As Salam O Alaikum Wa Rahmatullah Wa Baraktouh On behalf of the Board of Directors, I am delighted to present the 11th Annual Report of Faysal

Bank Limited along with the audited financial statements and the Auditors Report thereon for the year ended December 31, 2005.

DIRECTORS REPORT

General Economic Review

The fiscal year 2004-05 was an exhilarating year for Pakistan's economy. Real GDP grew by 8.4 percent in 2004-05 as against 6.4 percent in the year 2003-04 and outshone the target (6.6%) by a broad margin. The per capita income crossed the $700 mark rising from $579 in 2002-03 to $736 in 2004-05. Fiscal deficit has been significantly trimmed down, foreign exchange reserves are at an adequate level, public and external debt burden declined to their lowest level in decades. The growth was really widespread as each sub-sector has witnessed strong expansion. In comparison to previous fiscal years growth, the initial economic indicators emerging during second half of the year 2005 portray a mixed picture of economic outlook for Pakistan during FY06. The growth in largescale manufacturing has decelerated sharply. However, recent intensification in development spending augurs well for the development prospects of the economy.

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The fiscal year 2004-05 registered the largest ever growth in private sector credit. The credit to private sector as percentage of GDP swelled from almost 20 percent in 1999-2000 to over 25 percent in 2004-05 - almost 5 percentage point's increase in the last six years, reflecting rising level of economic activity. The delivery of credit to private sector was highly broadbased as almost all sectors of the economy availed substantial credit.

Credit expansion: The fiscal year 2004-05 registered the largest ever growth in private sector credit. The credit to private sector as percentage of GDP swelled from almost 20 percent in 1999-2000 to over 25 percent in 2004-05 - almost 5 percentage point's increase in the last six years, reflecting rising level of economic activity. The delivery of credit to private sector was highly broad-based as almost all sectors of the economy availed substantial credit. Inflation and monetary policy: Inflation was at an eight year high in 2004-05 at 9.3 percent. The State Bank of Pakistan (SBP) took stringent measures to slow down the demand pressures generated by the rising level of economic activity. The monetary expansion has been restricted to 3.0 percent during July-Nov FY06, as compared to the 5.0 percent increase seen in the corresponding period of FY05. Notwithstanding measured tightening of monetary cycle, monetary policy has been essentially helpful to growth momentum. In order to curb cost-push inflation, SBP raised the discount rate during April 2005, by 150 basis points (for the first time after June 2001). Accordingly, the CPI inflation continued plummeting from a peak of 11.1 percent year on year in April 2005 to reach 7.9 percent year on year during later part of the period July December 2005.

Fiscal policy: After six years of far-reaching efforts through the reform of tax system and tax administration, Pakistan has been successful in achieving fiscal strength. The overall fiscal deficit that averaged nearly 7.0 percent of the GDP in the 1990s has been curtailed to 3.2 percent during fiscal year 2004-05. However, the fiscal deficit widened slightly during first half of fiscal year 2005-06 rising by 0.5 percent of GDP, as compared to approximately 0.4 percent of GDP during corresponding period of FY05. Trade balance: The trade deficit has increased beyond target for the last fiscal year due to rising import bill and a much quicker increase in imports compared with exports. However, the widening of trade gap is not troublesome as long as it is a result of rising import that is augmenting the production pedal of the economy. Foreign direct investment: The country has succeeded in attracting FDI, over 70 percent of which has come into power, telecom, chemicals, pharmaceutical and fertilizer, oil and gas sectors, and in banking and finance. Foreign exchange reserves: The countrys liquid foreign exchange reserves evidenced an upward trend during the fiscal year 2004-05. Many factors contributed to this, the most valuable among these being private remittances, higher export proceeds, floatation of Islamic

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bond (Sukuk) and higher FDI inflows. The persistent increase in foreign exchange reserves has lent strength to the Pak Rupee vis--vis US dollar. On December 28, 2005, Standard & Poors (S&P) reaffirmed Pakistans foreign currency credit rating at B+ and enhanced rating outlook from stable to positive. S&P has cited improvements in the countrys external debt indicators as a reason for up gradation of outlook. Capital markets: FY05 was a very exciting year for the capital markets of the country except crisis-like situation that emerged in March 2005 mainly because of COT related issues and sharp increase in futures trading. Subsequently the KSE index climbed up to 9,557 by end of December 2005 (December 2004: 6218) and this rising trend continued thereafter. The market also attracted increased Foreign Direct Investment during this period. This shows the strength of fundamentals and good prospects of capital market for the future. The FY05 also witnessed a significant rise in the listings of new debt instruments, especially by banks, in comparison to FY04. The renewed interest in corporate debt market is the upshot of SBPs recent regulation that directs the commercial banks to augment their paid-up capital and to perk-up capital adequacy requirement.

