Chairman's Statement

Dear Shareholders,
It gives me great pleasure to present the 25th consolidated financial statements of United Gulf Bank B.S.C. for the year ended December 31, 2004.

Another Year of Record Earnings
The Bank entered its Silver Jubilee year with a record net profit of US$ 36.2 million earned in 2003, and closed the year with another record net profit of US$ 43.3 million in 2004, up 19.6 per cent. The results put UGB’s return on average equity at 16 per cent and return on average assets at 3.4 per cent, placing it in the league of top performing banks in the region.

The year has been dominated by high volatility in global markets coupled with a weaker dollar and higher oil prices. On the other hand, the Gulf Cooperation Council (GCC) economies experienced exceptional growth as a result of a buoyant oil market. Total oil export revenues in the GCC could exceed US$ 180 billion in 2004. In addition, GCC real estate and stock markets demonstrated strong performance throughout the year and GDP growth of individual GCC countries is expected to vary between 7 per cent and 10 per cent.

Financial Performance
The Bank continued to improve its performance and recorded a 19.6 per cent jump in net income from US$ 36.2 million in 2003 to US$ 43.3 million in 2004. Total recurring revenue rose from US$ 96.0 million in 2003 to US$ 105.1 million in 2004, while operating income before provisions, based on recurring revenue, increased from US$ 50.9 million in 2003 to US$ 54.5 million in 2004. Recurring income from core investments in subsidiaries and associates, as well as careful positioning of UGB’s asset mix and prudent management of the risks has led to excellent results. Investment income, after adjusting for non-recurring gain in 2003 of US$ 16.1 million on sale of shares in subsidiaries and associates, advanced 10.7 per cent from US$ 30.0 million in 2003 to US$ 33.2 million in 2004; interest income increased 34.7 per cent from US$ 10.1 million in 2003 to US$ 13.6 million in 2004; shares in profits of associates jumped 16.9 per cent from US$ 27.8 million in 2003 to US$ 32.5 million in 2004. Fees and commission income firmed 6.5 per cent up to US$ 22.8 million from US$ 21.4 million in 2003. Foreign exchange gain, however, moderated down to US$ 2.9 million in 2004 from US$ 6.6 million in 2003.

With a solid US$ 54.5 million in operating income before provisions, your Board decided to take a provision of US$ 4.0 million determined in accordance with the IAS parameters for non-trading investments. Income before minority interest at US$ 52.4 million increased by 21 per cent over US$ 43.3 million in 2003. Net income for the year soared to US$ 43.3 million over US$ 36.2 million in 2003. This translates to basic earning of 5.67 US cents per share, against 4.74 US cents per share earned in 2003.

The total balance sheet expanded 16.8 per cent to US$ 1.39 billion as at December 31, 2004 over US$ 1.19 billion as of year- nd in 2003, coupled with a boost of 7.5 per cent in shareholders’ equity, increasing from US$ 260.3 million in 2003 to US$ 279.7 million as of year-end in 2004. Risk adjusted capital adequacy (consolidated BIS ratio) stood at 17.7 per cent (2003: 21.9 per cent). Despite a reduced BIS ratio due to asset expansion, UGB remains one of the best capitalised regional investment banks.

Our commitment to value creation for our shareholders continued during the year. The market value of our investments in four of our listed subsidiaries and associates, namely: Jordan Kuwait Bank; KIPCO Asset Management Company (KAMCO); United Real Estate Company; and United Industries Company was US$ 266 million in excess of our carrying values of these investments, as of December 31, 2004 compared to US$ 164 million in 2003 (up US$ 102 million). This is a very substantial but unrecognised appreciation which may be unlocked over the years to come. The market price of our share does not reflect these hidden values and ended the year at 224 Bahraini fils compared to 262 Bahraini fils at the beginning of the year.

2004 Highlights
Significant events took place during 2004 within our corporate landscape. Some of the salient events were:

• UGB registered a historic level of income and profitability.
• Capital Intelligence upgraded UGB’s foreign currency long-term rating to BBB. The Bank’s short-term ratings and outlook remains unchanged as A3 and Stable respectively.
• A medium-term Islamic financing in the amount of US$ 65 million was successfully raised as part of the Bank’s strategy to continue diversification of its funding sources and to extend the maturity profile of its liabilities.
• Algeria Gulf Bank formally opened its doors for business.
• The Bank signed an MOU with Bank of Baghdad (BoB) to take a 25 per cent stake in the capital increase of the bank raising BoB’s capital to nearly US$ 36 million. BoB, established in 1992, is the second largest private bank in Baghdad with 19 operating branches and two branches under construction. It has been profitable for the past five years and is a listed Company. UGB will also enter into a five-year management agreement with BoB. Completion of the MOU arrangements are subject to concerned regulatory approvals.
• The Bank has received initial approval from the Central Bank of Syria for forming a new US$ 30 million capitalised commercial bank in Syria. Subject to final regulatory and shareholders’ approval, UGB will own a 24 per cent stake and manage the bank. Other Kuwaiti investors will own 25 per cent, while 51 percent will be offered to Syrian investors.

Silver Jubilee Year
UGB marked the beginning of its Silver Jubilee year with a celebration in May 2004 attended by government, banking and business dignitaries. It was an opportunity to celebrate the Bank’s 25th year in business with an event recognising its success during these years as an investment bank that supports regional business.

The Silver Jubilee year was highlighted by the introduction of an Employee Stock Option Plan (ESOP) after it was approved by last year’s Annual General Meeting. We think highly of our employees who have demonstrated diligence, insight and creativity, and thrive in an environment of change, challenge and competition. We value top performers who are committed to excellence in whatever they do.

Corporate Governance
Your Board has been responsive to adoption of the best practice in corporate governance and risk management. Your Board held seven scheduled and four unscheduled meetings to consider and take decisions in corporate management and business proposals and on various strategic actions during 2004. The Board Audit Committee met three times during the year to consider and evaluate various reports from the Internal Audit Department. This is an on-going process of ensuring controls on the working and compliance parameters of your Bank.

Other committees that oversee various functions of the Bank are the Management Committee, Asset & Liability Committee, Investment Committee, Board Executive Committee and Share Trading Committee.

Dividend and Donations
In view of the outstanding profits generated by the Bank during 2004, I am pleased to report that the Board has recommended to the Annual General Meeting the payment of 15 per cent in cash dividend (3.75 US cents per share) (2003: 14 per cent).

Your Board has also recommended to the Annual General Meeting an allocation of US$ 325,000 for its on-going charitable works in Bahrain (2003: US$ 250,000).

Gratitude and Thanks
We are grateful to the Government of Bahrain and the Bahrain Monetary Agency for their support and for providing a sound regulatory and economic environment for our success. On behalf of the Board, I extend our gratitude and best wishes to His Majesty King Hamad Bin Isa Al Khalifa, the Prime Minister H.H. Sheikh Khalifa Bin Salman Al Khalifa and to the Crown Prince and Commander-in-Chief of the Bahrain Defence Force H.H. Sheikh Salman Bin Hamad Al Khalifa. Our special thanks to the Bahrain Monetary Agency for its continuous support and understanding, and to the Ministry of Industry & Commerce and to the Stock Exchanges in Bahrain and Kuwait for their encouragement.

I thank our shareholders and all stakeholders for their support and look forward to a continued rewarding future working for, and with them. I extend my heartfelt appreciation and thanks to our management team and staff for their hard and dedicated work and contribution, without which such exceptional results could not have been achieved in 2004.

Faisal Hamad Al Ayyar
Chairman