Chairman’s Letter

Board of Directors

Management, Shareholders

Independent Auditors’ Report

Throughout The Year

Balance Sheet

Income Statement

Financial Highlights

Financial Ratios

Basel II & Risk Management

Charts

Indicators

Correspondent Banks

Head Office & Branches

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Table of Contents

2

For the past two consecutive years, Lebanon has been confronted with enormous challenges. During2005, the assassination of Former Prime Minister Rafic Hariri had severe impacts on the economyand the banking sector leading eventually to a slow down in real GDP growth. The year 2006

started with positive prospects that were reflected in the first half through the increased flow of funds andthe improvement in tourism and real estate sectors. However, the war that erupted in July led to devastatingimpacts at the human, social and economic levels.

The loss in the banking sector due to the war was around USD 80 millions representing 15% of itsprofits. Nevertheless, this sector guided with the policies of the central bank was able to overcome thatperiod and achieve a balance sheet growth of 8.3% in 2006 compared to 3.7% in 2005. By the end of2006, the consolidated balance sheet of the Lebanese banking sector approached 350% of GDP that isconsidered one of the highest ratios in the region and even worldwide.

As for Bank of Kuwait and the Arab World and throughout 2006, we worked with incessantdetermination especially after the war, trying to fulfill our role by assisting our clients to pull through thenegative influences of the war. During the war, we implemented a contingency plan operating through halfof our branches to ensure a continuous and efficient service for our clients. After the cease-fire agreement,we made sure to reopen all our branches within few days.

Financial wise, we augmented our capital by 31% to become LBP 50 billions. Furthermore, our figureswere consistent with those of the banking sector and we witnessed growth in our deposits portfolio by12.51% whereas total assets growth rate approximated 13%. Our profits recorded a history high of 76%for the year. However due to the July war effects and in coherence with the central bank recommendationsalong with the management decisions, we accounted for a one-time provision against expected losses thusleading to a decline in the profit growth rate to 2.76%.

Strategic wise, we capitalized on facilitating our clients’ needs in Africa, specifically in the central part,as part of our expansionary plan. Regular visits were conducted as a preliminary step with the aim ofestablishing representative offices as a further step.

Internally, we launched the infrastructure of the E-Banking project. Moreover, we leveraged our staffwith a variety of training sessions. Likewise, we continued the rigorous work for a smooth shift toimplement the Basel II requirements starting 2008.

We believe we have gained much experience during the last couple of years and proved our solidstanding despite the crisis that took place. However, we look forward for better future achievements in orderto meet all the expectations driven with the deep dedication and commitment of each member in BKAWfamily.

ABDEL RAZZAK ACHOUR

Chairman – General Manager

3

Dear Stakeholders

Chai

rman

’s L

ette

r

4

LEGAL ADVISORS

Me. Charles GHAFARI

Me. Waddah EL-CHAER

AUDITORS

Grant Thornton

BO

AR

D o

f dir

ecto

rs

Mr. Abdel Razzak ACHOURChairman - General Manager

Mr. Aziz MAACARONMember

Dr. Mohamad CHEAIBMember

Mr. Youssef MERHIMember

Mr. Abdallah ACHOURMember

5

Mr. Abdel Razzak ACHOURChairman - General Manager

Mr. Mohsen NAAMANIAssistant General Manager

Mr. Asaad KHOSHEISHAssistant General Manager

Dr. Ibrahim HAMMOUDCredit Dept. Manager

Mr. Muhieddine ARNAOUTLegal Dept. Manager

Mrs. Hala Achour SAFIEDDINEAdministration & H.R. Manager

Dr. Habib KOBEISSYI.T. Dept. Manager

Mr. Izzat MsheikRisk Manager

Mr. Emile KATTANInspection & Internal Audit Manager

Mr. Hachem FADLALLAHInternational Trade Dept. Manager

Mrs. Nada KARAKIOperation & Treasury Dept. Manager

Mrs. Samar HAMDANAccounting Dept. Manager

Mr. Ghassan HAIDARHead of Foreign Exchange Dept.

