• Message from the Managing Director

• Directors' Report

• Income Statements

• Balance Sheets

• Download a copy of the 2007 Annual Report

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The Chairman's Report

With the onset of a significantly changed regulatory environment, the adoption of enhanced global compliance frameworks particularly for the prevention of anti-money laundering, and the need to restructure the Bank for another period of sustainable growth, the Board endorsed management’s recommendation to implement an extensive strategic infrastructure development program. This program included IT hardware and software, implementation of a new retail banking front-end system, restructuring the Bank to better position for future growth and reviewing our strategy with a view to diversifying our business. I am pleased to advise that this program was completed in 2007 with the launch of our new internet banking system to incorporate business banking, in the first half of the year, and completion of our BASEL II implementation in the latter part of 2007.

One of our key objectives was to ensure that our leadership team was inspired, motivated, and committed, with a ‘One Team Can Do’ attitude. To that extent, I am very pleased to advise that we have managed to recruit some of the most talented people in the industry to help position the Bank for growth and continue our track record as one of the most successful overseas owned banks operating in Australia. We also have an agile and responsive, cost conscious operation, with a family orientated culture based on strong Core Values. The shareholder, Arab Bank plc, which is the largest bank from the Middle East, has demonstrated commitment to Australia and this is reflected by the fact that all profits to date have been retained in the Australian operation. Additional support has also been provided by the parent bank in the implementation of IT systems, governance frameworks, compliance and anti-money laundering systems in the Australian operation, which are of the highest world standard.

In 2007 Arab Bank Australia completed its transformation into a mature and sustainable financial institution thanks to the hard work and commitment of our Staff, our Board and the support of our Shareholder.

Our products and service range has increased substantially from those of a few years ago and this will continue to grow and improve with the launch of the new Business Divisions and improved products specifically tailored to our customer needs, which in turn will allow us to cross sell to our existing customers and entice potential customers to bank with us. In 2007 we began investigating strategically increasing our market share to reach beyond our traditional Arabic customer base, with the value add proposition “we understand your business” and to take full advantage of our wider and better range of distribution channels with particular focus on our new and improved Internet Banking and on our Mobile Lending Managers.

Customer service as always will be at the centre of our focus and a sales and service culture which we have established and are continuing to enhance in 2007, will drive the business through a structured, measurable and accountable sales performance and rewards program. The aim of this being that our frontline staff not only will provide exceptional service but they will cross sell the Bank’s range of products and services based on the needs of the customer at the counter.

The Bank’s balance sheet is well positioned for growth particularly given the global credit and liquidity crunch. We have achieved a large percentage of retail customer deposits to fund our planned asset growth which is based on an existing high quality loan portfolio. In this regard we will continue to be vigilant and place strong focus on fully understanding the needs of new and existing borrowing customers so that we do not compromise credit quality for asset growth in any circumstance.

Looking forward

The Board and I are optimistic that with the successful implementation of the infrastructure and compliance projects, and with the restructuring and the recruitment of talented and committed employees, Arab Bank Australia is well positioned to embark on a new growth phase in its balance sheet and P&L footings. My confidence is founded on the strong belief that we have in Arab Bank Australia today, a strong team that understands that the ultimate sustainability to growth for any great company is its ability to attract and keep enough of the right people. To that extent I am confident that our management team will consistently apply rigorous discipline in formulating a “one team can do attitude” with a strong focus on customer intimacy throughout the Bank. We will focus on diversifying our revenue streams and on our market concentration.

Overall, I am confident that Arab Bank Australia has made significant progress in implementing very sound foundations for future growth and achievement of our long term business strategy. We are proud of our brand and the strong good will value that we have fostered in the community through the successful implementation of our customer focused strategy as reflected by our award winning products. In 2007, we have received a host of awards from various industry bodies, including Money magazine “Best of Best” awards and AFR Smart Investor Blue Ribbon awards, reflecting our commitment to delivering only the very best to our customers. We are committed to continued improvement in the Bank’s ability to develop a recognized brand in support of our balance sheet growth.

