,736,357 (17,876,069) 8,770,811

1,115,752

1,115,752

74,540 -

223,150

(74,540) (223,150)

12,178,495

8,000,000

(384,281) 482,102

503,840

3,659,495

1,736,357

(17,058,007)

(384,281) 9,502,282

2,043,409

2,043,409

50,868

(50,868)

408,682

678,086 59,885 (408,682)

678,086 59,885 -

12,178,495

8,000,000

(9,462) 472,640

554,708

4,068,177

1,736,357

(14,736,177)

(9,462) 12,274,200

The annexed notes and annexures form an integral part of these accounts.

President and Chief Executive

Director

Director

Director

Habib Bank Limited and Subsidiary Companies

Notes to the Consolidated Financial Statements
For the year ended December 31, 2002 1. THE GROUP AND ITS OPERATIONS Habib Bank Limited is incorporated in Pakistan and engaged in commercial banking, modaraba management and related services in Pakistan and overseas. The Bank as a group comprises of: Holding company Habib Bank Limited, Pakistan

Subsidiary companies Habib Allied International Bank Plc., United Kingdom shareholding at 90.5% Habib Finance International Limited, Hong Kong - wholly owned Habib Finance (Australia) Limited, Australia - wholly owned Habib Bank Financial Services (Private) Limited, Pakistan - wholly owned

The consolidated financial statements of the group for the year ended December 31, 2002 comprise the bank and its subsidiaries (together referred to as the Group) and the Groups interest in its associated and jointly controlled entities.

2.

BASIS OF PRESENTATION The consolidated financial statements include the financial statements of Habib Bank Limited and its subsidiary companies. The financial statements of such subsidiary companies have been consolidated on a line-by-line basis. In accordance with the directives of the Federal Government regarding the shifting of the banking system to Islamic modes, the State Bank of Pakistan has issued various circulars from time to time. Permissible forms of trade-related modes of financing include purchase of goods by banks from their customers and immediate resale to them at appropriate mark-up in price on deferred payment basis. The purchases and sales arising under these arrangements are not reflected in these accounts as such but are restricted to the amount of facility actually utilised and the appropriate portion of markup thereon. Material intra-group balances and transactions have been eliminated. The US Dollar amounts shown in the financial statements are stated solely for information convenience. For the purpose of translation to US Dollars, the rate of Rs. 58.31 per US Dollar 1 has been used for both 2002 and 2001.

2 3. STATEMENT OF COMPLIANCE These financial statements are prepared in accordance with approved accounting standards as applicable in Pakistan and the requirements of the Companies Ordinance, 1984 and the Banking Companies Ordinance, 1962. Approved accounting standards comprise of such International Accounting Standards as notified under the provisions of the Companies Ordinance, 1984. Wherever the requirements of the Companies Ordinance, 1984, Banking Companies Ordinance, 1962 or directives issued by the Securities and Exchange Commission of Pakistan and the State Bank of Pakistan differ with the requirements of these standards, the requirements of the Companies Ordinance, 1984, Banking Companies Ordinance, 1962 or the requirements of the said directives take precedence. International Accounting Standard 39, Financial Instruments: Recognition and Measurement (IAS 39) and International Accounting Standard 40, Investment Property (IAS 40) are not applicable for banking companies in Pakistan. Accordingly, the requirements of these standards have not been considered in the preparation of these financial statements. However, investments have been classified in accordance with the requirements of the format prescribed by the State Bank of Pakistans BSD Circular No. 36 dated October 10, 2001.

4. 4.1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Accounting convention These accounts have been prepared under the historical cost convention, except that certain fixed assets have been included at revalued amounts, assets and liabilities of foreign entities denominated in foreign currencies have been translated at year end rates and certain investments and commitments in respect of forward exchange contracts have been marked to market and are carried at fair value. All specific provisions except those relating to provisions against non-performing loans and advances are netted off from the relevant balance sheet heads.

4.2

Revenue recognition Advances and investments Income on loans and advances and debt security investments are recognised on an accrual basis. Where debt securities are purchased at a premium or discount, those premiums / discounts are amortised through the profit and loss account over the remaining maturity, using the effective yield method. Interest or mark-up recoverable on classified loans and advances and investments is recognised on a receipt basis. Interest / mark-up on rescheduled / restructured loans and advances and investments is recognised as permitted by the regulations of State Bank of Pakistan or overseas regulatory authorities of countries where the branches / companies operate, except where in the opinion of the management, it would not be prudent to do so. Dividend income from investments (other than those which are accounted for under the equity method) is recognised when the right to receive it is established.

3 Lease financing Financing method is used in accounting for income from lease financing. Under this method, the unearned lease income (excess of the sum of total lease rentals and estimated residual value over the cost of leased assets) is deferred and taken to income over the term of the lease period so as to produce a constant periodic rate of return on the outstanding net investment in lease. Unrealised lease income is suspensed, where necessary, in accordance with the requirements of the prudential regulations of State Bank of Pakistan. Gains/losses on termination of lease contracts, documentation charges, front-end fees and other lease income are recognised as income on a receipt basis. Letters of credit and guarantees Commission on letters of credit and guarantees etc., is recognised on accrual basis.

4.3

Taxation Income tax on the profit or loss for the year comprises of current and deferred tax. Current taxation Provision for current taxation is based on taxable income at the current rates of taxation after taking into account tax credits and rebates available, if any. Deferred taxation Deferred tax is recognised using the balance sheet liability method on all temporary differences between the amounts attributed to assets and liabilities for financial reporting purposes and amounts used for taxation purposes, except that deferred tax assets / liabilities associated with investments in foreign entities are recognised to the extent that these temporary differences will reverse in the foreseeable future. In addition, the group also records deferred tax asset on available tax losses using the tax rates, enacted or substantially enacted at the balance sheet date, expected to be applicable at the time of its utilisation. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. The revised International Accounting Standard (IAS) 12 dealing with Income Taxes became applicable during the current year on financial statements covering periods beginning on or after January 1, 2002. As required by this IAS, the bank now recognises deferred tax asset / liability on deficit / surplus on revaluation of fixed assets and securities which is adjusted against the related deficit/surplus. In accordance with the allowed alternative treatment prescribed in IAS 8, Net Profit or Loss for the period, Fundamental errors and Changes in Accounting Policies, the effect of this change in accounting policy has been recognised in the current year. The proforma information relating to the change in policy has not been given as this change would not have any effect on the opening balance of accumulated losses as at January 1, 2002.

4 The above change in accounting policy, to the extent that it relates to surplus on revaluation of fixed assets, has resulted in an increase in the profit after taxation for the year by Rs. 52.672 million while the change in accounting policy relating to the surplus on revaluation of securities did not have any effect on the profit before taxation for the year.

4.4

Investments The group values its security holdings at market value, in accordance with the guidelines given in the State Bank of Pakistan circular BSD No. 20 dated August 4, 2000. Any unrealised surplus / deficit arising on such revaluation is taken directly to Surplus / deficit on revaluation of securities in the balance sheet. Where an active market is not available, securities continue to be stated at cost. Provision for diminution in the value of these securities is made after considering permanent impairment, if any, in their value. Where securities are sold subject to a commitment to repurchase them at a pre-determined price, they remain on the balance sheet and a liability is recorded in respect of the consideration received in Borrowing from Banks or Deposits as appropriate. Conversely, securities purchased under analogous commitments to resell are not recognized on the balance sheet and the consideration paid is recorded in Lendings to financial institutions or Loans and advances as appropriate. The group records its investments in associated and joint venture companies on the basis of equity accounting. The investments in undertakings where the group does not exercise significant influence or control and those held with a view for disposal in the near future continue to be stated at cost less impairment losses (if any). Gain / loss on disposal of investments during the period are taken to the profit and loss account.