Achour Group

Maacaron Group

Merhi Group

Dr. Mohamad Cheaib

Others

SHAREHOLDERS NATIONALITY SHARES IN CAPITAL

Lebanese

Lebanese

Lebanese

Lebanese

–

73.98%

14.99%

10.00%

01.00%

00.03%

MA

NA

GEM

EN

T

Bank Committees

1. Asset Liability Management Committee (ALCO)

2. Risk Management Committee

3. Credit Committee

4. IT security Committee

5. Archiving Committee

6. Anti-Money Laundry Committee (AML)

7. Credit Rating Committee

6

Indep

enden

t A

udit

ors’

Rep

ort

7

8

Thro

ugh

out

the

yea

r Moving our heart to the heart...The construction

The year 2005 witnessed the groundwork. In February

2006, we signed an agreement with Hourieh Enterprise for

the construction of our future premises in downtown

Beirut. Throughout 2006 and despite all the critical

circumstances that took place in Lebanon, we resumed the

work for moving our headquarters to Beirut Central

District.

A vision towards abroad ...The foundation

In consistency with the management

vision to expand abroad and its reliance on

our good affiliation with a fertile customer

base in Africa, we started working on

establishing representative offices

specifically in the central part of Africa.

The first step was by implementing a

schedule of regular visits with the aim of

facilitating our clients’ banking needs

more efficiently.

Electronic banking ...The infrastructure

During the year 2002, we successfully launched the on-line banking system

with a commitment to introduce the E-banking service at a later stage. The

year 2006 witnessed the final retouches in preparing the infrastructure of this

project related to security procedures, website design, staff training and

equipment needed.

Overcoming the war ...The continuity

During July 2006, we experienced the unfortunate influences of the war. Seven

of our branches were non-operating due to their existing in dangerous locations,

yet we persisted on serving our clients through the rest of our branches.

We initiated an emergency room at our headquarters for the closed branches to follow up with the clients and

assist them in every possible way. Our contingency action plan was applied at all levels related to internal

operations, communication network, connections

with banks and suppliers and secure

accommodation for the bank’s employees with their

families close to their work locations.

After the war, four of our branches reopened

normally within a few days. Meanwhile, Ghazieh,

Haret Hreik and Bint-Jbeil continued operating off-

premises due to their total destruction during the

war. Later, these branches gradually opened after a

whole renovation process.

Comprehensive services ...The convenience

Within our mission framework of providing first-rate services, we registered significant growth in our basket of

banking services during 2006; 47% increase in commercial loans portfolio comprising 73% rise in the volume

of Kafalat and subordinated loans. Our International Trade Department witnessed an active growth in the

nominal volume of letters of credit approximated 23%. Furthermore, we extended the volume of our housing

loans to boost up by 50%. Moreover, our Plastic Cards Department recorded a noteworthy improvement with

45% increase in the number of outstanding cards in addition to installing two new ATMs at Bint-Jbeil and

Haret Hreik branches during their restoration processes.

Social responsibility...

The commitment

Throughout the years, we

always try to contribute for

the improvement of our

community through social,

cultural and educational

events. During the war, we

helped in the humanitarian relief of the displaced people through the Lebanese Association for the

Handicapped and other NGOs. Moreover, we continued in supporting children care through several

institutions such as Children’s Cancer Center – Lebanon and Espoir de Vie – Congo. Socially, we participated

in fundraising awareness campaigns with the Lebanese Medical Students’ International Committee.

Furthermore, we sponsored many social receptions and cultural events organized by schools and fraternities

in addition to sports events through sponsoring Al-Sadaka Sporting Club.

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(Figures in thousands LBP)Balance Sheet as on December 31st

Assets 2006 2005

Cash & Central Bank 208,544,933 226,874,764Lebanese Treasury Bills 245,881,412 191,091,166

Banks & Financial Institutions 116,214,069 116,237,127• Current Accounts 17,520,795 21,967,568• Time Deposits 89,259,335 84,572,549• Securities Purchased under Resale Agreements 9,433,939 9,697,010

Loans & Advances to Customers* 158,752,647 120,400,087• Commercial Loans 66,706,602 45,305,685• Current Debtor Accounts 83,575,601 64,998,499• Loans & Advances to Related Parties 3,450,866 4,085,605• Doubtful Loans 5,019,578 6,010,298

