Directors ReportOn behalf of the Board of Directors, I am pleased to present 65th Annual Report to the members together with Audited Financial Statements and Auditors Report for the year ended December 31, 2006. The Board is committed to ensure that requirements of the Code of Corporate Governance set by the Securities and Exchange Commission of Pakistan are fully met. The Bank has adopted corporate governance practice and the directors are pleased to inform that: The financial statements prepared by the management of the Bank presents a true and fair view of the state of its affairs, operational results, cash flows and changes in equity. Proper books of accounts of the company have been maintained. Appropriate accounting policies have been consistently applied in preparation of financial statements, except for change in accounting policy as disclosed in note 4.14 of Groups annual financial statements. This policy has been changed pursuant to a circular number 06-2006 dated June 19, 2006 issued by the Institute of Chartered Accountants of Pakistan 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 although declared subsequent to year end, were accounted for in the year to which those related. This change has been applied retrospectively and comparatives have been restated. The company has followed international accounting standards (as applicable to banks in Pakistan) in the preparation of accounts and there is no departure from the said standards. As a continuous process, efforts have been made to effectively implement the internal control system. Issues identified during the review process are rectified through appropriate corrective actions and by further strengthening the internal control procedures. There are no doubts whatsoever about the Banks ability to continue as a going concern. There has been no material departure from the best practices of corporate governance as detailed in the regulations.

Risk Management, Human Resource and Audit Committees constituted by the Board are functioning efficiently to meet the desired objectives.

Results for 2006 The Groups pre tax profit for the year is Rs.18, 840 million registering an increase of 36 per cent over last year. The earning per share for the year is Rs. 18.30 registering an increase of 32 percent. An amount of Rs.1428 million has been transferred to statutory reserves. Financial highlights and summarized key operating and financial data of last ten years are annexed to the accounts. Risk Management Framework The Bank evaluates business opportunities in terms of the risk-reward relationship. The risks that Bank takes are reasonable, controlled, within its financial resources and credit competence. The diversity of our business requires us to identify, measure and manage our risks effectively .The risk is managed through a framework, organizational structure, risk management and monitoring processes that are closely aligned with the activities of the Bank and in line with the guidelines given by State Bank of Pakistan The following key principles forms part of the Banks approach to risk management: The Board, through its subcommittee, oversees risk management, reviews and approves Risk policies and tolerance limits wherever required. Various committees at functional level oversee the implementation of risk management policies. Market and Liquidity risk are managed by a well-represented ALCO, whose members are President and CEO, heads of Business groups, Chief Risk Officer, Chief Financial Officer and Head of Market risk. Chief Risk Officer, who is the secretary of the Board subcommittee on risk management, heads Risk Management group. Credit policy committee and Operational risk committee are responsible for defining and implementation of respective policies. The Management Risk Committee represented by Heads of various risk groups allows the bank to manage Credit, Market and Operational risk on an integrated basis. The structure of Risk Management group is closely aligned with the structure of banks business groups. The risk management function is independent of business groups/divisions. The Business Risk Review department operating under Internal Audit which

reports directly to the Board audit committee conducts independent risk review function.

Value of Investments in Employee Retirement Benefit Fund The following is the value of investments of provident, gratuity, pension and benevolent funds maintained by the Bank, based on latest audited financial statements as at December 31, 2005. Amount in 000 Employees Provident Fund 6,635,911 Employees Pension Fund 8,998,939 Employees Gratuity Fund 600,755 Employees Benevolent Fund Executive and Officers 861,480 Employees Benevolent Fund Clerical and Non- Clerical 383,115 Dividend The Directors approved payment of Cash Dividend of 10 per cent (Re 1 per share) for payment to the shareholders entitled at close of business on December 08, 2006, as per the proviso to section 251 (1) of the Companies Ordinance, 1984. The directors further recommended payment of a final dividend of 20 per cent (Re. 2.00 per share) to Shareholders entitled at the close of business on March 10, 2007 subject to approval of the Shareholders at the Annual General Meeting. Meetings of the Board Six Board meetings were held during 2006 and were attended by the Directors as follows: Name Meetings during tenure Attendance Mr. Sultanali Allana 6 6 Mr. R. Zakir Mahmood 6 6 Mr. Iain Donald Cheyne 6 5 Mr. Sajid Zahid 6 4 Mr. Ahmad Waqar

1 Mr. Muhammad Ismail Qureshi 6 4 Mr. Arif Mansur 6 5 Mr. Shaukat Hayat Durrani 6 5 Mr Ahmed Waqar, Secretary Ministry of Petroleum and Natural Resources, Government of Pakistan, ceased to be a Director of the bank from March 27, 2006.

Pattern of Shareholding The pattern of shareholding as at December 31, 2006, as required by the code of Corporate Governance and Section 236 of the Companies Ordinance 1984 is given below: Shareholders Shareholding % Securities & Exchange Commission of Pakistan 1 National Bank of Pakistan (Trustee Department) 105,924 0.015 Privatization Commission 1,886 Islamic Republic of Pakistan 6,468,187 0.938 State Bank of Pakistan 331,524,002 48.047 Aga Khan Fund for Economic Development 351,900,000 51.000 Total 690,000,000 100.00 Auditors

On the suggestion of the Audit committee, the Board of Directors recommends to appoint M/s KPMG Taseer Hadi & Co., Chartered Accountants for the next term. On behalf of the Board R. Zakir Mahmood President & Chief Executive Officer Karachi: February 13, 2007

AUDITORS REPORT TO THE MEMBERS We have audited the annexed consolidated financial statements comprising consolidated balance sheet of Habib Bank Limited as at December 31, 2006 and the related consolidated profit and loss account, consolidated cash flow statement and consolidated statement of changes in equity together with the notes forming part thereof, for the year then ended. These financial statements include unaudited certified returns from the branches, except for 82 branches, which have been audited by us and 40 branches audited by auditors abroad. The financial statements of subsidiary company First Habib Bank Modaraba were reviewed in accordance with the International Standard on Review Engagements 2400 by another firm of chartered accountants, whose report has been furnished to us and our opinion in so far as it relates to the amounts included for First Habib Bank Modaraba, is based solely on the report of other auditors. These financial statements are responsibility of the Banks management. Our responsibility is to express our opinion on these financial statements based on our audit. We conducted our audit in accordance with the auditing standards as applicable in Pakistan. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the above said statements are free of any material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the above said statements. An audit also includes assessing the accounting policies and significant estimates made by management, as well as, evaluating the overall presentation of the above said statements. We believe that our audit provides a reasonable basis for our opinion. In our opinion the consolidated financial statements present fairly the financial position of Habib Bank Limited as at December 31, 2006 and the results of its operations, its cash flows and changes in equity for the year then ended in accordance with the approved accounting standards as applicable in Pakistan. The corresponding figures presented are based on consolidated financial statements of the Bank as of December 31, 2005 which were audited by another auditor whose report dated March 28, 2 006 expressed an unqualified opinion on those statements. Date: KPMG Taseer Hadi & Co. Chartered Accountants Karachi

HABIB BANK LIMITED CONSOLIDATED BALANCE SHEET AS AT DECEMBER 31, 2006

2006 2005 Note 2006 2005

(Rupees in '000) Restated Restated ASSETS 760,310 542,621 Cash and balances with treasury banks 5 46,310,478 33,051,049 590,462 522,304 Balances with other banks 6 35,965,048 31,813,513 107,538 201,482 Lendings to financial institutions 6,550,128 12,272,248 1,963,347 1,763,002 Investments 119,587,476 107,384,470 5,736,869 5,202,457 Advances 9 349,432,685 316,881,635 291,665 237,758 Other assets 10 17,765,291 14,481,818 196,271 183,323 Operating fixed assets 11 11,954,876 11,166,195 44,746 30,258 Deferred tax asset 12 2,725,486 1,842,977 9,691,208 8,683,205 590,291,468

528,893,905 LIABILITIES 94,196 94,834 Bills payable 13 5,737,457 5,776,325 925,829 573,048 Borrowings from financial institutions 14 56,392,270 34,904,352 7,538,010 7,101,382 Deposits and other accounts 15 459,140,198 432,545,165 Sub-ordinated loans Liabilities against assets subject to finance lease 255,757 237,895 Other liabilities 16 15,578,177 14,490,213 Deferred tax liability 8,813,792 8,007,159 536,848,102 487,716,055 877,416 676,046 NET ASSETS 53,443,366 41,177,850 REPRESENTED BY: Shareholders' equity 113,282

113,282 Share capital 17 6,900,000 6,900,000 292,277 261,242 Reserves 17,802,584 15,912,277 336,153 162,681 Unappropriated profit 20,475,080 9,908,920 Total equity attributable to the equity 741,712 537,205 holders of the Bank 45,177,664 32,721,197 14,995 13,902 Minority interest 913,317 846,801 120,709 124,939 Surplus on revaluation of assets - net of tax 18 7,352,385 7,609,852 877,416 676,046 53,443,366 41,177,850 CONTINGENCIES AND COMMITMENTS 19The annexed notes 1 to 47 and annexures I to III form an integral part of these financial statements.