With the current global liquidity tightening in financial markets, I am pleased to report that Arab Bank Australia Limited has positioned itself very well to weather this issue. We are currently operating at the highest liquidity ratio for some years and our credit loan portfolio is well managed. We have maintained our impeccable record of zero material loan losses for the 13th consecutive year in Australia. Furthermore, the Bank’s capital continues to be at well in excess of our prudential requirements.

Our parent company Arab Bank plc is also well positioned in the current climate with a very strong liquidity and capital position. Our parent is the largest financial institution from the Arab world and has maintained strong profitability and growth during the past several years. Arab Bank plc has not called for any dividend repatriation to date from Arab Bank Australia, preferring to leave all our profits in Australia to be used to increase our capital and further invest in our growth. The strong support of our parent further enhances our strength in Australia as a local Bank.

Arab Bank Australia’s success could only have been possible through the effort of the Board of Directors, our shareholder, our staff and the continuous support of our loyal customers. I take this opportunity to thank them for their ongoing commitment and support.

Samir Kawar
Chairman

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Message from the Managing Director

2007 marked the completion of our major infrastructure review and implementation project, which in stages spanned over 3 years. The successful completion means that the Bank is well positioned for sustainable long term growth, with minimal cost increase thus significantly reducing our cost to income ratio, in 2008 and beyond. We are now able to focus our efforts on increasing banking product multiples to our existing customers and to target potential customers within the markets in which we operate.

With our infrastructure review and implementation project behind us we are able to provide even a greater focus on our staff and our customers. Our front line staff received extensive training in 2007 so that their confidence in cross selling the Bank’s products and services was at an all time high and their attentiveness to customer service ensures that every customer experience is a positive one.

With the rise of increased competition in the marketplace, we knew that to continue to keep our customers satisfied and wanting to bank with us we needed to offer them more than just good rates and service, hence we developed and nurtured our value add proposition of “understanding your business”. These are not mere words but are a result of strong marketing and analytical skills and knowledge of various industries, demonstrated by our Relationship Management team and our Senior Managers. The message which we put to the market and which was well received is that "We’re ready to do business".

Strength in the marketplace is always a direct reflection of your internal strength and our greatest asset and strength is our people. Our leadership team is strongly aligned with their "One Team Can Do" attitude and the Arab Bank Australia staff have a strong culture built on dedicated work ethics and the Bank’s core values. These values in summation are "treat others the way we would like to be treated". Together these ensure that all staff take genuine ownership of any task at hand and have a real interest in protecting the Bank’s brand, its customers and the general community which they serve.

The Bank has an excellent balance sheet structure with strong liquidity and capital. Our parent, Arab Bank plc, support and guidance continues to be a differentiating factor in our long term strength and sustainability. We are very fortunate to have one of the most liquid banks in the world as our shareholder. The strength and brand of Arab Bank plc in the Middle East and North African market provides us with a competitive edge in being able to provide financial support and service to local Australian companies who trade with the Middle East region.

Financial Highlights

Both fierce competition in the market place on interest margins and a slight decrease in lending and deposit volumes resulted in an 11% decline in the retail net interest margin. In addition, total operating costs increased by 7.3%, the primary cause of which was the investment in more experienced bankers recruited into the frontline.

The combined effect caused an increase to the cost to income ratio to 91%. However, management is confident that the cost to income ratio will reduce to a more respectable 81% by the end of 2008 through increased lending, deposit growth, and cost containment, and with the aim of matching the cost to income ratio to that of our peers over time.

Customer Intimacy & Relationship Banking

Achieving true customer intimacy and delivering on our mission of being a relationship bank remained our top strategic priority for 2007.

Consistent with our commitment to these goals, we commenced a number of initiatives to improve our performance in this area. These initiatives included restructuring the retail branch network to introduce a new operating model designed to keep us close to our customers and better align our banking model with our customers’ needs. We increased our footprint by increasing the number of business bankers and mobile managers.

In keeping with our commitment to improved customer convenience and accessibility, we responded to customer demand for more flexible opening hours, and extended our operating hours in priority locations to suit the preferred banking hours of our clients.

We have also begun to embed our sales and service culture with our branch network team, and have placed emphasis on both training and programs for our front line people to deepen their understanding of our customers’ needs and business referral initiatives. To this extent, we are starting to see an improvement in both new business and customer service.