4.5

Advances including net investment in finance lease Loans and advances Loans and advances and net investment in finance lease are stated net of interest / mark-up in suspense and provision for loan losses. Provision for loan losses of Pakistan operations is made in accordance with the requirements of the State Bank of Pakistan and charged to the profit and loss account. Provision for loan losses of overseas branches and subsidiary companies are made as per the requirements of the respective Central Banks. Finance lease receivables Leases where the group transfers substantially all the risks and rewards incidental to ownership of an asset to the lessee are classified as finance leases. A receivable is recognised at an amount equal to the present value of the lease payments, including any guaranteed residual value. Finance lease receivables are included in loans and advances to customers.

4.6

Operating fixed assets and depreciation Operating fixed assets are stated at cost or revalued amount less accumulated depreciation and impairment losses (if any). Cost of fixed assets of foreign branches and subsidiary companies includes exchange differences arising on translation at year-end rates. Land and buildings are revalued by professionally qualified valuers with sufficient regularity to ensure that the net carrying amount does not differ materially from the fair value. Surplus arising on revaluation is credited to the Surplus on revaluation of fixed assets account. Under the provisions of the Companies Ordinance, 1984, deficit arising on revaluation of fixed assets is adjusted against the balance in the above surplus account. Depreciation is calculated so as to write off the assets over their expected economic lives at varying rates and methods depending on the nature of the asset and the country of its location. No depreciation is charged on land. Depreciation on additions is charged from the month in which the asset is put to use while no depreciation is charged in the month in which the assets are deleted. Normal repairs and maintenance are charged to the profit and loss account as and when incurred. However, major repairs and renewals are capitalised. During the year, certain amendments in the Companies Ordinance, 1984 were promulgated. One of these amendments relates to section 235 of the Companies Ordinance, 1984 under which the surplus on revaluation of fixed assets can now be reversed to the extent of incremental depreciation charged on these assets. Before this amendment, the surplus could only be reversed at the time of disposal of the fixed asset or to set off a deficit arising on any subsequent revaluation of the fixed asset. As a result of the amendment in law, the surplus on revaluation of fixed assets to the extent of the incremental depreciation charged on the related assets is now transferred by the group to retained earnings / accumulated losses. In accordance with the above change in law, as clarified by the Securities and Exchange Commission of Pakistan (SECP), an amount equal to the incremental depreciation charged on these assets till December 31, 2001 has been transferred from the surplus on revaluation of fixed assets to retained earnings / accumulated losses in the current year. This effect has been shown in note 19.1 to these financial statements. Gains and losses on sale of fixed assets are included in income currently, except that the related surplus on revaluation of fixed assets (net of deferred taxation) is transferred directly to retained earnings / accumulated losses. Capital work in progress is stated at cost.

4.7

Employee benefits

4.7.1 Habib Bank Limited (the bank) operates the following schemes for its employees: For new employees and for those who did not opt for the pension scheme of 1977, the bank operates: Approved funded provident fund (defined contribution scheme)

Approved funded gratuity scheme (defined benefit scheme) Liability under the gratuity scheme is determined on the basis of actuarial advice under the Projected Unit Credit method.

For those who opted for the pension scheme introduced in May 1977, the bank operates: Approved funded pension scheme (defined benefit scheme) Liability under the pension scheme is determined on the basis of actuarial advice using the Projected Unit Credit method.

Post retirement medical benefits The bank also provides post retirement medical benefits to its employees. Provision is made in the accounts for this benefit based on actuarial advice using the Projected Unit Credit method.

Employees compensated absences The bank also makes periodic provisions in the accounts for its liabilities towards vested compensated absences accumulated by its employees. This liability is estimated on the basis of actuarial advice under the Projected Unit Credit method.

4.7.2

Any surplus / deficit arising on actuarial valuation of these schemes is recognised in the year in which it arises.

4.7.3 Employee benefits offered by subsidiary companies are as follows: Habib Allied International Bank plc, United Kingdom Habib Finance International Limited, Hong Kong Habib Finance (Australia) Limited, Australia Habib Bank Financial Services (Private) Limited, Pakistan - Defined contributory pension and life assurance schemes. - Provident fund and un-funded gratuity schemes. - A contributory superannuation scheme for locally recruited employees. - Governed by Habib Bank Limiteds retirement schemes

4.8

Foreign currencies Foreign currency transactions Transactions in foreign currencies are translated to rupees at the foreign exchange rates ruling on the transaction date. Monetary assets and liabilities in foreign currencies are expressed in rupee terms at the rates of exchange ruling on the balance sheet date except certain deposits, which are covered by forward foreign exchange contracts are translated at contracted rates. Forward foreign exchange contracts and foreign bills purchased are valued at forward rates applicable to their respective maturities.

7 Foreign entities The assets and liabilities of foreign entities are translated to rupees at exchange rates prevailing at the balance sheet date. The results of foreign entities are translated at the average rate of exchange for the year. Translation gains and losses Translation gains and losses are included in the profit and loss account, except those arising on the translation of net investment in foreign branches, subsidiaries and joint venture companies, which are taken to capital reserve (Exchange Translation Reserve). Commitments Commitments for outstanding forward foreign exchange contracts disclosed in these financial statements are translated at forward rates applicable to their respective maturities. Contingent liabilities / commitments for letter of credits and letter of guarantees denominated in foreign currencies are expressed in rupee terms at the rates of exchange ruling on the balance sheet date.

4.9

Cash and cash equivalents Cash and cash equivalents include cash, balances with banks in current and deposit accounts and call money lending.

4.10 Off setting Financial assets and financial liabilities are set off and the net amount is reported in the financial statements when there is a legally enforceable right to set off and the group intends either to settle on a net basis, or to realise the assets and to settle the liabilities simultaneously.

8 Note 5. CASH AND BALANCES WITH TREASURY BANKS In hand Local currency Foreign currency 2002 2001 (Rupees in '000)

3,528,000 948,738 4,476,738

3,980,512 910,749 4,891,261

With State Bank of Pakistan in: Local currency current account Foreign currency deposit account

12,594,967 4,459,298 17,054,265 5.1 2,873,108 1,824,824 4,697,932

10,911,931 3,867,079 14,779,010

With other Central Banks in: Foreign currency current account Foreign currency deposit account

5,619,396 385,410 6,004,806

With National Bank of Pakistan in local currency current account

1,220,357 27,449,292

1,994,199 27,669,276

The above balance includes remunerative accounts amounting to Rs. 5,700.357 million. 5.1 This includes balances held with the Central Banks of the respective countries in accordance with the requirements of the local statutory / Central Bank regulations. Note 6. BALANCES WITH OTHER BANKS In Pakistan On current account On deposit account 2002 2001 (Rupees in '000)

22,893 116,705 139,598

Outside Pakistan On current account On deposit account

6.1

2,003,576 24,727,593 26,731,169 26,870,767

1,530,719 23,556,806 25,087,525 25,087,525

6.1

This includes remunerative current account balance amounting to Rs. 742.678 million. Note 2002 2001 (Rupees in '000)

7.

