Bank of Khyber 2006

THE BANK OF KHYBER
BALANCE SHEET
AS AT DECEMBER 31, 2006
Note 2006 2005
Rupees in '000
(Restated)
ASSETS
Cash and balances with treasury banks 7 1,574,531 1,618,521
Balances with other banks 8 3,755,151 2,510,190
Lendings to financial institutions 9 2,493,430 1,552,190
Investments 10 8,565,483 7,698,406
Advances 11 9,219,391 10,589,737
Operating fixed assets 12 142,002 140,206
Deferred tax assets 13 96,288 73,342
Other assets 14 1,364,984 891,345
27,211,260 25,073,937
LIABILITIES
Bills payable 15 150,435 119,308
Borrowings 16 4,325,809 4,374,154
Deposits and other accounts 17 19,076,564 17,452,170
Sub-ordinated loans - -
Liabilities against assets subject to finance lease - -
Deferred tax liabilities - -
Other liabilities 18 629,496 631,533
24,182,304 22,577,165
NET ASSETS 3,028,956 2,496,772
REPRESENTED BY
Share capital 19 2,000,949 1,231,034
Reserves 758,290 639,543
Unappropriated profit 103,890 176,089
2,863,129 2,046,666
Surplus on revaluation of securities 20 165,827 450,106
3,028,956 2,496,772
CONTINGENCIES AND COMMITMENTS 21
The annexed notes from 1 to 41 form an integral part of these financial statements.
Managing Director Director Director Director

Managing Director
THE BANK OF KHYBER
PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED DECEMBER 31, 2006
Note 2006 2005
Rupees in ‘000
(Restated)
Mark-up/Return/Interest Earned 22 1,943,335 1,416,322

Mark-up/Return/Interest Expensed 23 1,304,742 908,085
Net Mark-up/ Interest Income 638,593 508,237
Provision against non-performing loans and advances 11.4 346,655 232,357
Provision for doubtful placement with a financial institution 9.4 10,000 -
Provision for diminution in the value of investments 10.3 - (2,013)
Bad debts written off directly - -
356,655 230,344
Net Mark-up/ Interest Income after provisions 281,938 277,893
NON MARK-UP/INTEREST INCOME

Fee, Commission and Brokerage Income 67,883 74,977
Dividend Income 120,743 94,917
Income from dealing in foreign currencies 12,572 12,964
Gain on sale of securities 24 65,079 183,580
Unrealized gain / (loss) on revaluation of investments classified as
held for trading 382 (89,586)
Other Income 25 40,018 24,903
Total non-markup/interest Income 306,677 301,755
588,615 579,648
NON MARK-UP/INTEREST EXPENSES

Administrative expenses 26 372,129 361,569
Other provisions/write offs - -
Other charges 27 3,828 1,581
Total non-markup/interest expenses 375,957 363,150
212,658 216,498
Extra ordinary/unusual items - -
212,658 216,498
Share in results of associate before taxation 10.6.1 12,207 18,211
PROFIT BEFORE TAXATION 224,865 234,709
Taxation
Current 28 20,025 16,833
Prior years - -
Deferred 3,250 (775)
23,275 16,058
PROFIT AFTER TAXATION 201,590 218,651
Unappropriated profit brought forward - 7,591
Profit available for appropriation 201,590 226,242
Basic and diluted earnings per share 29 #REF! #REF!

THE BANK OF KHYBER
STATEMENT OF CHANGES IN EQUITY
Reserves
Capital Revenue
Share Reserve Reserve Unappropr-
Reserve Statutory TOTAL
capital Share Revenue for for Total iated profit
for bonus reserve
premium reserve consumer contingenc
Note issue
financing -ies*
------------------------------------------------------------------- Rupees in '000' --------------------------------------------------------------------
Balance as at January 01,

2005 1,231,034 - - 285,208 183,000 21,182 100,000 589,390 7,591 1,828,015
Profit for the year - - - - - - - - 287,453 287,453
Transfer from revenue
reserve - - - - (128,869) - - (128,869) 128,869 -
Transfer to statutory
reserve - - - 57,491 - - - 57,491 (57,491) -
Transfer to reserve
against consumer
financing
- - - - - 6,422 - 6,422 (6,422) -
Transfer to reserve for
issue of bonus shares - 360,000 - - - - 360,000 (360,000) -
Balance as at
December 31, 2005 1,231,034 360,000 - 342,699 54,131 27,604 100,000 884,434 - 2,115,468
Effect of prior period
restatement on:
Unappropriated profit - - - - - - - - (68,802) (68,802)
reserve - - - (13,760) - - - (13,760) 13,760 -
Effect of change in
accounting policy on:
reserve - - - - 128,869 - - 128,869 (128,869) -
issue of bonus shares - (360,000) - - - - - (360,000) 360,000 -
Balance as at 5.1.1
December 31, 2005 -
Restated
1,231,034 - - 328,939 183,000 27,604 100,000 639,543 176,089 2,046,666
reserve - - - - (128,869) - - (128,869) 128,869 -
issue of bonus shares - 360,000 - - - - 360,000 (360,000) -
Issue of share capital 409,915 - - - - - - - - 409,915
Share premium - - 204,958 - - - - 204,958 - 204,958
Transfer to share capital 360,000 (360,000) - - - - - (360,000) - -
Profit for the year - - - - - - - - 201,590 201,590
reserve - - - 40,318 - - - 40,318 (40,318) -
Transfer to reserve
against consumer
financing
- - - - - 2,340 - 2,340 (2,340) -
Balance as at
December 31, 2006 2,000,949 - 204,958 369,257 54,131 29,944 100,000 758,290 103,890 2,863,129

THE BANK OF KHYBER
CASH FLOW STATEMENT
Note 2006 2005
Rupees in '000
(Restated)
CASH FLOW FROM OPERATING ACTIVITIES
Profit/(Loss) before taxation 224,865 234,709
Less: Dividend income 120,743 94,917
104,122 139,792
Adjustments:
Depreciation 16,534 18,353
Amortization 1,768 2,201
Provision against non-performing advances 346,051 232,357
Unrealized gain / (loss) on revaluation of investments classified as held for trading (382) 89,586
Provision against doubtful placement with financial institution 10,000 -
Provision for Diminution in the value of investments/ other assets - (2,013)
Loss/ (Gain) on sale of fixed assets (634) (1,155)
Share in results of an associate (12,207) (18,211)
Fixed assets adjustment - (147)
361,130 320,971
465,252 460,763
(Increase)/ Decrease in operating assets
Lendings to financial institutions (127,810) 1,127,498
Advances 1,024,295 (1,715,415)
Others assets (excluding advance taxation) (453,600) 299,609
442,885 (288,308)
Increase/ (Decrease) in operating liabilities
Bills Payable 31,127 (901,586)
Borrowings (48,345) 193,901
Deposits and other accounts 1,624,394 1,620,858
Other liabilities (excluding current taxation) (2,037) (42,913)
1,605,139 870,260
Cash generated from operations 2,513,276 1,042,715
Income tax paid (67,619) (65,703)
Net cash flow from operating activities 2,445,657 977,012
CASH FLOW FROM INVESTING ACTIVITIES

Net investments in held for trading securities 238,359 (338,593)
Net investments in available-for-sale securities (1,862,114) (525,166)
Net investments in held-to-maturity securities 485,938 67,237
Dividend income 121,153 95,117
Investments in operating fixed assets (21,122) (33,885)
Sale proceeds of property and equipment disposed-off 1,657 1,956
Net cash used in investing activities (1,036,129) (733,334)
CASH FLOW FROM FINANCING ACTIVITIES

Issue of share capital 614,873 -
Net cash flow from financing activities 614,873 -
Increase/(Decrease) in cash and cash equivalents 2,024,401 243,678

Cash and cash equivalents at beginning of the year 29 5,488,711 5,245,033
Cash and cash equivalents at end of the year 29 7,513,112 5,488,711

THE BANK OF KHYBER
NOTES TO THE FINANCIAL STATEMENTS
1. STATUS AND NATURE OF BUSINESS
The Bank was established under The Bank of Khyber Act, 1991 (N.W.F.P. Act No. XIV of 1991) and is principally
engaged in the business of commercial, investment and development Banking. The Bank acquired the status of a
scheduled bank in 1994. The Bank is listed on the Karachi Stock Exchange (KSE). The registered office of the
Bank is situated at 24 The Mall, Peshawar Cantt, Peshawar. The Bank was operating 29 branches as at
December 31, 2006 (2005: 29 branches).
2. BASIS OF PRESENTATION
2.1 In accordance with the directives of the Federal Government regarding the shifting of the banking system to
Islamic modes, the State Bank of Pakistan (SBP) has issued various circulars from time to time. One permissible
form of trade related mode of financing comprises of purchase of goods by the banks from their customers and
resale to them at appropriate mark-up in price on deferred payment basis. The purchases and sales arising under
the respective arrangements (except for murabaha financings accounted for under Islamic Financial Accounting
Standard - 1 "Murabaha") are not reflected in these financial statements as such but are restricted to the amount
of facility actually utilized and the appropriate portion of rental/profit thereon. Following the setting up of the
Islamic Banking Division the Bank also provides financing through Shariah compliant modes of financing.
2.2 The financial results of the Islamic Banking Division have been consolidated in these financial statements for
reporting purpose, after eliminating the effects of intra-bank transactions and balances. The bank is conducting
Islamic Banking in five (2005: four) of its branches. Key financial figures of the Islamic Banking Division are
disclosed in annexure "A" to these financial statements.
3. STATEMENT OF COMPLIANCE
3.1 These financial statements have been prepared in accordance with the requirements of the Banking Companies
Ordinance, 1962, the Companies Ordinance, 1984, the directives issued by SBP including format for the financial
statements of banks issued by SBP through BSD Circular No. 04 dated February 17, 2006, and the International
Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB) and
interpretations issued by the Standing Interpretation Committee of IASB (the interpretations), as adopted in
Pakistan. However, the requirements of the Banking Companies Ordinance, 1962, the Companies Ordinance,
1984 and the directives of the SBP have been followed in case where their requirements are not consistent with
the requirements of the IFRSs and the interpretations.
3.2 The Securities and Exchange Commission of Pakistan (SECP) has approved the adoption of IAS 39 "Financial
Instruments: Recognition and Measurement" and IAS 40 "Investment Property". However, SBP through its BSD
Circular letter No.10 dated August 26, 2002 has deferred the implementation of these standards for banks in
Pakistan till further instructions. Accordingly, the requirements of these standards have not been considered in
preparation of these financial statements for the year ended December 31, 2006. However, investments have
been classified in accordance with the requirements of various circulars issued by the State Bank of Pakistan.
4. BASIS OF MEASUREMENT
These financial statements have been prepared under the historical cost convention except for certain financial
instruments which have been stated at fair value.
THE BANK OF KHYBER
5. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGMENTS
The preparation of financial statements in conformity with approved accounting standards requires management
to make judgments, estimates and assumptions that affect the application of policies and reported amounts of
assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical
experience and various other factors that are believed to be reasonable under the circumstances, the results of
which form the basis of making the judgments about carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates. The estimates and underlying
assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in
which the estimate is revised if the revision affects only that period or in the period of the revision and future
periods if the revision affects both current and future periods.
The areas involving a higher degree of judgment, complexity or areas where assumptions and estimates are
significant to the financial statements are disclosed below:
5.1 Classification of investments

Investments are classified as disclosed in Note 6.3 to these financial statements.
5.2 Impairment of available-for-sale equity investments

The Bank determines that available-for-sale equity investments are impaired when there has been a significant or
prolonged decline in the fair value below its cost. This determination of what is significant or prolonged requires
judgment. In making this judgment, the Bank evaluates among other factors, the normal volatility in share prices.
In addition, impairment may be appropriate when there is evidence of deterioration in the financial health of the
investee, industry and sector performance, changes in technology, and operational and financing cash flows.
5.3 Held-to-maturity investments

The Bank follows the guidance provided in State Bank of Pakistan’s circulars on classifying non-derivative
financial assets with fixed or determinable payments and fixed maturity as held-to-maturity. In making this
judgment, the Bank evaluates its intention and ability to hold such investments to maturity.
5.4 Provision against non-performing loans and advances

The Bank reviews its loan portfolio to assess amount of non performing loans and advances and provision
required there against on a quarterly basis. While assessing this requirement various factors including the
delinquency in the account, financial position of the borrower, the forced sale value of securities and requirements
of the Prudential Regulations are considered. The estimates of forced sale values are supported by independent
valuations of the assets mortgaged / pledged. The amount of provision against advances is determined in
accordance with the relevant Prudential Regulations.
5.5 Income taxes

While making the estimates for income taxes currently payable by the Bank, the management looks at the current
income tax law and the decisions of appellate authorities on certain issues in the past. There are various matters
where bank’s view differs with the view taken by the income tax department and such amounts are shown as
contingent liability.
5.6 Defined benefit plan

The cost of the defined benefit plan (gratuity) is determined using actuarial valuations. The actuarial valuation
involves making assumptions about discount rates, expected rates of returns on assets, future salary increases
and mortality rates. Due to the long term nature of these plans, such estimates are subject to significant
uncertainty.
THE BANK OF KHYBER
6. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
6.1 Change in accounting policy
6.1.1 During the year the Institute of Chartered Accountants of Pakistan (ICAP) issued a circular No. 06-2006 dated
June 19, 2006 which requires that all declarations of dividends to holders of equity instruments 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 declared subsequent to year end, were accounted for in the year to which those related. This change
has been accounted for as a change in accounting policy with retrospective effect in accordance with the
treatment specified in International Accounting Standard - 8 "Accounting Policies, Changes in Accounting
Estimates and Errors". The effect of this change has been disclosed in the Statement of Changes in Equity.
6.1.2 During the year, the Bank has adopted the Islamic Financial Accounting Standard 1 - "Murabaha" issued by the
Institute of Chartered Accountants of Pakistan and notified for adoption by the Securities and Exchange
Commission of Pakistan, vide SRO 865(I)/2005 dated August 24, 2005, by all financial insitutions for periods
beginning on or after January 01, 2006. Pursuant to the requirements of the said standard, funds disbursed for
puchase of goods are recorded as 'Advance against Murabaha'. On culmination of murabaha transaction, i.e. sale
of goods to the customer, murabaha financing is recorded at the invoiced amount. Previously, murabaha financing
were recorded at the cost of goods sold. Profit on murabaha transactions is recognized on accrual basis whereby
profit is recognized over the period of the contract. This change in accounting policy has been applied
retrospectively and does not have any impact on current or prior period's profit.
Had there been no change in accounting policy, amounts in the following balance sheet line items would have
been higher/(lower) by:
2006 2005
Rupees in '000'
Loans, cash credits, running finances, etc. (64,840) (97,367)