A customer contact program has also commenced, including a disciplined sales and marketing funnel plan, which has been designed to enhance our ongoing relationship with existing and potential customers, and enhance our business development opportunities.

Whilst we are yet to see these improvements reflected in formal customer satisfaction surveys (due to be conducted in 2008), we are beginning to see evidence of improvements in service levels through feedback from our customers and a substantial reduction in the level of customer complaints to a negligible level.

Enhanced Product & Service Offering

In addition, and in response to our customers’ feedback on areas where we can improve our services, we continued to review and refine our product portfolio, and introduced new and improved products to better meet the needs of our customers.

We embarked on a large scale replacement of our internet banking service, which was re-designed to suit our niche customer requirements. Improvements included, offering some of the most up to date technology, such as the provision of SMS banking for those of our customers regularly on the move, business banking services and security at industry best practice levels.

We were also pleased to provide our customers with a broadened product range to include the arrangement of insurance services, enhanced asset financing, additional foreign exchange products and tailored banking packages for our valued corporate customers and their employees. These new and improved products are not only designed to meet the needs of our customers, but we believe will also make us more competitive.

As further proof of our commitment to delivering excellence in our products and services, the Bank received a wide range of 1st place awards in 2007, including:

• Best 3 Year Fixed Home Loan - Money Magazine "Best of the Best" awards 2007
• Best 5 Year Fixed Investment Loan - Money Magazine "Best of the Best" awards 2007
• Best Business Deposit Account for our Premium Business Cheque Account - Money Magazine "Best of the Best" awards 2007
• Best Short Term Deposit - AFR Smart Investor Blue Ribbon awards 2007
• Best Long Term Deposit - AFR Smart Investor Blue Ribbon awards 2007

The improvements made to our retail product range were also evidenced by the awarding of ‘5 Star Ratings’ by Cannex for the following products - Basic Home Loan, Revolving Line of Credit, 2 Year Fixed Loan (Investment), 3 Year Fixed (Investment), and 5 Year Fixed (both Owner Occupied and Investment) - a rating only awarded to a product in the top 5% of all products within that category, recognising we do in fact offer one of the best combinations of features and pricing to our customers.

A Robust Risk Management & Compliance Framework

Over 2007, the Bank has continued to strengthen its risk management practices by completing the implementation of the Basel II regulatory requirements and building its operational risk framework.

Anti-Money Laundering and compliance management remained at the forefront of management’s efforts focusing on building a best practice compliance program. This includes the implementation of a best-in-class transaction monitoring system that will assist us in effective monitoring of all banking transactions. For a good part of the year, focus was placed on Business Continuity Management through testing the Bank’s capability to resume its operations and crisis management. The results identified the Bank’s ability to effectively manage a crisis and capabilities to successfully recover critical business operations.

The Bank’s periodic Fraud and Ethics Survey conducted last year yielded significant improvements in virtually all areas reflecting effective management initiatives been made in the right direction in strengthening fraud control.

Credit Risk Management Challenges in 2007

The 2007-year proved to be a significant challenge in maintaining credit quality and simultaneously growing the portfolio in an increasingly competitive and aggressive lending market.

Property prices have not yet recovered since the value peak of 2003, although we remain comfortable that our exposures are well covered due to our consistently conservative lending philosophy.

Taxi plate lending remained steady throughout the year. Growth however, was nominal due to pay-downs of existing debt. This has been true of the loan portfolio in general. Significant new lending was approved throughout the year, with solid conversion achieved. However new lending was counter balanced by large repayments, as our customers, who have typically remained very liquid in the current environment, continued to sell off assets and reduce their debts.

Default rates remained relatively low throughout 2007, however as interest rates continued on an upward trend, stress on the portfolio increased and a slight growth in arrears was noted.

In line with the Bank’s broad strategic objectives, we continued with our unwavering commitment to "understand our customer, their business and the problems we believe we can best solve for them". Unlike most of our competitors, all credit staff become involved as early as possible in the credit proposal process and work hand in hand with the Relationship Managers in structuring loan transactions to suit the customer’s needs. In fact, joint credit and front line staff visits to both existing and potential customers have improved our understanding of the client’s business, operating cycle and associated risks for improved customer satisfaction and better credit and asset management. This has been further enhanced through the ongoing credit training for field staff, sponsored by the Credit area, and aimed at improving credit and financial analysis skills.