LENDINGS TO FINANCIAL INSTITUTIONS Call money lendings Repurchase agreement lendings (reverse repo) Placements with non-banking financial institutions 430,000 9,121,123 450,000 10,001,123 9,379,534 12,634,307 830,000 22,843,841

7.1

9
2002 7.1 2001 Total Held by bank Further given as collateral Total

Securities held as collateral against lendings to financial institutions

Held by bank

Further given as collateral

------------------------------------------------------------ (Rupees in '000) ------------------------------------------------------------

Market treasury bills Pakistan investment bonds Federal investment bonds

4,813,496 870,000 215,000 5,898,496

3,222,627 3,222,627

8,036,123 870,000 215,000 9,121,123

7,454,307 2,150,000 3,030,000 12,634,307

7,454,307 2,150,000 3,030,000 12,634,307

Market value of securities held as collateral against lendings to financial institutions as at December 31, 2002 amounted to Rs. 9,660.056 million (2001: Rs. 13,216.516 million)

Note

2002 Held by bank Given as collateral Total Held by bank

2001 Given as collateral Total

8.

INVESTMENTS

------------------------------------------------------------ (Rupees in '000) ------------------------------------------------------------

8.1

Investments by type
Available-for-sale securities

Federal Government Securities - Market treasury bills - Pakistan investment bonds - Federal investment bonds - Central Government securities - Government of Pakistan Guaranteed Bonds - WAPDA bonds - Government of Pakistan US Dollar/Euro bonds Provincial Government securities Overseas Government securities 72,788,986 12,035,208 13,783,286 1,499,995 3,271,790 673,511 3,106,762 17,031,963 1,118,363 89,820,949 13,153,571 13,783,286 1,499,995 3,271,790 673,511 3,106,762 19,616,921 1,749,947 376,696 312,375 15,194,827 1,750,000 2,430,828 701,511 2,820,753 4,118,460 400,000 23,735,381 2,149,947 376,696 312,375 15,194,827 1,750,000 2,430,828 701,511 2,820,753

Fully paid-up ordinary shares: - Listed companies - Unlisted companies 2,441,800 332,822 2,441,800 332,822 2,995,769 323,079 2,995,769 323,079

Modaraba certificates Debentures, Participation Term Certificates and Term Finance Certificates NIT units Preference shares Other investments

37,920

37,920

30,134

30,134

3,410,145 365,989 372,848 4,879,834 119,000,896

18,150,326

3,410,145 365,989 372,848 4,879,834 137,151,222

3,388,258 365,989 247,311 529,986 52,834,384

4,518,460

3,388,258 365,989 247,311 529,986 57,352,844

Investment in associated undertakings Investment in joint venture companies Investment (net of provision)

8.4 8.5

63,300 752,808 119,817,004

18,150,326

63,300 752,808 137,967,330

288,300 748,330 53,871,014

4,518,460

288,300 748,330 58,389,474

Surplus/(deficit) on revaluation of investments Investments (at revalued amount)

19.2

4,471,499 124,288,503

439,101 18,589,427

4,910,600 142,877,930

(618,735) 53,252,279

21,586 4,540,046

(597,149) 57,792,325

8.2

Investment in shares of Bank Al-Falah were sold by the Privatisation Commission (Government of Pakistan) on behalf of Habib Bank Limited to Abu Dhabi Group and Bank AlFalah employees / exemployees for an aggregate amount of Rs 620.058 million. The sale of these shares resulted in a capital gain of Rs 395.058 million to the bank.

10 Note 8.3 Investments by segments Federal Government Securities: - Market treasury bills - Pakistan investment bonds - Federal investment bonds - Central Government securities - Government of Pakistan Guaranteed bonds - WAPDA bonds - Government of Pakistan US Dollar / Euro bonds Provincial Government securities Overseas Government securities Fully paid-up ordinary shares: - Listed companies - Unlisted companies Modaraba certificates Debentures, Participation Term Certificates and Term Finance Certificates NIT units Preference shares Other investments Investment in associated undertakings Investment in joint venture companies Investment (net of provision) Surplus/(deficit) on revaluation of investments Investments (at revalued amount) 8.4 8.4 8.5 2002 2001 (Rupees in '000)

89,820,949 13,153,571 13,783,286 1,499,995 3,271,790 673,511 3,106,762 2,441,800 332,822 37,920 3,410,145 365,989 372,848 4,879,834 63,300 752,808 137,967,330 4,910,600 142,877,930

23,735,381 2,149,947 376,696 312,375 15,194,827 1,750,000 2,430,828 701,511 2,820,753 2,995,769 323,079 30,134 3,388,258 365,989 247,311 529,986 288,300 748,330 58,389,474 (597,149) 57,792,325

This represents investment of Habib Bank Limited (bank) in First Women Bank Limited. This investment is being carried at cost and has not been accounted for under the equity method as the bank does not have significant influence over this entity. 2002 2001 (Rupees in '000)

8.5

Investment in joint venture companies - under equity method Habib Nigeria Bank Limited - Holding 40% (2001: 40%) Opening balance Share of profit for the year - net of tax Investment during the year Exchange translation reserve for the year Dividend received during the year Himalayan Bank Limited, Nepal - Holding 20% (2001: 20%) Opening balance Share of profit for the year - net of tax Exchange translation reserve for the year Dividend received during the year

598,494 146,081 (45,199) (121,019) 578,357 149,836 31,510 (6,895) 174,451 752,808

380,671 214,357 26,483 (23,017) 598,494 99,737 75,642 2,532 (28,075) 149,836 748,330

11 8.6 Particulars of provision held against diminution in value of investments The balances above are stated net of specific provision held. The analysis of total provision held is as follows: Note 2002 2001 (Rupees in '000) Opening balance (Reversed)/ charged during the year Transfered to other assets Closing balance 987,847 (144,154) (22,244) 821,449 1,207,376 3,747 (223,276) 987,847

8.7

8.7 This represents unrealised mark-up suspensed on non-performing Debentures, Participation Term Certificates and Term Finance Certificates. This balance has been reclassified and adjusted against related balance of unrealised mark-up / interest receivable as shown in note 10. 8.8 The market value of investments held by Habib Bank Limited for maintaining the liquidity requirements of the State Bank of Pakistan amounted to Rs 40,046 million as at December 31, 2002 (2001: Rs 37,736 million). 8.9 Investments include Rs. 543.500 million as at December 31, 2002 (2001: Rs. 649.253 million) pledged to State Bank of Pakistan and National Bank of Pakistan against TT/DD discounting facilities and demand loan facilities sanctioned to Habib Bank Limited. 8.10 Investments include Rs 10 million as at December 31, 2002 (2001: Rs 10 million) pledged with the Controller of Military Accounts in lieu of Regimental Fund Accounts being maintained at various branches of the bank. 8.11 Information relating to investments in shares of listed and unlisted companies, redeemable capital and bonds, required to be disclosed as part of the financial statements by the State Bank of Pakistan, is given in Annexure"I" and is an integral part of these financial statements. Note 9. ADVANCES Loans, cash credits, running finances, etc. In Pakistan Outside Pakistan Net investment in finance lease - in Pakistan Bills discounted and purchased (excluding Government treasury bills) Payable in Pakistan Payable outside Pakistan Provision against non-performing advances 9.1 Particulars of advances 127,811,312 39,711,987 167,523,299 146,146,212 21,079,189 167,225,401 9.5 9.2 2002 2001 (Rupees in '000)

150,830,151 31,412,006 182,242,157 443,625

153,961,585 27,341,424 181,303,009 385,272

7,269,589 10,558,805 17,828,394 (32,990,877) 167,523,299

5,726,914 11,969,521 17,696,435 (32,159,315) 167,225,401

9.1.1 In local currency In foreign currencies (including foreign currency financing by domestic branches amounting to Rs 17,884.688 million)

12 2002 2001 (Rupees in '000) 9.1.2 Short term (for upto one year) Long term (for over one year)
130,390,058 37,133,241 167,523,299
2002 Not later than one year Later than Not later 2001 Later than