Other assets 22,691 34,230
Other liabilities (42,149) (63,137)
6.2 Standards, interpretations and amendments to published approved accounting standards that are not
yet effective:
The IAS / IFRS / IFRIC interpretations, which have been published and / or revised and are applicable to financial
statements of the Bank covering accounting periods on or after January 01, 2007 or later periods are as follows:
a) IAS 1: Presentation of financial statements - Capital disclosures effective from January 01, 2007
b) IFRIC 11, IFRS 2 – Group Treasury Share Transactions effective from March 01, 2007
c) IFRIC 12 – Service Concession Arrangements effective from January 01, 2009
Adoption of above amendments would result in an impact on the extent of disclosures presented in the future
financial statements of the Bank.
THE BANK OF KHYBER
In addition to the above, a new series of standards called ‘International Financial Reporting Standards’ (IFRS)
have been introduced and seven IFRSs have been issued by the IASB. Out of these following four IFRSs have
been adopted by Securities and Exchange Commission of Pakistan (SECP) vide its S.R.O. (1) / 2006 dated
December 06, 2006:
a) IFRS 2 Share-based payments

b) IFRS 3 Business combinations
c) IFRS 5 Non-current assets held for sale and discontinued operations
d) IFRS 6 Exploration for and evaluation of mineral resources
The Bank expects that the adoption of the above-mentioned pronouncements will have no significant impact on
the financial statements in the period of initial application.
6.3 Investments
6.3.1 All investments acquired by the Bank are initially recognized at cost, being the fair value of consideration given
including acquisition cost. In accordance with the directives of the SBP, quoted and government securities,
excluding investments categorized as ‘held to maturity’ securities, are stated at revalued amounts. Investment in
unquoted securities (excluding investment in an associate) are stated at the lower of cost and break-up value.
Break-up value is calculated on the basis of net assets of the investee companies according to their latest
available audited financial statements.
6.3.2 The Bank classifies its investments as follows:
Held to maturity
These are securities acquired by the Bank with the intention and ability to hold them upto maturity. In accordance
with BSD Circular No. 14 dated September 24, 2004 investments in securities categorized as ‘held to maturity’ are
carried at amortized cost.
Held for trading

These are investments acquired principally for the purpose of generating profit from short-term fluctuation in
prices or dealers’ margins, or are securities included in a portfolio in which a pattern of short-term profit taking
exists. These securities are not held for more than ninety (90) days. Surplus/(deficit) arising on revaluation of ‘held
for trading’ securities is credited / charged to the profit and loss account.
Available for sale

These are investments that do not fall under the ‘held for trading’ or ‘held to maturity’ categories. Surplus/(deficit)
arising as a result of revaluation of securities categorized as ‘available for sale’ is presented below the
shareholders’ equity in the balance sheet. The surplus/(deficit) arising on these securities is taken to the profit and
loss account when realized.
Investment in associate is accounted for using the equity method of accounting wherein the company's share of
underlying net assets of the investee is recognized as the carrying amount of such investment. Difference
between the amounts previously recognized and the amount calculated at each year end is recognized in the
profit and loss account as share of profits of associate. Distribution received out of such profits is credited to the
carrying amount of investment in associated undertaking.
Provision for diminution in the value of securities (except TFCs) is made for permanent impairment, if any, in their
value. Provision against TFCs is made as per the aging criteria prescribed by Prudential Regulations.
THE BANK OF KHYBER
6.4 Repurchase and resale agreements
Securities sold with a simultaneous commitment to repurchase at a specified future date (repos) continue to be
recognised in the balance sheet and are measured in accordance with accounting policies for investment
securities. The counterparty liability for amounts received under these agreements is included in borrowings from
financial institutions. The difference between sale and repurchase price is treated as mark- up/return/interest
expense and accrued over the term of the related repo agreement.
Securities purchased with a corresponding commitment to resell at a specified future date (reverse repos) are not
recognised in the balance sheet, as the bank does not obtain control over the assets. Amounts paid under these
agreements are included in lendings to financial institutions. The difference between purchase and resale price is
treated as mark-up/return/interest income and accrued over the term of the related reverse repo agreement.
6.5 Advances
Advances are stated net of provisions for bad and doubtful debts and are based on the appraisal carried out,
taking into consideration the Prudential Regulations issued by the State Bank of Pakistan and where such
provision is considered necessary, it is charged to profit and loss account. The Bank also maintains general
provision in line with the Bank’s prudent policies as precautionary provision to hedge against unforeseen
contingencies. Advances are written-off when there are no realistic prospects of recovery.
6.5.1 Murabaha
Funds disbursed for purchase of goods are recorded as 'Advance for Murabaha'. On culmination of murabaha i.e.
sale of goods to customers, murabaha financings are recorded at the invoiced amount. Goods that have been
purchased but remained unsold are recorded as inventories. Profit is recorded at the time of sale of goods under
murabaha as deferred income and is included in the amount of murabaha financings. Profit is taken to the profit
and loss account over the period of the murabaha.
6.5.2 Ijarah
In case of ijarah financing, the present value of the ijarah rental is recognized as a receivable. The difference
between the gross receivable and the present value of the receivable is recognized as unearned ijarah income.
Ijarah income is recognized over the term of the ijarah using the net investment method (before tax), which
reflects a constant periodic rate of return.
6.6 Inventories
The Bank values its inventories at the lower of cost and net realizable value. Cost of inventories represent the
actual purchase made by the customer as an agent on behalf of the Bank from the funds disbursed for the
purposes of culmination of murabaha. The net realisable value is the estimated selling price in the ordinary course
of business less the estimated cost necessary to make the sale.
6.7 Operating fixed assets
6.7.1 Tangible fixed assets

Property and equipment, except land and CWIP which are not depreciated, are stated at cost less accumulated
depreciation and accumulated impairment, if any. Depreciation on fixed assets is charged to income over the
useful life of the asset on a systematic basis by using the reducing balance method at the rates stated in Note
12.2.
Depreciation charge commences from the month when the asset is available for use and continues till the month
the asset is discontinued either through disposal or retirement.
Minor renewals, replacements, maintenance, repairs and gains and losses on disposal of fixed assets are
charged to the profit and loss account when incurred. Major renewals and improvements are capitalized.
THE BANK OF KHYBER
The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
When the carrying amount of an asset is greater than its estimated recoverable amount it is written down
immediately to its recoverable amount.
Change in accounting estimate

Pursuant to change in IAS-16 'Property, plant and equipment', the Bank has changed its estimate for charging
depreciation on assets. Previously, full year's depreciation was charged in the year of addition while no
depreciation was charged in the year of disposal. Now the Bank charges depreciation from the month the asset is
available for use till the month the asset is derecognized either through disposal or retirement. This change has an
immaterial impact on the profits and operating fixed assets reported in the financial statements.
6.7.2 Intangible fixed assets

Intangible fixed assets comprise of cost of computer software, which are being amortized using the straight-line
method over their useful lives but restricted to a maximum period of five years (Note 12.3). Costs associated with
maintaining computer software are recognized as an expense when incurred.
6.7.3 Capital work in progress

Capital work in progress is stated at cost. These are transferred to operating fixed assets as and when assets are
available for use.
6.8 Taxation
6.8.1 Current
Provision for current taxation is based on taxable income at the current rates after considering tax credits and
rebates, if any.
6.8.2 Deferred
Deferred income tax is provided, using the liability method, on all temporary differences at the balance sheet date
between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax
assets and any unused tax losses, to the extent that it is probable that taxable profits will be available against
which the deductible temporary differences, carry forward of unused tax assets and unused tax losses can be
utilised.
The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the
extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred
income tax asset to be utilised.
Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the period
when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or
substantively enacted at the balance sheet date.
Income tax relating to the items recognized directly in equity are recognized in equity.
THE BANK OF KHYBER
6.9 Staff retirement benefits
6.9.1 Defined benefit plan

The Bank operates a funded gratuity scheme for all its permanent employees. Contributions are made to the fund
in accordance with the rules of the scheme by the Bank. Employees are entitled to the benefits under the scheme
which comprise of 2 last drawn basic salaries for each completed year of service. Further, the profit earned
through the investments of the fund shall also be credited to the account of each employee on proportionate basis
at the end of each year.
Contributions to the fund are made on the basis of actuarial recommendations. Actuarial valuation was carried as
on December 31, 2006 using the projected unit credit actuarial cost method. Actuarial gains and losses, if any,
arising during the year are fully charged to the profit and loss account.
The principle actuarial assumptions used in the actuarial valuation comprised of discount rate at 10% per annum,
salary increase at 9% per annum, expected return on plan assets at 10% per annum and average expected
remaining working life of employees at 14 years.
Change in accounting estimate

During the year the Bank has changed its accounting estimate for determination of liability regarding defined
benefit plan (gratuity). Previously, the liability was determined using the Bank's own estimates based on the lasr
drawn salary of each employee at each year end. Now, the liability is determined using actuarial techniques as
explained above. This change in accounting estimate has been prospectively applied. Had there been no change
in this estimate, the profits for the year (before taxation) would have been higher by Rs. 21.952 million while
receivable from gratuity fund would have been lower by the same amount.
6.9.2 Defined contribution plan

The Bank operates a recognized contributory provident fund covering all its permanent employees. Equal monthly
contributions are made by the Bank and the employees to the fund at a rate of fifteen percent of basic salary.
6.10 Revenue recognition

Income on murabaha is accounted for on culmination of murabaha transaction. However, profit not due for
payment in the current year is deferred by accounting for unearned murabaha income with a corresponding credit
to deferred murabaha income which is recorded as a liability. The same is then recognized as revenue on a time
proportionate basis.
Return / markup on advances (other than murabaha) and investments is recognized on accrual basis, except the
income which is required to be carried forward or taken to "mark-up in suspense account" in compliance with the
Prudential Regulations of the SBP.
The Bank follows the finance method in recognizing income on ijarah contracts. Under this method the unearned
income i.e. the excess of aggregate ijarah rentals over the cost of the asset under ijarah facility is deferred and
then amortized over the term of the ijarah, so as to produce a constant rate of return on net investment in the
ijarah. Gains / losses on termination of ijarah contracts, documentation charge, front-end fees and other ijarah
income are recognized as income on receipt basis.
Purchase and sale of investments are recorded on the dates of contract. Gains and losses on sale of investment
are also recorded on those dates.
Dividends are recognized as income when the right to receive is established.

Fee, commission, liquidated damages etc., are recorded on receipt basis except guarantee commission, which is
recognized on time proportion basis.
THE BANK OF KHYBER
6.11 Foreign currencies
The Bank's financial statements are presented in Pak Rupees (Rs.) which is the Bank's functional and
presentation currency. Assets and liabilities in foreign currencies are translated into Pak Rupees at the rates of
exchange approximating those prevailing at the balance sheet date except those covered by forward exchange
contracts, which are translated at the contracted rates. Consistent with prior years, forward exchange contracts
are valued at the rates applicable to the respective maturities of the relevant foreign exchange contracts. Gains or
losses on forward exchange contracts outstanding as at the year end are recognized currently. Exchange gains or
losses are included in income currently.
6.12 Cash and cash equivalents
For purposes of the cash flow statement the cash and cash equivalents comprise of cash and balances with
treasury banks, balances with other banks and call lendings and placements with financial institutions having
maturities of three (3) months or less.
6.13 Provisions and contingent assets and liabilities
Provisions are recognized when the Bank has a present legal or constructive obligation arising as a result of past
events and it is probable that an outflow of resources embodying economic benefits will be required to settle the
obligation and a reliable estimate of the amount of the obligation can be made.
Contingent assets are not recognized, and are also not disclosed unless the realization of the asset is virtually
certain and contingent liabilities are not recognized, and are disclosed unless the probability of outflow of
resources embodying economic benefits is remote.
6.14 Financial instruments
All the financial assets and financial liabilities are recognized at the time when the bank becomes a party to the
contractual provisions of the instrument. Any gain or loss on derecognition of the financial assets and financial
liabilities is taken to income currently.
6.15 Derivative financial instruments
Derivative financial instruments are initially recognized at their fair value on the date on which the derivative
contract is entered into and are subsequently remeasured at fair value. All derivative financial instruments are
carried as asset when fair value is positive and liabilities when fair value is negative. Any change in the value of
derivative financial instruments is taken to the profit and loss account.
6.16 Trade date accounting
All regular way purchases/sales of investment are recognised on the trade date, i.e. the date the Bank commits to
purchase/sell the investments. Regular way purchases of sales of investment require delivery of securities within
three days after the transaction date as required by stock exchange regulations.
6.17 Off-Setting
Financial assets and financial liabilities are only set off and the net amount is reported in the financial statements
when there is a legally enforceable right to set off and the bank intends either to settle on a net basis, or to realize
the assets and to settle the liabilities simultaneously.
THE BANK OF KHYBER
7 CASH AND BALANCES WITH TREASURY BANKS Note 2006 2005

Rupees in '000
In hand
Local currency 147,461 161,558
Foreign currency 30,305 17,623
177,766 179,181
With State Bank of Pakistan in
Local currency current account 7.1 & 7.2 1,256,789 868,450
Foreign currency current account 7.2 12,204 7,166
Foreign currency deposit account 7.2 & 7.3 33,805 21,928
1,302,798 897,544
With National Bank of Pakistan in
Local currency current account 93,067 541,663
National prize bonds 900 133
1,574,531 1,618,521
7.1 The current account is maintained under the requirements of section 29 of the Banking Companies
Ordinance, 1962 as amended from time to time by the State Bank of Pakistan.
7.2 These include accounts maintained for mandatory reserve requirements and such balances are not available
for use in the Bank's operations.
7.3 The balance held in the foreign currency deposit account with the SBP represents the 20% (2005: 15%)
reserve requirement for holding FE-25 deposits. The rate of return on this account is 4.32% (2005: 3.29%)
per annum.
8. BALANCES WITH OTHER BANKS Note 2006 2005

Rupees in '000
In Pakistan
On current account 576,224 514,436
On deposit account 8.1 2,951,075 1,901,510
Outside Pakistan
On current account 181,716 74,415
On deposit account 8.2 56,164 29,857
3,765,179 2,520,218
Less: Provision for doubtful placement with a bank 8.3 10,028 10,028
3,755,151 2,510,190
8.1 These represent short-term deposits with banks and carry mark-up at the rates ranging from 11.50% to
12.68% per annum (2005: 2.50% to 12.50% per annum) and having maturities upto June 28, 2007 (2005:
March 31, 2006).
8.2 These represent placements of funds with banks outside Pakistan, which have been generated through the
foreign currency deposit scheme (FE-25). The placements had been made at the rates ranging from 3.5% to
5.22% per annum (2005: 4.25% per annum) and had maturities upto January 17, 2007 (2005: January 19,
2006).
THE BANK OF KHYBER
8.3 Provision for doubtful placement with a bank Note 2006 2005
Rupees in '000
Balance as at January 01 10,028 10,028

Charge for the year - -
Reversals - -
Balance as at December 31 10,028 10,028
9. LENDINGS TO FINANCIAL INSTITUTIONS
Repurchase agreement lendings (Reverse Repo) 9.2 & 9.5 310,000 192,190
Placements with financial institutions 9.3 2,194,430 1,361,000
2,504,430 1,553,190
Less: Provision for doubtful placements with financial institutions 9.4 11,000 1,000
2,493,430 1,552,190
9.1 Particulars of lending

In local currency 2,504,430 1,553,190
In foreign currencies - -
2,504,430 1,553,190
9.2 Repurchase agreement lendings (reverse repos) carry interest at the rates ranging from 9.40% to 15% (2005:
7.50% to 13.00%) per annum and had maturities upto June 28, 2007 (2005: January 16, 2006).
9.3 These unsecured placements carry interest at rates ranging from 11.20% to 14% per annum (2005: 10.90%
to 14.00% per annum) and have maturities upto March 27, 2007 (2005: March 27, 2006).
9.4 Provision for doubtful placements with financial institutions Note 2006 2005
Rupees in '000
Balance as at January 01 1,000 1,000

