Chairman's Statement

Dear Shareholders,
It gives me great pleasure to present the 26th consolidated financial statements of United Gulf Bank B.S.C. for the year ended 31 December 2005.

The momentum continues
The Bank had an outstanding year, its best ever, in 2005. A remarkable 87 percent increase in net income to US$ 81 million from US$ 43.3 million in 2004, which in itself was a record performing year. The historic results were buoyed by 130 percent jump in income from investment activities, over 100 percent increase in fees income and 52 percent growth in our shares in the profits of associates. Such was the momentum of growth in income from our broad based asset mix that we had to revise our year-end projection twice during the year. Those projections, however, did not factor-in the outstanding fourth quarter strong trading performance, incentive fees and investment exits. In the fourth quarter 2005, UGB's quarterly run rate was US$ 30.3 million compared to an average US$ 16.9 million for the first three quarters of 2005 and an average quarterly run rate of US$ 10.8 million for 2004. I feel extremely satisfied and pleased with the performance of our Bank in 2005 and am confident that 2006 will be another year of strong performance for UGB.

Marked improvement in regional capital markets
The area of business focus of our Bank, to a great extent, is in the Middle East and North Africa (MENA). Our operations extend to nine countries in the MENA region and UGB holds significant assets outside these countries. The Region has been characterized by an upturn in macro-economic indicators with its positive undertones, a renewed pace of economic reforms and economic liberalization. In particular the economies in the six GCC countries have witnessed an unprecedented oil-led boom and liquidity. Oil prices have remained at record highs almost throughout the year with the regional economies, specially in the GCC, consolidating their vibrant growth rates, record budgets and record current account surpluses. This has resulted in a buoyant regional liquidity which, coupled with resilient global growth (sustained US growth and Euro zone recovery) and a measured pace in global monetary tightening, has created an investment friendly environment in the Region. This led to the powering ahead of GCC real estate and equities markets. Market capitalization in GCC stock markets surged 118 percent to US$ 1.15 trillion at the end of 2005 from US$ 526 billion in 2004. At the year-end in 2000, total capitalization in these six markets was just US$ 119 billion, making a nine-fold gain over the past five years. There was a big spurt in IPOs in 2005 raising over US$ 5.5 billion compared to US$ 3.9 billion in 2004; one of the Gulf IPOs having been oversubscribed over 800 times. Improved capital market conditions have resulted in growing investors interest in the regional equity markets with regional stock market indices showing a stellar performance in 2005 increasing between 23.8 percent (Bahrain) and 132.4 percent (Dubai). The Saudi market surged 104 percent accounting for 80 percent (US$ 1.1 trillion) turnover in all the GCC equity markets. The Kuwait Stock Exchange Index posted a robust growth of 78.6% and market capitalization in Kuwait shot up 87% to KD 41.332 billion (US$ 141.6 billion).

Bank’s performance in perspective
Over the past five years, the growth in net income picked up pace gradually from US$ 4 million in 2001 to US$ 10 million in 2002, US$ 36 million in 2003 and US$ 43 million in 2004. This momentum accelerated in 2005 and the journey from US$ 4 million in 2001 to US$ 81 million in 2005 represents about 20 times growth in five years. The growth in profitability in 2005 was broad based from all of Bank’s business activities with operating income registering a 91.6 percent increase to US$ 160.4 million over US$ 83.7 million in 2004. This progress is in line with development across UGB’s business spectrum particularly in investment banking, re-profiling of its strategies, creation of a first class internal control system and an improved corporate governance culture, continued transparency in dealing with all stakeholders, a new corporate identity and an experienced and professional management team. The results that we have today are a natural outcome of a systematic reorientation of strategy to leverage the Bank’s financial strengths – the road for future growth is now well set.

The numbers speak
Total revenues shot-up from US$ 105.8 million in 2004 to US$ 198.8 million in 2005, a growth of 87.9 percent. All business activities made a strong contribution in this phenomenal growth. Income from investment activities more than doubled; US$ 78.2 million in 2005 from US$ 34.0 million in 2004. Interest income at US$ 22.5 million jumped 65.4 percent from US$ 13.6 million in 2004. Fee income, almost entirely from investment banking activities doubled in 2005; US$ 45.9 million over US$ 22.8 million in 2004.

Our asset management subsidiary, KIPCO Asset Management Company, Kuwait (KAMCO) recorded an impressive growth in its net profit in 2005; over a three-fold jump to US$ 85.8 million from US$ 27.6 million in 2004. Tunis International Bank, our commercial banking subsidiary in Tunis, posted a significant 32.3 percent growth in its net income to US$ 8.2 million in 2005 over US$ 6.2 million in 2004. Algeria Gulf Bank, the new commercial bank, which opened its doors for business in Algeria in March 2004, has turned around in 2005 with a net profit of US$ 1.2 million against a loss of US$ 1.7 million in 2004. Jordan Kuwait Bank, our banking affiliate in Jordan, posted a robust 37.8 percent growth in its profit to US$ 36.1 in 2005 from US$ 26.2 million in 2004.