94,199,367 73,026,034 167,225,401

9.2

Net investment in finance lease

one and Total than one one and Total less than year less than five years five years ---------------------------------------------------------------------- (Rupees in '000) ---------------------------------------------------------------------Lease rentals receivable Residual value Gross investment in finance lease Unearned finance income Net investment in finance lease 155,039 2,170 157,209 49,738 107,471 331,028 70,228 401,256 65,102 336,154 486,067 72,398 558,465 114,840 443,625 196,800 1,453 198,253 90,150 108,103 Non-performing advances Pakistan Other assets especially mentioned Substandard Doubtful Loss Overseas operations Total 320,748 30,403 351,151 73,982 277,169 Provision required 517,548 31,856 549,404 164,132 385,272 Provision held

9.3

Category of Classification

---------------------------- (Rupees in '000) ---------------------------1,664,540 2,277,930 864,550 33,813,090 38,620,110 14,392,465 53,012,575 151,260 179,380 19,828,642 20,159,282 12,831,595 32,990,877 151,260 179,380 19,828,642 20,159,282 12,831,595 32,990,877

Non-performing advances include Government guaranteed debts of Rs. 1,840.30 million as at December 31, 2002 (2001: Rs. 1,827.493 million).

9.4

Transfer of non-performing advances to Corporate and Industrial Restructuring Corporation

During the year, certain non-performing advances with a net book value of Rs. 179.991 million were transferred to Corporate and Industrial Restructuring Corporation (CIRC) which has been established by the Federal Government with the specific objective for recovery of non-performing loans and assets of nationalised banks. Under the terms of the Transfer and Assignment Agreements dated March 1, 2001, April 10, 2001, June 26, 2001 and October 2, 2001 signed between the bank and CIRC in respect of these loans, the bank will receive Federal Government guaranteed bonds as a consideration for transfer of these assets. These bonds will be issued after three years from the transfer date or privatisation of the bank, if earlier.

9.5

Particulars of provision against non-performing advances - Specific Provision

2002 2001 Specific Total Specific Total ---------------------------------------------------------- (Rupees in '000) --------------------------------------------------------Opening balance Exchange adjustment and other movement Charge for the year Reversals Provision transferred to CIRC Amounts written off Closing balance 32,159,315 (365,477) 2,815,630 (159,269) (717,150) (742,172) 32,990,877 32,159,315 (365,477) 2,815,630 (159,269) (717,150) (742,172) 32,990,877 29,851,249 111,984 2,632,960 (436,878) 32,159,315 29,851,249 111,984 2,632,960 (436,878) 32,159,315

13 2002 2001 (Rupees in '000) 9.6 Particulars of write-offs: 1,459,322 1,459,322 848,599 610,723 1,459,322 436,878 436,878 93,777 343,101 436,878

9.6.1 Against provisions (including transferred to CIRC) Directly charged to profit and loss account

9.6.2 Write-offs of Rs 500,000 and above Write-offs of below Rs 500,000

9.7

Details of loan write off of Rs 500,000 and above In terms of sub-section (3) of Section 33A of the Banking Companies Ordinance, 1962, the statement in respect of written-off loans or any other financial relief of five hundered thousand rupees or above allowed to a person(s) during the year ended December 31, 2002 is given in annexure II.

9.8

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

Balance as at December 31, 2002

Maximum total amount of loans and advances including temporary advances granted during the year

Debts due by directors or executives of the group or any of

(Rupees in '000) 623 115,104 623 118,142

them either severally or jointly with any other persons: - in respect of directors - in respect of executives *
Debts due by companies or firms in which the directors of the

group are interested as directors, partners or in the case of private companies as members
Debts due by subsidiary companies, controlled firms, managed

125,612

127,671

modarabas and other related parties

* (These represent staff loans given by the bank to its executives as per their terms of employment) Note 10. OTHER ASSETS Income / mark-up accrued in local currency Income / mark-up accrued in foreign currency Receivable from CIRC Prepaid exchange risk fee Advances, deposits, advance rent and other prepayments Advance taxation (payments less provisions) Unrealised gain on forward foreign exchange contracts - net Receivable from defined benefit plans Receivable from defined contribution plan Stationery and stamps on hand Branch adjustment account Due from Privatisation Commission Due from Government of Pakistan Others

2002 2001 (Rupees in '000)

9.4

20.9 32.3.2

8.2 10.1 10.2

3,423,827 510,978 179,991 45,826 507,766 11,626,839 190,892 110,478 620,058 386,373 534,903 18,137,931

3,233,193 1,337,952 218,914 621,497 14,204,479 14,260 106,314 5,944 100,388 803,802 287,475 322,300 21,256,518

14

10.1

This represents residual amount recoverable from the Government of Pakistan on account of payments made to retrenched employees under the Voluntary Separation Scheme (VSS). All payments made under this scheme are recoverable from the Government of Pakistan as grant to the bank. This includes Rs 269.969 million recoverable from the State Bank of Pakistan (SBP) on account of encashment of various instruments on behalf of SBP by the bank. 2002 2001 Note (Rupees in '000) OPERATING FIXED ASSETS Capital work-in-progress Property and equipment 11.1 11.2 97,765 7,086,858 7,184,623 77,870 5,796,552 5,874,422

10.2

11.

11.1

Capital work-in-progress Civil works Equipment Others 67,416 12,871 17,478 97,765 58,611 19,259 77,870

11.2

Operating fixed assets

COST Surplus/ Additions/ As at (deficit) on December 31, (deletions) / adjustments revaluation 2002 during the during the year year ------------------ Rupees in 000s -------------------(1,500) (6,532) 228,847 (86,657) 182,228 471,466 (107,075) 147,556 (36,027) 847,869 (237,791) 182,228 587,487 (157,230) (16,609) 108,491 DEPRECIATION Charge for Reversed on As at revaluation the year/ December 31, (depreciation 2002 on deletions) / adjustments ------------------ Rupees in 000s -------------------206,967 (261) 182,228 349,100 (92,299) 52,530 (28,066) 608,597 (120,626) 182,228 565,576 (78,809) 24,056 -

Description

As at January 1, 2002

As at January 1, 2002

Book value as at December 31, 2002

Rate of depreciation %

Lease hold land

126,600

108,491

Land on which buildings are constructed

2,973,487

134,513

3,101,468

3,101,468

Building on leasehold land

2,313,195

61,927

2,699,540

935,267

(988,368)

335,833

2,363,707

Furniture, fixture and office equipment

3,007,993

3,372,384

1,750,092

2,006,893

1,365,491

10-30

Vehicles

398,668

510,197

338,032

362,496

147,701

20

2002

8,819,943

179,831

9,792,080

3,023,391

(988,368)

2,705,222

7,086,858

2001

8,473,080

11,107 (94,501) -

8,819,943

2,539,279

(26,711) -

3,023,391

5,796,552

15 11.3 The bank's domestic properties were revalued by independent professional valuers as on July 01, 2002. These properties were revalued by M/s Iqbal A. Nanjee & Co., professional valuers on the basis of market value. The revaluation has resulted in increasing the surplus on revaluation of fixed assets by Rs. 1,168.199 million.

The bank's properties in Colombo branch were revalued on December 26 and 27, 1998, by A.Y. Daniel and Sons, licensed valuers, on market value basis. This revaluation resulted in a surplus of Rs. 63.686 million. However, as per the regulations of Central Bank of Sri Lanka only 50% of the above revaluation surplus amounting to Rs. 31.843 million has been recorded by the bank.

The movement in surplus on revaluation of properties is given in note 19 to these financial statements.