Credit Department was also restructured to better align its constituents and operations with our customer philosophy. This included the recruitment of experienced credit personnel and the formation of new positions, for the purpose of improving responsiveness to customer supporting staff and of course our customers. Most importantly, the relocation of credit resources to our flagship branch, Bankstown, was our most effective initiative in forging workforce and customer connectivity. This scheme yielded successes both in bringing to fruition our “one team can do” value through one on one coaching between the credit and front line team, and bringing us closer to our customers.

Capital & Treasury

We have always placed great importance on our capital position and supporting Treasury operations, and this focus in 2007, more than ever, served to place us in perhaps one of the strongest liquidity and capital positions relative to our peers in the face of the financial market turmoil surrounding the US sub-prime fallout. We continue to remain well capitalised through the support and commitment of our parent and our focus on retail banking for the majority of our liability base. This has ensured that we continue to remain extremely well positioned throughout this very challenging operating environment.

Growth in our retail deposit base, again in the face of an aggressively competitive market for retail funding, has also allowed us to expand our liquidity holdings generating a much improved and stronger liquidity position.

For the first time in January 2007 we were assigned ratings from Standard & Poor’s of A- /A2 and we are now rated by all three major international rating agencies with these ratings reflecting our close relationship with Arab Bank plc.

During May 2007 Moody’s Investors Service published our rating results as part of the application of its refined joint default analysis (JDA) and updated bank financial strength rating (BFSR) methodologies for banks in Australia. The specific rating changes for us were positive, namely:

• BFSR was upgraded to D+ from D’
• Foreign Currency Deposit Ratings were upgraded to A3/Prime-1 from Baa1/Prime-2;
• Local Currency Deposit Ratings of A3/Prime-1 were assigned; and
• All ratings were assigned a stable outlook

In addition, in August 2007, Fitch Ratings upgraded our Short-Term Issuer Default Rating (IDR) to ‘F1’ from ‘F2’. Fitch also affirmed our other ratings being: Long-Term IDR ‘A-’, Individual ‘C/D’ and Support ‘1’. The outlook for the Bank’s Long-Term IDR was assigned as Stable.

Over the longer term, we will continue to concentrate on retail deposits for our liabilities and we are well positioned to further access the wholesale markets, as and when required.

Consequently, notwithstanding the credit squeeze caused by the sub-debt crisis in the United States and its contagion affect around the globe, our capital position remains untainted by the crisis; this is certainly an attribute we can be proud of.

Technology & Operations

From a technology perspective, we have continued to progressively invest in improving systems and hardware, with the desktop replacement rollout yielding new process efficiencies in terms of response times and consequently improved customer service.

Significant work was also completed in readiness for Basle II such that from January 2008 reporting in terms of the Basle II requirements for the first reporting period (April 2008) will commence ahead of schedule. Process reviews to enhance operational efficiencies and ensuing customer service improvements were also assessed throughout 2007, with the benefits expected to be realised in 2008.

Significant work was completed in the area of Trade Finance and International Banking throughout 2007, including reinforcing the strength and global network of the Arab Bank Group, and the acquisition of a leading edge application, a renewed level of trade finance business development and enriched service levels to Australian companies dealing predominantly in the Middle East, North African and Asian markets.

Our Finance area has been under new leadership since early 2007, and has been an instigator in generating timely management information for both regulatory reporting and enhancing the business decision making process.

Our people are our greatest asset

Our staff, represent the diversity that is Australia. This contributes to the unique banking experience offered by us, and our distinct ability to appreciate and be able to empathise with our unique customer base.

Our core values - Mutual Respect, Trust, Customer Service, Community and Empowerment - are demonstrated and encouraged in each of our daily activities and play an integral role in our recruitment and selection processes.

We recruit to enhance our value add proposition of continuing to understand our customers’ needs. We achieve this by attracting and selecting highly motivated staff with a customer-centric focus, high level interpersonal skills, professionalism and an affinity with the communities that we serve.