Banking Sector Review

By capitalizing on the strong growth in high yield assets and sizeable increase in the loan portfolio over the last few quarters, the banking sector has started to generate remarkable results. Consumer financing provided the real thrust. However, during later half of year 2005, credit growth lost velocity as it coincided with the seasonal slowdown in business activities. The lending rates, in line with SBPs monetary drive to arrest inflationary pressures, are following a steady rising pattern since the last quarter of FY04. Since then, weighted average lending and deposits rates have crawled up considerably. Over the last couple of years, banks branch networks, as well as the human and technical resources, have witnessed a large expansion. Accordingly, their administrative expenses increased at faster rate over these years. However, even stronger growth in earnings resulting from volume of business overshadowed the growth in expenses a fact that is well reflected in steadily falling cost income ratio. During the year 2005, SBP continued to bring in new regulations for the financial soundness and stability of the banking system. It has recently scaled up the minimum capital requirement from Rs. 2 billion to Rs. 6 billion to be achieved in a phased manner. Prudential Regulations

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During the year under review the management of Faysal Bank maintained its strategy of focusing on core, yet high yield, banking operations. Lending to financial institutions registered a growth of 143% as it increased from Rs. 4.4 billion as of December 31, 2004 to Rs. 10.7 billion at the end of December 2005.

pertaining to loans classification and provisioning were also modified. The amendments seek to make loan classification and provisioning requirements relatively more stringent in line with the international best practices. Another most important development is voluntary adoption of Basel II accord by Pakistan. It seeks to strengthen existing capital adequacy standards by introducing more sensitive measures for credit and market risks, and new capital requirements for operational risk. This framework will enable capital ratios to be more responsive to changes in risk and will foster additional disclosures by banks about their riskmeasurement and management systems, placing greater responsibility on bank management and market-based discipline. These developments are likely to have a significant effect on the overall solvency of the banking system by fortifying its capital base and instilling a sound culture of risk assessment and management among the banks.

(including unrealized revaluation surplus of Rs.6.1 billion as compared to Rs.3.9 billion last year). Financing enlarged to Rs.62.3 billion as of December 31, 2005 from Rs.50.5 billion as at end of December 2004. The total assets recorded a growth of 40% as these scaled up to Rs.110.3 billion (2004: Rs.78.5 billion). The total deposits swelled to Rs.74.7 billion (2004: Rs.56.4 billion) reflecting a growth of 32%. In line with augmentation in lending, investments and financing, the total income also rose from Rs.4.6 billion in year 2004 to Rs.8.4 billion in year 2005 depicting growth of 83% although total assets increased by 40%. The mark-up / return income registered quantum jump of 130% as it improved from Rs.2.8 billion (year 2004) to Rs.6.3 billion in year 2005 while non mark-up income witnessed a modest growth of over 12% from Rs.1.8 billion to Rs.2.1 billion during the year 2005. The relatively higher surge of 196% in mark-up expense from Rs.1.1 billion to Rs.3.3 billion was due to stiff competition for deposits mobilization. Administrative expenses were also kept well under control and were contained at Rs.1.4 billion (2004: Rs.1.1 billion). The rise in non mark-up expenses is mainly attributable to aforesaid volume surge, opening of six new branches and annual salary increases to staff. It also included contribution of Rs. 10 million towards the Presidents Relief Fund and Rs.2.5 million to Waqf Faisal for earthquake relief. Accordingly PBT grew by 80% (from

Operating Results
During the year under review the management of Faysal Bank maintained its strategy of focusing on core, yet high yield, banking operations. Lending to financial institutions registered a growth of 143% as it increased from Rs.4.4 billion as of December 31, 2004 to Rs.10.7 billion at the end of December 2005. The investments climbed up to Rs.24.4 billion as of December 31, 2005 as compared to Rs.12.3 billion on December 31, 2004

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Earning per share (EPS) was recorded at Rs. 8.33 (2004: Rs.4.76) despite increase in paid-up capital from Rs.2.913 billion in the year 2004 to Rs.3.684 billion in the year 2005 due to issuance of bonus shares. The shareholders equity (excluding surplus on revaluation of assets) amounted to Rs.8.1 billion as at December 31, 2005 (2004: Rs.6.3 billion). The revaluation surplus aggregated to Rs.6.1 billion as at December 31, 2005 as compared to Rs.3.9 billion as at December 31, 2004.