President and Chief Executive Officer Director Director (US $ in '000)

Director

HABIB BANK LIMITED CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED DECEMBER 31, 2006 2006 2005 Note 2006 2005 (Rupees in '000)

717,218 531,000 Mark-up / return / interest earned 20 43,685,740 32,343,206 216,779 120,302 Mark-up / return / interest expensed 21 13,204,037 7,327,603 500,439 410,698 Net mark-up / interest income 30,481,703 25,015,603 47,007 48,837 Provision against non-performing loans and advances - net 9.5 2,863,207 2,974,665 (746) 2,115 (Reversal) / provision against off-balance sheet obligations 16.2 (45,438) 128,851 (225) (1,356) Reversal of provision against diminution in value of investments 8.8 (13,697) (82,568) Bad debts written off directly 46,036 49,596 2,804,072 3,020,948 454,403 361,102 Net mark-up / interest income after provisions 27,677,631 21,994,655 Non mark-up / interest income 64,549 48,235 Fee, commission and brokerage income 3,931,710 2,938,000 20,023 28,342 Income / gain on investments 22 1,219,623 1,726,336 18,098

23,026 Income from dealing in foreign currencies 1,102,358 1,402,521 36,707 29,346 Other income 23 2,235,805 1,787,443 139,377 128,949 Total non-mark-up / interest income 8,489,496 7,854,300 593,780 490,051 36,167,127 29,848,955 Non mark-up / interest expense 253,250 231,408 Administrative expenses 24 15,425,461 14,095,063 2,011 4,089 Other provisions / write offs - net 122,510 249,033 901 1,124 Other charges 25 54,898 68,483 256,162 236,621 Total non mark-up / interest expenses 15,602,869 14,412,579 337,618 253,430 20,564,258 15,436,376 28,300 26,308 Staff retrenchment cost 29.1 1,723,771 1,602,401 309,318 227,122 Profit before taxation 18,840,487 13,833,975 Taxation 26 117,302 66,932 - current

7,144,846 4,076,848 (641) (647) - prior years (39,067) (39,397) (15,853) 2,462 - deferred (965,607) 149,975 100,808 68,747 6,140,172 4,187,426 208,510 158,375 Profit after taxation 12,700,315 9,646,549 Attributable to: 207,359 157,007 Equity holders of the Bank 12,630,259 9,563,303 1,151 1,368 Minority interest 70,056 83,246 208,510 158,375 12,700,315 9,646,549 0.300 0.228 Basic and diluted earnings per share 27 18.30 13.86

The annexed notes 1 to 47 and annexures I to III form an integral part of these financial statements.President and Chief Executive Officer Director Director (US $ in '000) Director

HABIB BANK LIMITED CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED DECEMBER 31, 20062006 2005 Note 2006 2005 (Rupees in '000) CASH FLOWS FROM OPERATING ACTIVITIES 309,318 227,122 Profit before taxation 18,840,487 13,833,975

(19,573) (6,822) Less: Dividend income and share of profit of associated and joint venture companies (1,192,213) (415,533) (450) (21,520) Gain on sale of investments- net (27,410) (1,310,803) (20,023) (28,342) (1,219,623) (1,726,336) 289,295 198,780 17,620,864 12,107,639 Adjustment for: 15,925 13,309 Depreciation / amortisation / adjustments 969,983 810,663 (225) (1,356) Reversal against diminution in the value of investments (13,697) (82,568) 47,007 48,837 Provision against non-performing loans and advances - net of reversals 2,863,207 2,974,665 5,939 6,738 Amortisation of premium on investments 361,750 410,420 (1,206) (706) Gain on sale of property and equipment - net (73,441) (43,001) (1,173) (2,415) Miscellaneous provisions (71,469) (147,128) 66,267 64,407 4,036,333 3,923,051 355,562 263,187 21,657,197 16,030,690 (Increase) / decrease in operating assets (219,215) 449,101 Government securities (13,352,383) 27,354,750 93,944 (139,833) Lendings to financial institutions 5,722,120 (8,517,209) (581,419) (997,650) Loans and advances (35,414,257) (60,766,834) (31,109) (91,899) Other assets - net (1,894,864) (5,597,584) (737,799)

(780,281) (44,939,384) (47,526,877) Increase / (decrease) in operating liabilities 436,628 458,317 Deposits and other accounts 26,595,033 27,916,106 352,781 91,251 Borrowings from financial institutions 21,487,918 5,558,068 (638) (29,969) Bills payable (38,868) (1,825,441) 31,101 12,554 Other liabilities - net 1,894,448 764,674 819,872 532,153 49,938,531 32,413,407 437,635 15,059 26,656,344 917,220 (144,555) (16,005) Income tax paid - net (8,804,827) (974,888) 293,080 (946) Net cash flows from / (used in) operating activities 17,851,517 (57,668) CASH FLOWS FROM INVESTING ACTIVITIES 9,672 19,736 Net investments in securities, associated and joint venture companies 589,141 1,202,093 11,837 3,687 Dividend income received 720,998 224,545 (27,296) (14,510) Fixed capital expenditure (1,662,596) (883,817) 2,527 1,000 Proceeds from sale of fixed assets 153,904 60,891 Exchange adjustment on translation of balances in foreign branches, 7,377 (11,161) subsidiaries and joint venture 449,350 (679,792) 4,117 (1,248) Net cash flows from / (used in) investing activities 250,797 (76,080) CASH FLOWS FROM FINANCING ACTIVITIES (11,350) (6,421) Dividend Paid (691,350) (391,112)

(11,350) (6,421) Net cash flows used in financing activities (691,350) (391,112) 285,847 (8,615) Increase / (decrease) in cash and cash equivalents during the year 17,410,964 (524,860) 1,008,331 1,080,119 Cash and cash equivalents at beginning of the year 61,417,428 65,790,067 56,594 (6,579) Effects of exchange rate changes on cash and cash equivalents 3,447,134 (400,645) 1,064,925 1,073,540 64,864,562 65,389,422 1,350,772 1,064,925 Cash and cash equivalents at end of the year 28 82,275,526 64,864,562 The annexed notes 1 to 47 and annexures I to III form an integral part of these financial statements. President and Chief Executive Officer Director Director Director (US $ in '000)

HABIB BANK LIMITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2006Statutory requirement of Joint Venture and Subsidiaries Bank General Unappropriated profit

Balance as at December 31, 2004 as previously stated 6,900,000 1,927,344 718,386 6,003,860 6,073,812 1,481,417 23,104,819 835,390 23,940,209 Effect of change in accounting policy with respect to proposed dividend 345,000 345,000 345,000 Balance as at December 31, 2004 as restated 6,900,000 1,927,344 718,386 6,003,860 6,073,812 1,826,417 23,449,819 835,390 24,285,209 Cash dividend paid at Re 0.50 per share (345,000) (345,000) (46,454) (391,454) Profit for the year ended December 31, 2005 -

9,563,303 9,563,303 83,246 9,646,549 Exchange translation / statutory reserves released on disposal of investmen 684,658 (613,666) 613,666 684,658 684,658 Transferred from surplus on revaluation o fixed assets 48,209 48,209 48,209 Effect of translation of net investment in foreig branches, subsidiaries and joint venture (679,792) (679,792) (28,863) (708,655) Total recognized income and expense for the yea 4,866 (613,666) 10,225,178 9,616,378 54,383 9,670,761 Transferred to statutory reserves 14,441 1,783,234 (1,797,675) Minority share of surplus on revaluation of securities of modaraba 3,482 3,482 Balance as at December 31, 2005 as restated 6,900,000 1,932,210 119,161 7,787,094 6,073,812 9,908,920 32,721,197 846,801 33,567,998 Profit for the year ended December 31, 2006 12,630,259 12,630,259 70,056 12,700,315 Exchange translation released on disposa of investment (55,709) (55,709) (55,709) Transferred from surplus on revaluation o fixed assets

66,858 66,858 66,858 Effect of translation of net investment in foreig branches, subsidiaries and joint venture 505,059 505,059 43,665 548,724 Total recognized income and expense for the yea 449,350 12,697,117 13,146,467 113,721 13,260,188 Transferred to statutory reserves 13,344 1,427,613 (1,440,957) Cash dividend paid at Re 1 per share (690,000) (690,000) (42,885) (732,885) Minority share of deficit on revaluation of securities of modaraba (4,320) (4,320) Balance as at December 31, 2006 6,900,000 2,381,560 132,505 9,214,707 6,073,812 20,475,080 45,177,664 913,317 46,090,981 The annexed notes 1 to 47 and annexures I to III form an integral part of these financial statement

President and Chief Executive Officer Director Director DirectorMinority interest

---------------------------------------------------------------------------- (Rupees in '000) ---------------------------------------------------------------------------Share Capital Total Sub Total Attributable to shareholders of the Group Statutory RESERVES Exchange Translation Reserve Other Reserves

HABIB BANK LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2006 1 THE GROUP AND ITS OPERATIONS Holding company Habib Bank Limited, Pakistan Subsidiaries 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 Habib Currency Exchange (Private) Limited, Pakistan Wholly owned HBL Asset Management Limited, Pakistan-wholly owned First Habib Bank Modaraba, Pakistan 2 BASIS OF PRESENTATION 2.1 2.2 Basis of measurement 1 Habib Bank Limited (the Bank) is incorporated in Pakistan and is engaged in commercial banking, modaraba management and asset management related services in Pakistan and overseas. The banks registered office is located at Habib Bank Tower, 4th Floor, Jinnah Avenue, Islamabad. The bank operates 1,437 branches (2005: 1,425) inside Pakistan and 40 branches (2005: 45) outside the country. The Group comprises of: The subsidiary company of the Bank, Habib Bank Financial Services (Private) Limited exercises control over Habib Bank Modaraba as its management company and also has a direct economic interest in it. The bank has consolidated the financial statements of the modaraba as the ultimate holding company. 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 financial statements as such but are restricted to the amount of facility actually utilized and the appropriate portion of mark-up thereon. 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. 60.91 per US Dollar has been used for both December 31, 2006 and 2005. Basis of consolidation Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity, so as to obtain economic benefits from its activities. The consolidated financial statements incorporate the financial statements of Habib Bank Limited and the financial statements of subsidiary companies from the date that control commences until the date that control ceases. The financial statements of such subsidiary companies are incorporated on a line-by-line basis and the investments held by the Bank is eliminated against the corresponding share capital of subsidiaries in the consolidated financial statements. Material intra-group balances and transactions have been eliminated. Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Joint ventures are those entities over whose activities the Group has joint control established by contractual agreement. Associates and joint ventures are accounted for using the equity method. The consolidated financial statements includes Group's share of the results of the associates. These financial statements have been prepared under the historical cost convention except that certain fixed assets are stated at revalued amounts, trading and available for sale investments and derivative financial instruments are measured at fair value. The consolidated financial statements are presented in Pakistan Rupees, which is Bank's functional currency. The amounts are rounded to nearest thousand.