Charge for the year 10,000 -
Reversals - -
Balance as at December 31 11,000 1,000
THE BANK OF KHYBER
9.5 Securities held as collateral 2006 2005

against lending to financial Held by Further Total Held by Further Total
institutions
bank given as bank given as
collateral collateral
Rupees in '000
Market Treasury Bills - - - 92,190 - 92,190

Pakistan Investment Bonds 115,000 - 115,000 - - -
Others - Listed securities 195,000 - 195,000 100,000 - 100,000
9.6 310,000 - 310,000 192,190 - 192,190
9.6 Aggregate market value of securities held as collateral is Rs.412.462 million as on December 31, 2006 (2005: Rs.. 238.766 million).
2006 2005
Held by Further Total Held by Further Total
10. INVESTMENTS bank given as bank given as
collateral collateral
10.1 Investments by types Rupees in '000
Held for trading securities

Dawood Money Market fund 50,000 - 50,000 - - -
Fully paid ordinary shares in listed compani - - - 338,593 338,593
50,000 50,000 338,593 338,593
Available-for-sale securities
Treasury Bills 1,934,359 1,834,755 3,769,114 1,095,081 1,866,859 2,961,940
Pakistan Investment Bonds 10.1.1 145,210 1,715,000 1,860,210 287,780 1,094,339 1,382,119
National Investment Trust Units 243,476 - 243,476 243,476 - 243,476
Term Finance Certificates 340,039 - 340,039 354,899 - 354,899
UTP AAA Fund 20,000 20,000 - - -
UTP Islamic Fund 15,000 - 15,000 - - -
Meezan Balanced Growth Fund 5,000 - 5,000 5,000 - 5,000
Pakistan Strategic Allocation Fund 4,500 - 4,500 4,500 - 4,500
Pakistan International Element Islamic Fun 30,000 - 30,000 - - -
ABAMCO Composite Fund - - - 30,000 - 30,000
NAMCO Fund 68,673 - 68,673 - - -
AMZ Income Fund 50,000 - 50,000 - - -
Askari Income Fund 50,000 - 50,000 - - -
Alfalah GHP Value Fund 5,000 - 5,000 5,000 - 5,000
Fully paid ordinary shares
Ordinary shares in listed companies 551,039 - 551,039 172,149 - 172,149
Ordinary shares in unlisted companies 80,487 - 80,487 80,487 - 80,487
3,542,783 3,549,755 7,092,538 2,278,372 2,961,198 5,239,570
Held-to-maturity securities
Pakistan Investment Bonds 1,033,651### - 1,033,651 548,232 1,046,357 1,594,589
Wapda Bonds 200,010### - 200,010 200,010 - 200,010
Wapda Sukuk Bonds 75,000 - 75,000 - - -
1,308,661 - 1,308,661 748,242 1,046,357 1,794,599
Associates
Ordinary shares in unlisted compan 10.6 78,229 - ### 78,229 69,083 - ### 69,083
78,229 - 78,229 69,083 - 69,083
Investment at cost 4,979,673 3,549,755 8,529,428 3,434,290 4,007,555 7,441,845

Less: Provision for diminution in
value of investments 10.3 38,754 - 38,754 38,754 - 38,754
Investments (Net of Provisions) 4,940,919 3,549,755 8,490,674 3,395,536 4,007,555 7,403,091
Surplus/(deficit) on revaluation of
Available-for-sale securities 23.2 334,728 (260,301) 74,427 556,433 (171,532) 384,901
Surplus/(deficit) on revaluation of
held for trading securities 382 - 382 (89,586) - (89,586)
Total investments at market value 5,276,029 3,289,454 8,565,483 3,862,383 3,836,023 7,698,406
10.1.1 Pursuant to the requirements of BSD Circular no 7, dated May 30, 2006, which allowed a one time reclassification of securities between the
three catagories, the bank reclassified Pakistan Investment Bonds amounting to Rs. 537 million from "Held to Maturity" to "Availale for Sale"
THE BANK OF KHYBER
10.2 Investments by segments Note 2006 2005

Rupees in '000
Federal Government Securities:

Market Treasury Bills 10.2.2 3,769,114 2,961,940
Pakistan Investment Bonds 10.2.3 2,893,861 2,976,708
6,662,975 5,938,648
Fully Paid up Ordinary Shares:
Listed Companies 551,039 510,742
Unlisted Companies 158,716 149,570
709,755 660,312
Term Finance Certificates:
Listed TFCs 216,185 203,485
Unlisted TFCs 123,855 151,414
340,040 354,899
Other Investments
National Investment Trust Units 10.5 243,476 243,476
WAPDA Bonds 10.2.4 200,010 200,010
WAPDA Sukuk Bonds 10.2.5 75,000 -
UTP Islamic Fund 15,000 -
UTP AAA FUND 20,000 -
Meezan Balanced Growth Fund 5,000 5,000
Pakistan Strategic Allocation Fund 4,500 4,500
Pakistan International Element Islamic Fund 30,000 -
Alfalah GHP Value Fund 5,000 5,000
Dawood Money Market Fund 50,000 -
NAMCO Fund 68,672 -
AMZ Income Fund 50,000 -
Askari Income Fund 50,000
ABAMCO Composite Fund - 30,000
10.2.6 816,658 487,986
Total investment at cost 8,529,428 7,441,845
Less: Provision for diminution in value of invest 10.3 38,754 38,754
Investments (Net of Provisions) 8,490,674 7,403,091
Surplus on revaluation of Available-for-
sale securities 23.2 74,427 384,901
Deficit on revaluation of held for trading
securities 382 (89,586)
Total investments at market value 8,565,483 7,698,406
Federal Government Securities and NIT units, other than those further offerred as collateral, are
10.2.1 held by the Bank to meet Statutory Liquidity Requirements (SLR) of the SBP calculated on the
basis of time and demand liabilities.
10.2.2 Market Treasury Bills have a market value of Rs. 3,764.489 million (2005: Rs. 2,955.941 million).
These carry returns ranging from 8.49% to 9% per annum (2005: 5.85% to 8.79% per annum) and
have maturity periods ranging between Jan 2007 to December 2007 (2005: March 2006 to
December 2006). These are held with the SBP and are eligible for rediscounting.
THE BANK OF KHYBER
10.2.3 PIBs under 'available for sale' category have a market value of Rs. 1,603.691 million (2005: Rs.
1,209.346 million). These PIBs carry returns ranging from 7% to14% per annum (2005: 6% to13%
per annum) and have maturity periods ranging between October 2008 to October 2013 (2005:
October 2006 to October 2013). These are held with the SBP and are eligible for rediscounting.
10.2.4 The WAPDA bonds carry a return of 8.75% per annum (2005: 8.75% per annum) and are maturing
in March 2008 (2005: March 2008).
WAPDA Sukuk Bonds carry return of 10.89% per annum (2005: Nil) and are maturing in October
10.2.5 2012 (2005: Nil)
10.2.6 The market value of these open ended mutual fund units aggregated to Rs. 1,012.94 million (2005:
Rs. 831.992 million) as at December 31, 2006.
10.3 Particulars of provision Note 2006 2005

Rupees in '000
Opening balance 38,754 40,767

Charge for the year - -
Reversals - (2,013)
Closing Balance 10.3.1 38,754 38,754
10.3.1 Particulars of provision in respect of type and segment
Available-for-sale securities
Ordinary shares in listed companies 8,267 8,267
Ordinary shares in unlisted companies 30,487 30,487
38,754 38,754
THE BANK OF KHYBER
10.4 Information relating to investment in ordinary shares / certificates of listed and unlisted companies / mutual funds, term finance certificates and bonds,
which is required to be disclosed as part of the financial statements under State Bank of Pakistan's BSD Circular No. 4 dated February 17, 2006, is
disclosed in Annexure "C" to these financial statements. Information relating to quality of available for sale securities is given in annexure "D"
10.5 The cost of investment in 16,055,670 units of National Investment Trust (NIT) as of December 31, 2006 aggregates to Rs. 243.476 million (2005: 243.476
million). The Government of Pakistan through a letter of comfort (LOC) dated August 8, 2001 has undertaken to facilitate NIT in redeeming these units at
Rs. 13.70 per unit on the condition that the Bank shall continue to hold all the units for a minimum period of five years from the date of the letter of comfort.
An amount of Rs. 476.621 million is included in surplus on revaluation of securities as at December 31, 2006 (2005: Rs. 414.806 million) which represents
the difference between the repurchase price of NIT units and their cost.
The Government of Pakistan (Ministry of Privitisation) through its letter ref. 2(10)Bkg/PC/97 dated November 27, 2005 had given options to the LOC
holders to either acquire proportionate management rights and manage its portion of funds as a separate split fund or to continue with the existing
arrangement wherein the funds continue to be managed by National Investment Trust Limited (NITL). In response, the Bank's management has requested
the Government of Pakistan (Ministry of Privitisation) to waive off the LOC status on its NIT units and conveyed that accordingly its holding may be split
and privatised in accordance with the terms mentioned in the aforementioned instructions for Non-LOC holders. A response from the Government of
Pakistan (Ministry of Privitisation) is awaited. However, Government of Pakistan vide its letter dated December 22, 2006 has extended the LOC status
upto June 30, 2007. Subsequent to year end, NIT through its letter dated February 23, 2007 has given following options to LOC holders:
Option (a): LOC holders may exercise their option of acquiring the right to manage their funds at same terms as determined by a competitive bidding
process for auction of the non-LOC management rights with no discount.
Option (b): In the event the above option is not acceptable the LOC holders may either choose:
(i) to enter into an agreement with NIT for a stagged redemption spread over period of several years with an initial payment from proceeds of sale
of PICIC and PSO shares.
(ii) to excerise the redemption option before the expiry of current LOC date with immediate payment at a discount of 10% over and above the
normal procedure.
The bank has not yet conveyed its concurrance to any of the above referred options as the matter is under consideration by the management.
10.6 Investment in associate Note 2006 2005
Taurus Securities Limited
Number of shares held - number 4,500,001 4,500,001
Value of investment - rupees in thousands 78,229 69,083
Percentage of investment - percentage 33.33 33.33
Break-up value per share - rupees 17.38 15.35
Latest available financial statements December 31, 2006 December 31, 2005
Name of Chief Executive Mr. Zia Hussain Mr. Zia Hussain

THE BANK OF KHYBER
10.6.1 Carrying value of associate under equity method of accounting Note 2006 2005
(Rupees in '000)
Carrying value of investment as at January 01 69,083 54,777

Share in profit before taxation of the associate for
the year ended December 31 12,207 18,211
Share in charge for taxation 27 (3,061) (3,905)
Carrying value of investment as at December 31 78,229 69,083
-
10.6.2 Associate key information
Assets 674,212 1,048,720

Liabilities 439,502 842,682
Revenue for the year 109,975 132,955
Profit before taxation for the year 37,855 51,500
Profit after taxation for the year 28,672 41,691
10.7 During the year ended December 31, 2005 and during the period upto September 30, 2006, the bank has been carrying out investment trading
transactions in respect of a portfolio which was owned by the bank but classified and treated as “Advances under Continuous Funding System (CFS)” in
the year ended December 31, 2005 and during the period from January 2006 to September 30, 2006 as “Advances under CFS” and partially as “Other
Assets”. Upon identification of the above matter by the management in September 2006, the bank carried out a review of its treasury transactions,
investment portfolio and advances under CFS and as a result transferred an aggregate portfolio of Rs 132.12 million, having a market value amounting to
Rs.107.52 million to “Investments Account” from “Advances under CFS” and “Other assets”. Consequently, the unrealized loss amounting to Rs.24.6
million relating to the above portfolio has also been recognized in the Profit and Loss Account for the current year. Further, the financial statements for the
year ended December 31, 2005 have also been restated to adjust the misclassification of investments which were previously classified as “Advances
under CFS”.
Similarly a portfolio of investments costing Rs. 218.856 million having market value of Rs.173.224 million was misclassified as “Available for sale” instead
of “Held for Trading” as on December 31, 2005 which resulted in overstatement of profit and loss for the year then ended by Rs. 45.6 million.
In addition to this CFS income and income on securities purchased under resale agreements (Reverse Repo) was overstated by 37.62 million and Rs.2.49
million in 2005 while capital gains and dividend income was understated by 31.74 million and 8.4 million respectively. The same has been reclassified
accordingly.
The effects of the said restatements on the prior year financial statements are tabulated below:
(Rupees in '000)
Decrease in advances under CFS 119,736
Increase in investments 75,782
Decrease in deficit on revaluation on securities 45,632
Decrease in profit 89,586
Decrease in CFS income 37,619
Decrease in income on Reverse Repo 2,485
Increase in Capital gains 31,739
Increase in Dividend income 8,365
Considering the above, the bank has appointed an independent firm of Chartered Accountants to carry out special audit of its Treasury and Investment
Division for the period from January 01, 2005 to September 30, 2006. Pending completion of the special audit, further misclassification/adjustment, if any,
would be accounted for in the subsequent year. However, the management believes that with the aforesaid adjustment and restatements, it is not probable
that a material misstatement relating to prior or current financial statements would have remained unidentified and unadjusted.
THE BANK OF KHYBER
11. ADVANCES Note 2006 2005

Rupees in '000
Loans, cash credits, running finances, etc.