Rs.2.207 billion to Rs.3.969 billion). There was overall reversal of provision against investments and financings to the extent of Rs.309 million mainly due to reversal of Rs. 338 million upon successful restructuring of financing to Pakland Group. During the year 2005 the bank took a number of initiatives for augmenting business volume, which are listed in the achievements section of this report.

Earning per share (EPS) was recorded at Rs.8.33 (2004: Rs. 4.76) despite increase in paid-up capital from Rs. 2.913 billion in the year 2004 to Rs. 3.684 billion in the year 2005 due to issuance of bonus shares. The shareholders equity (excluding surplus on revaluation of assets) amounted to Rs.8.1 billion as at December 31, 2005 (2004: Rs. 6.3 billion). The revaluation surplus aggregated to Rs.6.1 billion as at December 31, 2005 as compared to Rs.3.9 billion as at December 31, 2004.

Financial Highlights
Rupees in million Profit before tax Provision for taxation Profit after tax Un-appropriated profit brought forward Profit available for appropriation Appropriations: - Transfer to statutory reserve - Transfer to capital market reserve - Reserve for issue of bonus shares - Cash dividend - final (2004) @ 25% - interim (2005) @ 15% Unappropriated profit carried forward Proposed final cash dividend (2005) @ 20% Proposed final bonus issue (2005) @ 15% Earning per share Rs.8.33 3,969 (899) 3,070 1,079 4,149

(614) (61) (354) (728) (481) (2,238) 1,911

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Credit Rating
The bank has been assigned AA rating for medium to long-term and A1+ for short term by JCR VIS.

preparation of financial statements without any material departure. e. The system of internal control is sound in design and has been effectively implemented and monitored. f. There are no doubts about the Bank continuing as a going concern. g. There has been no material departure from the best practices of corporate governance as detailed in the listing regulations. h. Summarised key operating and financial data of the last six years is tabulated on the initial pages of this Annual Report. i. The values of investments of provident and gratuity funds are Rs.30.53 million and Rs.9.54 million respectively as per the audited financial statements. j. The details of Board Meetings held and attended by the directors forms part of this Annual Report. k. The prescribed pattern of shareholding is given as part of this Annual Report.

Corporate Governance
(i) The Bank has implemented the requirements of the Code of Corporate Governance (the Code) relevant for the year ended December 31, 2005. A prescribed statement by the management along with the auditors review report thereon forms part of this Annual Report. (ii) Statement under clause xix of the Code: a. The financial statements prepared by the management of the Bank present fairly the state of affairs, the results of its operations, cash flows and changes in equity. b. Proper books of account of the Bank have been maintained. c. Appropriate accounting policies have consistently been applied in preparation of the financial statements and accounting estimates are based on reasonable and prudent judgment. d. International Accounting Standards, as applicable to banks in Pakistan, have been followed in

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Statement Of Internal Controls

Management of Faysal Bank is fully responsible for establishing and maintaining adequate controls and procedures. The Banks management fully recognizes this responsibility and appreciates its value and significance. Accordingly, policies and procedures encompassing various functional and administrative areas have been developed and circulated across all pertinent levels of the organization. These policies and procedures are approved by the senior management and ratified by the Board of Directors as and when developed. The Banks Internal Audit function keeps monitoring compliance with these policies and procedures and regularly apprises the Board on the same through the Audit Committee. Similarly, financial performance is kept under regular review and the Board is kept updated on the same through the Executive Committee. The Management feels confident that through adoption of above measures, the Banks Internal Control environment is maintained at a satisfactory level. Recognizing it to be an ongoing process, the Bank is actively pursuing additional measures towards strengthening Internal Controls through adoption of Guidelines issued by SBP on the subject. Accordingly a more formalized mechanism of evaluation of Internal Control framework itself as well as level of adherence to the same will be in place during 2006.

Risk Management Framework

In order to effectively assess, monitor and control credit risk, Credit Risk Policies and Procedures are covered in the Credit Policy Manual and are supported by various addenda and other communications to supplement or elaborate on the Manual. Although Credit Risk is managed centrally by an independent Credit Risk Management Office, which forms part of the Country Credit Committee, a tiered approval system with discretionary approval authority delegated to credit committees at each Region is in place to improve credit delivery. Comprehensive monthly MIS is prepared to monitor key indicators of potential credit risk and ensure high credit quality of the portfolio. Ongoing administration of credit portfolio is conducted by the Credit Administration Department, which supports the extension and maintenance of credit. The Board of Directors has approved the strategy on Country Exposure. Faysal Bank ensures that it proactively manages its liquidity mismatches and that the gaps are match funded. The Bank endeavors to keep its liquidity position well under control by closely watching liquidity flows and keeping itself liquid by deploying part of the liquidity in treasury products which can be cashed in the minimum time frame giving the Bank the required liquidity bounce in case there is a drift in the market dynamics. In order to mitigate the operational risk, steps have been