Customers Acceptances Liability 21,623,019 14,536,892Investments & Loans to Related Parties 497,656 497,656Tangible Fixed Assets 23,064,793 18,695,577Intangible Fixed Assets 92,680 92,680Other Assets 17,784 19,187Regularization Accounts & Miscellaneous Debtors 3,280,208 2,976,703

Total Assets 777777,,996699,,220011 669911,,442211,,883399* After deduction of:

• Provisions for doubtful debts 10,547,691 11,870,471

• Unrealized interest 8,042,306 6,603,167

* Of which substandard loans 3,610,342 4,909,348

• Unrealized interest on substandard loans 961,390 1,384,168

Off-Balance Sheet AccountsEngagements by Signature Received 3,384,683 2,243,028• From Financial Intermediaries 3,384,683 2,243,028

Total Off-Balance Sheet Accounts 33,,338844,,668833 22,,224433,,002288

Bad debts written-off 19,561,381 17,320,400

(Figures in thousands LBP)Balance Sheet as on December 31st

Liabilities 2006 2005

Banks & Financial Institutions 1,540,977 7,539,204• Current Accounts 549,572 35,094• Time Deposits 991,405 7,504,110

Customers’ Deposits 671,547,961 596,888,307• Sight Deposits 62,118,170 61,970,925• Time Deposits 99,020,312 85,592,430• Saving Accounts 505,279,073 444,508,421• Related Parties Accounts 5,130,406 4,816,531

Engagements by Acceptances 21,623,019 14,536,892Miscellaneous Creditor Accounts 9,170,352 5,540,350Order & Regularization Accounts 1,501,319 1,942,403Provisions for Contingencies & Charges 6,949,822 2,090,089

Capital 50,000,000 38,000,000Reserves for General Banking Risks 2,170,625 1,825,537Reserves & Premiums 6,467,310 16,237,587Net Results of the Year 6,551,244 6,374,898Variation in Revaluation of Fixed Assets 446,572 446,572

Total Liabilities 777,969,201 691,421,839

Off-Balance Sheet AccountsEngagements by Signature Issued 48,704,422 56,123,989• To Financial Intermediaries 38,963,049 40,148,739• To Clients 9,741,373 15,975,250

Total Off-Balance Sheet Accounts 48,704,422 56,123,989

Fiduciary Account Assets 17,774,904 16,517,961

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(Figures in thousands LBP)Income Statement for the year ended December 31st

2006 2005Interest & similar income 49,764,526 41,387,240

Lebanese treasury bills 18,954,602 14,816,025

Deposits & similar accounts in banks & financial institutions 16,865,578 15,194,051

Loans & advances to customers 13,668,869 10,849,889

Loans & advances to related parties 275,477 527,275

Interest & similar charges -30,650,907 -25,232,932

Deposits & similar accounts from banks & financial institutions -31,856 -170,617

Deposits from customers & other creditor accounts -30,211,612 -24,543,783

Deposits from related parties -407,439 -518,532

Net provisions less recoveries on loans & advances -6,525,545 -3,226,337

Provisions on loans & advances -7,129,260 -3,830,857

Write-back of provisions on loans & advances 603,715 604,520

Net interest received 12,588,074 12,927,971Income from marketable securities & financial instruments

with variable income 24,173 20,144

Net income from commissions 4,572,025 3,899,045

Commissions received 4,900,354 4,163,222

Commissions paid -328,329 -264,177

Profit from financial operations 571,808 543,735

Positive balance from foreign exchange operations 571,808 543,735

Loss from financial operations -134,422 -148,809

Negative balance from foreign exchange operations -134,422 -148,809

Net profit or loss from financial operations 437,386 394,926Other operating revenues 27,456 22,252

Other operating expenses -199,227 -139,665

Administrative & general expenses -10,207,003 -9,518,772

Salaries, wages & staff expenses -6,134,575 -5,707,615

General operating expenses -4,072,428 -3,811,157

Allocations to depreciation & provision of tangible &

intangible fixed assets -469,961 -537,241

Ordinary results before taxes 6,772,923 7,068,660Extraordinary results before taxes -221,679 -39,629