2.3 Critical accounting estimates and judgments i) Classification of investments ii) Provision against non performing loans and advances iii) Impairment of available for sale equity investments iv) Income taxes v) Fair value of derivatives vi) Depreciation and amortization of fixed assets 3 STATEMENT OF COMPLIANCE 3.1 2 The preparation of financial statements in conformity with the approved accounting standards requires the use of certain critical accounting estimates. It also requires the management to exercise its judgment in the process of applying the bank's accounting policies. Estimates and judgments are continually evaluated and are based on historical experience, including expectations of future events that are believed to be reasonable under the circumstances. The areas where various assumptions and estimates are significant to the Group's financial statements or where judgment was exercised in application of accounting policies are as follows: In classifying investments as "held-for-trading" the Group has determined securities which are acquired with the intention to trade by taking advantage of short term market / interest rate movements and are to be sold within 90 days. In classifying investments as "held-to-maturity" the Bank follows the guidance provided in SBP circulars on classifying nonderivative financial assets with fixed or determinable payments and fixed maturity. In making this judgment, the Bank evaluates its intention and ability to hold such investments to maturity.

The investments which are not classified as held for trading or held to maturity are classified as available for sale. The Bank reviews its loan portfolio to assess amount of non-performing loans and advances and provision required there-against. While assessing this requirement various factors including the delinquency in the account, financial position of the borrower, the forced sale value of the securities and requirements of Prudential Regulations are considered. The estimates of forced sale values are supported by independent valuation of the assets mortgaged / pledged. For portfolio impairment provision on consumer advances, the Group follows, the general provision requirement set out in Prudential Regulations. These provisions change due to changes in requirements and the effect is disclosed in note 9. 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 price. 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. In making the estimates for income taxes currently payable by the Bank, the management looks at the current income tax laws and the decisions of appellate authorities on certain issues in the past. In making the provision for deferred taxes, estimates of the Bank's future taxable profits are taken into account. The fair values of derivatives which are not quoted in active markets are determined by using valuation techniques. The valuation techniques take into account the relevant interest rates in effect at the balance sheet date and the rates contracted. In making estimates of the depreciation / amortization method, the management uses method which reflects the pattern in which economic benefits are expected to be consumed by the Bank. The method applied is reviewed at each financial year end and if there is a change in the expected pattern of consumption of the future economic benefits embodied in the assets, the method would be changed to reflect the change in pattern. Such change is accounted for as change in accounting estimates in accordance with International Accounting Standard - 8, "Accounting Policies, "Changes in Accounting Estimates and Errors". These financial statements have been prepared in accordance with the approved accounting standards as applicable in Pakistan and the requirements of the Companies Ordinance, 1984, the Banking Companies Ordinance, 1962, directives issued by the Securities and Exchange Commission of Pakistan and the State Bank of Pakistan. Approved accounting standards comprise of such International Financial Reporting 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.

3.2 IAS 1- Presentation of Financial Statements - amendments relating to Capital disclosures. IFRS 2 - Share-Based Payments. IFRS 3 - Business Combinations IFRS 5 - Non-current assets held for sale and discontinued operations IFRS 6 - Exploration for and evaluation of mineral resources IFRIC 8 - Scope of IFRS 2 Share-based Payments. IFRIC 9 - Reassessment of Embedded Derivatives IFRIC 10 - Interim Financial Reporting and Impairment IFRIC 11 - Group and Treasury Share Transactions IFRIC 12 - Services Concession Arrangements. 4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 4.1 Revenue recognition Advances and investments Lease financing 3 The State Bank of Pakistan, vide its BSD Circular No. 10 dated August 26, 2002 has deferred the applicability of International Accounting Standard 39, Financial Instruments Recognition and Measurement and International Accounting Standard 40, Investment Property for banking companies till further instructions. Accordingly, the requirements of these standards have not been considered in the preparation of these financial statements. However, investments have been classified and valued in accordance with the requirements prescribed by the State Bank of Pakistan through various circulars. During 2005, the Securities and Exchange Commission of Pakistan notified the Islamic Financial Accounting Standard 1 issued by the Institute of Chartered Accountants of Pakistan relating to accounting for Murabaha transactions undertaken by a bank, effective from financial periods beginning on or after January 01, 2006. The standard has not been adopted by stand alone Islamic branches of conventional banks pending resolution of certain issues e.g. invoicing of goods, recording of inventories, concurrent application with other approved accounting standards in place for conventional banks, etc. Pakistan Banks Association has taken up the matter with the State Bank of Pakistan. Standards, interpretations and amendments to published approved accounting standards that are not yet effective The following standards, amendments and interpretations of approved accounting standards, effective for accounting periods beginning on or after January 01, 2007 are either not relevant to Bank's operations or are not expected to have significant impact on the Bank's financial statements other than certain increased disclosures: Income on loans and advances and debt security investments are recognized on a time proportion basis that takes into account effective yield on the asset. Where debt securities are purchased at a premium or discount, those premiums / discounts are amortized 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 recognized on receipt basis. Interest / mark-up on rescheduled / restructured loans and advances and investments is recognized 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 recognized when the right to receive it is established. 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. Unrealized lease income is suspensed on classified leases, in accordance with the requirements of the Prudential Regulations of the State Bank of Pakistan. Gains / losses on termination of lease contracts, documentation charges, front-end fees and other lease income are recognized as income on receipt basis.

Letters of credit and guarantees Commission on letters of credit and guarantees etc. is recognized on time proportion basis. 4.2

Taxation Current Deferred 4.3 Investments The Group classifies its investment portfolio into the following categories: Held-for-trading Held-to-maturity Available-for-sale These are investments that do not fall under the held-for-trading or held-to-maturity categories. Investments, including those referred to in para above, are accounted for as follows: Quoted securities are carried at fair value. Gain / loss on investments sold during the period are taken to the profit and loss account. 4 Income tax expense comprises current and deferred tax. Income tax expense is recognized in the profit and loss account except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity. Current taxation is the tax payable on taxable income earned from local as well as foreign operations for the year using tax rates enacted at the balance sheet date and, any adjustments to tax payable relating to prior years. Deferred tax is recognized using the balance sheet liability method on all temporary differences between the amounts attributed to the assets and liabilities for financial reporting purposes and amounts used for taxation purposes. Deferred tax is not recognized on differences relating to investments in subsidiaries to the extent that they probably will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted at the reporting date. A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. These are securities, which are either acquired for generating a profit from short-term fluctuation in market prices, interest rate movements, dealers margin or are securities included in a portfolio in which a pattern of short-term trading exists. These are securities with fixed or determinable payments and fixed maturity that the Group has the positive intent and ability to hold till maturity. The Group records its investments in associates and joint venture companies on the basis of equity accounting. Associates as defined under local statutes but not under IAS are accounted for as ordinary investments. Unquoted equity securities are valued at lower of cost and break-up value. Break-up value of equity securities is calculated with reference to the net assets of the investee company as per the latest available audited financial statements. Securities classified as held-to-maturity are carried at amortized cost. Provision for diminution in the value of equity securities is made after considering permanent impairment, if any in their value. Provision for diminution in the value of debt securities is made as per the Prudential Regulation issued by the State Bank of Pakistan. Any unrealized surplus / deficit arising on revaluation of investment classified as held-for-trading are taken to the profit and loss account and unrealized surplus / deficit arising on revaluation of investment classified as available-for-sale is taken directly to surplus / deficit on revaluation of securities in the balance sheet.

4.4 Lendings to / borrowings from financial institutions 4.5 Advances Loans and advances Finance lease receivables 4.6 Operating fixed assets and depreciation 4.6.1 Tangible Depreciation on addition and deletion of tangible assets during the year is charged in proportion to the period of use. 4.6.2 Intangible 5 Where securities are sold subject to a commitment to re-purchase them at a pre-determined price, they remain on the balance sheet and a liability is recorded in respect of the consideration received in borrowings from financial institutions. 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 difference between the sale and purchase price is recognized as mark-up / return expensed or earned on time proportion basis as the case may be. Loans and advances and net investment in finance lease are stated net of provision for loan losses. Provision for loan losses of Pakistan operations including general provision is made in accordance with the requirements of the prudential regulations issued by the State Bank of Pakistan. Provision for loan losses of overseas branches and subsidiary companies are made as per the requirements of the respective central banks. Advances are written off when there are no realistic prospects of recovery. 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 recognized 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. Fixed assets and capital work-in-progress, are stated at cost or revalued amount less accumulated depreciation, where applicable, and accumulated impairment losses (if any). Cost of fixed assets of foreign branches and subsidiary companies include exchange differences arising on translation at year-end rates. Land and buildings are revalued by independent 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 (net of deferred tax). Under the provision of the Companies Ordinance, 1984, deficit arising on revaluation of fixed assets is adjusted against the balance in the above surplus account. Surplus on revaluation of fixed assets to the extent of the incremental depreciation charged on the related assets is transferred by the Group to un-appropriated profits (net of deferred tax). All operating assets are being depreciated over their expected economic lives using the straight-line method from the date the assets are available for use. Depreciation is calculated so as to write-off the assets over their expected economic lives at the rates specified in note 11.3 to these financial statements. The depreciation charge for the year is calculated after taking into account residual value, if any. The residual values, useful lives and depreciation method are reviewed and adjusted, if appropriate, at each balance sheet date.