11.4

Details of disposal of fixed assets The information relating to disposal of properties and equipment in aggregate having book value exceeding Rs. 250,000 or cost exceeding Rs. 1 million (whichever is lower) by the group required to be disclosed as part of the financial statements by the State Bank of Pakistan is given in Annexure III and is an integral part of these financial statements.

11.5

At December 31, 2002 carrying value of temporarily idle properties and equipment and those retired from active service and held for disposal purposes amounted to Rs. 159.750 million (2001: 195.617 million) and Rs. 30.206 million (2001: 115.743 million), respectively. Gross carrying amount of fully depreciated properties that are still in the bank's use, as at the above date, amounted to Rs. 0.887 million (2001: 0.907 million). 2002 (Rupees in '000) 2001

12.

DEFERRED TAX ASSET Deductible temporary differences Recognised tax losses Other deductible temporary differences Taxable temporary differences Surplus on revaluation of fixed assets Surplus on revaluation of investments Other taxable temporary differences Net deferred tax asset recognised by the group

3,796,291 1,348,057 5,144,348 (540,792) (1,228,829) (407,157) (2,176,778) 2,967,570

4,518,297 1,982,500 6,500,797 (499,500) (499,500) 6,001,297

13.

BILLS PAYABLE In Pakistan Outside Pakistan 5,042,648 792,025 5,834,673 4,592,805 826,455 5,419,260

16 Note 14. BORROWINGS FROM FINANCIAL INSTITUTIONS In Pakistan Outside Pakistan 14.1 Particulars of borrowings from financial institutions In local currency In foreign currencies 14.2 Details of borrowings from financial institutions Secured Borrowings from State Bank of Pakistan Under export refinance scheme Locally manufactured machinery Others Repurchase agreement borrowings Unsecured In Pakistan International Development Agency Interbank call money borrowing Outside Pakistan Overdrawn nostro accounts Borrowings of overseas branches 474,079 4,890,656 5,364,735 5,529,541 38,045,541 951,361 3,006,322 3,957,683 9,202,020 23,443,322 164,806 164,806 204,337 5,040,000 5,244,337 32,680,806 5,364,735 38,045,541 19,485,639 3,957,683 23,443,322 32,680,806 5,364,735 38,045,541 19,485,639 3,957,683 23,443,322 2002 2001 (Rupees in '000)

14.3 14.3

10,697,570 470,047 21,348,383 32,516,000

8,873,433 813,913 19,000 4,534,956 14,241,302

14.3

Borrowings from State Bank of Pakistan (SBP) under the export and local manufactured machinery refinance scheme of SBP is secured by the bank's cash and security balances held by SBP. 2002 2001 (Rupees in '000)

15.

DEPOSITS AND OTHER ACCOUNTS Customers Fixed deposits Savings deposits Current accounts - non-remunerative Financial institutions Remunerative deposits Non-remunerative deposits

72,658,997 182,627,105 51,029,789 306,315,891 19,913,278 1,952,885 21,866,163 328,182,054

72,882,630 154,326,190 45,803,094 273,011,914 8,923,783 1,508,983 10,432,766 283,444,680

17 2002 2001 (Rupees in '000) 15.1 Particulars of deposits In local currency In foreign currencies (including domestic foreign currency deposits of Rs 43,697.799 million) 16. OTHER LIABILITIES Mark-up / return / interest payable in local currency Mark-up / return / interest payable in foreign currency Security deposits against leases Accrued expenses Unrealised loss on forward foreign exchange contracts - net Staff welfare fund payable Unclaimed dividends Provision for employees' compensated absences Provision for post retirement medical benefits Payable to defined benefit plan Branch adjustment account Others 17. SHARE CAPITAL 3,266,127 173,489 72,398 273,564 88,445 215,159 2,295 826,905 1,166,330 3,863,953 1,294,677 11,243,342 5,482,755 361,037 31,856 344,682 117,244 2,295 587,798 868,979 832,529 8,629,175 233,215,773 94,966,281 328,182,054 199,224,056 84,220,624 283,444,680

17.1 Authorised Capital 2002 2001 Number of shares -------------- in 000s -------------3,000,000 2,000,000 Ordinary shares of Rs. 10 each 17.2 Issued, subscribed and paid-up capital 2002 Ordinary shares of Rs. 10 each 2001 Number of shares -------------- in 000s -------------1,210,249.5 1,210,249.5 Fully paid in cash 7,600.0 7,600.0 Issued as bonus shares 1,217,849.5 1,217,849.5

30,000,000

20,000,000

12,102,495 76,000 12,178,495

12,102,495 76,000 12,178,495

18.

OTHER TIER I CAPITAL This represents an amount received in June 2000 from State Bank of Pakistan as subscription against future issue of right shares of Habib Bank Limited.

18 Note 19. SURPLUS ON REVALUATION OF ASSETS Surplus arising on revaluation of: - fixed assets - investments Surplus on revaluation of assets - net of tax 19.1 Surplus on revaluation of fixed assets Surplus on revaluation of fixed assets as at January 1 Surplus relating to incremental depreciation charged on related assets in prior years - transferred to accumulated losses Net surplus on revaluation of banks's properties during the year Surplus realised on disposal of revalued properties (land) during the year Transferred to accumulated losses in respect of incremental depreciation charged during the year - net of deferred tax Related deferred tax liability Surplus on revaluation of fixed assets as at December 31 Less: related deferred tax liability on: revaluation as at January 1 revaluation of bank's properties during the year incremental depreciation charged during the year transferred to profit and loss account 3,705,515 (678,086) 1,168,199 (488) (59,397) (52,672) 4,083,071 3,762,197 (56,682) 3,705,515 2002 2001 (Rupees in '000)

19.1 19.2

3,542,279 3,681,771 7,224,050

3,705,515 (597,149) 3,108,366

217,193 376,271 (52,672) 540,792 3,542,279

3,705,515

19.2 Surplus / (deficit) on revaluation of investments Market treasury bills Pakistan Investment Bonds Listed securities NIT units Other investments Less: related deferred tax liability 20. CONTINGENCIES AND COMMITMENTS 18,992,873 13,621,076 602,030 2,227,543 1,551,784 515,999 13,244 4,910,600 1,228,829 3,681,771 68,053 (759,906) 94,404 300 (597,149) (597,149)

20.1 Direct credit substitutes 20.2 Transaction-related contingent liabilities Guarantees in favour of: Government Financial institutions Others

7,335,541 1,058,779 2,860,254 11,254,574

5,691,351 3,627,015 7,971,745 17,290,111

19 2002 2001 (Rupees in '000) 20.3 Trade-related commitments Credit cash Credit DA Credit acceptance 49,445,165 6,546,535 9,422,890 65,414,590 32,472,856 2,845,239 2,428,125 37,746,220

20.4 Commitments in respect of forward lending The bank makes commitments to extend credit in the normal course of its business but none of these commitments are irrevocable and do not attract any significant penalty or expense if the facility is unilaterally withdrawn. 2002 2001 (Rupees in '000) 20.5 Other contingencies Claims against the Group not acknowledged as debts 20.6 Commitments in respect of forward foreign exchange contracts Purchase Sale 20.7 Commitments for acquisition of operating fixed assets 32,886,617 16,422,667 33,067 24,396,784 12,675,236 71,246 43,696,997 39,268,606

