History of HBL:

Habib Bank Limited (the Bank) is incorporated in Pakistan and is engaged in commercial
banking, modaraba management and related services in Pakistan and overseas. The bank’s
principal / registered office is located at Habib Bank Plaza, I.I Chundrigar road, Karachi. The
bank operates 1,425 branches (2004: 1,424) inside Pakistan and 45 (2004: 47) branches outside
the country. The Group comprises of:

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
- First Habib Bank Modaraba, Pakistan

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. From the current year, the bank has consolidated the financial statements of the
modaraba as the ultimate holding company and the comparative information has also been
restated accordingly. The impact has been disclosed in note 42 to these financial statements.

The consolidated financial statements of the Group for the year ended December 31, 2005
comprise of the bank and its subsidiaries (together referred to as the Group) and the Group’s
interest in its associated and jointly controlled entities.
 Auditors Report to the Members

We have audited the annexed consolidated financial statements comprising consolidated Balance
Sheet of Habib Bank Limited (Holding Company) and its subsidiary companies (the Group) as at
December 31, 2005 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 un audited certified
returns from the branches, except for 82 branches, which have been audited by us and 45
branches audited by auditors abroad. We have also expressed a separate opinion on the financial
statements of Habib Bank Limited while the financial statements of subsidiary companies 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, Habib Currency Exchange (Private) Limited, Pakistan and First Habib Bank
Modaraba, Pakistan were audited by other firms of Chartered Accountants and our opinion in so
far as it relates to the amounts included for such companies, is based solely on the report of such
auditors. These financial statements are the responsibility of the Holding Company’s
management. Our responsibility is to express an 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 financial statements are free of any material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting policies and significant estimates
made by management, as well as, evaluating the overall presentation of the financial statements.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements examined by us, based on 82 branches
audited by us and the returns referred to above received from the branches which have been found
adequate for the purposes of our audit, present fairly the financial position of Habib Bank Limited
and its subsidiary companies as at December 31, 2005 and the results of their operations, their
cash flows and changes in equity for the year then ended in accordance with approved accounting
standards as applicable in Pakistan.

The financial statements of the Group for the year ended December 31, 2004 were audited jointly
by A.F.Ferguson & Co., Chartered Accountants and Taseer Hadi Khalid & Co., Chartered
Accountants, who had expressed an unqualified opinion thereon vide their report dated March 28,
2005.
 Consolidated Balance Sheet
AS AT DECEMBER 31, 2005
 Consolidated Profit And Loss Account
FOR THE YEAR ENDED DECEMBER 31, 2005
 Consolidated Cash Flow Statement
FOR THE YEAR ENDED DECEMBER 31, 2005
 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 un audited 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 Bank’s 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.

Results for 2006

The Group’s 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.
 Consolidated Balance Sheet
AS AT DECEMBER 31, 2006
 Consolidated Profit And Loss Account
FOR THE YEAR ENDED DECEMBER 31, 2006
 Consolidated Cash Flow Statement
FOR THE YEAR ENDED DECEMBER 31, 2006
 Statement of Internal Control

The system of internal control is based on an ongoing process designed to identify the principal
risks to the achievement of the Bank’s policies, aims and objectives, to evaluate the nature and
extent of those risks and to manage them efficiently, effectively and economically. Management
assumes the responsibility of establishing and maintaining adequate internal controls and
procedures while Board of Directors is ultimately responsible for the internal control policy. In
this connection the Bank has documented Procedures and Manuals, which incorporates the
internal controls applicable while conducting any banking transaction. These procedures are
revised and updated as and when required. This process has been in place for the year ended
December 31, 2007 and up to the date of approval of the annual report in accordance with
guidance from State Bank of Pakistan. In addition, the Bank has implemented a Compliance &
Control Self Assessment (CCSA) through which the Bank is able to identify irregularities at the
branch level and is able to rectify them through a monitoring system built into CCSA. The Audit,
BRR & Investigation Group (ABIG) of the Bank reviews the adequacy and implementation of
internal controls on a regular basis and deficiencies, if any, are followed up until they are
rectified. Quarterly updates on unresolved significant issues highlighted by the ABIG are
reviewed by the Audit Committee of the Board of Directors together with recommendations for
improvements.

The system of internal control is designed to manage rather than eliminate the risk of failure to
achieve the organization’s policies, aims and objectives; it can therefore, only provide reasonable
and not absolute assurance against material misstatement or loss. The system of internal controls
being followed by the Bank is considered adequate and sound in design and is being effectively
implemented and monitored.

Audit Procedures for Verification

Revenue Recognition

Advances and Investments

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.
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.

Unrealized lease income is suspense, where necessary, 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.