In Pakistan 11.8 10,140,190 10,460,232
Outside Pakistan - -
10,140,190 10,460,232
Net investment in ijarah
In Pakistan 11.2 386,600 316,597
386,600 316,597
Bills discounted and purchased (excluding treasury bills)
Payable in Pakistan 94,100 191,551
Payable outside Pakistan 485,803 472,212
579,903 663,763
Financing in respect of continuous funding system 2,022 691,814
Advances - gross 11,108,715 12,132,406
Less: Provision for non-performing advan 11.4 1,889,324 1,542,669
Advances - net of provision 9,219,391 10,589,737
11.1 Particulars of advances - net of provision
11.1.1 In local currency 9,219,391 10,589,737

9,219,391 10,589,737
11.1.2 Short Term ( for upto one year) 3,564,233 3,564,233

Long Term ( for over one year) 5,655,158 7,025,504
9,219,391 10,589,737
THE BANK OF KHYBER
11.2 Net investment in Ijarah 2006 2005

Not later Later than Over Total Not later Later than Over Total
than one one and less five than one one and less five
year than five years years year than five years years
-----------------------------------------------------------Rupees in '000-----------------------------------------------------------------
Ijarah rentals receivable 161,519 224,287 2,636 388,442 117,798 203,678 2,595 324,071
Residual value 153 52,287 - 52,440 295 39,808 - 40,103
Minimum ijarah rentals 161,672 276,574 2,636 440,882 118,093 243,486 2,595 364,174
Profit for future periods 23,524 30,039 719 54,282 24,048 23,459 70 47,577
Net investment in ijarah 138,148 246,535 1,917 386,600 94,045 220,027 2,525 316,597
11.3 Advances include amounts aggregating to Rs.3,187.646 million ( 2005: Rs.. 2,869.446 million) which have been placed under non-performing status as detailed below:-
2006
(Rupees in '000)
Classified Advances Provision Required Provision Held*
Category of Classification Domestic Overseas Total Domestic Overseas Total Domestic Overseas Total
Substandard 293,387 - 293,387 17,184 - 17,184 17,184 - 17,184

Doubtful 284,451 - 284,451 27,080 - 27,080 27,080 - 27,080
Loss 2,609,808 - 2,609,808 1,845,060 - 1,845,060 1,845,060 - 1,845,060
3,187,646 - 3,187,646 1,889,324 - 1,889,324 1,889,324 - 1,889,324
2005
(Rupees in '000)
Classified Advances Provision Required Provision Held*
Category of Classification Domestic Overseas Total Domestic Overseas Total Domestic Overseas Total
Substandard 41,886 - 41,886 3,533 - 3,533 3,533 - 3,533

Doubtful 96,244 - 96,244 26,057 - 26,057 26,057 - 26,057
Loss 2,731,316 - 2,731,316 1,513,079 - 1,513,079 1,513,079 - 1,513,079
2,869,446 - 2,869,446 1,542,669 - 1,542,669 1,542,669 - 1,542,669
* Adjusted for any amount of liquid assets realizable without recourse to a court of law and the forced sale value of any mortgaged/pledged securities as valued by professional
valuers.
11.3.1 The loss category includes balances aggregating Rs. 793.707 million (2005: Rs. 1,075.613 million) forwarded to the National Accountability Bureau for settlement and recovery
against which a provision of Rs. 631.556 million (2005: Rs. 677.869 million) is held in accordance with the Prudential Regulations of SBP.
11.4 Particulars of provision against non-performing advances 2006 2005

Specific General Total Specific General Total
Rupees in '000
Opening balance 1,542,669 - 1,542,669 1,310,312 - 1,310,312

Charge for the year 414,138 - 414,138 269,166 - 269,166
Reversals (67,483) - (67,483) (36,809) - (36,809)
Closing balance 1,889,324 - 1,889,324 1,542,669 - 1,542,669
11.4.1 Particulars of provisions against non-performing advances
In local currency 1,889,324 - 1,889,324 1,542,669 - 1,542,669

In foreign currencies - - - - - -
1,889,324 - 1,889,324 1,542,669 - 1,542,669
11.4.2 As of December 31, 2006 the Bank has modified the method of computing provision against non-performing advances pursuant to the changes in the Prudential Regulations
issued by SBP. In accordance with the revisions in the regulations, the criteria has been amended as follows:
- provision required under the substandard category has been raised to 25% from 10% previously
- the benefit of forced sales value is allowed for financing facilities of Rs. 10 million and above as compared to Rs. 5 million and above previously, for all facilities other than
housing finance facilities under consumer financing.
The incremental provision resulting from the aforementioned revisions amounts to Rs. 65.685 million. Had the effect of the aforementioned revisions not been recognized,
advances (net of provisions) would have been higher by Rs. 65.685 million whereas the profit for the year would have been higher by Rs.65.685 million and the amount of
contingent liabilities as mentioned in Note 20.6 would have been lower by Rs. 22.332 million.
11.5 Details of loans amounting to Rs 500,000 and above written off:
In terms of sub-section (3) of section 33A of the Banking Companies Ordinance, 1962 a statement in respect of write off of loans or any other financial relief of Rs 500,000 or
above allowed to a person(s) in Pakistan during the year ended December 31, 2006 is enclosed as annexure 'B' to the notes to these financial statements.
THE BANK OF KHYBER
11.6 Particulars of loans and advances to directors, associated companies, Note 2006 2005
etc. (Rupees in '000)
Debts due by directors, executives or officers of the bank or any of

them either severally or jointly with any other persons
Balance at beginning of year 303,072 265,145
Loans granted during the year 55,000 43,560
Repayments (4,755) (5,633)
Balance at end of year 353,317 303,072
12. OPERATING FIXED ASSETS
Capital work-in-progress 12.1 5,919 6,069

Property and equipment 12.2 133,850 130,135
Intangible assets 12.3 2,233 4,002
142,002 140,206
12.1 Capital work-in-progress
Civil works 1,237 895

Office equipments 1,182 5,174
Advances to suppliers and contractors 3,500 -
5,919 6,069
THE BANK OF KHYBER
12.2 Property and equipment
COST DEPRECIATION
As at As at As at Charge for As at
Additions / Depreciation
January December January 01, the year / December Book Value
(Deletions) Rate (%)
01, 2006 31, 2006 2006 (Adjustment) 31, 2006
Rupees in '000
Free hold land 41,558 - 41,558 - - - 41,558 -
Building on free hold land 11,620 - 11,620 7,554 406 7,960 3,660 10
Building on other land 1,964 - 1,964 1,457 51 1,508 456 10
Furniture and fixture 65,811 5,593 70,309 34,287 4,585 38,011 32,298 10 - 20
(1,095) (861)
Office equipment 88,861 13,880 102,670 52,860 8,198 60,993 41,677 10 - 20
(71) (65)
Vehicles 41,108 1,712 38,471 24,840 3,271 24,545 13,926 20
(4,349) (3,566)
Library books 460 87 547 249 23 272 275 10
251,382 21,272 267,139 121,247 16,534 133,289 133,850

(5,515) (4,492)
COST DEPRECIATION
As at As at As at Charge for the As at
Additions / Depreciation
January 01, December January 01, year / December Book Value
(Deletions) Rate (%)
2005 31, 2005 2005 (Adjustment) 31, 2005
Rupees in '000
Free hold land 41,558 - 41,558 - - - 41,558 -
Building on free hold land 11,620 - 11,620 7,102 452 7,554 4,066 10
Building on other land 1,964 - 1,964 1,401 56 1,457 507 10
Furniture and fixture 54,829 11,464 65,811 29,947 4,647 34,287 31,524 10 - 20
(482) (307)
Office equipment 75,016 14,359 88,861 43,966 9,057 52,860 36,001 10 - 20
(514) (163)
Vehicles 36,497 7,914 41,108 23,401 4,117 24,840 16,268 20
(3,303) (2,678)
Library books 453 7 460 225 24 249 211 10
221,937 33,744 251,382 106,042 18,353 121,247 130,135

(4,299) (3,148)
THE BANK OF KHYBER
12.2.1 Reconciliation of net book values
Free hold Building on Building on Furniture Office Vehicles Library Total

land free hold land other land and fixture equipment books
---------------------------------------------------------------------Rupees in '000--------------------------------------------------------------
Net book value as at

January 01, 2005 41,558 4,518 563 24,882 31,050 13,096 228 115,895
Additions - Cost - - - 11,464 14,359 7,914 7 33,744
Deletions
Cost - - - (482) (514) (3,303) - (4,299)
Depreciation - - - 307 163 2,678 - 3,148
Depreciation charge - (452) (56) (4,647) (9,057) (4,117) (24) (18,353)

December 31, 2005 41,558 4,066 507 31,524 36,001 16,268 211 130,135
Additions - Cost - - - 5,593 13,880 1,712 87 21,272
Deletions
Cost - - - (1,095) (71) (4,349) - (5,515)
Depreciation - - - 861 65 3,566 - 4,492
Depreciation charge - (406) (51) (4,585) (8,198) (3,271) (23) (16,534)

December 31, 2006 41,558 3,660 456 32,298 41,677 13,926 275 133,850
12.2.2 None of the operating fixed assets having original cost of Rs. 1 million or book value of Rs. 0.250 million which ever is less, were disposed off during the year
12.2.3 Building on other land represents the cost of building constructed on a plot of land which is owned by the Government of N.W.F.P.
12.2.4 The fair values of operating fixed assets according to estimates of the management are not materially different from their carrying amounts.
12.3 Intangible assets
COST AMORTIZATION
As at As at As at As at
Additions / Charge for Amortization
January December January 01, December Book Value
(Deletions) the year Rate (%)
01, 2006 31, 2006 2006 31, 2006
Rupees in '000
Computer software 11,759 - 11,759 7,757 1,768 9,525 2,234 20
11,759 - 11,759 7,757 1,768 9,525 2,234
COST AMORTIZATION
As at As at As at As at
Additions / Charge for the Amortization
January 01, December January 01, December Book Value
(Deletions) year Rate (%)
2005 31, 2005 2005 31, 2005
Rupees in '000
Computer software 11,759 - 11,759 5,556 2,201 7,757 4,002 20
11,759 - 11,759 5,556 2,201 7,757 4,002
12.3.1 Reconciliation of net book values
Net book Amortization Net book Amortizatio Net book

value as at charge value as at n charge value as at
January December December 31,
01, 2005 31, 2005 2006
Rupees in '000
Computer Software 6,203 (2,201) 4,002 (1,768) 2,234

THE BANK OF KHYBER
12.3.2 The cost of computer software includes the cost of fully amortized software amounting to Rs. 2.920 million (2005: Rs. 2.920 million) which is still in use.
THE BANK OF KHYBER
13. DEFERRED TAX ASSETS Note 2006 2005

Rupees in '000
Taxable temporary differences
Accelerated depreciation for tax purposes (7,486) (2,704)
Deferred tax in respect of investment in associate (11,630) (8,429)
(19,116) (11,133)
Deductible temporary differences
Provision for balances with other banks 3,510 3,510
Provision for placements with financial institutions 350 350
Provision for lendings to financial institutions 3,500 -
Provision for investments 10,670 10,670
Revaluation of investment 91,400 65,205
Provision for other assets 4,367 4,367
Taxable losses - -
Stabilization reserve 1,607 373
115,404 84,475
Net deferred tax asset as at December 31 96,288 73,342
14. OTHER ASSETS
Income/ Mark-up accrued

In local currency 393,597 266,948
In foreign currency - -
Advances, deposits, advance rent and 14.1 313,417 46,057
Advance taxation (payments less provisions) 619,288 568,633
Receivable on account of sale of securities - 7,214
Receivable from gratuity fund 32.2 21,952 857
Prepaid exchange risk fee 14.2 41 40
Stationery and stamps on hand 4,529 4,861
Inventories 14.3 7,101 -
Others 17,537 9,213
1,377,462 903,823
Less: Provision held against other ass 14.4 12,478 12,478
1,364,984 891,345
14.1 The amount includes Rs. 200.002 million (2005: Rs. 2.000 million) on account of
funds disbursed under agency agreements for purchase of goods to be sold under
murabaha arrangements.
14.2 Exchange Risk Fee is being amortized over the terms of the respective forward
exchange contracts. According to the SBP’s Foreign Exchange (FE) Circular No. 7
dated March 18, 2002, effective April 1, 2002 no fresh forward covers or their
rollovers will be provided for foreign currency deposits under FE Circular No. 31.
14.3 The amount represents the cost of goods purchased by the agents of the bank
under agency agreements to be sold under murabaha arrangements.
14.4 Provision held against other assets Note 2006 2005

Rupees in '000

Charge for the period - -
THE BANK OF KHYBER
Reversal for the period - -

Closing balance 12,478 12,478
THE BANK OF KHYBER
15. BILLS PAYABLE Note 2006 2005

Rupees in '000
In Pakistan 150,435 119,308

150,435 119,308
16. BORROWINGS
In Pakistan 4,280,227 4,313,378
Outside Pakistan 45,582 60,776
4,325,809 4,374,154
16.1 Particulars of borrowings with respect to Currencies

4,325,809 4,374,154
16.2 Details of borrowings Secured / Unsecured
Secured
Borrowings from State Bank of Pakistan
Under export refinanc 16.2.1 380,472 239,615
Repurchase agreement bo 16.2.2 3,549,755 3,731,573
3,930,227 3,971,188
Unsecured
Call borrowings 16.3 350,000 342,190
Foreign credit lines 16.4 45,582 60,776
395,582 402,966
4,325,809 4,374,154
16.2.1 The Bank has entered into agreements for financing carrying markup
ranging from 6.5% to 7.5% (2005: 3.5% to 7.5%) with the State Bank of
Pakistan for extending export finance to customers. According to the
terms of the respective agreements, the SBP has the right to receive the
outstanding amount from the Bank at the date of maturity of the finances
by directly debiting the current account maintained by the Bank with the
SBP. A limit of Rs 400 million was allocated to the Bank by the SBP for
the fiscal year ending June 30, 2007 (2005: Rs. 650 million for the fiscal
16.2.2 Repurchase agreements with financial institutions carry interest at rates

ranging from 8.60% to 9.00% per annum (2005: 8.00% to 8.55% per
annum) and having maturities upto March 14, 2007 (2005: March 28,
2006).
16.3 These borrowings from a bank carry interest at the rate of 11.70 % per
annum (2005: 10.90% per annum) and have maturities upto March 30,
2007 (2005: March 27, 2006).
16.4 Foreign credit lines Note 2006 2005

Rupees in '000

Repaid during the year (15,194) (10,130)
Closing balance 16.3.1 45,582 60,776
16.4.1 The amount of facility granted by Kreditanstalt fur Wiederaufbau (KfW) is

DM 5 million which was fully availed upto December 31, 1999. The
THE BANK OF KHYBER
17. DEPOSITS AND OTHER ACCOUNTS Note 2006 2005

Rupees in '000
Customers
Fixed deposits 7,874,269 6,574,778
Savings deposits 7,474,100 6,824,504
Current accounts - Non-remunerative 3,073,370 3,558,289
Call deposits 178,739 110,121
Margin and sundry deposits 471,454 375,372
19,071,932 17,443,064
Financial Institutions
Remunerative deposits 3,783 7,087
Non-remunerative deposits 849 2,019
4,632 9,106
19,076,564 17,452,170
17.1 Particulars of deposits

In foreign currencies 192,326 147,509
19,076,564 17,452,240
18. OTHER LIABILITIES

Mark-up/ Return/ Interest payable
In local currency 350,471 324,016
In foreign currency 261 126
Unearned commission and income on bills discounted 16,144 12,322
Accrued expenses 9,438 32,739
Branch adjustment account 42,937 35,988
Share subscription money refund 1,358 -
Mark-up in suspense 18.1 105,049 105,678
Deferred income on murabaha 42,149 63,137
Security deposits against ijarah 52,440 40,103
Charity payable 126 70
Others 9,123 17,354
629,496 631,533
18.1 This balance is stated net of mark-up accrued aggregating Rs. 940.505 million (2005: Rs. 946.214
million) against non-performing loans.
THE BANK OF KHYBER
19 SHARE CAPITAL
19.1 Authorized Capital
2006 2005 Note 2006 2005