Normal repairs and maintenance are charged to the profit and loss account as and when incurred. However, renewals are capitalized. Gain or loss arising on the disposal of fixed assets are included in income currently. Surplus on revaluation of fixed assets (net of deferred tax) realized during the year is transferred directly to un-appropriated profit. Intangible assets having a finite useful life are stated at cost less accumulated amortization and accumulated impairment losses, if any. Such intangible assets are amortized using the straight-line method over their estimated useful lives. Amortization is charged at the rate stated in note 11.2. Amortization on additions and deletions of intangible asset during the year is charged in proportion to the period of use. The useful lives and amortization method are reviewed and adjusted, if appropriate at each balance sheet date. Intangible assets having an indefinite useful life are stated at acquisition cost.

4.7 Employee benefits The Bank operates the following post retirement schemes for its employees: i) For those who did not opt for the pension scheme of 1977 and for new employees, the Bank operates: - Approved funded provident fund (defined contribution scheme) - Approved funded gratuity scheme (defined benefit scheme) ii) For those who opted for the pension scheme introduced in 1977, HBL operates: - Approved funded pension scheme (defined benefit scheme) for services up to March 31, 2005 March 31, 2005 Post retirement medical benefits Other post retirement benefits Employees compensated absences Benevolent fund Surplus / deficit on retirement funds / schemes Other schemes Employee benefits offered by subsidiary companies are as follows: Habib Allied International Bank Plc. United Kingdom Defined Contribution Pension scheme Habib Finance International Limited, Hong Kong Provident fund and long service payment scheme Habib Finance (Australia) Limited, Australia A contributory superannuation scheme. 4.8 Foreign currency Foreign currency transactions Foreign operations 6 Liability under the gratuity scheme is determined on the basis of actuarial advice under the Projected Unit Credit method. - Contributory gratuity and provident fund schemes in lieu of pension fund ,for services subsequent to Liability under the pension scheme is determined on the basis of actuarial advice using the Projected Unit Credit method. The Bank also provides post retirement medical benefits to its clerical employees and pensioners retiring before December 31, 2005. Provision is made in the financial statements for this benefit based on actuarial advice using the Projected Unit Credit method. The Group provide cash benefit on retirement which are estimated as per the actuarial advice. The Bank also makes provision in the financial statements for its liabilities towards compensated absences. This liability is estimated on the basis of actuarial advice under the Projected Unit Credit method. The Bank operates funded benevolent schemes for its executives / officers and clerical / non-clerical employees. Under this scheme, the employees of the Bank are entitled to receive defined grants during their service and after retirement. The benevolent fund plan covers all the employees of the Bank. Any surplus / deficit arising on actuarial valuation of these schemes (including actuarial gains / losses) available to / payable by the Group is recognized in the year in which it arises. Transactions in foreign currencies are translated to Pakistani rupees at the 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. The fair value of forward cover taken from the State Bank of Pakistan for foreign currency deposits is added / deducted from value of foreign currency deposits. Forward foreign exchange contracts and foreign bills purchased are valued at forward rates applicable to their respective maturities. The assets and liabilities of foreign operations are translated to Pakistani rupees at exchange rates prevailing at the balance sheet date. The results of foreign operations are translated at average rate of exchange for the year.

Translation gains and losses Commitments 4.9 Cash and cash equivalents 4.10 Off setting 4.11 Impairment 4.12 Provision for guarantee claim 4.13 Other provisions 4.14 Derivative financial instruments 4.15 Dividend distribution December 31, December 31, 2006 2005 ----------- (Rupees in '000) ----------Decrease in other liabilities 1,380,000

690,000 Increase in unappropriated profit 1,380,000 690,000 4.16 Segment reporting 7 Translation gains and losses are included in the profit and loss account, except those arising on the translation of net investment in foreign operations (foreign branches, subsidiaries, joint ventures or associates) which are taken to equity under "Exchange Translation Reserve" and on disposal are recognized in profit or loss account. 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 letters of credit and letters of guarantee denominated in foreign currencies are expressed in rupee terms at the rates of exchange ruling on the balance sheet date. Cash and cash equivalents include cash and balances with banks in current and deposit accounts. 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 realize the assets and to settle the liabilities simultaneously. The carrying amount of the Groups assets (other than deferred tax asset) are reviewed at each balance sheet date to determine whether there is any indication of impairment. If such indication exists, the recoverable amount of the relevant asset is estimated. An impairment loss is recognized whenever the carrying amount of an asset exceeds its recoverable amount. Impairment losses are recognized in profit and loss account. An impairment loss is reversed if the reversal can be objectively related to an event occurring after the impairment loss was recognized. Provision for guarantee claim is recognized when intimated and reasonable certainty exists that the Group will settle the obligation. Expected recoveries are recognized by debiting customers account. Charge to profit and loss account is stated net of expected recoveries. Other provisions are recognized when the Group has a legal or constructive obligation as a result of past events and it is probable that outflow of resources will be required to settle the obligation and a reliable estimate of the amount can be made. Provisions are reviewed at each balance sheet date and are adjusted to reflect the current best estimate. Derivative financial instruments are initially measured at fair value and subsequently remeasured at fair value. The significant gain or loss on remeasurement to fair value is recognized in profit and loss account. During the period the Institute of Chartered Accountants of Pakistan issued a Circular No. 06-2006 dated June 19, 2006 which requires that all declarations of dividends to holders of equity instruments consistent with / in accordance with IAS - 10, Events after the Balance Sheet Date, 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 although declared subsequent to year end, were accounted for in the year to which those relates. This change has been applied retrospectively and comparatives have been restated. The change in accounting policy had following impact on these financial statements: A segment is a distinguishable component of the Bank that is engaged in providing product or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. The Bank's primary format of reporting is based on business segments.

Business segments Geographical segments The group operates in five geographic regions, being: - Pakistan - Asia Pacific (including South Asia) - Europe - North America - Middle East - Others 8 Retail banking Consist of retail lending, deposits and banking services to private individuals and small businesses. Corporate / commercial banking Consist of Corporate customers and investment banking, includes advices and placements to corporate mergers and acquisitions, underwriting, privatisations and securitisation. Treasury Involves the businesses of proprietary trading, fixed income, equity and foreign exchanges. International Banking Group It represents Group's operations at 26 countries and is considered a separate segment for monitoring purposes. Head Office This includes balances held at Head Office level for regulatory requirements or other operational reasons and includes some non performing loans (not managed by other business segments), statutory liquidity and shareholders equity related balances and their associated cost / income.

Note 2006 2005 (Rupees in '000) 5. CASH AND BALANCES WITH TREASURY BANKS In hand including National Prize Bonds Local currency

5,402,660 4,105,753 Foreign currency 1,264,265 1,120,899 6,666,925 5,226,652 With State Bank of Pakistan in Local currency current account 25,597,743 16,890,585 Foreign currency deposit account 4,526,763 5,493,077 30,124,506 22,383,662 With other Central Banks in 5.1 Foreign currency current account 3,993,679 3,421,714 Foreign currency deposit account 3,599,553 518,001 7,593,232 3,939,715 With National Bank of Pakistan in Local currency current account 1,925,815 1,501,020 46,310,478 33,051,049 5.1 Note 2006 2005 (Rupees in '000) 6. BALANCES WITH OTHER BANKS In Pakistan On current account 301,209 427,966 Outside Pakistan On current account 6.1 6,362,454 3,827,072 On deposit account 29,301,385 27,558,475 35,663,839 31,385,547

35,965,048 31,813,513 6.1 Note 2006 2005 (Rupees in '000) 7. LENDINGS TO FINANCIAL INSTITUTIONS Call money lendings 600,000 500,000 Repurchase agreement lendings (reverse repo) 7.2 5,950,128 11,772,248 6,550,128 12,272,248 7.1 PARTICULARS OF LENDING In local currency 6,550,128 12,272,248 This includes balances held with the Central Banks of the respective countries in accordance with the requirements of the local statutory / Central Bank regulations. The above balances include remunerative accounts amounting to Rs 8,294.267 million (2005: Rs 5,518.113 million). This includes remunerative current account balance amounting to Rs 340.884 million (2005: Rs 416.277 million). 9

7.2Securities held as collateral Held by Further Total Held by Further Total against lendings to financial Group given as Group given as institutions collateral collateral Market treasury bills 3,900,128 3,900,128 11,772,248 11,772,248 Pakistan investment bonds 2,050,000 2,050,000

5,950,128 5,950,128 11,772,248 11,772,248

8.INVESTMENTS Note Held by Given as Total Held by Given as Total

8.1Investments by type Group collateral Group collateral Held-to-Maturity securities (HTM) 8.3 Federal Government Securities Market treasury bills 86,392 86,392 48,272 48,272 Pakistan investment bonds 14,782,250 14,782,250 15,866,815 15,866,815 Overseas Government securities 224,382 224,382 2,212,674 2,212,674 Debentures and Corporate Debt Instruments 166,996 166,996 291,365 291,365 15,260,020 15,260,020 18,419,126 18,419,126 Available-for-sale securities (AFS) Federal Government Securities Market treasury bills 35,891,929 21,337,072 57,229,001