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Comprehensive monthly MIS is prepared to monitor key indicators of potential credit risk and ensure high credit quality of the portfolio. Ongoing administration of credit portfolio is conducted by the Credit Administration Department, which supports the extension and maintenance of credit. The Board of Directors has approved the strategy on Country Exposure.

taken towards ensuring that policies and procedures, duly approved by the Board are in place pertaining to all functions of the Bank and these are complied with. Know Your Customer (KYC) and Anti Money Laundering policies have been formulated and circulated to all branches. To ensure timely and accurate submission of reports to regulators, central control over all reporting is being established. The Bank continues to pursue a goal of improving upon its risk management procedures with the aim of attaining full compliance of the State Bank of Pakistan Guidelines. Moreover, a high level steering committee has been constituted to oversee planning, monitoring for implementation of stipulations of Basel II accord in compliance with SBPs instructions.

FMM made a profit (before / after tax) of Rs.86.032 million for the year ended December 31, 2005 (2004: Rs.86.032 million). Dividends declared amounted to Rs.85.5 million (2004: Rs.86.4 million). FMSL earned a dividend income of Rs.17.460 million (2004: Rs.21.060 million) and a management fee of Rs. 3.600 million from FMM during the year under review. The profit before and after tax amounted to Rs.20.728 million (2004: Rs.24.380 million) and Rs.17.778 million (2004: Rs.20.987 million) respectively. FMSL declared dividends aggregating to Rs.12.960 million (2004: Rs.16.740 million). As per agreement, the Modaraba is due for termination on maturity date of September 2006 unless renewed further. Accordingly, the accounts of the subsidiaries continue to be prepared under a going concern scenario.

Holding Company
Through its subsidiaries, Dar Al Maal Al Islami (DMI) Trust, Bahamas is the ultimate holding company of the Bank.

Board Meetings and Attendance

The detail about number of Board meetings and attendance by directors during the year 2005 has been appended separately as a part of corporate information.

Subsidiary Companies
Faysal Bank has two subsidiaries with following effective shareholdings: Fayzan Manufacturing Modaraba (FMM): 59.81% Faysal Management Services (Pvt.) Limited (FMSL): 60.00%

Future Outlook
The Government of Pakistan has offered Faysal Bank Limited the management rights of one of the six funds proposed to be created under the privatization scheme

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Faysal Bank aims to continue with its strategy of geographical expansion during the year 2006. Expansion is planned in niche markets with potential for consumer, agricultural and SME finance. The management believes that these markets, if explored, with the risk control measures in place, can spur the growth of the bank as well as the economy as a whole.

of NIT. This first right of refusal to Faysal Bank has been offered in lieu of 166,964,780 units to be valued at the re-purchase price prevailing at a certain future date yet to be announced by the Government of Pakistan. The market value based on the above referred re-purchase price as at December 31, 2005 amounted to Rs.8.6 billion (cost Rs.2.7 billion). In addition to the above, the bank has through its associated company (Faysal Asset Management Limited) expressed interest for acquisition of the management rights of one more fund representing investment of general public in NIT units. With the expected roll-out of the new banking system (SYMBOLS) during the year 2006, the bank would be ready for take-off to a new era of fresh and re-branded products and services for its customers. Faysal Bank aims to continue with its strategy of geographical expansion during the year 2006. Expansion is planned in niche markets with potential for consumer, agricultural and SME finance. The management believes that these markets, if explored, with the risk control measures in place, can spur the growth of the bank as well as the economy as a whole.

recommendations of the Audit Committee for the reappointment of Messrs. KPMG Taseer Hadi & Co., Chartered Accountants, as the auditors for the financial year 2006.

Acknowledgement
On behalf of the Board and the management, I express thanks to the customers and the shareholders of the Bank for the confidence they have reposed in us. I would like to also express sincere appreciation to the State Bank of Pakistan for its constant support and to the employees of the Bank for their enthusiasm and loyalty.

On behalf of the Board of Directors President & CEO Karachi Datetd: February 23, 2006

Auditors
The present auditors, Messrs KPMG Taseer Hadi & Co., Chartered Accountants, retire and being eligible, offer themselves for reappointment. The directors endorse the
Sources of general ecnomic and banking sector review includes various reports of SBP and press.

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Annual Report 2005