Extraordinary revenues 4,219 18,525

Extraordinary expenses -225,898 -58,154

Income tax 0 -654,133

Net results after taxes 6,551,244 6,374,898

(Figures in millions LBP)Financial Highlights

2006 2005 % of Change

Total Assets

LBP 278,180 260,499

USD 499,789 430,923

Customer Deposits

LBP 222,482 203,093

USD 449,066 393,795

Total Net Liquidity

LBP 230,708 213,166

USD 338,391 313,497

Shareholders’ Equity

LBP 64,266 61,781

USD 1,370 1,103

Total Loans & Advances

LBP 27,422 20,401

USD 131,331 99,999

Net Income

LBP 6,551 6,375

12,52%

12,51%

8,06%

4.38%

31,85%

2,76%

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Financial Ratios

2006 2005

Liquidity Ratios

Net Liquidity in LBP 102.80% 104.11%

Net Liquidity in Foreign Currencies 42.64% 45.26%

Total Net Liquidity 81.01% 85.51%

Liquid Assets / Total Assets 73.35% 77.26%

Loans / Deposits in LBP 12.33% 10.05%

Loans / Deposits in USD 29.25% 25.39%

Loans / Deposits (Total) 23.64% 20.17%

Asset Quality Ratios

Doubtful Loans / Total Loans 14.87% 16.47%

Loan Provisions / Doubtful Loans 78.74% 79.97%

Loan Provisions / Total Loans 11.71% 13.17%

Capital Adequacy Ratio 26.42% 32.14%

Profitability Ratios

Return on Average Equity 11.09% 11.28%

Return on Average Assets 0.84% 0.92%

Number of Shares Outstanding (in millions) 500 380

Earnings per Share in LBP (after tax) 13 17

Net Asset Value per Share in LBP 1,556 1,820

Management Efficiency Ratios

Interest Paid / Interest Received 61.59% 60.97%

Total Commissions / Financial Income 8.77% 8.90%

Cost / Income 88.28% 86.37%

Cost per Average Branch (in millions LBP) 3,525 3,033

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Basel II & Risk Management

The risk management process starts at the Board of Directors level, which overseas the bank’s overall

risk assisted by a “Risk Management Committee” that meets regularly. There is an independent risk

management department that measures and manages these different risks reporting directly to the

Chairman – General Manager.

Credit Risk Management:

Credit risk is the loss resulting from any of the borrowers or other counter parties defaulting on their

obligations. The bank measures credit risk using the “Standardized Approach” as per Basel II requirements

to determine its capital adequacy ratio that was 11.22 % as of 31/12/2006.

Furthermore, our credit portfolio is categorized into Corporate, Small & Medium Enterprises (SME) and Retail

for the purpose of risk assessment. As for concentration, our risk management unit overseas the risk at the

client, group, industry, area, and country levels taking into account different sovereign risk rating. It is worth

mentioning that a major credit risk evolved due to the “July War” which cost the bank around USD 3 millions

in a collective provision.

Market Risk Management:

Market risk is the risk of losses due to fluctuations in the financial markets. The bank has established

guidelines that define its trading portfolio despite the fact that we don’t hold any securities for trading

purposes for the time being. As for our banking books, securities are recorded at book value and interest rate

is measured using “ Maturity Gap Analysis”. All of the above is under the supervision of our Asset Liability

Management Committee (ALCO), which has set the bank’s “Market Risk Policy” that clearly describes the

bank’s exposure limits.

Operational Risk Management:

Operational Risk is the risk of loss resulting from failure in processes, human operations and systems, or

from external events. The capital requirement for operational risk using “Basic Indicator Approach” was

around LBP 3 billions. Besides, we initiated the process of creating a database for operational loss data to

categorize these losses into the different business lines and banking activities. Operational losses for the year

2006 totaled around LBP 487 millions of which 92 % was a result of the “July War” as damage to physical

assets, given that we never seized operations during the war mainly due to a preset “Business Continuity

Plan” as well as a “Procedures Manual” which detailed the instructions for most of the operations.