20.8 The Group has committed to upgrade its computer software system for all its international and domestic operations and the cost in this respect is approximately US $ 5 million payable over a period of 2 years. 20.9 Taxation The income tax returns of Habib Bank Limited (Pakistan) have been submitted upto and including the bank's financial year 2001. In computing the taxable income, the Income Tax Department has disallowed various items including certain provisions against bad and doubtful debts and added income, which the bank suspensed in accordance with State Bank of Pakistan's requirements with tax impact of Rs. 8,006 million including additional tax of Rs. 189 million. Appeals against the assessments are pending before the appellate authorities. The appeals of the bank in respect of interest/mark-up in suspense are in the High Court while the Income Tax Appellate Tribunal has directed the Income Tax Department to reconsider the disallowance of provision for bad and doubtful debts. The bank has also filed a reference application with the High Court of Azad Jammu and Kashmir regarding the excessive assessments amounting to Rs.1,703 million made by the Azad Jammu and Kashmir Taxation Authorities in the financial years 1982 to 2000 on account of profits relating to Azad Jammu and Kashmir branches. The tax related to the above have been paid by the bank and is included in advance tax paid. No provision has been made in the accounts for these amounts as the management is confident that the eventual outcome of these cases will be in favour of the bank. 2002 2001 (Rupees in '000) MARK-UP / RETURN / INTEREST EARNED On loans and advances to customers On investments in available for sale securities On deposits with financial institutions On lendings to financial institutions 14,336,854 7,895,335 924,092 799,833 23,956,114 17,196,001 6,279,391 2,151,481 1,111,573 26,738,446

21.

20 Note 22. MARK-UP / RETURN / INTEREST EXPENSED Deposits Securities sold under repurchase agreements Other short term borrowings Long term borrowings Forward cover fee Others 23. INCOME / GAIN ON INVESTMENTS Dividend income Gain on sale of investments Share of profit of joint venture companies 24. OTHER INCOME Incidental charges Rent on lockers Gain on sale of property and equipment - net Rent on property Miscellaneous earnings 25. ADMINISTRATIVE EXPENSES Salaries, allowances, etc. Charge for defined benefit plan Contribution to defined contribution plan Non-executive directors' fees, allowances and other expenses Brokerage and commission Rent, taxes, insurance, electricity, etc. Legal and professional charges Communications Operating lease expenses Repairs and maintenance Stationery and printing Advertisement and publicity Auditors' remuneration Depreciation Entertainment Travelling Conveyance and motor car Remittance charges Others 7,372,385 604,121 96,766 25 11,593 1,052,081 136,997 64,959 247,098 180,848 79,991 48,494 608,597 42,544 163,169 81,375 16,070 1,000,016 11,807,129 7,838,730 98,485 124,209 14 19,634 873,733 268,248 81,399 7,686 98,254 169,188 56,921 55,767 565,576 50,889 176,352 70,592 20,311 1,148,455 11,724,443 244,447 77,938 36,956 81,364 711,046 1,151,751 144,896 92,097 111,840 21,932 732,080 1,102,845 498,150 1,038,356 258,879 1,795,385 642,344 215,284 242,319 1,099,947 9,512,735 263,633 1,097,536 19,739 625,649 61,139 11,580,431 11,133,869 323,010 2,584,753 82,453 1,262,479 47,980 15,434,544 2002 2001 (Rupees in '000)

25.1 11.2

21 25.1 Auditors' remuneration

A.F. Ferguson Taseer Hadi Overseas 2002 2001 & Co. Khalid & Co. auditors -------------------------------------------------------- (Rupees in '000) -------------------------------------------------------Audit fee Fee for interim audit Fee for audit of local branches of Habib Bank Limited Fee for audit of foreign branches/ subsidiary companies of Habib Bank Limited Special certifications/examinations and sundry advisory services Tax services Out of pocket expenses 1,250 2,500 1,910 1,250 2,500 1,910 6,393 8,893 5,000 3,820 8,061 3,320

1,400 900 7,960

1,339 3,500 1,014 11,513

20,230 1,013 849 536 29,021

20,230 3,752 4,349 2,450 48,494

30,197 6,003 5,834 2,352 55,767

(Rupees in '000) 26. OTHER CHARGES Penalties imposed by State Bank of Pakistan Others 27. TAXATION For the year For Pakistan - current - deferred For overseas branches, subsidiaries and joint venture companies - current joint venture companies - deferred 469,882 1,210,138 133,246 4,061 4,061 4,368 8,013 12,381

372,749 1,297 374,046 2,054,066

978,580 62 978,642 1,111,888

27.1 Relationship between tax expense and accounting profit Accounting profit for the current year Tax on income @ 47% (2001: 50%) Permanent differences Effect of change in tax rate Loss utilised including other deductible temporary differences net of current year's recognition of previously unrecognised losses Reversal of deferred tax liability on incremental depreciation Minimum tax Tax charge of overseas branches of Habib Bank Limited Tax charge of subsidiaries and joint venture companies Deferred tax charge of a subsidiary company Tax charge for the current year 4,088,026 1,921,372 (395,396) 1,200,000 (1,137,184) (52,672) 143,900 291,461 81,288 1,297 2,054,066 2,224,230 1,112,115 336,947 827,586 (2,276,648) 128,000 829,520 154,306 62 1,111,888

22 2002 2001 (Rupees in '000) 28. BASIC EARNINGS PER SHARE Profit for the year attributable to shareholders 2,043,409 (Number) Weighted average number of ordinary shares 1,217,849,500 1,217,849,500 1,115,752

(Rupees) Basic earnings per share 29. DILUTED EARNINGS PER SHARE (Rupees in '000) Profit for the year attributable to shareholders 2,043,409 (Number) Weighted average number of ordinary shares (adjusted for the effects of conversion of advance against right shares) 2,017,849,500 2,017,849,500 1,115,752 1.68 0.92

(Rupees) Diluted earnings per share 1.01 2002 2001 (Rupees in '000) 30. CASH AND CASH EQUIVALENTS Cash and balance with treasury banks Balance with other banks 27,449,292 26,870,767 54,320,059 2002 (Number) Total number of employees 32. DEFINED BENEFIT PLANS AND OTHER BENEFITS 19,005 19,352 27,669,276 25,087,525 52,756,801 2001 0.55

31.

STAFF STRENGTH

32.1 Habib Bank Limited (bank) - general description Three types of defined benefit plans are offered by the bank namely pension, gratuity and medical benefits. Actuarial valuations of these schemes are carried out at regular intervals. For staff who opted for the bank's pension scheme introduced in 1977, the bank operates an approved funded pension scheme. This scheme is now closed to new employees. For staff who did not opt for the bank's pension scheme and for new employees, the bank operates an approved funded gratuity scheme in addition to the provident fund scheme mentioned in note 33.

23 32.2 Principal actuarial assumptions The latest actuarial valuation was carried out as at June 30, 2002 assuming that no indexation of pension will take place. Projected Unit Credit Actuarial Cost method, using the following significant assumptions was used for the valuation of these schemes: Expected rate of increase in salary level Expected rate of return on funds invested Rate of inflation for medical benefits 32.3 Pension and gratuity schemes 8% 10% 8% per annum per annum per annum

32.3.1 Fair value of plan assets and present value of defined benefits obligations of these schemes as at the valuation date were as follows: Pension Gratuity (Rupees in '000) Fair value of plan assets Present value of defined benefit obligation 4,399,540 (4,398,295) 1,245 (24,034) 525,866 (373,981) 151,885 214,926

Estimated (deficit) / surplus as at December 31, 2002 32.3.2 Movement in amount receivable from / (payable to) defined benefit plans Opening balance Charge for the year Payment made during the year Closing balance 32.4 Post retirement medical benefits

108,371 (207,405) 75,000 (24,034)

(2,057) 154,926 62,057 214,926

The liability of the bank in respect of medical benefits is based on actuarial valuation carried out as at June 30, 2002 which, after considering the estimated liability for the period July 1, 2002 to December 31, 2002, amounts to Rs. 1,987 million as at December 31, 2002 (2001: Rs 2,100 million). The bank's actuarial liability under this scheme was first determined in the year 2000 and it amounted to Rs 2,052 million. This liability is being recognised over a period of five years commencing from the year 2000. Actuarial gains and losses are recognised immediately. 32.5 Other benefits - Employee compensated absences The liability of the bank in respect of employees compensated absences is based on actuarial valuation carried out as at June 30, 2002 which, after considering the estimated liability for the period July 1, 2002 to December 31, 2002, has increased to Rs. 826.905 million as at December 31, 2002 (2001: 580.958 million). Provision for this balance is held by the bank.