Number of shares Rupees in '000
800,000,000 250,000,000 Ordinary shares of Rs.10 each 8,000,000 2,500,000
19.2 Issued, subscribed and paid up
Ordinary shares
Fully paid in cash
75,000,000 75,000,000 Opening balance 750,000 750,000
40,991,500 - Issued during the year 409,915 -
115,991,500 75,000,000 1,159,915 750,000
Issued as fully paid bonus shares
48,103,448 48,103,448 Opening balance 481,034 481,034
36,000,000 - Issued during the year 360,000 -
84,103,448 48,103,448 841,034 481,034
200,094,948 123,103,448 19.3 & 19.4 2,000,949 1,231,034
19.3 At December 31, 2006 the Government of N.W.F.P., held 130,580,604 (2005: 107,100,000) ordinary shares of Rs. 10 each.
19.4 The Bank is in the process of raising its paid up capital to Rs. 4 billion as according to BSD Circular No. 06 dated October
28, 2005 the Bank is required to raise its share capital to Rs 3 billion by December 31, 2006 and Rs. 4 billion by December
31, 2007. The Bank through its letter BOK/FD/06/439 dated November 18, 2006 applied to the SBP for relaxation of the
requirement as it intends to offer 100 percent right shares. The SBP vide its letter BSD/SU-1/608/722/2006 dated December
16, 2006 accepted the Bank’s request and extended the period of compliance with the aforementioned requirement till
January 15, 2007. Subsequently, the SBP has granted further extension upto March 30, 2007 vide its letter BSD/SU-
1/608/271/2007 dated February 06, 2007 in response to the Bank's letter dated December 26, 2006 for further extension.
The Bank has issued letter of rights on February 26, 2007 to the shareholders for payment by March 30, 2007.This right
issue will raise the paid-up capital of the Bank to over Rs. 4 billion which, in addition to meeting the minimum capital
requirements for the year ended December 31, 2006, will also meet the minimum capital requirements for the year ending
December 31, 2007.
20. SURPLUS/(DEFICIT) ON REVALUATION OF SECURITIES Note 2006 2005

Rupees in '000
Surplus on revaluation of available-for-sale securities
Surplus/(deficit) on revaluation of:
Federal government securities (261,144) (178,771)
Fully paid up ordinary shares - quoted (139,271) (26,089)
Other investments 474,842 589,761
10.1 74,427 384,901
Deferred tax asset 91,400 65,205
165,827 450,106
THE BANK OF KHYBER
21. CONTINGENCIES AND COMMITMENTS Note 2006 2005

Rupees in '000
21.1 Direct Credit Substitutes

Government 49,204 49,204
Banks 73,749 73,749
Others 66,704 89,104
189,657 212,057
21.2 Transaction-related Contingent Liabilities

Guarantees favouring:
Government 1,878,065 1,966,507
Banks - 82,062
Others 1,323,221 1,063,489
21.2.1 3,201,286 3,112,058
21.2.1 The above amounts include expired letters of guarantee aggregating to Rs. 497.389 million as at December 31,
2006 (2005: Rs. 500.976 million) for which the formalities relating to return of the original documents are in
process.
21.3 Trade-related Contingent Liabilities 2006 2005

Rupees in '000
Letters of credit
Sight 444,436 612,149
Usance 267,160 325,604
711,596 937,753
Acceptances 64,849 49,666
776,445 987,419
21.4 Commitments in respect of forward exchange contracts

Purchase 26,812 4,819
Sale 127,256 -
21.4.1 All forward exchange contracts are backed by trade related transactions to meet the needs of the Bank's clients to
generate trading revenues and, as part of its asset and liability management activity, to hedge its own exposure to
currency risk. At the year end, all foreign exchange contracts have a remaining maturity of less than one year.
21.5 Other commitments

Sale of mutual funds 51,061 -
Bills for collection
Inland bills 27,073 48,610
Foreign bills 47,226 42,456
74,299 91,066
125,360 91,066
21.6 Commitments to extend credit
The Bank makes commitments to extend credit in the normal course of its business but these being revocable
commitments do not attract any significant penalty if the facility is unilaterally withdrawn.
THE BANK OF KHYBER
21.7 Taxation
21.7.1 Bank
21.7.1.1 Assessments of the Bank have been finalized upto and including the assessment year 2002-2003 (accounting year ended December 31,
2001). While finalizing the assessments for the assessment years 1994-95 to 2002-2003 the Deputy Commissioner of Income Tax
(DCIT) has made additions to income on account of mark-up taken to reserve in accordance with the requirements of Prudential
Regulations amounting to Rs. 167.886 million and on account of provisions against non–performing advances charged to income
amounting to Rs. 577.863 million resulting in additional tax demands of Rs. 98.069 million and Rs. 329.464 million respectively. Further,
additional tax demands aggregating Rs. 507.799 million may arise in respect of disallowance of provisions against non–performing
advances for the tax years 2003, 2004, 2005 and 2006 [accounting years ended December 31, 2002, 2003, 2004, 2005 and 2006.
The management of the Bank, based on the advice of its tax consultant, is confident that the appeals filed in respect of the
aforementioned assessment years will be decided in the Bank’s favour. Accordingly, no provision has been made in the financial
statements of the Bank in respect of the aggregate amount of Rs 957.113 million referred above.
21.7.1.2 The Bank had established ‘The Bank of Khyber Employees Gratuity Fund’ (the fund) through a trust deed dated January 1, 2001. The
CIT has granted approval to the fund in accordance with the requirements of the Sixth Schedule to the Income Tax Ordinance, 2001 with
effect from June 6, 2003.
The Bank while calculating the tax provisions for the years ended December 31, 1999 and 2000 has claimed the gratuity expenditure
aggregating Rs 19.684 million as an allowable deduction having an aggregate tax impact of Rs 11.417 million which was disallowed.
However, while finalizing the assessment for the accounting year ended December 31, 2001 the amount claimed as gratuity expenditure
was allowed by the assessing authorities. The management of the Bank, based on the advice of its tax consultant, is confident that
based on the aforementioned assessment for the accounting year ended December 31, 2001 the amounts claimed for the years ended
December 1999 and 2000 will be allowed by the assessing authorities and therefore, no provision has been made for the
aforementioned tax effect of the gratuity expenditure claimed.
21.8 There are a number of legal proceedings outstanding against the Bank which include counter claims and counter suits filed by the
borrowers as at December 31, 2006. No provision has been made in respect of these as the management of the Bank is confident that it
is unlikely that any significant loss will arise.
21.9 The State Bank of Pakistan’s Committee for Resolution of Cases (CRC) and Committee for Revival of Sick Industrial Units (CRSIU) have
finalised the settlement of certain non performing loans of the Bank having principal amounting to Rs. 340.015 million and overdue
markup amounting to Rs. 191.662 million for an aggregate amount of Rs. 137.156. The decision of the CRC in two of the aforementioned
cases have been upheld by the Peshawar High Court (Original Banking Jurisdiction). The Bank has filed writ petitions against three
cases in the Division Bench of the Peshawar High Court and against one case in the Lahore High Court, Rawalpindi Bench. The Bank is
in the process of filing a writ petition in one of the cases in the Sindh High Court and in another case the Peshawar High Court has
already considered the CRSIU decision in the normal legal proceeding undertaken by the Bank against the customer. Based on the
advise of its respective legal counsels the management of the Bank is confident that the aforementioned cases shall be decided in its
favour and therefore no further provision has been made for an aggregate amount of Rs. 33.819 million.
THE BANK OF KHYBER
22. MARK-UP/RETURN/INTEREST EARNED Note 2006 2005

Rupees in '000
On Loans and advances to
Customers
Profit on murabaha financing 22.1 55,219 43,376
Mark-up/Return/Interest Earned on other facilities 859,208 595,298
914,427 638,674
Financial Institutions 74,947 77,036
989,374 715,710
On Investments in
Available for sale Securities 439,428 306,441
Held to Maturity Securities 96,919 133,348
536,347 439,789
On Deposits with financial institutions 395,863 212,321
On Securities purchased under resale agreements 21,751 48,502
1,943,335 1,416,322
22.1 Profit on murabaha financing

Murabaha sale price 553,597 1,982,448
Less: purchase price 22.3 486,912 1,884,605
66,685 97,843
Less: deferred murabaha income 11,466 54,467
55,219 43,376
22.3 Purchase price

Opening stock - -
Purchase price 494,013 1,884,605
Less: Closing stock 7,101 -
486,912 1,884,605
23. MARK-UP/RETURN/INTEREST EXPENSED

Deposits 1,019,502 594,270
Securities sold under repurchase agreements 243,314 236,710
Other short term borrowings 35,845 69,713
Long term borrowings 5,850 6,964
Others 231 428
1,304,742 908,085
24. GAIN / (LOSS) ON SALE OF SECURITIES
Federal Govt. Securities - Pakistan Investment Bonds (6,113) 8,018

Shares - Listed 58,607 157,072
Term Finance Certificates 25 18,490
Mutual Funds 12,560 -
65,079 183,580
THE BANK OF KHYBER
Note 2006 2005

25. OTHER INCOME Rupees in '000
Net profit on sale of property and equipment 634 1,155

Fixed assets adjustment - 147
Others 39,384 23,601
40,018 24,903
26. ADMINISTRATIVE EXPENSES

Salaries, allowances, etc. 173,455 177,311
Charge for defined benefit plan - Gratuity Fund - 13,633
Contribution to defined contribution plan - Provident Fund 8,271 7,589
Rent, taxes, insurance, electricity, etc. 33,873 31,714
Legal and professional charges 5,584 14,443
Communications 22,171 16,754
Repairs and maintenance 4,922 4,667
Stationery and printing 9,042 8,253
Advertisement and publicity 9,297 7,560
Donations 26.1 70 1,000
Auditors' remuneration 26.2 2,714 3,772
Depreciation 12.2 16,534 18,353
Amortization 1,768 2,201
Public offer expenses 18,879 -
Brokerage and commission 2,367 2,431
Entertainment 5,506 4,326
Traveling, boarding and lodging 9,830 8,517
Vehicle expenses 21,856 17,013
Newspapers and periodicals 572 521
Training 2,804 3,781
Sports 157 556
Others 22,457 17,174
372,129 361,569
26.1 During the year ended December 31, 2005 donation of Rs. 1 million was paid to Chief Minister's relief fund for earth quake
victims. No directors or his spouse had any interest in donee funds.
26.2 Auditors' remuneration

Audit fee 750 750
Fee for half-yearly review 325 -
Fee for half-yearly audit - 675
Special certifications and sundry advisory services 1,385 1,905
Out-of-pocket expenses 254 442
2,714 3,772
27. The amount represents the penalties imposed by the State Bank of Pakistan.
THE BANK OF KHYBER
2006 2005
Rupees in '000
28. TAXATION
Current - for the year
Bank 16,964 13,036
Associate 3,061 3,797
20,025 16,833
Deferred
Bank 27 (883)
Associate 3,223 108
3,250 (775)
23,275 16,058
28.1 Current tax charge 16,964 13,036

Deferred tax charge 27 (883)
16,991 12,153
28.2 Relationship between tax expense and accounting profit

Profit before taxation and share of associate 212,658 216,498
Share in associate's profit (net of associate's tax charge) 9,146 14,306
221,804 230,804
Tax at the applicable rate of 34% (2005: 38%) 75,413 87,706

Tax effect of reversal of provision (net) for diminution in value of
quoted investments - (765)
Tax effect of dividend income taxed at different rate (35,015) (28,562)
Effect of different tax rates used for current and deferred taxation 2 991
Tax effect of exempt capital gain (24,335) (35,158)
Tax effect of exempt capital gain on Govt securities current year - (3,362)
Others 926 (8,697)
16,991 12,153
29. BASIC AND DILUTED EARNINGS PER SHARE

Profit for the year 201,590 218,651
Weighted average number of ordinary shares #REF! #REF!
Basic and diluted earnings per share - rupees #REF! #REF!
29.1 Basic and diluted earnings per share are the same.
30. CASH AND CASH EQUIVALENTS

Cash and Balance with Treasury Banks 1,574,531 1,618,521
Balance with other banks 3,755,151 2,510,190
Lendings to financial institutions 2,183,430 1,360,000
7,513,112 5,488,711
31. STAFF STRENGTH ---------Numbers----------

Permanent 341 370
Temporary/on contractual basis 122 79
THE BANK OF KHYBER
Daily wagers 157 142

620 591
THE BANK OF KHYBER
32. DEFINED BENEFIT PLAN
32.1 General description of the type of defined benefit plan and the accounting policy for recognizing actuarial gains and losses
are disclosed in Note 6.9.1 to these financial statements.
32.2 Reconciliation of payable to defined benefit plan Note 2006

Rupees in '000
Present value of defined benefit obligations 32.3 (129,951)

Fair value of any plan assets 151,903
Net actuarial gains or losses not recognized -
Past service cost not yet recognized -
Any amount not recognized as an asset -
21,952
32.3 Movement in payable to defined benefit plan

Opening balance (124,716)
Current service cost (7,294)
Interest cost (6,560)
Actuarial gains/ losses 4,624
Benefits paid during the year 3,994
Closing balance (129,952)
32.4 Amount charges to profit and loss

Current service cost (7,294)
Interest on obligation (6,560)
Expected return on plan assets 12,722
Actuarial gains/(losses) recognized in the year 3,578
Transitional surplus 1,645
4,091
32.5 Movement in net asset

Net asset at the start of year 857
Net expense recognized in the financial statement 1,645
Contribution during the period 4,624
Net asset at the close of year 7,126
32.6 Actual return on plan assets 16,300
33. DEFINED CONTRIBUTION PLAN

During the year the Bank has contributed Rs. 8.271 million (2005: Rs. 7.589 million) to the provident fund.
THE BANK OF KHYBER
34. COMPENSATION OF DIRECTORS AND EXECUTIVES
Managing Director Directors Executives

2006 2005 2006 2005 2006 2005
Rupees in '000
Fees
Managerial remuneration 2,289 800 300 300 - -
Charge for defined benefit plan - - - -
Contribution to defined contribution plan 43 - - - -
Rent and house maintenance 902 412 - - - -
Utilities 122 141 - - - -
Medical 55 52 - - - -
Bonus 36 35 - - - -
Conveyance - - - -
Others (to be specified, if material) 401 87 - - - -
3,848 1,527 300 300 - -
Number of persons 2 2 1 1 - -
34.1 In addition of the above, the Managing Director and the Acting Managing Director were provided with the free use of Bank's maintained car in
accordance with their terms of employment.
34.2 The figures for remuneration of the managing director include remuneration of the Acting Managing Director till September 20, 2006.
35. FAIR VALUE OF FINANCIAL INSTRUMENTS 2006 2005

Book value Fair value Book value Fair value
35.1 On-balance sheet financial instruments Rupees in '000
Assets
Cash balances with treasury banks 1,574,531 1,574,531 1,618,521 1,618,521
Balances with other banks 3,755,151 3,755,151 2,510,190 2,510,190
Lending to financial institutions 2,493,430 2,493,430 1,552,190 1,552,190
Investments 8,565,483 8,565,483 7,698,406 7,698,406
Advances 9,219,391 9,219,391 10,589,737 10,589,737
Other assets 440,187 440,187 284,232 284,232
26,048,173 26,048,173 24,253,276 24,253,276
Liabilities
Bills payable 150,435 150,435 119,308 119,308
Borrowings 4,325,809 4,325,809 4,374,154 4,374,154
Deposits and other accounts 19,076,564 19,076,564 17,452,170 17,452,170
Sub-ordinated loans - - - -
Liabilities against assets subject to finance lease - - - -
Other liabilities 524,681 524,681 522,703 522,703
24,077,489 24,077,489 22,468,335 22,468,335
35.2 Off-balance sheet financial instruments
Forward purchase of foreign exchange 26,812 26,812 - -

Forward agreements for borrowing - - - -
Forward sale of foreign exchange 127,256 127,256 4,819 4,819