32,233,586 3,144,679 35,378,265 Pakistan investment bonds 987,349 987,349 809,736 809,736 Government of Pakistan Guaranteed bonds 20,653,643 20,653,643 24,140,057 24,140,057 WAPDA bonds 599,991 599,991 Government of Pakistan bonds (US Dollar / Euro) 864,805 864,805 852,254 852,254 Overseas Government securities 6,163,192 6,163,192 8,142,980 8,142,980 Fully paid-up ordinary shares Listed companies 1,679,827 1,679,827 1,446,174 1,446,174 Unlisted companies 455,613 455,613 449,055 449,055 Debentures and Corporate Debt Instruments Listed securities 510,926 510,926 559,851 559,851 Unlisted securities

12,117,227 12,117,227 13,400,290 13,400,290 NIT units 8.12 32,134 32,134 27,774 27,774 Preference shares 171,667 171,667 260,983 260,983 Other investments 183,414 183,414 171,885 171,885 79,711,726 21,337,072101,048,798

83,094,616 3,144,679 86,239,295 Investment in associates and joint venture companies 8.4 3,278,658 3,278,658 2,726,049 2,726,049 98,250,404 21,337,072119,587,476 104,239,791

3,144,679107,384,470

8.9 / 8.11 8.9 / 8.11

10--------------------------------------------- (Rupees in '000) --------------------------------------------20062005 2006

Market value of securities held as collateral against lendings to financial institutions as at December 31, 2006 amounted to Rs 5,891.147 million (2005: Rs 11,918.331 million) 2005 --------------------------------------------- (Rupees in '000) ---------------------------------------------

Note 2006 2005 (Rupees in '000) 8.2 Investments by segments

Federal Government Securities Market treasury bills 57,408,115 35,474,309 Pakistan investment bonds 15,912,056 16,813,295 Government of Pakistan Guaranteed bonds 20,653,643 24,140,057 WAPDA bonds 599,991 Government of Pakistan bonds (US Dollar / Euro) 864,805 852,254 Overseas Government securities 6,387,574 10,355,654 Fully paid-up ordinary shares Listed companies 1,642,811 1,190,058 Unlisted companies 485,828 493,381 Debentures and Corporate Debt Instruments Listed securities 519,093 559,851 Unlisted securities 12,650,570 14,119,215 Preference shares 175,547 264,863 NIT units 11,528 2,348 Other investments 86,792 86,792 Investment in associates and joint venture companies 8.4 3,278,658 2,726,049 120,077,020 107,678,117 less: Provision for diminution in the value of investments 8.8 (518,932) (562,065) Investment at cost (net of provision)

119,558,088 107,116,052 Surplus on revaluation of available for sale securities 18.2 29,388 268,418 119,587,476 107,384,470 8.3 2006 2005 (Rupees in '000) 8.4 Investment in associates and joint venture companies PlatinumHabib Bank Plc. - Holding 15% (2005: 15%) Opening balance 2,426,182 Investment during the year 2,426,182 Share of profit for the year - net of tax 256,458 2,682,640 2,426,182 Diamond Trust Bank Limited, Kenya - Holding 3% (2005: 0%) 8.5 Opening balance Investment during the year 227,568 227,568 Himalayan Bank Limited, Nepal - Holding 20% (2005: 20%) Opening balance 299,867 267,965 Share of profit for the year - net of tax 67,162 32,312 Exchange translation reserve for the year 13,909 (410) Dividend received during the year (12,488) 368,450 299,867 3,278,658 2,726,049 8.4.1 8.4.2 8.5 11 The market value of securities classified as "held-to-maturity" amounted to Rs 12,624.734 million (2005: Rs 13,883.681 million) as at December 31, 2006. The Group has significant influence because of Aga Khan Fund for Economic Development's holding (Parent of Group) in Diamond Trust Bank Limited. The investment was made during the last quarter of 2006. The market value of shares of above investments in associates at December 31, 2006 amounted to Rs 5,967.123

million (2005: Rs 3,263.717 million). Share of profit of the associates has been accounted for on the basis of financial results for the year ended December 31, 2006.

8.6 Summary of financial information on associates and joint venture companies Based on the financial statements as on Assets Liabilities Equity Revenue Profit / (loss) PlatinumHabib Bank Plc., Nigeria June 30, 2006 73,929,018 60,427,378 13,501,640 6,148,128 1,144,791 Diamond Trust Bank Limited, Kenya September 30, 2006 16,885,905 15,241,985 1,643,920 1,477,722 286,963 Himalayan Bank Limited, Nepal July 15, 2006 27,239,253 25,516,495 1,722,758 1,722,138 187,827 Based on the financial statements as on Assets Liabilities Equity Revenue Profit / (loss) PlatinumHabib Bank Plc., Nigeria June 30, 2005 24,001,123 18,120,383 5,880,740 3,092,798 326,317 Diamond Trust Bank Limited, Kenya December 31, 2005 13,584,324 12,214,457 1,369,867 1,451,298 224,251 Himalayan Bank Limited, Nepal July 15, 2005 23,083,252 21,805,144 1,278,108 1,459,604 255,560 8.7 Investment in associated undertakings - as per statute Fair value / cost Holding Fair value / cost Holding (Rupees in '000)

% (Rupees in '000) % Central Depository Company 6,346 9.83% 6,346 8.25% First Women Bank Limited 63,300 26.78% 63,300 26.78% Investment Corporation of Pakistan 36,474 19.98% 36,474 19.98% Khushali Bank 300,000 17.60% 300,000 17.60% National Institution Facilitation Technologies (Private) Limited 1,527 9.07% 1,527 9.07% The Resource Group (Pak) Limited 140,149 7.02% 212,225 7.02% TMT PKIC Incubation Fund 25,000 10.00% 17,343 12.50% 572,796 637,215 8.7.1 2005 12 --------------------------------------------- (Rupees '000) --------------------------------------------2006 The Group does not have significant influence over these entities either due to insignificant holdings or influence of the Government / major shareholders. Accordingly these investments are accounted for as normal investments. 2006 2005 --------------------------------------------- (Rupees '000) ---------------------------------------------

8.8 Particulars of provision held against diminution in value of investments 2006 2005 (Rupees in '000) Opening balance 562,065 655,870 Reversed during the year (13,697) (82,568) Amount written off (29,436)

(11,237) Closing balance 518,932 562,065 8.8.1 Particulars of Provision in respect of type and segment Available-for-sale securities (AFS) Fully paid-up ordinary shares Listed companies 118,490 86,299 Unlisted companies 30,215 44,326 Debentures and Corporate Debt Instruments 366,347 427,560 Preference shares 3,880 3,880 518,932 562,065 8.9 8.10 8.11 8.12 NIT units of Rs 3.537 million as at December 31, 2006 are pledged with Multan High Court. 8.13 13 Investments include Rs 10 million as at December 31, 2006 (2005: Rs 10 million) pledged with the Controller of Military Accounts in lieu of Regimental Fund Accounts being maintained at various branches of the bank. Information relating to investments including credit ratings 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. Investments held for maintaining the liquidity requirements of the State Bank of Pakistan amounted to Rs 72,304 million as at December 31, 2006 (2005: Rs 56,404 million). Investments include Rs 543.500 million as at December 31, 2006 (2005: Rs 543.500 million) pledged with State Bank of Pakistan and National Bank of Pakistan against TT/DD discounting facilities and demand loan facilities. The balances above are stated net of specific provision held. The analysis of total provision held is as follows:

2006 2005 9. ADVANCES (Rupees in '000) Loans, cash credits, running finances, etc. In Pakistan 291,209,502 272,397,998 Outside Pakistan 38,068,479 40,997,903 329,277,981 313,395,901 Net investment in finance lease - in Pakistan 9.2 11,827,390 12,636,997 - outside Pakistan 11,827,390 12,636,997 Bills discounted and purchased (excluding Government treasury bills) Payable in Pakistan 9,843,365 12,352,640 Payable outside Pakistan 20,415,802 12,039,363 30,259,167 24,392,003 Provision against non-performing advances 9.5 (21,931,853) (33,543,266) 349,432,685 316,881,635 Fully provided non-performing advances classified as loss for more than five years In Pakistan 6,622,757 Outside Pakistan 493,578 7,116,335 Provision 9.5.1

(7,116,335) 9.1 Particulars of advances 9.1.1 In local currency 289,781,368 269,872,966 In foreign currency including foreign currency financing by domestic branches amounting to Rs 18,858 million (2005: Rs 14,468.186 million) 59,651,317 47,008,669 349,432,685 316,881,635 9.1.2 Short term (for upto one year) 225,226,690 216,944,509 Long term (for over one year) 124,205,995 99,937,126 349,432,685 316,881,635 14

9.2 Net investment in finance leaseNot later Later than Not later Later than than one one and Total than one one and Total year less than year less than five years five years Lease rentals receivable 784,695 10,776,534 11,561,229 3,302,265 8,752,688 12,054,953 Residual value 145,145 2,043,223 2,188,368 75,627 2,024,510 2,100,137 Gross investment in finance lease 929,840 12,819,757 13,749,597 3,377,892 10,777,198

14,155,090 Unearned finance income 51,143 1,871,064 1,922,207 165,789 1,352,304 1,518,093 Net investment in finance lease 878,697 10,948,693 11,827,390 3,212,103 9,424,894 12,636,997

9.3Category of Classification Domestic Overseas Total Domestic Overseas Total Domestic Overseas Total Specific Provision Other assets especially mentioned656,589 656,589 -