24 33. 33.1 DEFINED CONTRIBUTION PLAN Habib Bank Limited (bank) Provident Fund For new employees and for those employees who did not opt for the bank's pension scheme introduced in 1977, the bank operates an approved provident fund under which both the bank and employees contribute at 5% of basic salary.

As per the last audited financial statements of the Fund the total assets were Rs 4,584.732 million as at December 31, 2001 (2000: Rs 4,748.948 million). 33.2 Subsidiary companies

33.2.1 Habib Finance (Australia) Limited Habib Finance (Australia) Limited is maintaining a superannuation scheme for its locally recruited employees. Membership of this scheme is voluntary. The scheme is an accumulation scheme administrated by Australian Mutual Provident Society. Employees are required to contribute to the plan at 8 percent with an option to increase contributions. The company has an obligation to contribute the employee's basic contribution.

33.2.2 Habib Finance International Limited, Hongkong The company is maintaining a contributory provident fund, contribution to which is made at 5% of salary for all local employees whose gross income exceeds HK $ 4,000 per month subject to a maximum contribution of HK$ 1,000. 33.2.3 Habib Allied International Bank Plc., United Kingdom Habib Allied International Bank Plc., is maintaining pension and life assurance schemes for its active and retired employees, membership to which is voluntary. Annual contribution at 5% of basic salary is made by the employees, while the company contributes to the schemes at 13% of the basic salary. 34. REMUNERATION OF DIRECTORS AND EXECUTIVES
Group President/Chief Executive Directors Executives 2002 2001 2002 2001 2002 2001 ----------------------------------------------------------------- (Rupees in '000) ----------------------------------------------------------------Fees Managerial remuneration Charge for defined benefit plan Rent and house maintenance Utilities Medical Conveyance Others 2,708 81 2,035 233 115 145 3,826 9,143 2 2,779 81 1,760 250 95 128 3,612 8,705 2 25 25 3 14 14 4 72,035 5,180 34,475 6,748 4,771 8,355 7,584 139,148 70 59,103 6,832 27,895 5,764 2,709 4,986 8,933 116,222 52

Number of persons

The President and executives are provided with free use of the group's maintained cars and club membership in accordance with their entitlement.

25 35. MATURITIES OF ASSETS AND LIABILITIES

2002 months to one year to five years years ----------------------------------------------- (Rupees in '000) ----------------------------------------------Assets Cash and balances with treasury banks Balances with other banks Lending to financial institutions Investments Loans and advances Other assets Operating fixed assets Deferred tax assets - net 27,449,292 26,870,767 10,001,123 142,877,930 167,523,299 18,137,931 7,184,623 2,967,570 403,012,535 Liabilities Bills payable Borrowings from financial institutions Deposits and other accounts - note 35.1 Other liabilities 5,834,673 38,045,541 328,182,054 11,243,342 383,305,610 Net gap - note 35.1 Share capital Other tier 1 capital Capital reserves Accumulated loss and other reserves Surplus on revaluation of assets Minority interest 19,706,925 12,178,495 8,000,000 1,027,348 (8,931,643) 7,224,050 208,675 19,706,925 5,834,673 37,292,427 273,735,695 8,207,243 325,070,038 (132,112,267) 434,743 31,003,994 972,636 32,411,373 84,609,703 318,371 20,906,552 70,228 21,295,151 27,444,046 2,535,813 1,993,235 4,529,048 39,765,443 25,135,539 25,747,303 8,001,854 35,657,708 92,764,065 5,160,797 103,413 387,092 192,957,771 549,057 1,123,464 1,999,269 63,015,511 37,625,993 11,050,908 310,238 1,346,636 117,021,076 23,415,404 19,549,618 726,226 1,667,574 1,857,640 48,739,197 1,522,735 241,961 20,789,307 17,583,623 1,200,000 5,103,398 (623,798) 44,294,491 Total Upto three Over 3 months Over one year Over five

35.1 Expected repricing and maturity dates do not differ significantly from the contract dates except for the maturity of Rs 206 billion of deposits representing retail deposit accounts considered by the Group as stable core source of fundings of its operations. 36. YIELD/INTEREST RATE RISK

36.1 Interest rate risk management The group is mainly exposed to mark-up / interest rate risk on its deposit liabilities and its loans and advances and investment portfolios. The Asset Liability Committee of the group reviews the portfolio of the group on a regular basis to ensure that risk is managed within acceptable limits. A high proportion of loans and advances portfolio of the group comprises of working capital finances which are re-priced on a three monthly basis. The group's interest / mark-up rate risk is limited since the majority of customers deposits are retrospectively re-priced on a six monthly basis on the profit and loss sharing principles.

26

Effective Yield/ Interest rate On-balance sheet financial instruments Financial Assets Cash and balances with treasury banks Balances with other banks Lendings to financial institutions Investments Advances Other assets Financial Liabilities Bills payable Borrowings from financial institutions Deposits and other accounts Other liabilities On-balance sheet gap Non - financial assets Total Net assets Cumulative Yield/Interest Risk Sensitivity Gap

2002 Exposed to Yield/ Interest risk Not exposed Upto Over 3 Over one Over to Yield/ three months to year to five Interest months one year five years years Risk -------------------------------------------------------- (Rupees '000) -------------------------------------------------------Total

6.16% 10.97% 13.49% -

27,449,292 26,870,767 10,001,123 142,877,930 167,523,299 17,208,927 391,931,338 5,834,673 38,045,541 328,182,054 11,243,342 383,305,610 8,625,728 11,081,197 19,706,925

6,026,806 24,346,807 8,001,854 37,872,699 79,537,989 155,786,155 5,834,673 37,292,427 273,878,604 317,005,704 (161,219,549) -

143,566 1,123,464 1,999,269 73,475,612 36,614,616 113,356,527 434,743 30,861,085 31,295,828 82,060,699 -

527,417 9,741,055 16,866,218 27,134,690 318,371 20,906,552 21,224,923 5,909,767 -

119,201 15,290,050 12,440,993 27,850,244 2,535,813 2,140,612 4,676,425 23,173,819 -

20,632,302 1,400,496 6,498,514 22,063,483 17,208,927 67,803,722 9,102,730 9,102,730 58,700,992 -

6.54% 6.72% -

(161,219,549)

(79,158,850)

(73,249,083)

(50,075,264)

8,625,728

37.