Unrecognised value
The business model that UGB put in place few years back is delivering sound results. The portfolio of its core and strategic investments in financial/non-financial subsidiaries and affiliates has provided a stable and sustainable earning base. Revenues from these core investments were at record high but equally important and more significant is the fact that the market value of our shares in five of our listed subsidiaries and affiliates, along with our Treasury shares, were US$ 1.16 billion as of 31 December 2005 against the carrying value of US$ 533.4 million in the Bank’s book, representing US$ 623.1 million excess in hidden value or 132 percent more than our shareholders’ equity. This provides a vital cushion of financial strength to the Bank’s balance sheet, to its liquidity, to its equity base, and a consistency and strength to our income base. Re-issuing our treasury shares alone would net in over US$ 23 million at its current price. Stock markets in Bahrain and Kuwait have not factored in this hidden value and yet the market value of the Bank’s shares surged 92 percent to 430 Bahraini fils at the year-end in 2005 from 224 Bahraini fils at the start of the year.

During the year the Bank moved ahead with rolling out its regional banking platform. Significant initiatives were:

• In October the Bank completed the acquisition of a 25 percent equity stake in Bank of Baghdad (BoB) by participating in the capital increase to ID 53 billion (US$ 36 million) from ID 5.3 billion (US$ 3.6 million). The Bank is in the process of taking over the management of BoB under a five year contract.
• The Bank applied for a licence for an asset management company in the Qatar Financial Centre.
• The Bank has completed all formalities for obtaining a commercial banking licence in Syria and is expecting to receive it soon. The Bank will own a 24 percent equity stake in Syria Gulf Bank and will manage it as well under a five year contract.
• Tunis International Bank received permission from the Central Bank of Libya to open a representative office in Tripoli.
• UGB is in discussion to form a joint venture investment company in Tunis.

Other significant developments during the year were:-

• A three year commodity backed Murabaha Facility for US$ 175 million was signed in October. The Bank had approached the market for US$ 100 million but the issue was well over-subscribed. This was the largest medium-term financing raised by the Bank and was almost three times larger than the medium-term Islamic financing raised in December 2004. This has further strengthened our funding base and improved the maturity profile of our liabilities. We are thankful to the lead arrangers and the arrangers for their support. Overall the liquidity of the Bank and its funding strength has considerably improved during the course of the year which has resulted in bringing down our cost of funding.
• Several new investments were made into promising new companies and new products in an effort to diversify and expand the asset base further. Total assets thus increased by US$ 299 million during the year to an all time high of US$ 1.69 billion at the year-end. Total equity firmed up further to US$ 472.1 million over the previous year-end base of US$ 330.5 million.
• In July 2005, Capital Intelligence maintained the Bank’s foreign currency rating at BBB with short-term rating at A3 and the Stable outlook.

Future Outlook
2006 promises to be another year of progress bolstered by the growth in our key business activities. The long term prospect for the Bank is encouraging as we anticipate further gains from our global portfolios as well as distributions / realizations from telecom and other regional investments and contributions from our growing financial services network in emerging Arab countries.

Corporate Governance
The purpose of pursing an effective corporate governance culture is to conduct the daily affairs of business with fairness, transparency and accountability and in accordance with best practice and to pursue objectives that are in the best interests of the Bank and all its stakeholders. The Board of Directors are ultimately responsible for the overall conduct of the Bank’s affairs which they do through meetings several times to discuss and review the businesses of the Bank, its strategic plans, the risks inherent in its businesses and other affairs of the Bank. Over 57 reports are produced on a daily weekly, monthly, quarterly and annual basis to the top management and to its Committees.

During 2005 the Board held eight scheduled and six unscheduled meetings to consider various business proposals and strategic actions.

The Board Audit Committee met three times during the year to consider and evaluate various reports from the Internal Audit Department. This is an ongoing process of assuring controls and quality as well as 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 Insiders’ Trading Committee.

Directors own 636,600 shares (no change) and Executive / Senior Management 41,000 shares of the Bank. However, Executive / Senior Management have been granted 16,97 million shares option under the Bank’s Employee Stock Option Plan as approved at the EGM held on 24th March, 2004.

Dividend and Donations
In view of the outstanding profits generated by the Bank during 2005, I am pleased to report that the Board has recommended to the Annual General Meeting the payment of a 27.5 percent in cash dividend (6.875 US cents per share) (2004: 15 percent)
Your Board has also recommended to the Annual General Meeting an allocation of US$ 500,00 for its on-going charitable works in Bahrain (2004: US$ 325,000).
Remembrance

Before concluding, I would like to recognize the sad demise passing of two great Arab leaders in year 2006, Sheikh Jaber Al-Ahmed Al-Sabah, the Amir of Kuwait and Sheikh Maktoum bin Rashid Al-Maktoum, the Ruler of Dubai and the sad demise of another two great Arab leaders in 2005, the Custodian of the Two Holy Mosques King Fahad Bin Abdulaziz Al-Saud and Shaikh Zaid bin Sultan Al Nahayyan. They will be remembered as great progressive Arab Leaders whose vision and farsightedness have effectively transformed their respective States/ Kingdom into sound, progressive and vibrant economies.

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 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 particularly extend my heartfelt appreciation and thanks to our management team and staff for their hard and dedicated work and contribution, without which such outstanding results could not have been achieved in 2005.

Faisal Hamad Al Ayyar
Chairman