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2002 2003 2004 2005 2006

2002 2003 2004 2005 2006

2002 2003 2004 2005 2006

408,463

483,525547,469

622,532691,422

777,969

45,32851,226

56,510

62,884 65,636

472,647

84,395 94,128 110,695 120,400 158,753

Deposits

Loans

534,789

596,888

671,548

• Customer Loans & Deposits Growth in millions of LBP

• Balance Sheet Growth in millions of LBP

• Shareholders’ Equity Growth in millions of LBP

Charts

17

Trade & Services

Industry

Agriculture

Construction

Consumption

Finance

Others

92%

4% 1%3%

Ordinary Loans

Watch Loans

Substandard Loans

Doubtful & Bad Loans

N.B.All our financial securities are classified as held to maturity according to the IAS # 39.During 2007, the bank converted its amortization method of the financial securities from the straight line to the effective interest rate in order to comply with IAS # 39 and BCC circular # 245.

Loan Diversification across Economic Sectors in 2006

Loan Portfolio Credit Classification in 2006

Indicators

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American Express Bank LTD

Bank of New York

HSBC

The British Arab Commercial Bank

Bank of Beirut (U.K.) LTD.

ABN - Amro Bank N.V.

Bank of New York

Dresdner Bank AG

ABC International Bank

HSBC

Banca Fideuram

Capitalia Gruppo Bancario

Société Générale

BLOM Paris

Banque Audi Saradar France

BLC Bank

Fortis Bank

Byblos Bank Belgium SA

Bank of New York - Tokyo

Bank of Kuwait & the Middle East

H.O.K.S.C

The Netherlands

Germany

Italy

France

Belgium

Japan

Kuwait

United Kingdom

USA New York

New York

New York

London

London

Amsterdam

Frankfurt

Frankfurt

Frankfurt

Milano

Milano

Rome

Paris

Paris

Paris

Paris

Brussels

Brussels

Tokyo

Kuwait

Correspondent Banks

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Verdun Ain El Tineh, Belle Vue Bldg., Telefax: (01) 866306 (ATM outdoor)

(Main Branch)

Hamra Makdessi Str., Chouman Bldg., Telefax: (01) 346348 - 739925 - (03) 310051

Achrafieh Sassine Square, Dr. Maalouf Bldg., Telefax: (01) 338635 - 219030 - (03) 722664 (ATM outdoor)

Haret Hreik Bir El Abed, Al-Arid Str., Itani Bldg., Telefax: (01) 559928 -543510 - (03) 310053 (ATM outdoor)

Mouawad Chiah, Mouawad Str., Sheaito Center, Telefax: (01) 549700/1 - (03) 310064 (ATM outdoor)

Zalka Autostrade Zalka, Elysée Center, Telefax: (01) 884450/1 - 896650/1 - (03) 310052

Khaldeh Autostrade Khaldeh, Zebian Bldg., Telefax: (05) 801241 - (03) 310055 (ATM outdoor)

Bickfaya Autostrade Bickfaya, Massoud Bldg., Telefax: (04) 983221 - 982320/2 - (03) 310054 (ATM outdoor)

Ghazieh Main Road, Ghaddar Bldg, Telefax: (07) 221958 - (03) 310062

Nabatieh Main Road, Sabbagh Center, Telefax: (07) 762546 - (03) 370123

Tyre Zein Bldg., facing Banque du Liban, Telefax: (07) 740522 - (03) 274131

Abbassieh Jal Albaher, Main Road, Belle Vue Bldg., Telefax: (07) 742710/722 - (03) 310057 (ATM outdoor)

Bint Jbeil Main Road, Al Shamy Bldg., Telefax: (07) 450051 - (03) 790191 (ATM outdoor)

Chtaura Main Road, Telefax: (08) 546630/1 - (03) 310056 (ATM outdoor)

Verdun, Ain El Tineh, Belle Vue Bldg.Telefax: (00 961 1) 866306, Fax: (00 961 1) 865299,Tlx: 23776 - 23778 LE BANKUT, P.O.Box: 113-6248

E-mail: info@bkawbank.comZip Code: 1103-2110 Beirut Lebanon, SWIFT: BKAWLBBE

website: www.bkawbank.com

Head Office

Branches

... providing first-rate services, and contributing

to economy by building a solid corner stone.

Our future headquarters in Downtown – Beirut

Still