Forward sale agreements of mutual funds 51,061 51,061 - -
35.3 Derivative financial instruments
The Bank does not offer structured derivatives. However, the Bank’s treasury buys/sells foreign exchange financial instruments namely forward foreign
exchange contracts and swaps with the principle view of hedging the risks arising from its trade business.
As per the Bank’s policy, these contracts are reported on their fair value at the balance sheet date. The gains and losses from revaluation of these
contracts are included under “income from dealing in foreign currencies”. Unrealized gain and losses on these contracts are recorded on the balance
sheet under “Other Assets/Other Liabilities”.
These products are offered to the Bank’s customers to protect from unfavorable movements in foreign currencies. Such contracts are entered with only
those obligors whose credit worthiness has been assessed as per the bank’s credit/risk assessment framework. The Bank effectively hedges such
exposures in the inter-bank foreign exchange market.
In the above contracts, both parties must fulfill their contractual obligations at the time of settlement. These contracts are primarily based on the
imports/exports, market expectations, economic/political circumstances and the Bank’s inflow/outflow position.
These positions are reviewed on a regular basis by the Bank’s Asset and Liability Committee (ALCO).
THE BANK OF KHYBER
36. Segment Details with Respect to Business Activities

The segment analysis with respect to business activity is as follows:
2006 2005
Corporate Trading & Retail Commercial Corporate Trading & Commercial
Retail Banking
Finance Sales Banking Banking Finance Sales Banking
(Rupees in '000) (Rupees in '000)
Total Income 786,460 549,617 121,588 792,347 651,460 433,108 85,441 548,068
Total Expenses 452,464 531,389 22,079 674,767 485,234 294,766 38,653 452,582
Net Income (Loss) 333,996 18,228 99,509 117,580 166,226 138,342 46,788 95,486
Segment Assets (Gross) 14,576,998 2,220,667 1,245,923 9,175,789 14,576,998 2,402,485 1,245,923 9,152,248
Segment Non Performing Loans - 13,947 18,465 3,155,234 - 12,744 14,057 2,842,248
Segment Provision Required - 10,370 10,634 1,868,320 - 801 4636 1,537,232
Segment Liabilities 7,998,550 7,716,346 945,408 7,533,011 6,566,837 3,731,573 952,052 11,326,703
Segment return on Net Assets (ROA) (%) 2% 1% 8% 1% 1% 6% 4% 1%
Segment cost of Funds (%) 6% 7% 2% 9% 7% 8% 4% 1%
37. RELATED PARTY TRANSACTIONS
37.1 Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions
and include the Government of NWFP, an associated company, retirement funds, directors and key management personnel.
37.2 The details of transactions with related parties during the year other than those which have been disclosed elsewhere in these financial statements are as follows:
2006 2005
Directors and Directors and

key manage- Associated Other related key Associated Other related
Total Total
ment company parties management company parties
personnel personnel
Rupees in '000 Rupees in '000

Advances
At January 1, 5,907 - - 5,907 3,936 - - 3,936
Disbursed during the Quarter 5,711 - - 5,711 2,082 - - 2,082
Repaid during the Quarter (949) - - (949) (111) - - (111)
At December 31, 10,669 - - 10,669 5,907 - - 5,907
Deposits
At January 1, 39 7,214 21,557 28,810 605 79,898 29,352 109,855
Deposited during the Quarter 14,417 1,405,756 161,783 1,581,956 7,930 7,832,711 420,866 8,261,507
Repaid during the Quarter (14,412) (1,394,794) (179,098) (1,588,304) (8,496) (7,905,395) (428,661) (8,342,552)
At December 31, 44 18,176 4,242 22,462 39 7,214 21,557 28,810
2006 2005
Directors and Directors and

key manage- Associated Other related key Associated Other related
Total Total
ment company parties management company parties
personnel personnel
Transactions, income and expenditure

Profit earned on Financings 44 - - 44 15 - - 15
Return on deposits expensed 3 93 1,642 1,738 895 137 1,526 2,558

THE BANK OF KHYBER
38. CAPITAL ADEQUACY

The risk weighted assets to capital ratio, calculated in accordance with the State Bank's guidelines on capital adequacy was as follows:-
2006 2005
Rupees in '000
Regulatory Capital Base
Tier I Capital
Shareholders capital/Assigned capital 2,000,949 1,231,034
Reserves 628,346 511,939
Unappropriated profits 103,890 176,089
2,733,185 1,919,062
Less: Adjustments 426,226 -
2,306,959 1,919,062
Tier II Capital
Subordinated debt (upto 50% of total Tier I Capital) - -
General provisions subject to 1.25% of Total Risk Weighted Assets 129,944 127,604
Revaluation reserve (upto 50%) 80,947 -
210,891 127,604
Eligible Tier III Capital - -
Total Regulatory Capital (a) 2,517,850 2,046,666
Risk-Weighted Exposures 2006 2005

Book Value Risk Adjusted Book Value Risk Adjusted
Value Value
Credit risk-weighted exposures
Balance Sheet Items:
Cash and other liquid Assets 5,329,682 751,030 4,128,711 502,038
Money at call - - - -
Investments 7,468,776 3,295,054 5,519,023 3,015,176
Loans and advances 9,219,391 5,963,632 10,589,737 5,787,287
Fixed Assets 142,002 142,002 140,206 140,206
Other Assets 1,364,984 575,761 891,345 308,615
23,524,835 10,727,479 21,269,022 9,753,322
Off Balance Sheet items:
Loan repayment guarantees 87,423 87,423 141,883 141,883
Purchase and resale agreements - - - -
Performance bonds etc 2,707,055 1,194,234 2,684,023 1,207,045
Revolving underwriting commitments - - - -
Stand by letters of credit 670,720 302,858 1,002,511 438,411
Outstanding foreign exchange contracts
-Purchase 26,812 - 4,819 -
-Sale 127,256 509 - -
3,619,266 1,585,024 3,833,236 1,787,339
12,312,503 11,540,661
Market risk-weighted exposures
General market risk 29,758 8,173
Specific market risk - -
29,758 8,173
Total Risk-Weighted exposures (b) 12,342,261 11,548,834
Capital Adequacy Ratio [ (a) / (b) x 100 ] 20.40% 17.72%

THE BANK OF KHYBER
39. RISK MANAGEMENT

The Bank's risk management infrastructure is designed to provide sound management principles and practices to maintain appropriate asset
quality across the Bank. In accordance with the guidance from SBP, the bank has established a separate Risk Management Division (RMD) to
identify and monitor the potential risks and establish mitigating policies against these risks along with advising the relevant divisions and
ensuring the implementation of these policies by other divisions of the bank. The scope of RMD also includes coordination and monitoring of
activities under taken by other divisions of the bank for risk mitigation. The bank is primarily subject to credit risk, market risk, liquidity risk and
operational risk as mentioned below:
39.1 Credit Risk

Credit risk is the risk that arises from the potential that the obligor is either unwilling to perform on an obligation or its ability to perform such
obligation is impaired resulting in economic loss to the Bank. The Bank attempts to control risk by monitoring credit exposure, limiting transaction
with specific counter parties and continually assessing the credit worthiness of the borrowers.
Credit risk is managed through the bank's lending policy approved by its board of directors and other laid down procedures outlined in the credit
manual and related circulars. The Head Office Credit Committee is responsible for the effective operation and implementation of these policies
including the establishment of credit limits for all counter-parties after evaluation of their credit worthiness, pre-sanction evaluations of credit
proposals, adequacy of security documents, pre-disbursement examination of charge documents and security of advances through adequate
collaterals with an acceptable security margin. This multi tiered credit approving system, at branch and head office level, ensures at each stage
that each transaction is analyzed keeping in view the risk factors as well as the stipulation of the Prudential Regulations.
The bank has also established a separate recovery division (RRMC) to monitor stuck-up facilities along with negotiations with borrowers as well
as undertaking legal actions against the delinquent borrowers. Further, to strengthen the portfolio and as a matter of prudence, adequate
provision against non-performing loans is maintained in compliance with the prudential regulations. Investments and other assets, doubtful of
recovery are also adequately provided.
Out of the total financial assets of Rs. 26,963.694 million (2005: Rs. 24,860.967 million), the financial assets which were subject to credit risk
amounted to Rs. 11,713.425 million (2005: Rs. 12,141.927 million). The major credit risk in respect of advances is concentrated in the fisheries
sector and some other sectors such as manufacturing, services, trading and micro finance.
39.1.1 SEGMENTAL INFORMATION
39.1.1.1 Segments by class of business 2006

Contingencies and
Advances (Gross) Deposits Commitments
Rupees Percent Rupees Percent Rupees Percent
in '000 in '000 in '000
Agriculture, Forestry, Hunting and Fishing 65,840 0.71% 434,928 2.28% - 0.00%
Automobile and transportation equipment 600,791 6.52% 0.00% 1,081,488 24.32%
Financial - 0.00% 1,022,179 5.36% - 0.00%
Services 2,074,424 22.50% 2,179,780 11.43% 1,867,351 41.99%
Individuals 866,197 9.40% 3,534,606 18.53% - 0.00%
Fisheries 1,102,010 11.95% - 0.00% - 0.00%
Education and health 74,159 0.80% 1,637 0.01% - 0.00%
Others 4,435,970 48.12% 11,903,434 62.40% 1,497,977 33.69%
9,219,391 100% 19,076,564 100% 4,446,816 100%
2005
Contingencies and
Advances (Gross) Deposits Commitments
in '000 in '000 in '000
Agriculture, Forestry, Hunting and Fishing 1,274,854 12.04% 290,472 1.66% - 0.00%
Automobile and transportation equipment - 0.00% 441,520 2.53% 498,049 11.30%
Financial - 0.00% 780,564 4.47% - 0.00%
Services 1,307,495 12.35% 281,024 1.61% 2,209,470 50.13%
Individuals - 0.00% 2,436,450 13.96% - 0.00%
Fisheries 373,289 3.53% - 0.00% - 0.00%
Education and health - 0.00% 39,632 0.23% - 0.00%
Others 7,634,099 72.09% 13,182,508 75.54% 1,699,900 38.57%
10,589,737 100% 17,452,170 100% 4,407,419 100%
THE BANK OF KHYBER
39.1.1.2 Segment by sector 2006

Contingencies and
Advances Deposits Commitments
in '000 in '000 in '000
Public/ Government 464,681 5.04% 8,291,535 43.46% 383,592 8.63%

Private 8,754,710 94.96% 10,785,029 56.54% 4,063,224 91.37%
9,219,391 100.00% 19,076,564 100.00% 4,446,816 100.00%
2005
Contingencies and
Advances Deposits Commitments
in '000 in '000 in '000
Public/ Government 1,549,081 14.63% 8,291,535 47.51% 397,369 9.02%

Private 9,040,656 85.37% 9,160,635 52.49% 4,010,050 90.98%
10,589,737 100.00% 17,452,170 100.00% 4,407,419 100.00%
39.1.1.3 Details of non-performing advances and specific provisions by class of business segment
2006 2005
Classified Specific Classified Specific
Advances Provisions Advances Provisions
Held Held
Rupees in '000
Agriculture, Forestry, Hunting and Fishing 7,815 7,139 7,887 7,384

Textile 128,452 44,403 128,452 86,309
Chemical and Pharmaceuticals 121,985 70,388 117,955 51,145
Footwear and Leather garments 144,587 138,440 150,203 131,211
Automobile and transportation equipment 3,169 2,230 5,614 4,626
Wholesale and Retail Trade 292,279 151,069 312,484 71,605
Financial 40,000 40,000 40,000 40,000
Services 348,567 65,573 175,737 49,382
Individuals 14,750 10,161 10,678 8,567
Fisheries 1,087,991 871,228 1,087,991 732,387
Others 998,051 488,693 832,445 360,053
3,187,646 1,889,324 2,869,446 1,542,669
39.1.1.4 Details of non-performing advances and specific provisions by sector
Public/ Government - - - -
Private 3,187,646 1,889,324 2,869,446 1,542,669
3,187,646 1,889,324 2,869,446 1,542,669
THE BANK OF KHYBER
39.1.1.5 Geographical segment analysis

2006
Contingen-
Profit before Total assets Net assets cies and
taxation employed employed commitm-
ents
Rupees in '000
Pakistan 103,890 27,211,260 3,028,956 4,446,816
Asia Pacific (including South Asia) - - - -
Europe - - - -
United States of America and Canada - - - -
Middle East - - - -
Others - - - -
103,890 27,211,260 3,028,956 4,446,816
2005
Contingen-
Profit before Total assets Net assets cies and
taxation employed employed commitm-
ents
Rupees in '000
Pakistan 176,089 25,073,937 2,496,772 4,407,419
Asia Pacific (including South Asia) - - - -
Europe - - - -
United States of America and Canada - - - -
Middle East - - - -
Others - - - -
176,089 25,073,937 2,496,772 4,407,419
THE BANK OF KHYBER
39.3 Market Risk

Market Risk is the risk that the value of on and off balance sheet positions of the group will be adversely affected by the movements in
interest rate, foreign exchange rates and equity prices resulting in the loss of earnings and capital. Assets and Liabilities Committee
(ALCO) of the bank monitors and manages the interest rate with objective of limiting the potential adverse effect on the profitability of the
Bank. Each Branch and Credit Division evaluates market risk at the time of sanction of facilities. The bank distinguishes three types of
market risks i.e. foreign exchange risk, equity position risk and interest rate risk.
39.3.1 Foreign Exchange Risk

The Bank's foreign exchange exposure comprises of forward contracts, purchases of foreign bills, foreign currency cash-in-hand,
balances with banks abroad, foreign currency placements with SBP and foreign currency deposits. The Bank manages its foreign
currency exposure by matching foreign currency assets and liabilities. The net open position and the nostro balances are managed within
the statutory limit fixed by SBP.
2006
Off-balance sheet Net foreign currency

Assets Liabilities
items exposure
Rupees in '000
Pakistan rupee 26,897,064 23,989,977 (514,072) 2,907,087
United States dollar 249,501 136,877 390,487 112,624
Great Britain pound 18,035 11,157 9,406 6,878
Japanese yen 1,111 3 55,055 1,108
Euro 45,264 44,290 59,124 974
Other currencies 285 - - 285
27,211,260 24,182,304 - 3,028,956
2005
Off-balance sheet Net foreign currency

Assets Liabilities
items exposure
Rupees in '000
Pakistan rupee 24,922,948 22,429,530 (872,079) 2,493,418
United States dollar 101,228 98,432 663,269 2,796
Great Britain pound 8,201 7,793 217 408
Japanese yen 716 - 163,239 716
Euro 40,396 41,410 45,354 (1,014)
Other currencies 448 - - 448
25,073,937 22,577,165 - 2,496,772
39.3.2 Equity position Risk