656,589 656,589 Substandard2,843,777 818,211 3,661,988 507,320 -

507,320 2,336,457 818,211 3,154,668 Doubtful2,775,895 105,923 2,881,818 801,877 52,962

854,839 1,974,018 52,961 2,026,979 Loss14,234,592 8,598,001 22,832,593 10,772,592 8,383,937

19,156,529 3,462,000 214,064 3,676,06420,510,853 9,522,135 30,032,988 12,081,789 8,436,899 20,518,688

8,429,064 1,085,236 9,514,300 General Provision1,173,890 239,275

1,413,165 20,510,853 9,522,135 30,032,988

13,255,679 8,676,174 21,931,853 8,429,064 1,085,236 9,514,300

9.3.1

9.4 9.4.1 9.5 Particulars of provision against non-performing advancesNote Specific General Total Specific General Total Opening balance 32,011,517 1,531,749 33,543,266 32,256,021 1,052,526 33,308,547 Exchange adjustment and other movement 1,160,608 (10,388) 1,150,220 (31,020) (9,054) (40,074) Charge for the year 3,089,217 50,219 3,139,436 2,653,750 488,499 3,142,249 Reversals (117,814) (158,415) (276,229) (167,362) (222) (167,584) 2,971,403 (108,196) 2,863,207 2,486,388 488,277 2,974,665 Amounts written off 9.6 (8,508,505) (8,508,505) (2,699,872) (2,699,872) Transferred to over 5 years category 9.5.1 (7,116,335) (7,116,335) Closing balance 20,518,688 1,413,165 21,931,853 32,011,517 1,531,749 33,543,266 In local currency 12,081,789 1,173,890 13,255,679 19,312,554 1,301,069 20,613,623 In foreign currency 8,436,899 239,275 8,676,174 12,698,963 230,680 12,929,643 20,518,688 1,413,165 21,931,853 32,011,517 1,531,749 33,543,266

Had the provision against non-performing loans and advances been determined in accordance with the previous requirements of the State Bank of Pakistan by considering the benefit of FSV where the outstanding amount is between Rs. 5 million and 10 million, the specific provision against non-performing loans and advances would have been lower and consequently profit before taxation

and advances (net of provision) as at December 31, 2006 would have been higher by Rs. 182.611 million.

152006 2005

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

During the year, the Group has separated non-performing loans classified as loss for more than five years and fully provided as a separate category for monitoring purposes. The total loans and advances so classified and the provisions thereagainst amounts to Rs. 7.12 billion. This category is not included in note 9.3.2006

Net non-performing loans ------------------------------------------------------ (Rupees in '000) --------------------------------------------------------2006 2005

The State Bank of Pakistan vide its BSD Circular 7 dated November 1, 2005 has withdrawn the benefit relating to FSVs conducted in respect of non-performing loans and advances where the outstanding principal amount is Rs.10 million (2005:Rs. 5 million) or less.Advances include Rs 30,032.988 million(2005: Rs 41,360.353 million) which have been placed under non-performing status, other than those accounts classified as loss and fully provided for more than five years which have been placed in separate category as referred to in note 9.4, are detailed below:

Classification of overseas non-performing advances and provision there against has been made in accordance with the accounting policy as referred in note 4.5.Provision required and held Non-performing advances ------------------------------------------------------------------------------------ (Rupees in '000) -----------------------------------------------------------------------------------------

2006 2005 (Rupees in '000) 9.5.1 Particulars of provision against fully provided non-performing advances classified as loss for more than five years Opening balance Transferred during the year 7,116,335 Write off / recovery 7,116,335 9.6 Particulars of write-offs 9.6.1 Against provisions 8,508,505 2,699,872 Directly charged to profit and loss account 8,508,505 2,699,872 9.6.2 Analysis of write-offs Rs 500,000 and above in Pakistan (Note 9.7) 2,754,149 1,820,476 Below Rs 500,000 in Pakistan and overseas 5,754,356 879,396 8,508,505 2,699,872 9.7 Details of loan write-off of Rs 500,000 and above 9.8 Particulars of loans and advances to directors, associated companies, etc. Balance outstanding Maximum total amount of loans and advances including Limit sanctioned during the year Loan repaid

during the year Balance outstanding Maximum total amount of loans and advances including Limit sanctioned during the year Loan repaid during the year Debts due by directors or executives of the Group or any of them either severally

or jointly with any other persons: - in respect of directors-

- in respect of executives *253,864 333,004 196,000 148,877 206,741 213,920 147,000 42,830

- in respect of key management personnel184,427 184,427 106,400 47,337 125,364 125,364 27,000 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 members292,000 292,000 392,000 Debts due by:

- Joint venture companies-

- Retirement benefit funds1,389,612 2,520,733 1,877,816 2,165,061 2,740,700 * (These represent staff loans given by the Group to its executives as per their terms of employment) ** (Maximum amount has been arrived at by reference to month end balance)

Note 2006 2005 (Rupees in '000) 10. OTHER ASSETS Income / mark-up accrued in local currency 8,179,779 6,738,133 Income / mark-up accrued in foreign currency 955,595 621,843 Advances, deposits, advance rent and other prepayments 688,323 555,828 Advance taxation (payments less provisions) 1,673,474 Receivable from defined benefit plans 30.2.3 4,835,017 4,245,070 Stationery and stamps on hand 164,568 159,234 Accrued fee income 129,600 Due from Government of Pakistan 10.2 295,353 328,620 Unrealised gain on forward foreign exchange contract 92,415 Deferred Costs Non-banking assets acquired in satisfaction of claims (market value Rs 36.336 million) 30,000 Others 721,167 1,833,090 Provision for other assets 17,765,291 14,481,818 The disclosure of the year-end balance, limit / amount sanctioned and the highest amount outstanding during the year is considered the most meaningful information to represent the amount of the transactions and the amount of outstanding balances during the year. 16 2005 2006 ---------------------------------------------------------- (Rupees in '000) -------------------------------------------------------The statement in respect of written-off loans or any other financial relief of five hundred thousand rupees or above allowed to a person(s) during the year ended December 31, 2006 is given in Annexure II required under sub-section (3) of Section 33A of the Banking Companies Ordinance, 1962.

2006 2005 10.1 Provision against other assets Opening balance 895,954 704,227 (Reversal) / charge for the year - net (141,477) 191,727 Closing balance 754,477 895,954 10.2 Note 2006 2005 11. OPERATING FIXED ASSETS

Capital work-in-progress 11.1 395,444 62,916 Intangible assets 11.2 435,217 302,297 Operating fixed assets 11.3 11,124,215 10,800,982 11,954,876 11,166,195 11.1 Capital work-in-progress Civil works 268,244 38,220 Equipment 1,332 14 Others 125,868 24,682 395,444 62,916 11.2 Intangible assetsBook value As at Additions / Adjustments As at As at Charge for Adjustments As at as at Description January 1, (deletions) December 31, January 1, the year December 31, December 31, Rate of 2006 during the 2006 2006 (Amortisation 2006 2006 amortization year on deletions) % Computer software 330,017 273,368 187,212 788,517 27,720 172,004 155,637 353,300 435,217 (2,080) (2,061) 33.33 Description Book value As at Additions / Adjustments As at As at Charge for Adjustments As at as at January 1, (deletions) December 31, January 1, the year December 31, December 31, 2005 during the 2005 2005 (Amortisation 2005 2005 amortization year on deletions) %

Computer software 330,017 330,017 27,720 27,720 302,297 33.33

11.3 Operating fixed assetsDescription Book value As at Additions / Surplus / As at As at Charge for Surplus / As at as at January 1, (deletions) / Adjustment (deficit) on revaluation December 31, January 1, the year / (deficit) on revaluation December 31, December 31, Rate of 2006 during the during the 2006 2006 (depreciation reversed 2006 2006 depreciation year year on deletions) / during the adjustments year % Land 6,487,194 71,472 124,128 6,682,994 6,682,994 (5,175) 5,375 Building including related machinery 3,433,186 166,959 8,003 3,583,565 617,987 165,316 (8,703) 747,266 2,836,299 2.5-10 (26,944) (26,944) 2,361 (390) Furniture, fixture and office equipment 4,743,872 772,748 5,025,133 3,424,250 571,450 3,525,070 1,500,063 20-33 (362,723) (357,324) (128,764) (113,306) Vehicles 573,214 55,509 329,791 394,247 61,213 224,932 104,859

20 (264,797) (199,049) (34,135) (31,479) 2006 15,237,466 1,066,688 132,131 15,621,483 4,436,484 797,979 (8,703) 4,497,268 11,124,215 (659,639) (583,317) (155,163) (145,175)

(Rupees in '000) 17COST / REVALUATION DEPRECIATION

(Rupees in '000)COST AMORTISATION ------------------------------------------------------------------------------------ Rupees in 000 -----------------------------------------------------------------------------------AMORTISATION

This represents residual amount recoverable from the Government of Pakistan on account of payments made to retrenched employees under the Voluntary Separation Scheme (VSS) offered by Habib Bank Limited (HBL) during 2001. All payments made under this scheme are recoverable from the Government of Pakistan as grant to HBL.COST Rate of ------------------------------------------------------------------------------------ Rupees in 000 ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- Rupees in 000 ------------------------------------------------------------------------------------