For the development and growth of our workforce, we foster a strong learning and development culture across the organisation and we have recently implemented a renewed leadership and management development plan to identify, support and advance our future leaders. Our learning and development program will assist in building the commitment and capability of our workforce to meet our strategic intent.

Helping Individuals, Supporting Communities

Being a good financial institution is not only about offering excellent products and superior service it is also about serving and supporting the families, businesses and individuals in the communities we serve.

Every year brings with it an opportunity to do more for the communities we serve. Our success has enabled us to make significant contributions, both physically and financially to charities, non-profit associations, community groups, sporting bodies, medical research and cultural programs. We are passionate about making a difference to the lives of all we serve, and remain committed to supporting the local and greater community in an evergrowing capacity.

In Conclusion

We have worked to build a robust and advanced banking platform through which we can grow in the short to medium term. Our foundations are sound, and will assist us in maintaining the solid brand that we have developed over the past 14 years.

With the continued support of our customers, staff, shareholder and Board, for which we are most grateful, we will move forward with confidence and deliver on our mission, of being a relationship Bank offering superior service and excellence in selected products.

James Wakim
Managing Director

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Directors' Report

The Directors present their report together with the financial report of Arab Bank Australia Limited ("the Company") and the consolidated financial report of the economic entity, being the Company and its controlled entity, for the year ended 31 December 2007 and the auditors’ report thereon.

Directors

The directors of the Company at any time during or since the financial year are:

His Excellency Samir F Kawar,
Chairman and Non Executive Independent Director

Mr Geoffrey C E Wild AM, Deputy Chairman and Non Executive Independent Director

Mr James Wakim, Managing Director

• Member of the Advisory Board of the Westmead Millenium Institute for Medical Research, Fellow of the Financial Services Institute of Australasia, and Affiliate of the Australian Institute of Company Directors.

Mr Eun-Young Kim, Non Executive Director

• Member of the Board since 01 July 1995.
• Member of the Board Audit, Risk & Compliance Committee, Board Remuneration Committee and Board Credit Committee.
• Executive Vice President and Area Executive of Arab Bank plc, Singapore.

Mr Ian G MacDonald, Non Executive Independent Director

• Member of the Board since 01 July 2006.
• Chairman of the Board Remuneration Committee, and a member of the Board Audit,
Risk & Compliance Committee and the Board Credit Committee.

Director:

CPT Global Limited, Futuris Corporation Limited, Elders Financial Services Group Limited, Elders Trustees Limited, Elders Insurance Limited, Elders Insurance Brokers Pty Limited, and Elders Rural Bank

Mr Leslie E Taylor, Non Executive Independent Director

• Member of the Board since 25 November 2004.
• Chairman of the Board Audit, Risk and Compliance Committee.

Mr Samer S H Al Tamimi, Non Executive Director

• Member of the Board since 04 June 2007.
• Member of the Board Credit Committee.
• Senior Vice President – Global Credit Group, Arab Bank plc.

Mr Muntaser M S Al-Shashtari, Non Executive Director

• Member of the Board from 28 January 2007 until his resignation effective 01 June 2007.
• Credit Supervisor, Investment Portfolio/Subsidiaries & Affiliate Affairs, Arab Bank plc

Mr Al Shashtari has a B.S Degree in Computer Science / Minor Banking.

Directors’ Meetings

The number of Directors’ meetings held (including meetings of committees of Directors) and number of meetings attended by each of the Directors during the financial year were

¹ The number of meetings held during the time the Director was a member of the Board.
² Mr All-Shashtari was appointed effective 28 January 2007, and resigned effective 1 June 2007.
³ Mr Al-Tamimi was appointed to the Board effective 04 June 2007.

Committee Meetings

¹ The number of meetings held during the time the Director was a member of the relevant Committee.

Principal activities

Results

Auditor’s independence

Indemnification and insurance of officers

Dividends

Review of operations

Change in state of affairs

Environmental regulations

Events subsequent to balance date

Likely developments

Directors’ benefits

Rounding off

Signed in accordance with a resolution of the directors:

Dated at Melbourne 12 March 2008

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Income Statements

For the year ended 31 December, 2007.

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Balance Sheets

As at 31 December, 2007.

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