The risk that may result in potential losses for the financial institutions because of frequent changes in market value of its tradable assets
due to adverse variation in the rate of equity investments. ALCO keeps a vigilant eye on the price fluctuation of the shares and takes
corrective measures to reduce the losses.
THE BANK OF KHYBER
39.3.3 Mismatch of Interest Rate Sensitive Assets and Liabilities
2006
Effective Total Exposed to Yield/ Interest risk
Over 1 Over 3 Over 6 Over 1 Over 2 Over 3 Over 5 Non-interest
Yield/ Upto 1 to 3 to 6 Months to 1 to 2 to 3 to 5 to 10 Above bearing financial
Interest Month Months Months Year Years Years Years Years 10 Years instruments
rate Rupees in '000
On-balance sheet financial instruments
Assets
Cash and balances with treasury banks 0.20% 1,574,531 843,341 - - - - - - - - 731,190
Balances with other banks 10.50% 3,755,151 2,529,076 900,000 - - - - - - - 326,075
Lending to financial institutions 11.94% 2,493,430 2,293,430 200,000 - - - - - - -
Investments 10.79% 8,565,483 279,717 57,390 462,372 3,260,378 475,676 745,646 636,667 1,033,651 - 1,613,986
Advances 8.70% 9,219,391 1,985,386 305,678 885,219 441,828 2,128,219 361,815 1,957,023 1,061,715 92,508 -
Other assets 0.00% 1,364,984 - - - - - - - - - 1,364,984
- 26,972,970 7,930,950 1,463,068 1,347,591 3,702,206 2,603,895 1,107,461 2,593,690 2,095,366 92,508 4,036,235
Liabilities
Bills payable 0.00% 150,435 - - - - - - - - - 150,435
Borrowings 7.46% 4,325,809 2,083,937 1,485,118 331,245 5,064 16,530 38,722 15,193 - - -
Deposits and other accounts 5.78% 19,076,564 3,116,689 1,054,268 7,049,550 1,600,255 612,409 1,205,709 1,053,899 9,499 - 3,724,286
Sub-ordinated loans 0.00% - - - - - - - - - - -
Liabilities against assets subject to finance lease 0.00% - - - - - - - - - - -
Other liabilities 0.00% 629,496 - - - - - - - - - 629,496
- 24,182,304 5,200,626 2,539,386 7,380,795 1,605,319 628,939 1,244,431 1,069,092 9,499 - 4,504,217
On-balance sheet gap 2,790,666 2,730,324 (1,076,318) (6,033,204) 2,096,887 1,974,956 (136,970) 1,524,598 2,085,867 92,508 (467,982)
Off-balance sheet financial instruments

Forward Lending - - - - - - - - - - -
Forward borrowings - - - - - - - - - - -
Off-balance sheet gap - - - - - - - - - - -
Total Yield/Interest Risk Sensitivity Gap 2,730,324 (1,076,318) (6,033,204) 2,096,887 1,974,956 (136,970) 1,524,598 2,085,867 92,508
Cumulative Yield/Interest Risk Sensitivity Gap 2,730,324 1,654,006 (4,379,198) (2,282,311) (307,355) (444,325) 1,080,273 3,166,140 3,258,648
2005
Effective Total Exposed to Yield/ Interest risk
Over 1 Over 3 Over 6 Over 1 Over 2 Over 3 Over 5 Non-interest
Yield/ Upto 1 to 3 to 6 Months to 1 to 2 to 3 to 5 to 10 Above bearing financial
Interest Month Months Months Year Years Years Years Years 10 Years instruments
rate Rupees in '000
On-balance sheet financial instruments
Assets
Cash and balances with treasury banks 0.14% 1,618,521 22,061 - - - - - - - - 1,596,460
Balances with other banks 8.50% 2,510,190 - 1,921,339 - ### - ### - ### - ### - ### - ### - 588,851
Lending to financial institutions 11.59% 1,552,190 816,190 736,000 - ### - ### - ### - ### - ### - ### - -
Investments 11.39% 7,698,406 75,783 431,120 372,563### 3,520,670### 1,984,882### - ### - ### - ### - 1,313,388
Advances 6.74% 10,589,737 623,294 339,920 1,164,450### 2,605,072### 1,894,579### 1,191,494### 2,655,074### 115,854### - -
Other assets 0.00% 891,345 - - - - - - - - - 891,345
- 24,860,389 1,537,328 3,428,379 1,537,013 6,125,742 3,879,461 1,191,494 2,655,074 115,854 - 4,390,044
Liabilities
Bills payable 0.00% 119,308 - - - - - - - - - 119,308
Borrowings 6.94% 4,374,154 849,814 3,360,649 87,986 25,065 10,128 10,128 30,384 - - -
Deposits and other accounts 4.02% 17,452,170 2,894,421 4,739,091 3,111,593 1,079,875 696,316 932,127 438,439 - - 3,560,308
Sub-ordinated loans 0.00% - - - - - - - - - - -
Liabilities against assets subject to finance lease 0.00% - - - - - - - - - - -
Other liabilities 0.00% 631,533 - - - - - - - - - 631,533
- 22,577,165 3,744,235 8,099,740 3,199,579 1,104,940 706,444 942,255 468,823 - - 4,311,149
On-balance sheet gap 2,283,224 (2,206,907) (4,671,361) (1,662,566) 5,020,802 3,173,017 249,239 2,186,251 115,854 - 78,895
Off-balance sheet financial instruments

Forward Lendings - - - - - - - - - - -
Forward borrowings - - - - - - - - - - -
Off-balance sheet gap - - - - - - - - - - -
Total Yield/Interest Risk Sensitivity Gap (2,206,907) (4,671,361) (1,662,566) 5,020,802 3,173,017 249,239 2,186,251 115,854 -
Cumulative Yield/Interest Risk Sensitivity Gap (2,206,907) (6,878,268) (8,540,834) (3,520,032) (347,015) (97,776) 2,088,475 2,204,329 2,204,329
39.3.4 Interest rate risk

Interest sensitive assets, liabilities and off-balance sheet items-repricing analysis is done by ALCO. ALCO also monitors and manages the interest rate risk and takes on exposure to the effects of fluctuations in the prevailing levels of interest rates on Bank's financial position and cash flows. Interest margin may increase as a result of
such changes but may reduce or create losses in the event of unexpected movements.
THE BANK OF KHYBER
39.4 Liquidity Risk
Liquidity risk is the risk that the Bank is unable to meet its current and future financial obligations as they fall due at acceptable cost, and includes (a) the operational ability of the Bank to meet refinancing requirement, (b)
concentration risk i.e. the ability of the Bank to diversify its funding sources to prevent undue reliance on a single or related counterparites, and (c) tenor risk i.e. the ability of the Bank to raise adequate longer term funds
(maturity at issue in excess of 12 months).
The Bank’s liquidity position is managed by ALCO. The Committee monitors the maintenance of Balance Sheet liquidity ratios on monthly basis using duration and convexity analysis at the Middle Office. The core object is to
avoid undue reliance on individual deposits and extending advances for long periods. Thus on the whole the Bank manages liquidity and funding risk through a combination of prositive cash flow management, the maintenace of
portfolio containing high quality liquid assets, maintenance of a prudent fundings strategy and diversification of its funding base.
39.4.1 Maturities of Assets and Liabilities

Total 2006
Over 1 Over 3 Over 6 Over 1 Over 2 Over 3 Over 5
Upto 1 to 3 to 6 Months to 1 to 2 to 3 to 5 to 10 Above
Month Months Months Year Years Years Years Years 10 Years
Rupees in '000
Assets
Cash and balances with treasury banks 1,574,531 1,574,531 - - - - - - - -
Balances with other banks 3,755,151 2,855,151 900,000 - - - - - - -
Lending to financial institutions 2,493,430 2,078,430 415,000 - - - - - - -
Investments 8,565,483 240,962 162,078 518,749 3,727,254 1,214,544 930,485 662,760 1,108,651 -
Advances 9,219,391 1,985,386 305,678 885,219 441,828 2,128,219 361,815 1,957,023 1,061,715 92,508
Operating fixed assets 142,002 - - - - - - 12,884 129,118 -
Deferred tax assets 96,288 - - - 96,288 - - - -
Other assets 1,364,984 421,561 13,531 574,430 355,462 - - - - -
27,211,260 9,156,021 1,796,287 1,978,398 4,524,544 3,439,051 1,292,300 2,632,667 2,299,484 92,508
Liabilities
Bills payable 150,435 150,435 - - - - - - - -
Borrowings 4,325,809 2,083,937 1,835,118 331,245 5,064 16,530 38,722 15,193 - -
Deposits and other accounts 19,076,564 6,840,975 704,268 7,049,550 1,600,255 612,409 1,205,709 1,053,899 9,499 -
Sub-ordinated loans - - - - - - - - - -
Liabilities against assets subject to
finance lease - - - - - - - - - -
Deferred tax liabilities - - - - - - - - - -
Other liabilities 629,496 447,596 114,172 65,205 2,523 - - - - -
24,182,304 9,522,943 2,653,558 7,446,000 1,607,842 628,939 1,244,431 1,069,092 9,499 -
Net assets 3,028,956 (366,922) (857,271) (5,467,602) 2,916,702 2,810,112 47,869 1,563,575 2,289,985 92,508
Share capital 2,000,949

Reserves 758,290
Unappropriated 103,890
Surplus on revaluation of assets 165,827
3,028,956
THE BANK OF KHYBER
Total 2005
Over 1 Over 3 Over 6 Over 1 Over 2 Over 3 Over 5
Upto 1 to 3 to 6 Months to 1 to 2 to 3 to 5 to 10 Above
Month Months Months Year Years Years Years Years 10 Years
Rupees in '000
Assets
Cash and balances with treasury banks 1,618,521 1,618,521 - - - - - - - -
Balances with other banks 2,510,190 110,190 2,400,000 - - - - - - -
Lending to financial institutions 1,552,190 816,190 736,000 - - - - - - -
Investments 7,698,406 75,373 431,120 372,563 3,520,670 244,313 244,312 1,123,858 1,686,197 -
Advances 10,589,737 623,294 339,920 1,164,450 2,605,072 1,894,579 1,191,494 2,655,074 115,854 -
Operating fixed assets 140,206 - - - - - - - 140,206 -
Deferred tax assets 73,342 - - - 73,342 - - - - -
Other assets 891,345 253,997 223,071 414,277 - - - - - -
25,073,937 3,497,565 4,130,111 1,951,290 6,199,084 2,138,892 1,435,806 3,778,932 1,942,257 -
Liabilities
Bills payable 119,308 119,308 - - - - - - - -
Borrowings 4,374,154 849,814 3,360,649 87,986 25,065 10,128 10,128 30,384 - -
Deposits and other accounts 17,452,170 6,454,729 4,739,091 3,111,593 1,079,875 696,316 932,127 438,439 - -
Sub-ordinated loans - - - - - - - - - -
Liabilities against assets subject to finance
lease - - - - - - - - - -
Deferred tax liabilities - - - - - - - - - -
Other liabilities 631,533 324,142 86,082 117,999 63,207 40,103 - - - -
22,577,165 7,747,993 8,185,822 3,317,578 1,168,147 746,547 942,255 468,823 - -
Net assets 2,496,772 (4,250,428) (4,055,711) (1,366,288) 5,030,937 1,392,345 493,551 3,310,109 1,942,257 -
Share capital 1,231,034

Reserves 639,543
Unappropriated 176,089
Surplus on revaluation of assets 450,106
2,496,772
THE BANK OF KHYBER
39.5 Operational Risk

Operational risk has been defined as the potential of incurring losses in relation to employees project
management, contractual specifications, documentation, technology, infrastructure failure and disaster, external
influences and customer relationship. This includes legal and regulation but excludes business risk. Various
reports are produced at management, Board Committee and Board level to assist with their oversight and
monitoring obligations. This incorporates reporting of risk profiles, key operational risk events, as well as
consideration of external events and their relevance to the Bank. This process generates visibility and
understanding of the Bank's overall operational risk profile. The Operational Risk Framework is based on a set
of core principles and defines the Bank's standards for operational risk management. Its design recognizes the
importance of embedding operational risk into 'business-as-usual' activities. It has partiular focus on defining
and implementing the right behaviours and incorporating risk considertions into the Bank's systems and
processes.
40. Non-adjusting post balance sheet event

The Board of Directors of the bank in their meeting held on March 09, 2007 have approved the appropriation of
reserve against contingencies amounting to Rs.100 million to general reserve. These financial statements do
not reflect this appropriation as explained in Note 6.1.
41. GENERAL
41.1 These financial statements have been prepared using the revised format of financial statements prescribed in
BSD Circular No. 4 dated February 17, 2006 issued by the State Bank of Pakistan. The revised format for
presentation of financial statements is applicable for annual financial statements prepared by banks for periods
commencing from January 01, 2006. The significant changes in the revised format for presentation of financial
statements include the introduction of disclosures in respect of segment details with respect to business
activities and capital adequacy and expended disclosures in respect of the Company's risk management.
Captions as prescribed by the aforementioned circular, in respect of which there are no amounts, have not
been reproduced in these financial statements except for balance sheet and the profit and loss account.
41.2 Figures have been rounded off to the nearest thousand of rupees, unless otherwise stated.
41.3 Corresponding figures have been reclassified, wherever necessary. However, no significant re-classifications
have been made except as stated in notes 6.1.1, 6.1.2, 6.9.1 and 10.7 in these financial statements.
42. DATE OF AUTHORIZATION FOR ISSUE

The financial statements were authorized for issue on March 28, 2007 by the Board of Directors of the Bank.