Description As at January 1, 2005 Additions / (deletions) during the year Adjustments As at December 31, 2005 As at January 1, 2005 Charge for the year / (depreciation on deletions) Adjustments As at December 31, 2005 % Land 6,495,864 304 (8,791) 6,487,194 6,487,194 (183) Building including 3,343,570 113,007 (15,216) 3,433,186 449,962 162,838 7,807 617,987 2,815,199 2.5-10 related machinery (8,175) (2,620) Furniture, fixture and 4,313,693 664,612 (38,164) 4,743,872 3,129,335 515,938 (30,246) 3,424,250 1,319,622 20-33 office equipment (196,269) (190,777) Vehicles 553,311 83,972 9,910 573,214 387,428 63,921 10,217 394,247 178,967 20 (73,979)

(67,319) 2005 14,706,438 861,895 (52,261) 15,237,466 3,966,725 742,697 (12,222) 4,436,484 10,800,982 (278,606) (260,716)

11.4 (Rupees in '000) Land 559,587 Building including related machinery 970,094 The movement in surplus on revaluation of properties is given in note 18.1 to these financial statements. 11.5 Details of disposal of fixed assets 11.6 Note 2006 2005 12. DEFERRED TAX ASSET Deductible temporary differences on - provision against investments 127,886 153,341 - provision against doubtful debts 2,886,695 1,705,775 - provision against others 247,175 446,225 On revaluation of investments 18.2 (11,732) 65,519 3,250,024 2,370,860 Taxable temporary differences on - fixed assets (488,994) (502,632) - others (35,544) (25,251) (524,538) (527,883) Net deferred tax asset recognised by the Group 2,725,486 1,842,977 13. BILLS PAYABLE In Pakistan 13.1 5,108,109 5,025,906 Outside Pakistan 629,348 750,419 5,737,457 5,776,325 13.1 It includes an amount of Rs 4,060.611 million held in inter-branch transitory accounts. 14. BORROWINGS FROM FINANCIAL INSTITUTIONS In Pakistan 47,068,094 28,327,258 Outside Pakistan 9,324,176 6,577,094 56,392,270 34,904,352

The information relating to disposal of fixed assets in aggregate having book value exceeding Rs 250,000 or cost exceeding Rs 1 million (whichever is lower), is 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. At December 31, 2006 carrying value of temporarily idle properties and equipment and those retired from active service and held for

disposal purposes amounted to Rs 121.573 million (2005: Rs 198.729 million) and Rs 99.945 million (2005: Rs 214.037 million) respectively. Gross carrying amount of fully depreciated properties and equipment that are still in the Group's use, as at the above date, amounted to Rs 1.6 million (2005: Rs 1.605 million).Book value as at December 31, 2005

Habib Bank Limited's (HBL) domestic properties were revalued by independent professional valuers as on December 31, 2004. These properties were revalued by 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. 4,055.522 million. HBL properties of Srilanka and Singapore branches were revalued on August 10, 2005 and September 5, 2006 by A. Y. Daniel & Son and CB Richard Ellis (Pte) Ltd. respectively, licenced valuers, on market value basis. These revaluations have resulted in a surplus of Rs. 140.834 million and the same has been recorded in the books in 2006. Had there been no revaluation, the carrying amount of revalued assets would have been as follows:(Rupees in '000)------------------------------------------------------------------------------------ Rupees in 000 -----------------------------------------------------------------------------------Rate of depreciation

18COST / REVALUATION DEPRECIATION

Note 2006 2005 (Rupees in '000) 14.1 Particulars of borrowings from financial institutions In local currency 47,068,094 28,327,258 In foreign currency 9,324,176 6,577,094 56,392,270 34,904,352 14.2 Details of borrowings from financial institutions Secured Borrowings from State Bank of Pakistan under - Export refinance scheme 15,678,110 14,525,086 - Locally manufactured machinery refinance scheme 9,145 9,638 - Long term finance - export oriented projects 8,213,632 276,327 Repurchase agreement borrowings 21,285,463 3,141,207 45,186,350 17,952,258 Unsecured In Pakistan - Interbank call money borrowing including borrowing by domestic subsidiaries 1,881,744 10,375,000 Outside Pakistan - Overdrawn nostro accounts

692,708 367,460 - Borrowings of overseas branches 8,631,468 6,209,634 9,324,176 6,577,094 11,205,920 16,952,094 56,392,270 34,904,352 14.3 2006 2005 (Rupees in '000) 15. DEPOSITS AND OTHER ACCOUNTS Customers Fixed deposits 135,098,044 100,469,938 Savings chequing account 168,057,000 164,877,000 Other savings account 52,325,375 54,783,754 Current accounts - non-remunerative 90,350,296 104,878,310 445,830,715 425,009,002 Financial institutions Remunerative deposits 8,612,135 3,581,694 Non-remunerative deposits 4,697,348 3,954,469 13,309,483 7,536,163 459,140,198 432,545,165 15.1 Particulars of deposits In local currency 359,114,072 343,166,394 In foreign currency {including foreign currency deposits of domestic branches of Rs 33,147.443 million (2005: Rs 31,386.565 million)} 100,026,126 89,378,771 459,140,198

432,545,165 Borrowings from State Bank of Pakistan (SBP) under the export, locally manufactured machinery and export oriented projects refinance schemes of SBP are secured by the bank's cash and security balances held by SBP. 19 14.3

Note 2006 2005 (Restated) (Rupees in '000) 16. OTHER LIABILITIES Mark-up / return / interest payable in local currency 4,160,445 2,391,879 Mark-up / return / interest payable in foreign currency 503,115 442,962 Security deposits against leases 2,188,368 2,100,137 Accrued expenses 1,324,845 633,559 Unrealised loss on forward foreign exchange contracts - net 115 Unclaimed dividends 10,022 11,372 Provision for employees' compensated absences 30.3 1,297,901 1,260,440 Provision for post retirement medical benefits 30.2.3 1,660,083 1,891,523 Provision against off-balance sheet obligations 16.2 474,457 519,895 Provision for contingencies 16.3 807,754 839,702 Branch adjustment account 1,848,537 2,655,768 Payable to defined benefit plan 30.2.3 15,769 234,891 Provision for taxation - net of payments 25,574 Others 1,286,881 1,482,396 15,578,177 14,490,213

16.1 16.2 Provision against off-balance sheet obligations Opening balance 519,895 391,044 (Reversals) / charge for the year (45,438) 128,851 Closing balance 474,457 519,895 16.3 Provision for contingencies Opening balance 839,702 655,077 (Rreversal) / charge for the year (36,193) 184,395 Exchange adjustment 4,245 230 Closing balance 807,754 839,702 17. SHARE CAPITAL 17.1 Authorised Capital 2005 2006 2005 (Rupees in '000) 1,380,000 Ordinary shares of Rs. 10 each 13,800,000 13,800,000 17.2 Issued, subscribed and paid-up capital 2005 Ordinary shares of Rs. 10 each 2006 2005 (Rupees in '000) 690,000 Fully paid in cash 6,900,000 6,900,000 690,000 6,900,000 6,900,000 17.3

Exchange translation reserve This comprises all foreign currency differences arising from the translation of financial statements of foreign operations.20 2006 1,380,000 2006 On recommendation of Directors, declaration of proposed dividend for the year 2005 was deferred by shareholders in the AGM until August 24, 2006 as stipulated in clause 4 A3 of Share Purchase Agreement dated February 26, 2004. The liability has been restated in line with the change in accounting policy as referred in note 4.15 to these financial statements. 690,000 690,000 Number of shares in '000

Number of shares in '000

17.4

Statutory reserves17.5

Dividends The following dividends were declared and paid by the Group: Re 1 per share in cash. 690,000 Rs 2 per share in cash. 1,380,00018.SURPLUS ON REVALUATION OF ASSETS - net of deferred tax

Note 2006 2005 (Rupees in '000) Surplus arising on revaluation of: - fixed assets 18.1 7,334,729 7,275,915 - investments 18.2 17,656 333,937 Surplus on revaluation of assets - net of deferred tax 7,352,385 7,609,852 18.1 Surplus on revaluation of fixed assets Surplus on revaluation of fixed assets as at January 1 7,950,982 8,027,572 Surplus / (adjustment) on revaluation during the year 131,519 (95) Surplus realised on disposal of revalued properties during the year (18,517) (2,057) Transferred to accumulated profit in respect of incremental depreciation charged during the year - net of deferred tax (48,341) (46,152) Related deferred tax liability of incremental depreciation charged during the year (26,030) (28,286) Surplus on revaluation of fixed assets as at December 31 7,989,613 7,950,982 Less: related deferred tax liability on - revaluation as at January 1 675,067 703,687 - revaluation of Group's properties recognised / (adjusted) during the year 5,847 (33) - incremental depreciation charged during the year

transferred to profit and loss account (26,030) (28,286) - disposal of revalued properties reversed during the year (301) 654,884 675,067 7,334,729 7,275,915 18.2 Surplus / (deficit) on revaluation of investments Market treasury bills (92,722) (47,772) Pakistan Investment Bonds (142,457) (136,744) Listed securities 155,506 342,415 NIT units 20,605 25,426 Other investments 88,456 85,093 29,388 268,418 (Less) / add: related deferred tax (liability) / asset (11,732) 65,519 17,656 333,937

The holding company is required to transfer 10% of its profits to a statutory reserve after the reserve equals share capital. This reserve is not available for distribution. Other companies in the Group also have almost similar requirements. After December 31, 2006 the following dividends were proposed by the Directors for 2006. The dividends have not been provided for and there are no income tax consequence.21

2006 2005 (Rupees in '000) 19. CONTINGENCIES AND COMMITMENTS 19.1 Direct credit substitutes - financial guarantees 10,934,318 25,098,266 19.2 Transaction-related contingent liabilities Guarantees in favour of: - Government 721,858 9,988,190 - Financial institutions 844,157

558,487 - Others 30,129,415 2,699,708 31,695,430 13,246,385 19.3 Trade-related commitments Credit cash 102,510,323 78,902,540 Credit documentary acceptences 12,375,995 10,694,765 Credit acceptances 9,278,055 10,672,476 124,164,373 100,269,781 19.4 Other contingencies Claims against the Group not acknowledged as debts 44,311,700 39,670,401 19.5 Commitments in respect of forward lending 19.6 Commitments in respect of forward foreign exchange contracts Purchase 52,898,091 32,207,080 Sale 44,985,569 28,668,592 Commitments in respect of foreign currency options Purchase 1,470,566 1,785,500 Sale 1,470,566 1,785,500 The above commitments have maturities falling within one year. 19.7 Commitments for acquisition of operating fixed assets / intangibles 587,277 249,052 22 The Group 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.