CURRENCY RISK

37.1 Currency risk management The management of the group manages this risk by setting dealer, currency and counterparty limits and monitors the group's exposure in this regard at all times. For this purpose, the group enters into ready, spot, forward and swap transactions in the inter bank market and with the State Bank of Pakistan in order to hedge its assets and liabilities and cover its foreign exchange position. The management of the group has also established dealing centres at certain strategic business centres and offshore banking units which operate in accordance with the strategies communicated by the Treasury Division. The currency risk at these locations is also managed in accordance with the instructions of Treasury Division which monitors the group's exposure to currency risk on a global basis.
2002 Net foreign currency exposure --------------------------------------- (Rupees '000) --------------------------------------Pakistan rupee United States dollar Great Britain pund UAE Dirhem Japanese yen Euro Other currencies
257,338,246 77,281,323 21,588,580 15,448,934 110,706 3,857,437 27,387,309 403,012,535 233,262,111 90,319,768 20,583,019 13,033,338 27,000 2,999,397 23,080,977 383,305,610 (16,463,950) 15,479,909 1,338,786 (867,880) 31,100 279,362 202,673 7,612,185 2,441,464 2,344,347 1,547,716 114,806 1,137,402 4,509,005 19,706,925

Assets

Liabilities

Off-balance sheet items

27 38. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of traded investments is based on quoted market prices and unquoted equity investments are estimated using the equity method based on their available financial statements. Fair value of fixed term loan, other assets, other liabilities, fixed term deposits and other Tier I capital can not be calculated with sufficient reliability due to absence of current and active market for such assets and liabilities and reliable data regarding market rates for similar instruments. The provision for impairment of loans and advances has been calculated in accordance with the Group's accounting policy as stated in note 4.5. The maturity and repricing profile and effective rates are stated in notes 35 and note 36 respectively. In the opinion of the management, the fair value of the remaining financial assets and liabilities are not significantly different from their carrying values since assets and liabilities are either short-term in nature or in the case of customer loans and deposits are frequently repriced. 39. 39.1 CONCENTRATION OF CREDIT AND DEPOSITS Credit risk management Habib Bank Limited (bank) has an established credit policy department responsible for formulating policies for extending and monitoring of credit in line with the management's risk acceptance methodology. The department has formally issued these credit policies through Credit Policy Manual. Credit risk is monitored, reviewed and analysed by appropriate officials in line with the guidelines contained in this manual. This risk is managed through counterparty and credit limits and by obtaining adequate collaterals. Loans and advances to financial institutions are granted in accordance with the limits assigned to each institution. Cross border risk is mitigated by employing exposure limits computed with reference to the country / sovereign risk associated with such transactions and are updated on a regular basis. The bank has also established an Asset Remedial Division to focus on expediting recoveries from all problem credits. This division negotiates with these borrowers and recommends all restructuring and rescheduling of stuck-up loans to the senior management. In case of willful default, the division coordinates with the legal division for commencing legal proceedings against these borrowers. 39.2 Concentration of credit risk Out of the total financial assets of Rs 391,931.338 million, financial assets which were subject to credit risk amounted to Rs 387,454.600 million. The group's major credit risk is concentrated in the textile sector. To manage the credit risk, the group applies credit limits to its customers and obtains adequate collaterals.

28 The following financial assets are guaranteed by the Federal / Overseas Governments or State Bank of Pakistan / other Central Banks and enterprises owned/controlled by the Government: Rupees in '000 Guaranteed by the Government of Pakistan - Investments 121,241,100 - Loans and advances 27,976,140 - Mark-up receivable on government guaranteed financial assets 2,381,915 151,599,155 Financial assets receivable from enterprises owned/controlled by Government 5,845,152 Guaranteed by Overseas Governments 8,743,337 Financial assets receivable from the State Bank of Pakistan 17,710,607 Financial assets receivable from other central banks 4,697,932 188,596,183
2002 Advances Rupees in '000 Percent Deposits Rupees in '000 Percent Contingencies and Commitments Rupees in '000 Percent

39.3

Segment by class of business

Chemical and Pharmaceuticals Agribusiness Textile Cement Sugar Shoes and leather garments Automobile and transportation equipment Financial Insurance Transportation Electronics and electrical appliances Production and transmission of energy Food, tobacco and beverages Public / Government Metal and allied General traders Others (including individuals) 2,870,251 2,745,296 38,990,429 2,864,588 2,339,270 1,338,636 316,214 355,754 11,417 919,489 946,015 2,245,064 4,045,306 33,021,243 6,851,264 26,731,334 40,931,729 167,523,299 1.71 1.64 23.27 1.71 1.40 0.80 0.19 0.21 0.01 0.55 0.56 1.34 2.41 19.71 4.09 15.96 24.44 100.00 521,417 82,463 1,577,178 2,700 141,190 174,170 3,532,663 21,866,163 5,441,682 216,267 744,520 330,145 1,706,621 17,927,962 2,022,288 119,921,344 151,973,281 328,182,054 0.16 0.03 0.48 0.00 0.04 0.05 1.08 6.66 1.66 0.07 0.23 0.10 0.52 5.46 0.62 36.54 46.30 100.00 2,049,479 11,913,475 6,337,281 1,834,365 143,236 226,475 1,497,677 6,329,550 200 534,499 1,379,072 422,237 30,417,563 11,606,252 1,294,494 3,018,688 16,657,494 95,662,037 2.14 12.45 6.62 1.92 0.15 0.24 1.57 6.62 0.00 0.56 1.44 0.44 31.80 12.13 1.35 3.16 17.41 100.00

39.4

Segment by sector
Public/ Government Private 33,021,243 134,502,056 167,523,299 19.71 80.29 100.00 17,927,962 310,254,092 328,182,054 5.46 94.54 100.0000 11,606,252 84,055,785 95,662,037 12.13 87.87 100.00

40.

GEOGRAPHICAL SEGMENT ANALYSIS

2002 Contingencies and Commitments -------------------------------------- (Rupees '000) -------------------------------------3,745,441 311,176,204 6,257,687 80,089,877 127,568 19,612,426 2,489,607 2,581,148 123,813 27,246,305 3,285,668 5,716,032 56,845 3,144,367 363,330 421,057 (186,623) 34,872,494 5,502,194 6,390,174 220,982 6,960,739 1,808,439 463,749 4,088,026 403,012,535 19,706,925 95,662,037 Profit before taxation Total assets employed Net assets employed

Pakistan Asia Pacific (including South Asia) Europe (including minority interest amounting to Rs 208.675 million) United States of America and Canada Middle East Others

29 2002 2001 (Rupees in '000) 41. NET ASSETS OF SUBSIDIARY COMPANIES (before intra-group elimination) Habib Allied International Bank Plc., United Kingdom Habib Finance International Limited, Hong Kong Habib Finance (Australia) Limited, Sydney Habib Bank Financial Services (Private) Limited, Karachi 42. RELATED PARTY TRANSACTIONS - Borrowings from related parties outstanding as at the year end - Share of profit of joint venture companies - net of tax under equity basis of accounting - Interest paid during the year - Modaraba management fees - Balances with related parties outstanding as at the year end - Interest income for the year - Other contingencies and commitments - Acceptances during the year - Guarantees favouring associated undertakings - Other income 43. SPECIFIC PROVISIONS 4,048,534 177,591 112,432 9,619 136,788 2,042 138,925 1,913 1,419 4,720 3,980,443 289,999 259,926 6,169 5,460 1,220 1,220 860 300 220 2,015,732 450,892 346,306 48,770 2,861,700 1,938,797 205,605 317,638 48,716 2,510,756

The Companies Ordinance, 1984 requires disclosure of the gross carrying value of the assets and provision made against them. The following are the specific provisions held in the books against the carrying value of the relevant assets: 2002 2001 (Rupees in '000) Balances with other banks Investments Other assets - others 44. DATE OF AUTHORISATION FOR ISSUE These financial statements were authorised for issue on January 30, 2003 by the Board of Directors of the Bank. 644,360 821,449 497,674 757,332 987,847 378,447

45.

GENERAL These accounts have been prepared in accordance with the revised format for financial statements of banks issued by the State Bank of Pakistan through BSD Circular No. 36 dated October 10, 2001.

President and Chief Executive

Director

Director

Director