Taxation

Current
Provision for current taxation is based on taxable income for the year determined in accordance
with the prevailing laws for taxation on income earned from local as well as foreign operations,
as applicable to the respective jurisdictions. The charge for the current tax is calculated using
prevailing tax rates or tax rates expected to apply to the profits for the year at enacted rates or
minimum tax at the rate of 0.5% of turnover whichever is higher. The charge for the current tax
also includes adjustments, where considered necessary relating to prior years, arising from
assessments framed during the year.

Deferred
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, except that deferred tax assets/liabilities associated with
investments/ disinvestments relating to foreign operations are recognized to the extent that these
temporary differences will reverse in the foreseeable future at rates enacted at the balance sheet
date. In addition, 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 utilization.

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.

The Group also recognizes deferred tax asset / liability on surplus / deficit on revaluation of fixed
assets and securities which is adjusted against the related surplus / deficit in accordance with the
requirements of International Accounting Standard (IAS 12) relevant to Income taxes.
Investments
The Group classifies its investment portfolio into the following categories:

Held for Trading

These are securities, which are either acquired for generating a profit from short-term fluctuation
in market prices, interest rate movements, and dealer’s margin or are securities included in a
portfolio in which a pattern of short-term profit making exists.

Held to Maturity
These are securities with fixed or determinable payments and fixed maturity that the Group has
the positive intent and ability to hold till maturity.

Available for Sale

These are investments that do not fall under the held for trading or held to maturity categories.
In accordance with the requirement of State Bank of Pakistan, quoted securities other than those
classified under held to maturity portfolio and investments in associates are carried at fair value.
In accordance with the requirement of State Bank of Pakistan, quoted securities other than those
classified under held to maturity portfolio and investments in associates are carried at fair value.

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. Securities classified as held to maturity are
carried at amortized cost.

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 are valued at cost less impairment losses (if any) and those held with a view
for disposal within twelve months are measured at the lower of the carrying amount and fair
value less costs to sell.

Unquoted equity securities are valued at lower of cost and breakup value. Break-up value of
equity securities is calculated with reference to the net assets of the invested company as per the
latest available audited financial statements. Investments in other unquoted securities are valued
at cost less impairment losses, if any.

Provision for diminution in the value of securities (except debentures, participation term
certificates and term finance certificates) is made after considering permanent impairment, if any
in their value. Provision for diminution in the value of debenture, participation term certificate
and term finance certificate are made as per the prudential regulation issued by the State Bank of
Pakistan.

Gain / Loss on investments sold during the period are taken to the profit and loss account.
Lending to / Borrowings from Financial Institutions

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 banks”. Conversely, securities purchased under analogous
commitments to resell are not recognized on the balance sheet and the consideration paid is
recorded in “Lending 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.

Advances – Net

Loans and Advances

Loans and advances and net investment in finance lease are stated net of provision for loan losses.
Provision for loan losses of Pakistan operations 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.

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 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.

Operating Fixed Assets and Depreciation

Tangible

Operating fixed assets other than freehold land which is not depreciated and capital work-in-
progress, are stated at cost or revalued amount less accumulated depreciation 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 provisions of the
Companies Ordinance, 1984, deficit arising on revaluation of fixed assets is adjusted against the
balance in the above surplus account.

All operating assets, except land, 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. No
depreciation is charged on freehold land.

Depreciation on addition and deletion of tangible assets during the year is charged in proportion
to the period of use.

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 / accumulated losses (net of
deferred tax).

Normal repairs and maintenance are charged to the profit and loss account as and when incurred.
However, major repairs and renewals are capitalized.

Gain or loss arising on the disposal of fixed assets is included in income currently, except that the
related surplus on revaluation of fixed assets (net of deferred taxation) is transferred directly to
un-appropriated profit.

Capital work in progress is stated at cost.

Intangible

Expenditure incurred to acquire software is capitalised as intangible asset and stated at cost less
accumulated amortisation and impairment losses, if any.

Intangible assets having a finite useful life are stated at cost less accumulated amortisation and
accumulated impairment losses, if any. Such intangible assets are amortised using the straight-
line method over their estimated useful lives. Amortisation is charged at the rate stated in note
11.2. Amortisation on addition and deletion of intangible asset during the year is charged in
proportion to the period of use. The useful life and amortisation method is reviewed and adjusted,
if appropriate at each balance sheet date. Intangible assets having an indefinite useful life are
stated at acquisition cost. Provisions are made for permanent diminution in value of the assets, if
any.

Cash and cash equivalents

Cash and cash equivalents include cash and balances with banks in current and deposit accounts.

Dividend distribution
Dividend distribution (including stock dividend) is accounted for in the year to which they relate.
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.