2006 2005 (Rupees in '000) 20.

MARK-UP / RETURN / INTEREST EARNED On loans and advances to - Customers 32,598,656 22,690,603 - Financial institutions 149,336 76,172 On investments - Available-for-sale 7,235,562 6,714,759 - Held-to-maturity 932,668 1,421,027 On deposits with financial institutions 1,002,062 1,033,061 On lendings to financial institutions 1,767,456 407,584 43,685,740 32,343,206 21. MARK-UP / RETURN / INTEREST EXPENSED Deposits 10,590,476 6,016,621 Securities sold under repurchase agreement borrowings 367,962 336,172 Other short term borrowings 2,167,784 936,410 Long term borrowings 77,481 37,223 Others 334 1,177 13,204,037 7,327,603 22. INCOME / GAIN ON INVESTMENTS 22.1 GAIN / (LOSS) ON SALE OF SECURITIES Federal Government Securities - Market Treasury Bills (10,832) 8,838 - Pakistan Investment Bonds 5,583 532 - Other Federal Government Securities 25,295 -

Shares - Listed 2,316 762,686 - Unlisted 5,048 538,747 27,410 1,310,803 22.2 INCOME ON INVESTMENTS Dividend income 721,379 226,174 Share of profit of associates and joint venture 470,834 189,359 1,192,213 415,533 1,219,623 1,726,336 23. OTHER INCOME Incidental charges 840,076 679,858 Rent on lockers 103,522 92,651 Gain on sale of property and equipment 73,441 43,001 Rent on property 70,254 72,822 Net gain on disposal of branches 142,259 Miscellaneous earnings 1,006,253 899,111 2,235,805 1,787,443 23

Note 2006 2005 (Rupees in '000) 24. ADMINISTRATIVE EXPENSES Salaries, allowances, etc. 9,649,081 8,689,124 Charge for defined benefit plan and

other benefits 30.2.2 / 30.3 98,964 522,703 Contribution to defined contribution plan 225,162 149,398 324,126 672,101 Non-executive directors' fees, allowances and other expenses 46 54 Brokerage and commission 15,404 11,412 Rent, taxes, insurance, electricity, etc. 1,045,775 1,010,196 Legal and professional charges 372,006 199,117 Communications 263,465 154,387 Repairs and maintenance 388,056 330,669 Stationery and printing 288,531 266,385 Auditors' remuneration 24.1 66,313 54,196 Advertisement and publicity 24.2 253,049 425,321 Amortisation 11.2 172,004 27,720 Depreciation 11.3 797,979 742,697 Entertainment 61,628 51,677 Travelling 229,832 173,392 Conveyance and motor car 78,387 86,256 Training 137,980 67,939 Security charges 289,123 125,131 Remittance charges

219,732 142,116 Donations 24.4 1,975 41,081 Others 770,969 824,092 15,425,461 14,095,063 24.1 Auditors' remuneration Audit fee 2,200 2,000 Fee for interim audit 2,093 1,820 Fee for audit of local branches of Habib Bank Limited 4,200 4,431 Special certifications / examinations and sundry advisory services 800 800 Tax services 3,123 Out of pocket expenses 1,500 1,500 13,916 10,551 Overseas subsidiaries / branches and domestic subsidiaries 52,397 43,645 66,313 54,196 24.2 24.3 24.4 Donations were not made to any donee in which Habib Bank Limited, Directors or their spouse had any interest. 24 During the year the bank restricted its expenditure on marketing as it has undertaken the review of corporate identity. This will be formally launched in February 2007. The Bank operates a short term employee benefit scheme which includes cash award / special bonus for all employees. Under this scheme, the bonus for all Executives, including the Chief Executive Officer is determined on the basis of employees' evaluation and the Bank's performance during the year. The aggregate amount determined for the eligible employees in respect for the above scheme for the year 2005 relating to all Executives and for the Key Management Personnel of the Bank amounted to Rs. 308.806 million (2004 scheme: Rs 181.724 million) and Rs 213.00 million (2004 scheme: Rs 127.662 million) respectively. The corresponding amount for 2006 scheme have not yet been determined.

Note 2006 2005

25. OTHER CHARGES Penalties imposed by State Bank of Pakistan 54,898 68,483 26. TAXATION For Pakistan - for the year - current 6,266,908 690,616 For Pakistan - for the year - deferred (1,081,182) 149,352 For Pakistan - prior year - current (61,738) For Pakistan - prior year - deferred 115,575 623 For Overseas - for the year - current 877,938 3,386,232 For Overseas - for the year - deferred For Overseas - prior year - current 22,671 (39,397) For Overseas - prior year - deferred 6,140,172 4,187,426 26.1 Relationship between tax expense and accounting profit Accounting profit for the current year 18,840,487 13,833,975 Tax on income @ 35% (2005: 38%) 6,594,170 5,256,911 - Exempted income (693,086) (596,780) - Reduced rate income (252,521) (86,297) - Others 491,609 (386,408) Tax charge for the current year 6,140,172 4,187,426 27. BASIC AND DILUTED EARNINGS PER SHARE Profit for the year attributable to equityholders of the Bank 12,630,259 9,563,303 Weighted average number of ordinary shares 690,000,000 690,000,000 (Rupees)

Basic and diluted earnings per share 18.30 13.86 28. CASH AND CASH EQUIVALENTS Cash and balance with treasury banks 5 46,310,478 33,051,049 Balance with other banks 6 35,965,048 31,813,513 82,275,526 64,864,562 29. STAFF STRENGTH Permanent 14,388 16,184 Others 184 130 Total Staff Strength 14,572 16,314 29.1 29.2 (Number) Subsequent to the year end, 900 employees have been retrenched as per Habib Bank Limited (HBL) Human Resource policy with effect from January 13, 2007. The bank has committed to pay, in addition to payments under the staff retirement funds, an amount of Rs 641 million under the retrenchment scheme. (Number) During the year 2,367 (2005: 2,202) employees were retrenched. The bank has paid in addition to payments under the staff retirement funds, an amount of Rs 1,724 million (2005: Rs 1,602 million) under the scheme. 25 (Rupees in '000) (Rupees in '000) For the purpose of taxation overseas include Habib Bank Limited's branches in Azad Jammu & Kashmir region.

30. DEFINED BENEFIT PLANS AND OTHER BENEFITS 30.1 Principal actuarial assumptionsPer Annum

Valuation discount rate 10.00% Expected rate of increase in salary level 8.00% Expected rate of return on funds invested 10.00% 30.2 Pension, gratuity and benevolent fund schemes 30.2.1 2006 2005 2006 2005 2006 2005 2006 2005 Fair value of plan assets 9,677,005

9,497,442 731,530 699,096 1,349,964 1,074,684 Present value of defined benefit obligation (5,105,937) (5,491,521) (467,581) (459,947) (1,615,281) (1,600,716) Surplus / (Deficit) 4,571,068 4,005,921 263,949 239,149 (265,317) (526,032) Present value of unfunded obligation (1,770,489) (2,020,330) Unrecognised past service cost 249,548 291,141 110,406 128,807 Asset / (provision) recognised in the balance sheet 4,571,068 4,005,921 263,949 239,149 (15,769) (234,891) (1,660,083) (1,891,523) 30.2.2 Note 2006 2005 2006 2005 2006 2005 2006 2005 Current service cost 35,105 134,546 264 6,869 25,556 29,920 25,102 61,757 Mark-up cost 549,152 518,617 45,995

41,417 160,072 113,801 202,033 190,281 Expected return on plan assets (1,063,872) (717,165) (69,910) (65,280) (145,154) (114,103) Other movements 30.2.2.1 (85,532) 79,544 (1,149) 111,305 539,424 243,779 (139,258) (289,695) Contibutions - employees (16,325) (19,253) Charge / (reversal) for the year (565,147) 15,542 (24,800) 94,311 563,573 254,144 87,877 (37,657) 30.2.2.1 It represents net impact of actuarial gain / (loss), past service cost, curtailment gain and assets recognized in current period. 30.2.3 2006 2005 2006 2005 2006 2005 2006 2005 Opening balance (4,005,921) (3,250,778) (239,149) (333,460) 234,891 1,891,523 2,279,646 Charge / (credit) for the year (565,147) 15,542 (24,800) 94,311 563,573 254,144 87,877 (37,657) Contributions during the year (770,685) -

(782,695) (19,253) Benefits paid (319,317) (350,466) Closing balance (4,571,068) (4,005,921) (263,949) (239,149) 15,769 234,891 1,660,083 1,891,523 30.2.4 The significant portion of the assets comprises of debt securities. 30.2.5 Movement of present value of defined benefit obligation 2006 2005 2006 2005 2006 2005 2006 2005 Opening balance (5,491,521) (6,259,884) (459,947) (427,571) (1,600,716) (885,670) (2,020,330) (2,279,646) Cur