THE BANK OF KHYBER
ANNEXURE 'A' TO THE FINANCIAL STATEMENTS AS REFEREED TO IN NOTE 2.2
The bank is operating five (05) Islamic banking branches at the end of current year as compared to four (04) Islamic banking
branches at the end of prior year.
2006 2005
Rupees in '000
ASSETS
Cash and balances with treasury banks 268,866 184,482
Balances with and due from Financial Institutions 460,527 234,270
Investments 118,066 45,419
Financing and receivables
Murahaba 581,073 1,847,306

Ijarah 386,600 316,596
Musharaka 16,065 -
Diminishing musharaka 157,155 44,660
Others - 70,000
1,140,893 2,278,562
Less: Provision against non-performing facilities 14,584 1,774
1,126,309 2,276,788
Operating fixed assets 13,132 12,470
Other assets 252,421 76,024
2,239,321 2,829,453
LIABILITIES
Bills payable 11,445 9,455
Due to Financial Institutions - -
Deposits and other accounts
Current Accounts 507,354 380,669
Saving Accounts 1,000,779 597,198
Term Deposits 245,204 144,370
Others 130,037 46,134
1,883,374 1,168,371
Deposits from Financial Institutions - Non-Remunerative - 257
Due to Head Office 99,542 1,347,142
Other liabilities 86,988 136,575
2,081,349 2,661,800
NET ASSETS 157,972 167,653
REPRESENTED BY
Islamic Banking Fund 150,000 150,000
Reserves 2,159 1,068
Unappropriated profit 22,316 22,186
174,475 173,254
Deficit on revaluation of assets (16,503) (5,601)
157,972 167,653
REMUNERATION TO SHARIAH ADVISOR 270 355
CHARITY FUND
Opening Balance 70 -
Additions during the period 56 70
Closing Balance 126 70
THE BANK OF KHYBER
ANNEXURE 'B' TO THE FINANCIAL STATEMENTS AS REFEREED TO IN NOTE 11.6
STATEMENT SHOWING WRITTEN-OFF LOANS OR ANY OTHER FINANCIAL RELIEF OF
RS. 500,000 OR ABOVE PROVIDED DURING THE YEAR ENDED DECEMBER 31, 2006
Outstanding Liabilities at the

Other fin-
Name and Name of individuals/ Father's/ beginning of the year Principal Interest/
S. ancial Total
address of the partners/ directors (with Husband's written- Mark-up
No. Principal Interest/ Others Total relief (9+10+11)
borrower NIC No.) name off written-off
provided
Mark-up
1 2 3 4 5 6 7 8 9 10 11 12
Rupees in '000
1. Sidra Rice Mills Pir Nazim Hussain Shah S/o Syed 2,000 559 - 2,559 - 559 - 559
(Pvt.) Ltd. CNIC # 272-50-225045 Shaukat Ali
5-km, Muridki Shah
Sheikhupura
Road, Muridke. Sayeda Tanhoor Shehzadi W/o Syed
CNIC # 272-91-510829 Nazim Hussain
Shah
Syed Arshad Ali Shah S/o Syed

CNIC # 224-49-070692 Yousaf Ali Shah
Sayeda Memoona Perveen W/o Syed

CNIC # 225-50-246227 Arshad Ali Shah
2. Frontier Shakir Ullah Durrani S/o M. Zaman 26,299 10,654 - 36,953 - 10,565 - 10,565
Ceramics (Pvt.) CNIC # 17101-0271163-3 Khan Durrani
Ltd.
29-Industrial Shamsul Hassan S/o Aftab
Estate, Jamrud NIC # 517-39-014383 Hassan Late
Road, Maj. Gen. (R) Jehanzaib S/o Maghal Baz
Peshawar. Khan (Late) Khan Late
NIC # 136-23-081778
M. Fayyaz Khan S/o Muhammad

NIC # 139-50-090020 Akbar Khan
3. Khan Match Khawaja Muhammad Khan S/o Sultan 27,737 19,009 - 46,746 - 6,100 - 6,100
Factory (Pvt.) CNIC # 17101-0295592-7 Muhammad
Ltd. (Formerly Khan
Azeem Match) Jawad Khan S/o Khawaja
Plot# 100-101B, CNIC # 17101-0295589-5 Muhammad
Industrial Khan
Fawad Khan S/o Khawaja
Estate, Jamrud CNIC # 17101-0295587-1 Muhammad
Road, Khan
Peshawar
4. Gohar Rehman Altaf Gohar S/o Mir Gohar 4,007 940 - 4,947 - 940 - 940
& Sons CNIC # 35202-3656321-1 Rehman
269-Landa
Bazar, Lahore.
TOTAL: 60,043 31,162 - 91,205 - 18,164 - 18,164

THE BANK OF KHYBER
ANNEXURE 'C' TO THE FINANCIAL STATEMENTS AS REFEREED TO IN NOTE 10.4
1) Particulars of investments held in shares of listed companies
Note 2006 2005 2006 2005

Investee Number of shares / *certificates held Cost (Rupees in '000)
Listed Companies
ABAMCO Composite Fund *3,000,000 30,000

Azam Textile 1,000 1,000 8 8
Bank Alfalah Limited 2,459,592 - 149,085 -
Business and Industrial Insurance Company Limited 500,000 500,000 5,000 5,000
Caravan East Fabric Limited 948,700 948,700 9,487 9,487
ICEPACK Limited 756,700 851,200 21,560 55,759
Fauji Cement Company Limited 936,000 - 27,042 -
Fauji Fertilizer Bin Qasim (FFC-Jorden) Company Lim 40,000 100,000 165 4,010
ICI Pakistan Limited 200,000 - 32,888 -
Kot Addu Power Company 328,000 328,000 21,289 21,289
Meezan Balanced Fund *500,000 *500,000 5,000 5,000
National Bank of Pakistan 80 - 22 -
National Refinery Limited 87,500 87,500 37,444 37,444
Nishat Mill Limited 220,000 100,000 23,035 11,350
Oil and Gas Development Company Limited 200,000 200,000 40,007 23,600
Pakistan Petroleum Limited 232,500 369,500 48,958 86,388
Pakistan State Oil Company Limited 314,200 239,200 111,870 105,599
Pakistan Telecommunication Company Limited 569,800 594,800 23,179 38,900
Pakistan Strategic Allocation Fund *450,000 *450000 4,500 4,500
Sui Northern Gas Pipelines Limited - 550,000 - 44,915
Sui Southern Gas Company Limited - 209,500 - 6,924
560,539 490,173
* The paid-up value of each share in listed companies was Rs.. 10 per share (2005: Rs.. 10 per share ).
2) Particulars of investments held in shares of unlisted companies (other than associates):
Note 2006 2005 2006 2005 Name of Chief

Investee Number of shares Carrying amount (Rupees in '000) Executive
Al-Hamra Hills (private ) limited 5,000,000 5,000,000 50,000 50,000 Mr.Habib Ahmed
Asian Housing Finance Limited 500,000 500,000 5,000 5,000 Mr. Junaid Khan
Khakwani
Mohib Textile Mills Limited 1,190,500 1,190,500 25,000 25,000 Mr. M.Asif Saigol
Mohib Exports Limited 25,300 25,300 487 487 Mr. M.Abid Saigol
Breakup value 10.7 80,487 80,487
* The paid-up value of each share in unlisted companies was Rs.. 10 per share (2005: Rs.. 10 per share).
** As at December 31, 2006, the aggregate market value of listed shares / certificates was Rs.. 423.88 million (2005:Rs. 312.443 million) and aggregate book
value (break up value) of unlisted shares was Rs.. 52.364 million (2005: Rs.. 54.238 million). Provision for diminution in value of investments includes an
aggregate amount of Rs.. 30.487 million representing provision against investments held in unlisted companies.
As at December 31, 2006, the aggregate market value of listed shares / certificates was Rs.. 423.88 million (2005:Rs. 312.443 million) and aggregate book
value (break up value) of unlisted shares was Rs.. 52.364 million (2005: Rs.. 54.238 million). Provision for diminution in value of investments includes an
aggregate amount of Rs.. 30.487 million representing provision against investments held in unlisted companies.
THE BANK OF KHYBER

ANNEXURE 'C' TO THE FINANCIAL STATEMENTS AS REFEREED TO IN NOTE 10.4
3) Particulars of investments held in listed term finance certificates (TFC)
Note 2006 2005 2006 2005

Investee Number of shares / certificates held Cost (Rupees in '000)
Bank Al-Falah Limited 11,877 11,889 59,383 59,405

Dawood Leasing Limited - 2,000 - 10,000
Gulistan Textile Mills Limited - 5,000 - 8,327
Orix Leasing Company Limited - 2,000 - 10,000
Pakistan Service Limited 512 897 2,561 3,842
Shakaregunj Sugar Mills Limited - 2,000 - 3,997
Sitara Chemical Industries 880 880 1,496 2,948
Telecard Limited 6,560 7,000 32,799 34,993
United Bank Limited 13,989 14,000 69,946 69,973
Jahangir Siddique and Company Limited 10,000 - 50,000 -
216,185 203,485
* The paid-up value of each TFC held was Rs.. 5,000 per certificate (2005: Rs.. 5,000 per certificate).
** The market value of these TFCs amounting to Rs.. 220.117 million (2005: Rs.. 210.440 million) as at December 31, 2006. The rate of return on these TFCs
ranges from 10% to 14.4% (2005: 8.45% to 14%) per annum.
4) Particulars of investments held in unlisted term finance certificates (TFCs)
Note 2006 2005 2006 2005 Name of Chief

Investee Number of certificates held Carrying amount (Rupees in '000) Executive
Al-Abbas Sugar Mills Limited - 6,000 - 17,368 Mr.Shunaid Quraishi
Crescent Commercial Bank Limited - 4,000 - 9,996 Mr. Azmat Ashraf

Dewan Farooq Spinning Mills Limited 3,000 4,000 15,000 20,000 Dewan Muhammad
Yousaf Farooqi
Dewan Textile Mills Limited 750 6,000 3,750 11,250 Dewan Ghulam
Mustafa Khalid
Orient Petroleum Inc. - 3,000 - 5,000 Mr. Anwar Moeen
Pakistan Mobile Communication (Private) Limited 4,800 6,000 24,000 30,000 Mr. Zohaib Abdul
Khaliq
Pakistan International Airlines Corporation 1,480 1,600 7,400 7,800 Mr. Tariq Kirmani
Reliance Export (Private) Limited 5 5 50,000 50,000 Mr. Fawad Ahmad
Sheikh
Union Bank Limited 4,741 - 23,705 - Mr. Badar Kazmi
123,855 151,414
THE BANK OF KHYBER
ANNEXURE 'D' TO THE FINANCIAL STATEMENTS AS REFEREED TO IN NOTE 10.4
Quality of Available for Sale Securities

2006 2005
Credit rating Credit rating
Amount Rating Agency Amount Rating Agency
Government Securities Rupees in '000 Rupees in '000
Treasury Bills 3,764,489 Government Security-Unrated 2,955,941 Government Security-Unrated
Pakistan Investment Bonds 1,603,691 Government Security-Unrated 1,209,346 Government Security-Unrated
Term Finance Certificates
Al-Abbas Sugar Mills Limited - N/A 17,368 Unrated
Bank Al-Falah Limited 63,004 AA- PACRA 59,405 AA- PACRA
Crescent Commercial Bank Limited - N/A 9,996 Unrated
Dawood Leasing Limited - N/A 10,000 Unrated
Dewan Farooq Spinning Mills Limited 15,000 BBB+ PACRA 20,000 BBB+ PACRA
Dewan Textile Mills Limited 3,750 Unrated 11,250 Unrated
Gulistan Textile Mills - N/A 8,327 Unrated
Jahangir Siddique and Company 50,000 AA+ PACRA - N/A
Orient Petroleum Inc. - N/A 5,000 Unrated
Orix Leasing Company Limited - N/A 10,000 AA+
Pakistan International Airlines Corporation 7,400 Unrated 7,800 Unrated
Pakistan Mobile Communication (Private) Limited 24,000 AA- PACRA 30,000 AA- PACRA
Pakistan Service Limited 2,664 A PACRA 3,842 A PACRA
Reliance Export (Private) Limited 50,000 Unrated 50,000 Unrated
Shakaregunj Sugar Mills Limited - N/A 3,997 Unrated
Sitara Chemical Industries 1,705 Unrated 2,948 Unrated
Telecard Limited 32,799 BBB PACRA 34,993 BBB PACRA
Union Bank Limited 23,705 AA- PACRA -
United Bank Limited 69,946 AA PACRA 69,973 AA PACRA
Mutual Funds
ABAMCO Composite Fund - 4 Star JCR-VIS 28,650 4 Star JCR-VIS
Alfalah GHP Value Fund 5,778 Unrated 5,125 Unrated
AMZ Income Fund 50,085 Unrated - N/A
Askari Income Fund 50,075 Unrated - N/A
Dawood Money Market Fund 50,382 5 Star PACRA - N/A
Meezan Balanced Growth Fund 5,540 Unrated 4,875 Unrated
NAMCO Fund 69,751 Unrated - N/A
National Investment Trust Units 720,097 Unrated 826,867 Unrated
Pakistan International Element Islamic Fund 28,786 Unrated 5,265 Unrated
Pakistan Strategic Allocation Fund 4,815 5 Star PACRA - N/A
UTP AAA Fund 15,586 Unrated - N/A
UTP Islamic Fund 12,044 Unrated - N/A
Fully paid ordinary Shares
Azam Textile 2 Unrated 5
Bank Alfalah Limited 102,811 AA+ PACRA - N/A
Business and Industrial Insurance company Limited 1,875 Unrated 2,525 Unrated
Caravan east fabric Limited 1,708 Unrated 3,700 Unrated
Icepack Limited 12,031 Unrated - N/A
Fauji Cement Company Limited 14,134 Unrated - N/A
Fauji Fertilizer Bin Qasim (FFC-Jorden) Company Limi 1,140 Unrated 3,815 Unrated
ICI Pakistan Limited 23,100 Unrated - N/A
Kot Addu Power Company 13,350 Unrated 15,908 Unrated
National Bank of Pakistan 18 AAA - N/A
National Refinery Limited 22,663 Unrated 31,653 Unrated
Nishat Mill Limited 17,560 A+ - N/A
Oil and Gas Development Company Limited 22,940 Unrated - N/A
Pakistan Petroleum Limited 53,940 Unrated - N/A
Pakistan State Oil Company Limited 66,150 Unrated - N/A
Pakistan Telecommunication Company Limited 25,242 AAA - N/A
Sui Northern Gas Pipelines Limited - N/A 37,400 AA-
Sui Southern Gas Company Limited - N/A 5,604 Unrated
Ordinary shares in unlisted companies
Al-Hamra Hills (private ) limited 50,000 Unrated 50,000 Unrated
Total 7,153,756 5,541,578

Bank of Khyber 2006

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THE BANK OF KHYBER

CONTINGENCIES AND COMMITMENTS 21

Managing Director Director Director Director

Mark-up/Return/Interest Earned 22 1,943,335 1,416,322

NON MARK-UP/INTEREST INCOME

NON MARK-UP/INTEREST EXPENSES

Basic and diluted earnings per share 29 #REF! #REF!

Managing Director Director Director Director

Balance as at January 01,

Managing Director Director Director Director

CASH FLOW FROM INVESTING ACTIVITIES

CASH FLOW FROM FINANCING ACTIVITIES

Increase/(Decrease) in cash and cash equivalents 2,024,401 243,678

Managing Director Director Director Director

1. STATUS AND NATURE OF BUSINESS

5. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGMENTS

5.1 Classification of investments

5.2 Impairment of available-for-sale equity investments

5.3 Held-to-maturity investments

5.4 Provision against non-performing loans and advances

5.5 Income taxes

5.6 Defined benefit plan

6. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6.1 Change in accounting policy

Loans, cash credits, running finances, etc. (64,840) (97,367)

a) IFRS 2 Share-based payments

6.3.2 The Bank classifies its investments as follows:

Held for trading

Available for sale

6.4 Repurchase and resale agreements

6.7 Operating fixed assets

6.7.1 Tangible fixed assets

Change in accounting estimate

6.7.2 Intangible fixed assets

6.7.3 Capital work in progress

6.9 Staff retirement benefits

6.9.1 Defined benefit plan

Change in accounting estimate

6.9.2 Defined contribution plan

6.10 Revenue recognition

Dividends are recognized as income when the right to receive is established.

6.11 Foreign currencies

6.12 Cash and cash equivalents

6.13 Provisions and contingent assets and liabilities

6.14 Financial instruments

6.15 Derivative financial instruments

6.16 Trade date accounting

7 CASH AND BALANCES WITH TREASURY BANKS Note 2006 2005

8. BALANCES WITH OTHER BANKS Note 2006 2005

Balance as at January 01 10,028 10,028

9. LENDINGS TO FINANCIAL INSTITUTIONS

9.1 Particulars of lending

Balance as at January 01 1,000 1,000

9.5 Securities held as collateral 2006 2005

Market Treasury Bills - - - 92,190 - 92,190

Held for trading securities

Investment at cost 4,979,673 3,549,755 8,529,428 3,434,290 4,007,555 7,441,845

10.2 Investments by segments Note 2006 2005

Federal Government Securities:

10.3 Particulars of provision Note 2006 2005

Opening balance 38,754 40,767

10.3.1 Particulars of provision in respect of type and segment

10.6 Investment in associate Note 2006 2005